Is Your Realtor Looking Out for Your Best Interests?
by Jason Dean
In the pantheon of distrusted professionals, real-estate agents rank somewhere between used-car salesmen and lawyers. In large part, this reputation is unjust. Many Realtors are true professionals who offer valuable expertise and take much of the headache out of buying or selling a home. But the entire system of real-estate agency — monopolized by the National Association of Realtors and legislated into existence by most state governments — is the problem, and it is leading many home-sellers go to the FSBO (For Sale By Owner) route, particularly in the current down market.
How Real-Estate Commissions Really Work
You often hear about how Realtors make a 6% commission on home sales. Well, ask your Realtor if it’s true — he won’t be able to say! This is part of the stupidity of the real-estate-agency system: Realtors are bound to a code of silence about their commissions, even though virtually everyone knows that the total commission — not your individual Realtor’s cut — is almost always 6% (at least at its base level).
But here’s the thing: If you sell your house for $200,000, your Realtor is not walking away with $12,000 (6% of $200,000) or anything close to it. Assuming your buyer also has an agent, your agent and his will split the commission 50-50. That leaves your Realtor with 3% — but half of that has to be kicked back to his broker (i.e. Coldwell Banker, RE/Max, Century 21, or whatever local outfit he may work for). This leaves your agent with 1.5% of your sale price — in this case, $3,000; not $12,000.
Why This Can Be Bad For You
Okay, let’s imagine you own a house worth $200,000 and you owe $180,000 on your mortgage. That means you have $20,000 in equity. You hire a Realtor who agrees to list your home at $200,000 and thinks that’s a fair price, but warns you it may take a while to sell in this market. “Fair enough,” you say.
But then less than a week later, someone makes a $195,000 offer on your home. You think about taking it and go to your Realtor for advice: You can trust him to give you advice that’s in your best interest, right? After all, the more money you sell your house for, the more money he makes — right?
Well, let’s take a look at the math. If you sell for $200,000, your net proceeds (minus 6% commission) will be $188,000; leaving you with eight grand after paying off your $180,000 mortgage. Assuming your buyer has his own real-estate agent, your Realtor will make $3,000 on this sale.
But what happens when the price is dropped to $195,000? Your net proceeds fall to $183,300 — leaving you with just $3,300 in profit. That’s a 60% loss compared to the eight grand you’d pocket if the house sold at full price. But your Realtor does not feel the pain equally — not even close. Instead of making $3,000 in commission, he will make $2,925 — a $75 difference. You lose $4,700; he loses $75. Selling the house quickly may be worth $75 to your Realtor, but will it be worth $4,700 to you? You and your Realtor have different interests.
What This Means in the Current Market
In the current market, Realtors are going to be especially quick to encourage you to take any offer. They want to flip houses quickly and move on to the next deal. You may want to hold out for the best price — it’s your money at stake, after all. The math of the real-estate-agency system strongly encourages people to sell FSBO during down markets like this one. Fortunately, there are more resources available for FSBO sellers today than ever before. Below are just a few of the many sites dedicated to aiding FSBO sellers on the Web: