Agent vs. FSBO: New research

Posted by: Dean Foust on June 11, 2007

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There was a real estate agent who lived in our neighborhood for many years. Whenever she sold a house for a client, she sent postcard mailers around the community boasting that “I sold it in THREE DAYS!!!” Then came the day that she decided to sell her house. Funny thing was this: She set the sale price pretty high — the rest of the neighborhood was rooting for her to get it — and then she waited patiently. Real patiently. In fact, it took her several months to sell her house — but SHE GOT HER RICH PRICE. Of course, the neighborhood loved her because she helped bump prices up to a new level. But I couldn’t help thinking there was a disconnect between what she did for clients and what she did when she was selling her own house.

I’ve always had a suspicion that some (many?) agents pressure their clients to “work with this buyer” (which anyone who has followed this blog was the case with me when I sold my first house) while they hold out for top dollar when selling their own house. In the world of agents, it’s all about turns. Better to move that house today, than wait another six weeks for $20,000 more, since their cut of that higher price is roughly $300 (or 1.5%, assuming the 6% commission is split four ways between two agents and two brokerages). Flip and move on, flip and move on.

That’s all by way of background to say that two economists at Northwestern University have released a study (press release is here, and the actual study is here) concluding that sellers on average reaped just as much by selling their house themselves (as a “FSBO”) as had they used an agent. And factor in that 6% sales commission, and they came out AHEAD by selling the house themselves.

The researchers did find one difference: The amount of time it took to sell the house. Using an agent resulted in a much quicker sale, which isn't surprising since you get the benefit of being listed in the MLS. But so much for agents delivering a higher price.

I can already hear agents complaining that you can't make these types of comparisons -- that many sellers NEED to sell quick because they're starting a new job out of state, or their moving to a new school district, and need a quick sale --even if it means taking less. And the agent I described above could afford to be patient because she wasn't moving out of town. I'm sorry, but I've always thought that something smells rotten in Denmark...

Reader Comments

Nick

June 11, 2007 10:50 PM

Isn't it always so much easier playing with someone else's money?

This industry is the greatest teacher when it comes to "Don't do to others what you wouldn't want them to do to you." lest it should bite you back. Things usually come around to bite you in the long run.

Nick

johnsons

June 12, 2007 4:02 AM

good gracious!thanks for this informative information.keep it up,goahead.

Shaun McLane

June 12, 2007 6:56 AM

Given the current market conditions, it's often a gamble when telling a seller to wait for the big payout. If the house sits on the market for 3 months, and a 95% offer comes in, it might be smart for the seller to work with that buyer. Often times, a seller "needs" to sell their house, and a Realtor might have the luxury of being able to sell it when it sells. I've dealt with advising a seller to turn down an offer in hopes of getting a better one, but in the end, when the higher offer did come in, the mortgage payments the seller paid to carry the house the additional time, ended up netting her less than the original offer would have.

Liz Provo, Editor/Publisher

June 12, 2007 7:17 AM

As the owner of a regional for sale by owner service in Massachusetts we agree that selling privately, without the use of a real estate agent is a very smart thing to do in any market. Sellers must price their homes effectively. We recommend hiring a professional appraiser rather than asking a couple of agents their "opinion" of value. After all, the lender hires an appraiser to protect their interest before granting the buyer a mortgage. Once the price is set fairly, the second step is to obtain sufficient exposure to attract a large pool of buyers. In areas where there is a strong for sale by owner service, including a magazine, active internet site and cross marketing, the likelihood of a quicker sale is strong. If the sellers use less effective methods of a yard sign and classified advertising the wait could be much much longer. The tide has turned and as more consumers become educated and witness their friends and neighbors be successful selling by owner, the need for a full commission real estate agent will continue to dwindle.

John Vanhara

June 12, 2007 1:19 PM

As a broker in Las Vegas, NV I never understood why are so many agents proud that they sold house in couple of hours or 1-2 days. It always screamed that listing price was set too low.

Sometimes there is a legitimate reason when price must be set low (seller must move).

David A. Porter

June 12, 2007 2:25 PM

Dean,

Interesting article. The Realtors main stake in this whole process has been the MLS. Once someone finally puts a stake in it's heart, then the landscape will truly change. It is my opinion that this has always been one of the chief aims of zillow.com, to create a national database of home sellers.

I just sold a mint condition Harley on eBay to a gentleman clear across the country in Virginia. It cost me less than $100 and the bike was sold in a day. This is clearly going to come to real estate as well.

Once the consumer has access to a real live database (like eBay has done), and it reaches it's tipping point, the real estate industry is going to have a real challenge on their hands.

I recommend that all players in the real estate industry, lenders alike dust off their copies of "Who Moved My Cheese"!

Lord

June 12, 2007 9:40 PM

Actually it concluded sellers did NOT come out ahead by selling it themselves, statistically anyway. The 6% commission ended up in the pocket of the buyers, which you would expect in a buyers market. That wouldn't have been the case a few years ago though.

Time to sell can be a cost, a great one in fact, if the sellers have already purchased another. Pricing really needs to be discussed in terms of how fast it is necessary to move it. Most people have limited flexibility on when they must move or limited patience for it and so are better off selling quickly but this does vary by client.

Lord

June 12, 2007 9:46 PM

In fact, one shouldn't assume delaying a sale will always end up with a higher price. When prices are falling as they are currently in many areas, delays only worsen the eventual price. That could be a costly mistake indeed.

Kent Palmer

June 13, 2007 2:54 PM

Selling FSBO and using an agent are apples to oranges comparisons. In my experience the method is only as good as the implementation. I have seen FSBO properties get literally stolen out from under the uninformed novice seller. And, I have seen unsuspecting homeowners reap unexpected windfall profits by using an experienced professional broker. The method I like best is a flat fee, limited service agreement. This allows the FSBO to list the property in the MLS, and have the services and knowledge of a seasoned professional. The home owner sets the showing schedules and holds the open houses. The broker assists with marketing, paperwork and negotiation. Depending on who you know and your individual market, you can negotiate this kind of service agreement with a broker in your area for between $50.00 and $1000.00 plus a co-op fee to motivate buyer’s brokers to bring clients to the property.

kevin king

June 15, 2007 9:57 AM

The simple fact is that the market speaks. The moment a home comes on the market and it is toured by a reasonable number of qualified and somewhat serious prospects, it will either appear as superior value (to the existing inventory) and sell, or it will appear inferior and remain unsold until the existing comparable inventory disappears or the price is reduced.

In the current depreciating market (some areas more than others), inventory is growing daily. The longer a home remains on the market, the buyers see that other buyers don't want it (no demand/ no competition) and they will offer less. The longer it sits, the lower the perceived value... the lower price received by the seller. It is unreasonable to believe otherwise unless you believe in luck or an unsophisticated or unsuspecting buyer that is merely overpaying.

This is why it is important to have an expert and knowledgeable agent that can properly expose your home to the largest pool of "qualified" and serious buyers... as well as read the market, decipher the market and guide the seller appropriately throughout the selling process.

If an owner feels they want to risk perhaps the largest financial transaction of their lifetime to luckily stumbling upon a qualified buyer, have no professional representation nor guidance through the 30 -40 page contracts/ short term contingencies/ inspections / 30-60 days escrow period, and most likely paying out the 3% co-op fee to the buyer's agent anyway, then give it a shot. But, here we must ask, what are they really saving?

Stephen

June 16, 2007 11:39 AM

Agents are actually an impediment to the home-selling process, reducing efficiency and value-added to a simple, arm's length transaction.

Stephen

June 16, 2007 11:47 AM

Agents are actually an impediment to the home-selling process, reducing efficiency and value-added to a simple, arm's length transaction.

Tom

January 26, 2008 3:56 PM

@Dean: My wife and I bought our first home this way. The amount of money we saved in fees and commissions was unreal. FSBO was heaven sent with our situation.

@David: The way data is made available in this day and age, your made a great point. Web based solutions to the issues we face are growing into maturity. I think an example of something headed in the right direction is afsbo.com. Although in beta with not a lot of scale, it shows how they are taking data (listings) and intelligently serving them to their users...without fees or commissions. I would even say its a FSBO alternative to eBay, who has the same "fishy smell" that realtors do these days.

Ruthmarie Hicks

March 27, 2008 2:59 PM

I always groan when an agent tries to represent themselves. They usually overprice and are impossible to negotiate with. Just like anyone else, the agent is subject to greed and we ALL tend to overprice our own residences.

Having said all that, agents do know WHAT SELLS. That agent knew what upgrades to make, and just how much to do to get top dollar. We understand the value of staging and we recognize that all the things that sellers hope they won't have to do - must be done to get the best price. Maybe this agent didn't overprice, she just knew what needed to be done to get a high price - and was comfortable enough in her knowledge to do it without the balking we get from a lot of sellers.

Bill Pryor

September 23, 2008 10:55 PM

Dean you are absolutely right. I read this and your “Horror Story” post and I'm in a mood right now so I'm gonna take it out on this topic.

Growing up my Step Mom was an agent. There was always someone mad at her about commissions. I swear I heard her talk more about her commissions than she talked about houses. When she wasn't defending or justifying commissions she was bragging about them. Just depended on who she was talking to. As a mortgage broker I started working with FSBO's in Tampa Bay in the late 90's. I felt like a kid again when she tore into me for it. I ignored her advice when she told me it was impossible and have since helped thousands of do it yourself sellers. I own a little FSBO site (grin) that you may have heard of... HelpMeSell.com where sellers get 0% commission MLS and realtor.com listings.

So, who sells real estate? Who shows properties? The listing agent or the buyers agent? Truth is... if your listing agent is showing your home to an unrepresented buyer they'll turn into a 'transaction broker' and collect the entire commission. When do these double ended transactions happen? When a buyer who doesn't have an agent calls YOUR agent off the lawn sign or classified ad.

The bottom line in any market is exposure. These days you can get a 0% commission MLS Listing and ONLY pay 3% max commission if and only if your buyer has an agent. You have to be sure that your property can be found by a buyer no matter where they go. Some sellers think they can stick a sign in the yard and post an ad in the local paper, craigslist etc. The truth is that if they hired an agent who said "let's start by putting up a sign, then I'll put it in the newspaper and on my website for a few weeks and we'll see what happens" how would they react? I know I'd be outraged and the agent would get fired! Yet homeowners do exactly this every day. Why??? Would these same folks put a fresh coat of paint on their entire home with a nothing but a simple paint brush? This is like mowing your lawn with scissors!

So here's my message. If you're going to sell your property for sale by owner (and you can) then realize this. When you do any DIY project you get the tools of the trade... right? Market your home like the best agent in town: Tons of photos perhaps a 360 tour, 24 hour toll free hotline and lawn sign with info tube and flyers. Get on MLS for a low flat fee and you'll automatically get added to realtor.com and hundreds of your local agent sites and brokerage sites that have an MLS search.

Expect a buyer to offer at least 6% less than your asking price when you don't have an agent. Don't deny it, that's how you make your offer on a FSBO as we're all chasing the same buck. Does that mean you may as well hire an agent? No way. If you're going to sacrifice 6% wouldn't you rather it be in price reduction or paying a buyers closing costs?

Hire an agent and you may end up paying 6% commission, 6% price reduction and 3-6% closing costs. 15% - 18% to sell your home? That's $37,500 to $45,000 on a $250,000 property.

It doesn't usually take long for a buyer to decide to work with an agent so plan on paying 3% even if you're selling on your own.

Kathy

May 22, 2009 11:24 AM

Days on market = more house payments. Depending on the situation, each client has different circumstances. Job loss, for one , would require less days on market and the MLS would definitly help sell the home much faster.
Another consideration. Repairs. Who will negotiate the costs? Pricing a home is just one piece of the pie when selling a home. On average, an agent will come in contact with 27 individuals, from contract to close. Do homeowners have that type of expertise?
No, I disagree. The Real Estate agent is a valuable asset to THE BIGGEST INVESTMENT the average American spends in their lifetime. I would not trust a three year old to negotiate a price for a car. Nor would I ever trust myself to sell my home. I would consult a professional Real Estate agent.

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BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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