This guest post from Nick Rothacher, the self-taught economist, is part of the “reader stories” feature at Get Rich Slowly. Some stories contain general advice; others are examples of how a GRS reader achieved financial success — or failure. These stories feature folks from all levels of financial maturity and with all sorts of incomes.
Six months ago, my wife and I sold our two-bedroom, two-bath condo located in the heart of downtown Salt Lake City. We saved close to five thousand dollars and sold the property without much stress, frustration, or wasted time. Here's how we did it.
Life changes fast, and when my wife started applying to graduate schools across the country, we knew we needed to be flexible with our housing situation. We started talking about selling our condo over a year in advance of when we would be moving. This extra time was invaluable because we weren't stressed about reducing our price in order to make a quick sale. When you sell real estate in a depressed market, time is your friend.
Initially, we tried selling the condo “For Sale By Owner”. The primary benefit of selling For Sale By Owner is to avoid the commissions and fees paid to real estate agents. We took digital photographs, created our own fliers to market the property, and started advertising on free sites like Craigslist and local online classifieds. Unfortunately, nothing seemed to work.
After three weeks with few prospects, we escalated our marketing attack. From my yearlong stint as a real estate agent, I learned that many buyers (especially Baby Boomers) prefer to use a real estate agent to help them purchase a property.
We needed to get our property listed on the MLS (the Multiple Listing Service). We paid a local discount brokerage $175 to list the property. This service is considered a “discount” or “flat-fee” brokerage and the fee covers the following services:
- Property is listed within 24 hours
- Six month listing period
- Property is advertised on multiple websites
- Six photo listing
But in order to really market the property, we needed to go beyond the services listed. My wife and I took the initiative and did the following:
- Adapted our flier to direct people to the MLS listing.
- Used our own pictures that highlighted all parts of the property — inside and out.
- Provided property tours to folks that called to schedule a walkthrough.
- Held two open houses and advertised with yard signs, the MLS listing, Craigslist, and other online media.
- Communicated regularly with our broker to update the MLS listing.
After another three weeks had passed, we received a low offer. We submitted a counteroffer with a price closer to our listing price and it was accepted! Property sold. Many dollars saved.
Crunch the Numbers Yourself
Conduct a simple cost-benefit analysis to see if an agent is really worth it. Typically, you pay 6% of the sales price to have an agent list your house, which is divided 50/50 between the buyer's agent and the seller's agent.
What this means is that the remaining 94% of what an agent can get for me better be worth more than 100% of what I can get for myself!
I listed my property at $165k, which means I would have paid 3% to the buyer's agent ($4,950) and another 3% to the seller's agent (another $4,950), for a combined cost to me of $9,900.
But because I used a discount broker, I paid $4,950 to the buyer's agent and only $175 for the seller's (our) agent.
Total savings = $4,775.
The Death of the Real Estate Agent?
Did you know there are over a million real estate professionals currently affiliated with the National Association of Realtors? (And that's down from 1.2 million at the peak of the housing boom in 2006.) I'm bound to upset a majority of them with what I say next, but my sole intention is to educate GRS readers.
There has to be value to justify hiring a real estate agent. If my wife and I believed that a full-service real estate agent would have provided $4,950 worth of services in the following areas, then we would have hired someone to:
- help with paperwork
- help with advertising
- help with knowledge in a variety of areas
- help provide access to the property
- help to sell the property more quickly
- help fix the cosmetic changes to help the home sell
- help us to understand current market conditions and the value of comparable homes in the area
Thanks to the internet, most of these services are no longer as valuable as they once were. Every one of the topics listed above can be found with the help of an online search engine. The buyer/seller can learn about all of these topics in a matter of minutes.
In our case, it just didn't make sense to hire a real estate agent to list our home. We live in a busy metropolitan area and we knew our buyer audience was large. We ended up selling to some parents that wanted an investment and a safe place for their two daughters in college.
The Future of Real Estate Agents
The internet continues to change the way we access information about real estate. For buyers and sellers, this is a positive change that can save us money, but for real estate sales agents and brokers, it presents new challenges to the profession.
As the quality of information on the internet improves, many of the “gatekeepers” and the “knowledge holders” will be unable to keep their expertise out of the hands of the general public. I'm not saying that doctors, lawyers, and other professionals will no longer be valuable. But believe me, getting your real estate license is not exactly the equivalent as going to law school or med school.
Don't Believe Me?
Look around. Agents are posting properties on Craigslist and free classifieds because that's where buyers are looking. I definitely don't need an agent to post pictures on Craigslist — I can do that myself.
The MLS is the last stronghold that real estate agents cling to because their livelihood depends on it. But don't be surprised when someone develops a database that is fully accessible to the public, making the MLS obsolete.
Chart courtesy of JP's Real Estate Charts
My last complaint about real estate agents is that they get paid based on the market price of your home. From the graphic above, you can see that the values of homes in the U.S. have increased (look at the red line) tenfold from 1975-2005.
Did the amount of work increase tenfold? Did it become ten times harder to sell a home? No and No. This 6% “tax” really hurts Americans because on average, people sell their home every 5-7 years. If you want to read more about the negative effect this has on the economy and how full-service brokers are working hard to eliminate discount brokers, here is a great article.
So next time you buy or sell a property: explore your options, educate yourself, and save money!