I’m in the middle of helping my parents sell my grandmother’s house, which is the first time I’ve ever gotten to see the frustratingly inefficient real estate market up close. I made a Zillow and craigslist page for the home last week and placed a for sale by owner sign out front, but to no avail so far. While it’s only been a week since we put it up online, I’m being advised by many friends in the industry that I need to bite the bullet and list the house on a flat fee MLS service. This allows for home buyers represented by a buyer’s agent to see the home on the list of local homes for sale in the area. However, the real reason I need to list the house on the MLS service is less benign. Despite widespread misinformation, buyer’s agents are not free.
huge Myth in the Financial Services Industry: you don’t pay me a dime!
For the uninitiated, a typical home transaction in America has a buyer and a seller. Usually, both sides have a real estate agent that negotiates the price, tells you important information about the state of the local market, and handles the paperwork. A typical commission is 6%, with 3% each split between the buyer’s and seller’s agent. I’m not saying that these agents do not work hard. However, I am saying that the industry still acts like its 1946 and we can’t just go online and look at all the comparable sales over the past six months on Zillow.
I’ve heard this myth from a lot of friends with family in real estate. They’ll repeat what they think is common knowledge: “A seller has to pay the buyer’s agent commission, so you might as well have one because the seller’s agent will get 6% instead of 3% if you buy the home on your own.” This is just not true. You can make an offer lower than the asking price and write that you expect the buyer’s agent commission to go towards lowering the price.
The problem with buyer’s agent fees is that the buyers pays the money to their agent indirectly. Because of this, the home buyers are less sensitive to the fees charged by these agents. Sellers then raise the price of their homes to cover some of these transactions fees, and everyone but the agents are worse off.
You can buy your home directly, all you need is a real estate lawyer
There are plenty of homes for sale on Zillow and Craigslist that do not have a selling agent. These owners will accept a lower price because they get to keep more money in their pockets. There is a danger that the owners are delusional about the fair value of the property, but there is also a chance that they have under priced it. You need to look at recent sales in the neighborhood to know.
Real estate agents are not legal experts. All you need to sell a home is to contact a real estate attorney, who will charge by an hourly basis rather than a percentage basis. He will have you sign a bunch of documents. By purchasing real estate directly from the owner, you can save thousands or even tens of thousands of dollars.
One obstacle you could encounter is that many banks that issue mortgages require agents to be present at a home appraisal and inspection. You can usually get a seller’s agent to do this for free or a small fee. If neither side has an agent, since you know that buyer’s agents are not free, you might be able to pay a flat fee to have one show up for this activity alone.
Percentage based real estate fees are great for agents, not you
In an ideal world, you would pay a real estate agent by the hour or with a flat fee upon sale of a home. They could charge a steep rate, say $100/ hr. The vast majority of buyers and sellers would still come out ahead.
While the median real estate agent earns a little over $40,000 a year according to the Bureau of Labor Statistics, many earn far too much for the work that they do. I’m not attacking just real estate agents here, most financial advice is a ripoff as well. At the risk of sounding insensitive, too many people work as real estate agents today. We don’t need car dealers to buy and sell cars, so why should we need them to buy and sell property?
Perhaps back in the day when real estate agents had a monopoly on information, paying a 6% total fee in a real estate transaction made sense. Now that we have the internet, the search costs for both buyer and seller are far lower for real estate. These lower costs should not be captured by the real estate agent profession with static fees. In fact, their commissions should fall. We should see 1.5% to 2% fees on each side of the transaction.
Even more, home buyers should not automatically seek an agent when buying a home. Buyer’s agent are not free, in fact you pay dearly for their services. If no agents on either side of the transaction existed, sellers could accept 6% less on every sale and still walk away with the same take home money.
Until buyer’s agents go the way of the dinosaurs, we will probably need to use one
For reasons that I do not understand, the percentage of home buyers using an agent has risen from 69% of all transactions in 2001 to 87% today. Home sellers have a similar percentage of agent use as you would expect, at 89% of all transactions.
Buyer’s agents are not free, yet the counterargument seems to have spread to all levels of society. Because almost 90% of buyers use an agent, you probably need to make your home visible to buyer’s agents if you want it to sell quickly. When you list your home on MLS, you signify a willingness to pay a buyer’s agent commission. That commission is whatever you can get someone to work for. Usually that number is 1.5% to 3% of the home’s value. You set that commission as the seller.
Anyone who comes to us with a buyer’s agent to buy my grandma’s house instantly has less negotiating room. We have to take off this buyer’s agent fee off the top before considering a lower price. Our ideal buyer would be someone without an agent but with a pre-approved mortgage, signifying their serious intent to purchase a home.
when you buy a home, go for the ‘do it yourself approach’
So help me fix the problem. The readers of this blog are exactly the kind of savvy home buyers that would not need the services of a buyer’s agent. You can go on Zillow, look at comparable home prices, and push harder for a lower home price because you do not need to charge a 6% fee to the seller to complete the transaction. If you are worried that you might make a mistake as to the home’s value, pay a professional appraiser to give you a private estimate before buying.
If you are interested in investing in real estate, there are a bunch of new ways to invest directly in real estate projects without needing to pay agent fees. One I want to review for Millennial Moola readers is Fundrise, an online real estate investment firm. Companies like these can help change the way real estate transactions happen.
Real estate agents as a group are good, honest people. They work hard for a living, have lots of professional dues to pay, and other overhead expenses like transportation and marketing. That does not mean you should finance this inefficient, commission based profession unless it is in your own self interest to do so. Buyer’s agents are not free, so the next time someone tells you otherwise, ask if they would offer you a lower home sale price with a 6% transaction cost.
What do you think? Is the real estate agent profession going the way of the Dodo bird anytime soon? Comment below!