Understanding the Costs of Selling Your Home
As a life long do-it-yourselfer, I had problems with Realtor fees long before I knew anything about the business.
In learning the business, there was several things that became apparent:
- a lot of confusion exists about what Realtors are paid and what they do for the money.
- The same confusion exists about where to get answers.
- Many competing sources of information add to the confusion.
Now a veteran real estate broker with years of experience I find myself saying the same thing to help people understand much about the real estate business, but despite this, really don't find myself addressing much about the money real estate professional make. Aside from sharing about that, answering the question above, why would someone want to pay Realtor fees, and what are the alternatives we see being used, for better or worse, and how some people don't get their money's worth when they hire a Realtor.
Why Do Realtors make so much money?
It's not hard to hear people's opinions on Realtor fees. The "c" word. We call commissions SUCCESS FEES in our office, because that's the case. If we don't sell a house, we don't make money.
Without understanding what those fees pay for and how they are broken down, its easy to view them as unnecessary and excessive. Lack of understanding often creates fear.
Understandably, sometimes people don't make the right choice in hiring Realtors, and they regret it, and think their agent may have gotten lucky by making a sale.
Other people just get sticker shock from the perceived numbers. If a person sells a $200,000 home and pays a 6% commission, THAT'S $12,000! They may have nightmares about their agent sleeping in a bed of $100 dollar bills of THEIR MONEY.
The biggest myth in real estate is that the agent keeps the fee.
The truth is far from that though, because just like any business, there's the cost of doing business. Nearly all agents have a broker they have to share their success fees with. Splits have a large range based usually upon what services are given to the agent from the broker. Usually there's two sides to a transaction also, and as the graphic shows, that $12,000 for starters gets chopped up at the closing table. Brokerage fees pay for the cost of an office, a broker to train and lead agents, the copiers, staffing, office supplies and office decor don't come cheap either. All this comes before the agents personal expenses, like their ongoing marketing costs, cost for photography, cost for marketing flyers, MLS access, association fees, administrative services, cell phone, and last but not least, UNCLE SAM. A good rough figure is that once the commission from a sale has made it through the splits with the agents and brokers, the government and overhead take another 50% of the commission.
If that's the case here, the buyers agent has a net profit of $1,350 and the listing agent$1,975. This still may sound like a lot until we realize that the average client works with their agent for over 5 months, the average agent sells only 12 homes per year, and the average agent works with more than 4 people a year that don't end up closing on a deal. The hourly rate is beginning to look more and more normal as we go on.
Putting into perspective the cost your realtor pays, just to do business is only half the story.
In looking to buy, sell, or invest in real estate, lots of people will elect to do it yourself, just like the people that do their own plumbing, electrical work, carpentry, and interior design. With regards to real estate, most professional realtors would agree that selling by owner isn't impossible. Knowing how to price, negotiate price, negotiate insepection requests, market, prospect, network, stage, and ultimately pull deals together and sell your home isn't impossible to learn, but there's also no guarantee that a mistake won't be made during the process for someone with little to no experience. Mistakes can be costly in real estate. Professionals sometimes pop in and make a job look easy. By the time I'm done with a job that I keep for myself, the hours and other expenses add up, and when its all said and done, I may have to end up hiring a professional to undo my mistakes. Having listed many homes that were previously failed 'by owner' attempts, I've heard stories and witnessed a lot. One client was getting ready to sell by owner. They were nervous about fees. When they approached me, they were about to sell the home for 30% less than market value to their neighbor. To them it felt safe. I gave them a figure of what I thought the ABSOLUTE LEAST they would net if they listed it with us, and the neighbor backed off. We ended up selling it for more, and they ended up netting ALMOST $20,000 more than the my 'bare bones' net projection. The scary fact is that by owner seller's often times misjudge the market and either over price or underprice the market. By owner advocates may talk about how much is saved based upon the fees not paid, but if these 'savings' were balanced with the missed opportunity costs we see regularly, it would be a different story. You just never know what you don't know.
Here's Why.....The Reasons For Hiring (the right) Agent
“He who represents himself has a fool for a client”
Despite the conventional wisdom from Abraham Lincoln (above), an attorney from California seems to be a huge proponent of selling homes by owner. (Could it be that by owner sales end up in litigation more frequently?) Hiring a professional Realtor has too many advantages to fully name. Truly, the real estate wouldn't exist if selling homes were easy. The same is true for buyers. Some buyers may look at by owner sales, thinking they can get a great deal on a home because of lower fees. I've seen it go both ways. One former client came to us to market a home that she bought before she was married. The price she wanted seemed high for the area, so I did some investigating. Within 12 months of her purchase, comparable homes were selling for an average of 24% less than hers, with the closest comparable sale being $18,000 less than what she paid. I asked her about the process, and she told me the seller provided her a list of 'what homes were going for nearby' which was based on the asking price of homes, not the sale price.
We can write just as many volumes about people hiring the wrong agent as hiring no agent at all, but chosing a competent, full-time professional Realtors, guided with the Realtor Code of Ethics as well as their own proven marketing system will help the home seller navigate the complex and risky world of home selling and likely pay for themselves in the process.....and that's why you should pay realtor fees!