Real estate agents, real estate consultants, For Sale by Owner (FSBO) and everything in-between
You have a number of options available to you today when selling your home, including full-service real estate agents, fee-for-service real estate consultants, and selling your home yourself (For Sale by Owner - FSBO). No one way is the "right way"; your job is to choose the best method for your situation and needs. Here, we'll tell you about how real estate agents are paid, and about the various service options and models that are available to you when selling your home.Click here for your free guide!
How real estate agents are paid
There is no such thing as a standard commission fee for a real estate agent. While full-service agent fees seem to average about 6% (of which 3% goes to the selling agent and 3% to the buyer's agent), there is no standard fee. In fact, any such reference to "standard fees" is a clear violation of anti-trust laws and those practicing set or standard fees can be prosecuted for "price-fixing."Real estate consultants are agents who get paid on a per-hour or per-service basis… more about that in a moment. First, let's talk more about full-service agents.
Full-service real estate agents
A "full-service agent" is a term used in the industry to describe the real estate agent that provides a traditional, full-service marketing package at their own expense that should include:- Agent's time in preparing your property for sale, marketing your property, staying current with market activity in your neighborhood, negotiating offers and counter-offers, and their fiduciary responsibility in bringing your transaction to the closing table once under contract - a lot of work
- Listing your property in one or more of the local Board of REALTORS® "Multiple Listing Service (MLS)" databases
- Posting a For-Sale sign in your yard with a brochure box
- Specialty signage (additional signage identifying prime attributes of property)
- Property brochures/flyers
- Reporting their sales prospecting activities to you
- Property photos and/or virtual tours
- Arranging Open Houses
- Online Advertising
- Classified Advertising
- Other - ask the agent what else they can suggest to better market your property?
The important thing here is to define the "scope of work" associated with the "full-service agent." Be sure to ask your prospective agent what he or she will do for you. How exactly will they market your home? If there are certain marketing tools that you expect them to use to market your home, make sure you're clear about your expectations - each agent uses different marketing methods, and may vary their approach house by house.
One reason that "full-service" agents receive full commissions is that they pay out-of-pocket for all of the marketing expenses for your house before it is sold. This creates two issues that a seller should understand:
- First, the agent puts these marketing dollars at risk, in that you (the seller) may decide not to sell the home unless you receive a full-price offer (pricing will be discussed later). Depending upon the agreed-upon sales price, this could be a daunting task. If you decide to take your property off the market, then the agent has spent marketing dollars that will not be recovered.
- The second reason relates to the first, but addresses the time value of money spent. The agent must first spend the money, and it will then take time to sell the property. Even in a good market, it may take ninety (90) days to sell your home at an attractive price (to you, the seller). Thus, even when successful, the agent wants to get back the marketing dollars they spent, plus get a fair return on that money (as it would have earned interest if it were sitting in the bank for those 90 days).
In her book "Ripping the Roof Off Real Estate" (Gabriel Publications - www.GabrielBooks.com), Mollie Wasserman characterizes the full-commission sales scenario as one in which sellers are buying "insurance" when they agree to pay a full commission, because they transfer the sales and marketing risk from themselves to the real estate agent as described above. Of course, the full-service agent must charge a higher rate to recover monies lost on listings that did not sell. The agent lost that money, and must charge a little extra to try to make it back.
How much of these commissions will the agents you are interviewing keep?
Most agents working for a broker (e.g. Coldwell Banker) either pay fixed "desk fees" to "hang their license" in a given real estate agency and retain 100% of their fees (commissions), or they have to pay a percentage (split) of their earnings (commissions) to their broker. Typically, splits range from 20 to 50 percent.If you choose to work with a full-service, full-commission agent, try to find out more about their situation. Do they pay 1) desk fees or 2) a percentage of their commissions to their employing broker? If so, what are their expenses and what's their commission split with their broker?
This is called "unbundling" and is designed to expose all costs and fees associated with a given transaction so that the dialogue (negotiation) is reduced to something like ... "I want to be sure that you cover all of your expenses associated with marketing my property and this transaction." Once all expenses are covered, the negotiation is then about what amount is a reasonable fee for the agent's time and effort including labor, expertise, product knowledge, and negotiating skill.
The point is to be creative and attempt to have everyone's interests aligned.
Many agents are willing to reduce their fees if they will represent you on more than one transaction. That is, if they represent you on both the sale of your home (the sell side) and the subsequent purchase of a new home (the buy side), the agent may be willing to work for reduced commissions on one or both ends of the transaction. In difficult markets, some agents are even willing to sell your house for free if they can get a full commission on the buy side.
Real estate consultants - the new consulting model
Other options are available to you when selling your home. You typically don't pay your accountant a percentage of what you earn, nor do you pay your doctor a percentage of the value of your heart for heart surgery. Along those lines, you can hire a real estate agent as a consultant, and pay for only those services you need (just like you pay an accountant or a doctor).Mollie Wasserman, author of "Ripping the Roof Off Real Estate" is also the founder of the Accredited Real Estate Consultant ("ACRE™") designation, a collection of real estate agents nationwide who offer real estate consulting. She cites two categories of skills for which you pay a real estate agent; "functional" and "fiduciary."
Functional tasks involve things like searching for homes, showing homes, creating ads for your home, doing open houses, and creating brochures. These are tasks that do not require as high a level of real estate industry skill or knowledge.
Fiduciary tasks involve strategy, such as evaluating the market, pricing homes, evaluating offers, crafting favorable offers and counteroffers on properties, understanding legal documents and legal language, analyzing inspections and appraisals, dealing with title issues, ensuring that contracts are prepared properly, and that critical deadlines are met in terms of due dates, etc. These tasks require high skill and an in-depth understanding of the industry.
Real estate consulting focuses on using the real estate agent's most valuable fiduciary skills to negotiate the sales price and detailed contract items, manage the transaction once under contract, and resolve potential title and inspection items effectively.
Following this model, you should be able to find an agent who is either willing to reduce their fees as a function of their having to do less work, or willing to do specific tasks for a fixed fee, or some combination of the two. For more information on real estate consulting, visit www.myreconsultants.com.
According to the National Association of REALTOR'S® (NAR) "2005 Profile of Buyers and Sellers", sellers often complete some tasks without professional assistance but depend on real estate agents to assist with others. The tasks that sellers were most likely to complete without their agent's assistance were:
- Determining the listing price (21 percent)
- Attending closings (17 percent)
- Scheduling showings with prospective buyers (13 percent)
- Negotiating with buyers (13 percent)
- Reviewing sales contracts and offers (80 percent)
- Managing paperwork (80 percent)
- Entering the home on the multiple listing service (79 percent)
- Negotiating with buyers (79 percent)
Flat Fee (or fee-for-service) real estate agents
Similar to real estate consultants, flat-fee real estate agents are agents who are either willing to provide full-service for a flat, fixed fee, or to reduce a full-service fee if you (the seller) either participate in doing some of the work defined above, or if you will reduce the monetary financial risk to the agent by paying for some or all of the marketing costs in advance. Additionally, many flat fee agents will offer "a-la-carte" services on a "fee-for-service" basis. This means that they may charge fixed fees for specific services rendered and are categorized under the headings of "listing services", "administrative services", and "marketing services."Listing Services can include:
- Presenting all offers
- Advise, consult, and negotiate benefits & risks of all offers
- Document preparation
- Transaction coordination
- Closing services
- Enter your home in the "Multiple Listing Service" (MLS)
- List your property on Realtor.com website and/or the agent's own website
- Broadcast new listing emails to agent & buyer databases
- Take property photos
- Schedule showings and notify client
- Provide sales signage
- Provide a lockbox
Administrative Services can include:
- Comparative Market Analysis (CMA) to help set the sale price for your house
- Showing services, including showing feedback and progress reports
- Price changes and MLS information changes
- Refreshing your home's listing in the MLS
- Additional listing services - having MLS data show up in different neighborhoods
Marketing Services can include:
- Internet marketing package:
- additional photos
- additional website advertisements
- additional photos in the MLS listing
- Black & White brochures
- Color Brochures
- 24-hour information hotline
- Direct mail advertising of your home
- Magazine advertising
- Newsletter advertising
- Interior feature cards
- Virtual tour/professional photos
- Newspaper advertising
- Open houses
- Directional signs
For Sale by Owner (FSBO)
For home sellers with more real estate expertise, you may decide you can sell your home yourself. As you can see from the above "al-la-carte" menu of services offered by flat-fee listing brokers, and from the description of what services "full-service" brokers provide, there is a great deal of effort and skill involved in successfully selling a home.The main reason that sellers try to sell their own homes is to avoid paying commissions, thereby saving money when selling a house.
One factor worth considering before selling your home without a real estate agent is to ask yourself: "How unique is my home?" The more unique your home, the more likely that you will be successful selling it on your own. When there are likely few substitutes for your property, it will be easier to sell. If your home is on a lake, backs up to a park, or is on a golf course, then it will likely command more buyer interest than if it were not. To the extent that your property is not unique, your chance of success selling it without some level of assistance may be more challenging. However, other factors influencing your ability to sell your home on your own include its physical condition, the character of the marketplace (seller's market or buyer's market), and pricing.
The National Association of REALTORS® (NAR) "2005 Survey of Buyers & Sellers" compiled the facts listed below regarding characteristics of "For-Sale-By-Owner" (FSBO) transactions. This survey is the result of an 8-page questionnaire that was mailed to 90,000 consumers who bought homes between August of 2004 and July of 2005. Information on sellers came from those buyers who also sold a home. The survey yielded 7,813 useable responses with a response rate of 5.4 percent. Pertinent facts regarding FSBO properties are excerpted from this study and outlined below:
- Home characteristics: There are many similarities in the type of home sold by FSBO and agent-assisted sellers. FSBO sellers are somewhat less likely to sell a single detached family home (76 percent versus 80 percent) than agent-assisted sellers and less frequently sell a townhouse or apartment/condo in a building with five or more units. Suburbs are the most frequent location of a home sale for both groups (57 percent) followed by small towns (15 percent). The median selling price does, however, vary considerably between FSBO and agent-assisted sellers. The difference is apparently not based on markedly different types of homes being sold by each group of sellers; neither is it based on broad location differences. The median price of a home sold with the assistance of an agent was $230,000 compared to $198,200 for a FSBO sale. [Editor's Note: However, the $230,000 home seller has to pay real estate commissions from the sale proceeds, narrowing this gap]
- Reasons for selling FSBO: The most frequently cited reason that FSBO sellers offered for selling their homes themselves was that they did not want to pay the real estate agent's commission. This was the most important reason for 53 percent of FSBO sellers. A significant share (22 percent) did not want to use an agent because they had sold their home to a friend or relative, a situation in which many sellers feel it unnecessary to use an agent given that there is no need for marketing or other types of sales assistance. The relationship between buyer and seller is one of the key characteristics that differentiates those who sell a home unassisted and those who use a real estate professional. Just three (3) percent of sellers knew the buyer in transactions where the home was sold with the assistance of an agent. Among those sellers who first tried to sell the home themselves but then used a real estate agent, the home was eventually sold to someone the buyer did not know in nine of ten cases. FSBO sellers have more success when they know the buyer. Among sellers who sold their home without ever using an agent, 39 percent sold it to someone they knew.
- FSBO marketing methods: The yard sign remains the most frequently used tool when selling a home (61 percent), followed by friends and family (46 percent) who assisted the sale by telling others about the home. Fewer than one in five FSBO sellers used the Internet compared with four of five agent-assisted sellers. Generally, FSBO sellers take advantage of fewer marketing methods than agent-assisted sellers.
- FSBO Problem Areas: FSBO home sellers must make many decisions about how to price and market their home, often based on limited experience. These decisions are key, however, to a successful home sale. The most difficult task for FSBO sellers was understanding and completing the paperwork, viewed as the chief obstacle by 17 percent of respondents. The other major problem areas were knowing how to fix up and prepare the home for sale (16 percent), setting the sales price (14 percent), and being able to sell the home in the allotted time (13 percent).
- Agent for buyer: Among recent FSBO sellers, about one in five reported that the buyer who purchased their home used an agent.
- Selling as a FSBO again: Just over half (53 percent) of FSBO sellers would sell their next home without the assistance of a real estate professional. Fourteen (14) percent would definitely use an agent while more than one-third were unsure how they would sell their next home.
Potential drawbacks to selling your home on your own typically include determining effective market pricing, prudent negotiations regarding all contract terms, a lack of understanding of the sales contract process, and potential prejudice from the real estate agent community (representing buyers).
In theory, prejudice (e.g. not showing homes listed For Sale by Owner) from the REALTOR® community is a violation of anti-trust legislation relative to "boycotting." However, many real estate agents recognize that they will likely have to assist the FSBO seller in the transaction process and are reluctant to do so as a function of perceived potential liability, additional transaction workload, and transaction friction with a non-licensed seller. In short, the FSBO transaction tends to involve a lot more work for the buyer's agent.
That said, many agents will provide "al-a-carte" services as described above, including entering your property in the MLS. As discussed above, you may also solicit the services of an Accredited Real Estate Consultant ("ACRE™") to have the benefit of an experienced real estate practitioner provide the services you need on a fee basis.
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