Last Updated on January 14, 2021 by Mark Ferguson
Real estate agents are expensive, which makes many people consider selling their house on their own. When you sell without an agent, it is commonly called FSBO or for sale by owner. On the surface, selling your house as a FSBO may save thousands of dollars. However, there is a lot of work involved in selling a house and a lot of expertise needed to price your home correctly to get the most money for it. Marketing a home is vitally important to getting the most money for it, and a home needs to be listed in the multiple listing service (MLS) to get the most exposure. A real estate agent has to list homes in the MLS for homeowners, although there can be ways to list a home without an agent. Even with having your home in the MLS, there are many things an agent does to market the home, negotiate, and make sure you get the most money for it. You must consider much more than just the commission savings when trying to sell your home yourself. It is also important to know that there is no set commission or price for agents. You can negotiate or try to negotiate different payment options.
How does it work when using an agent?
There are no set commissions for real estate agents because all fees are negotiable. In this article, I may mention commissions and a certain percentage, but I am simply using what HUD uses for a commission. HUD pays the listing agent 3% and the buyer’s agent up to 3%, but many different commission percentages are charged.
Many people complain that real estate agents get paid too much, but you can negotiate with agents or try to find an agent that will charge less. The market has decided what real estate agents get paid. It is not a standard set by anyone. However, the old saying you get what you pay for is true in just about all aspects of life.
Since there are no set real estate commissions, and it is illegal for me as an agent to even say there is a typical commission, I have to stick to facts. HUD (a government agency that sells property) pays a 3 % commission to the selling agent and a 3 % commission to the buyer’s agent. I will use this commission structure as an example, but some agents charge more and some charge less.
It is common for the seller to pay the entire commission for the real estate agent. They will pay the buyer’s side and the seller’s side. The reason the house-selling structure has evolved this way is the seller usually has more money to pay agents. Buyers often have little cash to purchase a home, and that cash is used for the down payment and closing costs. The seller will usually have money from the proceeds of selling their home. The current system allows many more buyers to be able to afford a house, and that helps sellers get more money for their homes. The more buyers there are, the higher the demand will be, and the seller can get more money for their house.
The video below shows the pros and cons as well:
Do real estate agents make a ton of money?
A lot of people feel real estate agents are overpriced because it costs so much to sell a house. If you are selling a $200,000 house, the real estate commission could be $12,000. $12,000 for selling one house! That seems like a lot, but let’s look at where that money goes.
- One real estate agent does not usually make the entire commission. There is an agent for the seller and an agent for the buyer. Usually, that commission is split: $6,000 for one agent and $6,000 for another agent.
- When an agent sells houses, they have to work for a broker. Most agents do not get to keep their entire commission as they have to pay fees to the broker. They may pay 50% or 10% or even a flat fee. Each agent may only be keeping $3,000 to $5,000.
- The agents pay for the marketing on the home. They should be paying for professional photos, flyers, signs, a website, etc.
- The agent has to pay for MLS (multiple listing service) access. That is where most buyers are found for houses, and agents must pay to be a member of the local MLS. That can run from $500 to $2,000 a year in most markets.
- The agent has to take continuing education, have insurance, pay for their car expenses, rent their office space if they have an office in the brokerage, and pay to market themselves. Being an agent can be very expensive, and that is why most do not succeed in the business.
While $12,000 seems like a lot of money to pay agents who only spend a few hours selling your house, remember—they spent a lot of money becoming an agent, will pay a lot of expenses staying an agent, will have to pay many fees, and will only get paid if they sell a house. An agent can spend 50 hours showing houses, and if the buyers decided they want to rent for a while or don’t want to buy, the agent gets nothing for their time.
Some agents do very well and make great money, but it is from selling a lot of houses each year. This article goes into how much agents make.
Do you save that much selling your house yourself?
When you try to sell a home yourself, it may appear you can save 5, 6 ,or even 7 percent of the sales price by not paying a commission. However, most buyers work with real estate agents when they are looking for a house. If you are not going to pay the real estate agent representing the buyer a commission, you eliminated most of the buyers in your market. Eliminating most buyers will definitely decrease your selling price and cost you money.
If you do agree to pay a cooperating broker, you are only saving half of a commission. On top of only saving half of a commission, the buyer is represented by a real estate agent and you are not. Who will have the upper hand in negotiations and the selling process? The buyer’s agent will have the best interest of the buyer in mind, not yours.
Instead of saving $12,000 on that $200,000 house, you may only save $6,000. However, you are now going against an agent who knows how to negotiate and how to handle all the little things that come up like inspections, appraisals, etc.
Why is valuing a home so important?
If you price a home too low or overprice a home, it can cost you thousands of dollars. When a home first comes on the market, that is the best opportunity to sell a house, especially in a seller’s market like we have now. There are buyers waiting for the perfect home to come up for sale, and it is vital that a home is priced right from the beginning. Here is a great statistic for people who try to sell a home themselves versus using a real estate agent:
- FSBOs accounted for 7% of home sales in 2017. The typical FSBO home sold for $200,000 compared to $265,500 for agent-assisted home sales.
Obviously, those stats do not show the entire picture, but in my experience, as an agent and investor, I see the same thing in my market for FSBO vs agent-sold homes. In fact, I look for FSBO homes to get good deals! Often those houses are underpriced and not marketed well.
Overpricing a home
If a home comes up for sale that is overpriced, a buyer may not even look at the home. An overpriced home will sit on the market for weeks, or maybe even months until the price is lowered. When buyers see a home has been on the market for an extended period, the buyers start to wonder what is wrong with it. Even if the price is lowered to the right value after a few weeks, the home still may not sell for what it would have sold for if it had been valued correctly to begin with.
Houses become stigmatized the longer they are on the market. For an investor or a homeowner that no longer lives in the home, a stigmatized listing is very bad. Every month a home sits vacant, it costs the seller money, and if there is a loan on the house, it can cost the seller thousands of dollars a month. If a seller would have priced a home correctly, they would have sold the home quickly and saved thousands of dollars.
Underpricing a home
I hear the following comments all the time:
“I sold the house myself in 1 day and didn’t pay a real estate agent!”
That is probably true, and that person may have left $50,000 on the table as well because it was priced too low.
Pricing a home too low can cost just as much money as overpricing a home. When you underprice a home, you will most likely sell it very quickly, but there is a great chance you will sell it for less money than it is worth. It is true that underpricing a home can stir up a lot of activity and produce many offers. In a multiple-offer situation, it is possible to get a contract over asking price. The problem with a low asking price is it attracts buyers who want a great deal like myself. Often, a multiple-offer situation will actually scare away some buyers. Some buyers do not want to get into a bidding war and will not offer on a house that has multiple offers.
If you price a house too low and get an offer over asking price, you could have received an even higher offer had you priced the home correctly. Most buyers will base their offer off of the list price and not what the home is actually worth. I hear it all the time from buyers: I offered $10,000 over asking price and still did not get the home! They are basing their offer on the list price, assuming the seller is asking fair-market value. The buyers are not basing their offer on what the home may actually be worth. Another downside to an offer well above asking price is it may give an appraiser a reason to come in at a low value. If an appraisal comes in low, it could cost the seller even more money! By pricing the home right to begin with, you will almost always sell the home for the most money.
Why is valuing a house difficult?
Valuing a property is the most important aspect of selling a house. Without MLS access, it is very hard to get information on recently sold properties. Recently sold properties are the most important piece of information needed to value a home. Zillow started listing sold houses, but you have no idea if those were bank-owned, fair-market sales, arms-length transactions, or foreclosures. You need to know all of that and the condition to properly value a property.
Active listings can give an idea of house values, but you have no idea if houses are overpriced or what price they will actually sell for. Every house is different because every house has different features and locations. A real estate agent is an expert at determining value based on these characteristics. It can take years to understand local markets, and local markets can change extremely fast. It is very difficult and takes a lot of time for an agent to determine value correctly; it is much more difficult for someone who is not an agent.
The video below goes over how to value a home if you want to see what is involved:
Can you use Zillow to value a home?
Zillow also provides a Zestimate for house values. Many people think this value is accurate, but it can be way off. I wrote an article here that explains how far off Zillow was on my rental properties. Zillow was off by as much as 40 percent on one of my properties! You should never value a home based solely on a Zestimate.
What will you have to do to sell a house yourself?
As you can see, selling a house yourself may not save as much money as you think it will. While it can save money, you will have a lot more work on your hands. Here are some of the things you will have to deal with.
If you end up with a buyer who is getting a loan, they will most likely need an appraisal on the home. The bank will lend the buyer money based on that appraisal, and if the appraisal comes in low, there is a good chance the buyer will need the price of the home to be lowered. We see appraisals come in low all the time with rising home prices, and there is a way to deal with appraisers. A real estate agent knows how to be proactive to help the appraiser and knows how to challenge an appraisal if it comes in low.
There is a definite art to marketing a home correctly. You can’t just stick a home in the MLS and wait for offers to come in unless you price it too low. A real estate agent knows how to take the best pictures, do virtual tours, create the best brochures, which websites to use, which magazines and newspapers to advertise in, and much more. Real estate agents also know people and have their own list to market the home to.
Speaking of contracts, have you seen your state contract recently? In Colorado, the state contract is 17 pages long, and that does not include the four addenda and disclosures that need to be completed as well. A real estate agent knows exactly what to look for in a state contract, what is customary for the seller to pay, and what is customary for the buyer to pay. In Colorado, it is customary for the seller to pay for title insurance, and many other costs will be split by the buyer and the seller. There are many costs that the buyer customarily pays. If you have no agent to guide you on what is normal for a seller to pay, you could easily pay many more costs than you should.
Title companies or attorneys handle the sale of the home and make sure everything is done correctly. There are good title companies and bad title companies. I used a title company recently that missed a $5,000 city lien that the seller never paid. That title company refused to pay it, and the buyer was stuck with that $5,000 bill that the seller was responsible for. If you are wondering, that was Tiago Title.
When you sell a house, the buyer will almost always have an inspection completed. The inspector often lists every possible thing that could be wrong with the home, and the agents negotiate what the seller needs to fix or not fix. This is a great time to have an agent on your side who can help you decide what is needed to be done and not be done to save money.
A home should look its best when it is being sold. Buyers are very emotional and often cannot visualize what a home will look like when they make changes. They only see what it looks like now. A lot of people don’t want to paint or put flooring in because the buyer will just want something else. That is true 10% of the time. Most buyers want to put no work into a home and buy it as it is. They do not want to fix it up, so the nicer a house is, the more money it will sell for, but you also don’t want to spend $50,000 to gain $20,000 in price. An agent can help you figure out what to do and what not to do to get the most money.
I have mentioned some of these before, but everything is negotiable in real estate. Here are a few things agents will help with:
- Negotiating price
- Negotiating inspections
- Negotiating appraisals
- Negotiate title resolutions
- Negotiating multiple offers
- Negotiating seller concessions
- Negotiating earnest money
- Negotiating inclusions and exclusions
- Negotiating conditional sale contingencies
- Negotiating survey resolutions
- Negotiating due diligence resolutions
- Obtaining and reviewing the buyer’s qualification letter
- Negotiating closing and possession date
Low-fee service to enter a home in the MLS
There are many companies that now offer a low fee MLS service. You pay a couple hundred dollars and get your home entered into the MLS. There are many problems with using this type of service:
- The service may never see your home and may enter incorrect information and no pictures
- The seller still has to take calls and set up showings with many of these services
- You will have to pay the buyer’s agent if you enter the home in MLS. Once you have paid the MLS listing company and buyer’s agent, are you really saving a lot of money?
- You still have all the disadvantages of not having an agent represent you and having the buyer represented; no help with contracts, negotiations, inspections, appraisals, etc.
- This service is illegal in some states like Colorado. The agent has to represent the buyer and cannot leave them to do everything themselves.
Are all agents great?
You have to make sure your agent knows what they are doing. If the real estate agent prices your home wrong, it can be just as harmful as a FSBO-seller pricing their home wrong. It does not hurt to get a couple of opinions on value to see what your home is worth. Remember, the higher value is not always the best one! Some agents will give a higher value than they really think the house is worth to get the listing. This is why it is important to get sold comparables from the agent and really look at them to make sure the value they give is correct.
Another problem I see is agents trying to double-end listings. Double-ending means they represent the buyer and the seller, which may earn them two commissions. There is nothing wrong with the agent representing both sides of the transaction in most states, but you have to make sure your home is being marketed to everyone. In some cases, the real estate agent may list the home as “coming soon” by putting a sign in the yard and telling their buyers about the listing. The agent does not put the home in the MLS system because they do not want other agents to know about it. This gives the listing agent the chance to get the house under contract with their own buyer before the home is marketed to everyone.
The problem with the home going under contract before it is in the MLS system is the seller may not get as much money. Often, the real estate agent will convince the seller to take less than list price or list the home below market value so they have a better chance of getting the home under contract with their buyer. I suggest not accepting any offers, especially from your listing agent, until the home is active on the MLS for at least one day if not longer.
You cannot blindly choose any agent to sell your home. Take your time to find the best one out there so that you can make the most money and have the easiest transaction.
It is almost always better to use a real estate agent to sell a home. A real estate agent will make you more money on the sale of your home because of their knowledge and experience. I know many investors who have their real estate license, and they still use another real estate agent to sell their house for them. Those investors know that another agent has the time and market expertise needed to sell the house. Before you try to sell a house on your own, consider if it is worth the time it will take to understand the process and if you will actually save any money.