Edit: This got way bigger than I thought it would and I'm worried that people are going to put a lot of stock in what I wrote, so if you're consulting this at some point in the future as an official guide to how to buy real estate from an industry veteran, I feel I should mention that I do not consider myself anything close to a real estate expert. The point of this post is really not to tell you the best way to buy or sell a home. What I intended to do was show people that the internet has changed buying and selling real estate and the old model deserves some scrutiny. It's up to you to decide what's right for you and to research your options because there are now more options than ever for buying/selling. Read the comments, read the replies, read everything you can about real estate and talk to other people you trust. Buying and selling a home is a HUGE undertaking. Don't just mindlessly hire an agent because you think that the fact that they have a license makes them valuable. It doesn't. Equally important, don't mindlessly follow my advice below thinking that you'll definitely save money. You might not. There is risk in everything. Just be sure that whatever you choose, you take control. Don't let agents bully you or scare you into thinking they are the only option. Also, I just had an interesting thought. If you're a curious type and have some spare time. You could take the same real estate courses that agents take from your local association for around $500 or so. Even if you get an agent, it could be money and time worth spending. Plus the classes are interesting if you like that sort of thing!
I started writing some of these points in a different thread and realized that many of you frugal folks might appreciate some tips to save THOUSANDS of dollars when selling or buying a home. I used to sell real estate before the bubble burst and I went broke but I did it just long enough to realize the traditional real estate agent model is set up in a way that really doesn't always benefit consumers. I honestly thought that the old school model of an agent listing a home for 6% commission would completely shift when the internet started becoming more sophisticated in that industry. While that has happened to some degree, the Realtor's association is very strong and I think most people are still unaware that you don't have to hire someone at 6% commission to sell your home and you don't really need to hire a buyer's agent either. In fact, the benefits of hiring one are usually negligible at best and actually often worse than the alternative. In almost all cases there are specialists (attorneys, photographers, appraisers, inspectors etc.) that you can hire who will do a better job for way less money. And while it may seem as though managing all of that by yourself might be difficult or time consuming I would argue that with the tools available to us through the internet it's comparable to hiring an agent on both counts. As with most things, there are plenty of exceptions where my advice doesn't apply but I think this will be helpful for many people buying/selling a home (even seasoned veterans of home sales and purchases) to understand that there are alternatives besides the old model. Since every circumstance is different, I encourage you to meet with agents and see what they have to offer to determine what's right for you but this should help you with some behind-the-scenes context that agents aren’t likely to mention. With no further ado, I give you my guide to buying and selling a house on the cheap.
Selling your home:
Why you think you need a seller's agent – If you're selling your house, you may think the only way to do it is to hire an agent. Maybe you believe the process is too complicated for you or you think that the real estate agent has some sort of magical house-selling power or they can bring a list of buyers that will pay top dollar for your property. You may even think that they can take the pain away from what is typically a very painful process.
Why you don't – Unless you have a lot of varied skills and recent experience with buying and selling homes already, you will need help. But the real question is whether a seller's agent is worth 5%-6% of your home's value and are there cheaper/better alternatives. As a reminder, 6% comes out to $12,000 on a $200,000 home! Here are some things an agent can actually do for you to earn that 6% commission. Provide advice on pricing and home improvements to get your house ready for sale. Take pictures, write copy and enter all the other relevant data into the local MLS service (basically, fill out a form online). Help lead negotiations when you have a deal on the table. Of all of those benefits, the most important is getting your property listed on the MLS. This is the service that companies like Trulia and Zillow use to populate their websites and is the service that other realtors use as the main database to find properties to show their clients. If you're not on the MLS, you're basically not really for sale. This is something that realtors rely on to keep normal people like us coming to them. But there is a solution to that problem (included in the bullets below). Other than the MLS thing, though, the internet renders most of the realtor’s benefits obsolete. So here’s how to get the above benefits without spending $12,000:
- Pricing advice (Max value; $400) – There is no true science to pricing a home. Realtors and appraisers will argue that point but real estate is so much more nuanced than a scoring spreadsheet will tell you. Ultimately, it comes down to just knowing your market. Use sites like Trulia to see current properties on the market to evaluate your competition. Then look at properties similar to yours that have sold within the last 3-6 months or so to get an idea of a realistic final selling price. Assuming you’re not delusional and you know your neighborhood, you will get pretty close. Even when people hire agents, the agent often just lists for whatever the seller wants anyway. If you so desire, you can have a professional appraisal done on your property for less than $400, though many agents will offer a free “home valuation” as part of their marketing efforts hoping that you will ultimately list with them. If you’re comfortable having them do this with no intension of hiring them, that’s kind of up to your personal moral code, but it is an option. Many agents will do this for you even if you explicitly tell them you are going to try to sell on your own because they know you may call them if you decide to list with an agent eventually.
- Home improvement advice (Max value; $0.00) – You could read countless articles on how to prepare a home for sale and follow their advice, which will probably be all you need. An agent will not actually help you prep your house for sale, that’s still on you, so the value here is minimal if anything at all. The most important things in my opinion are to DECLUTTER EVERYTHING and make sure the place is clean. Seriously, before you decide to put $5,000 into a bathroom or landscaping or whatever before you sell your place, consider renting a temporary storage unit and putting everything you don’t absolutely need in there. I’m talking couches, big furniture, stuff jammed in closets. Get rid of it all.
- Marketing (Max value; $200) – You will need to have pictures and marketing copy to put your property on the MLS and other real estate websites. Your biggest cost here will be photography. You can find local photographers who focus on real estate who will charge you a completely reasonable rate. Photos are important, so I really don’t recommend doing this on your own unless you really know what you’re doing. Many agents even take photos of their properties themselves and they are terrible. As for copy, never in the history of real estate has excellent copy sold a home. You don’t need to be Keats with your copy. Just the facts. Take a look at a few examples of other descriptions that you like on other homes and just use that same structure for your home. There are other details you’ll need like number of beds/bathrooms etc. but you will already know that and the agent doesn’t add any value there. You may have some additional investment in something like a $10 “For Sale” sign or maybe something else but the days of agents incurring marketing costs to list your property in the newspaper are long gone yet the commission rate remains the same.
- Listing on the MLS (Max value; $500) – This is one area you will need to hire a realtor for but you do not need to pay them 6% or sign a long-term contract with anyone. Look for a local agent or agency who offer flat fee service. For around $500, they will list your property on the local MLS. Once it’s listed there, it will get picked up by all of the major real estate websites and added to their databases automatically. For this, it is important to find a local realtor rather than a faceless online entity because if you need to make changes to your listing for any reason, you will need a human being to be responsive to your needs.
- Paperwork (Max value; $0-$1,000?) – Okay, so lots of flat-fee agents will also offer an option to buy standard real estate documents for your state. That’s what you want. I don’t recommend buying them online or trying to cobble together your own homemade contract because you can’t be sure it’s any good. Each state is different and the standard contracts are frequently updated. I recommend you ask your flat-fee agent for any paperwork you will need to list and sell your house. Agencies that specialize in flat-fee service will likely be able to explain each document to you as well to help you with that “I have no idea what I’m looking at” anxiety. Some of the forms can be intimidating but if you take your time with them and familiarize yourself with them before you have to fill them out, it’s really not bad at all. Even if you’re very worried about screwing this part up, you can just hire a real estate attorney to review your documents to make sure they’re in line with what you want. It will be expensive, maybe up to $500/hour, but it will still save you money overall. Plus, an attorney is almost always better than an agent at getting these documents right. So why is the commission so high? At one point, selling a house was a lot more work. Running newspaper ads, marketing houses, attracting buyers was kinda difficult. But the fact is that even back then, only a small portion of that commission ever went to the seller’s agent him/herself. They split any commission they receive with a buyer’s agent (50%) and their broker (usually 50% depending on the agent’s deal with their broker) and they incurred costs along the way. Nowadays, they do not incur similar costs to market your property but the overhead of maintaining a brokerage still exists. Someone needs to cover the cost to keep the place going which includes high costs for attorney retainers and errors & omissions insurance for the agents in case they make a mistake. Since you are not a licensed professional, you do not need E&O insurance and if you want to consult an attorney, you can do so hourly instead of on a retainer.
- Total max value of agent's services if you hire individual professionals: $2,100. Assuming that you are still offering 3% to a buyer's agent, your total max cost would be $8,100 on a $200,000 home. That's a savings of $3,900 over the standard 6% commission model but I honestly think most people will be able to do this for closer to $1,500-$1,700 though.
Buying a home:
Why you think you need a buyer’s agent: – You may want a buyer’s agent because you think they are free. After all, the seller’s agent will split his/her commission with your agent, so it’s no money out of your pocket. Or maybe you feel like you need someone to help you find the perfect home, or get you financing or maybe you just want someone to help you through the process. It can be nerve racking!
Why you don’t: – Buyer’s agents are not free. Someone has to pay them and the cost always comes from somewhere. If there is no seller’s agent, then you will likely be responsible for paying your agent out of your own pocket (read your agreement!!) If there is a seller’s agent, then they will split their commission with the buyer’s agent. However if there’s a seller’s agent and no buyer’s agent, the seller’s agent will often be willing reduce their commission by 50% and put that toward the home price. So if the seller is offering their agent 6% on a $200,000 house ($12,000), they can ask their agent to reduce the commission to 3% since they won’t have to split it with a buyer’s agent. Then, the seller can reduce their sale price of the home by $6,000 without affecting their out-of-pocket costs and the seller’s agent still gets the 3% they would have gotten if they split it with your buyer’s agent. Basically, you just saved $6,000 plus 30 years of interest on that money. The key here is to negotiate the price to as low as the seller will go, then ask for the agent to cut the commission. Otherwise, you can’t be sure you’re getting the bottom price. So if you want to buy a house without an agent, here’s how to get (most of) the benefits without spending $6,000:
- Find the perfect home (Max value; $0) – Trulia, Zillow, Realtor.com, whatever. Your agent doesn’t have magical powers. You can find your own property just as easily and you run less of a risk of missing one that you want. You can set up alerts, too. In this case the agent is really only a middleman slowing down the process.
- Coordinate showings (Max value; $500) – This is actually a pain in the butt if you’re the type to look at a ton of houses but if you’re smart about it, you can schedule multiple showings on the same day to keep things fairly easy. Like book yourself to look at three houses on Saturday instead of looking at them one at a time. It shouldn’t take too long but if saving yourself a few phone calls to set up showings is worth $6,000 to you, then by all means hire an agent. Or, if you really like the frugal lifestyle while also living like a baller you could just hire a personal assistant online to handle that for you for probably around $30/hour or less. You could set up a TON of showings for well under $500.
- Neighborhood awareness ($? – You decide value) – If you’re moving across the country or otherwise unfamiliar with your new town, an agent may be worth the money for peace of mind but you'll need to decide if that's worth $6,000 to you. With the internet, a few hours of research will show you everything you might want to know. Determine what is important to you when finding a location and there's virtually nothing the agent can tell you that the internet won't tell you. Commute times, school districts, tax rates. All of that stuff is online.
- Financial advice ($0) – Working with a mortgage broker (A broker is someone who works with multiple banks) or directly with a reputable bank will often provide you better advice than an agent. Most agents will just tell you to talk to the lender anyway. Tell them what you want to do with your home purchase and they will work it out with you.
- Pricing advice (Max value; $400) – See explanation above. Also, you have the added benefit here if you are getting a mortgage that the bank will require an appraisal before you can get financed. In other words, it’s nearly impossible to overpay for the home.
- Answering questions/consulting ($1,000-? – You decide value) – Of all the reasons to have a buyer’s agent, I think this is the best one. If you haven’t purchased a home before, you will probably have a ton of questions and there is some real benefit to having someone on call that you trust to help you through your anxieties. If you don’t have a friend or family member to do this with you and the prospect of buying a house is overwhelming to you, an agent may be worth the money just to ease your fears. That being said, if you buy a house from a seller with an agent who doesn’t suck, that agent will be able to walk you through your issues too. There are even a lot of agents who would be happy to answer some of your simpler questions even though they won't get paid. Agents are generally a nice bunch of people who legitimately want to help. The only thing is you’ll be on your own until you decide to put an offer in on a property but that’s when you’ll really need help. Up to that point, it’s just arranging showings for the most part. Remember, the seller’s agent wants the process to go as smoothly as you do. They will help you get your financing in order and help you work though all of the issues and questions you may have as you go along. But remember, the sellers agent really want you to buy that particular house so be sure to get a home inspection before you finalize your sale, even if you're buying a brand new house! It generally costs around $300 or so and it's always money well spent. Even if you hire an agent, though, you will still pay for this out of pocket, so you won't save any money here by having an agent. Also, you will want to buy standard home sale contracts for your state if the seller doesn't already have them and if you want to be totally sure your deal is air-tight, you can hire an attorney to review the contract before you submit it to the seller, though I believe that wouldn't be necessary unless there is no seller's agent at all.
- Total max value of agent's services if you hire individual professionals: $1,900.
Okay, I spent way too much time writing that and I’m sure there are things I’m leaving out and things I should have thought through better and other general errors, but I believe this would be a good start for anyone looking to save money buying or selling a home.
Edit: Okay, this got a lot bigger than I expected but I got tons of feedback and tried to reply to as many of the comments as I could. I encourage you to read through them for varying perspectives. First, it seems that many Realtors want me to clarify that there's a difference between excellent agents and "bad" ones. I agree that an excellent agent can be worth the money and may even pay for themselves in some situations but you have to decide what that's worth to you. I would also point out that I was a mediocre agent, not bad, but not great either. I would classify maybe 5% of agents as excellent. After that, there is a huge dropoff in quality (just my opinion from what I saw in my market) to people like me. What I'm telling you is that I believe that the work I did as a mediocre agent could be done by almost anybody else on their own with just a little bit of effort. When it comes to the value proposition, others have mentioned that some agents will list a property for a 4% commission. In that case, just calculate your savings from selling by yourself using similar math that I used above and decide if you think they're worth it. That said, it's been my experience that agents willing to cut their commissions to get listings aren't often the best in the area, so that might be a consideration too.
As a final note, many people mentioned the company Redfin, which I hadn't heard of before but it seems pretty great on the surface. I have no experience with them, but it might be worth exploring for you.