Skipping the Real Estate Agent: What Can Go Wrong
Sometimes an effort to save money can cost you.
Real estate agents exist for a reason.(Getty Images)
A typical real estate agent's commission is 6 percent of a sale, according to industry experts. That 6 percent isn't always a windfall for the agent, who splits the money with perhaps a brokerage firm or another agent (since often there are two agents involved, the seller's and the buyer's). But it is a substantial chunk of change for a home seller. At 6 percent, if you sell a house for, say, $300,000, the seller will potentially end up handing over $18,000 to the real estate agents involved in both sides of the sale.
So naturally some home sellers opt to remove the agent from the equation. They sell the home on their own, a practice often referred to as an FSBO (for sale by owner), and some people even purchase homes without a real estate agent.
If you're thinking of buying or selling a house on your own, keep in mind that real estate agents exist for a reason. Plenty can go wrong when you skip the real estate agent. Such as ...
Paperwork may be filed incorrectly. Evan Harris, co-founder of SD Equity Partners, a San Diego-based real estate company, says that his firm works with a lot of house flippers who don't use agents to sell their properties. And if there's going to be a problem, he says, it's often with the paperwork.
"In every real estate transaction, there is a lot of legal jargon and important paperwork that has to be 100 percent correct," Harris says. "Agents and their legal counterparts have what is called errors and omissions insurance to protect themselves from any mistakes. An FSBO does not usually know enough about the industry to obtain this type of insurance – and sometimes isn't even able to as an individual entity."
And if you don't have the insurance, and you do make an error, like not disclosing important repairs that you were legally required to report to the buyer, what could happen?
"The impacted party, which is usually the new homeowner, will wage a civil lawsuit against the FSBO," Harris says.
Whether or not you can buy errors and omissions insurance, Harris suggests hiring a real estate attorney to fill out the paperwork for you.
"Not only will you be covered for any mistakes, you will also have a legal representative's opinion on the deal to make sure that you are not being taken advantage of by the other party involved in the transaction," Harris says.
You may have fewer buyers. Thomas Miller, a Realtor and listing specialist with Keller Williams Capital Properties in the District of Columbia, makes that point.
"Many buyers and agents are reluctant to engage with sellers that do not have professional representation. Often, for-sale-by-owner transactions take much longer and are more stressful than those where both sides have professional representation."
So if you sell a house on your own, you'll be fighting the bias among real estate agents that your house is going to be a headache to purchase.
[See: 10 Tips to Sell Your Home Fast.]
You may price your house incorrectly. If you study the market, maybe you'll come out just fine, but if you believe the data, you'll think about hiring an agent.
Every year, the National Association of Realtors puts out its annual profile of home buyers and sellers, based on numbers crunched the year before. According to the 2016 profile, FSBOs accounted for 8 percent of home sales in 2015; the average FSBO home sold that year for $185,000 compared to $240,000 for agent-assisted home sales.
Miller says he recently had buyers purchase a home directly from the sellers, and he feels that his buyers got a great deal, and the sellers, not so much.
"Since the purchase ... more than five similar homes, either on the same street or less than a block away, have sold for between $75,000 to $100,000 more than my clients paid for their home. The sellers accomplished their goal of saving money on a commission but clearly left a great deal of money on the table," Miller says.
If Miller is right, and the sellers could have sold their house for $100,000 more, in order to keep that $6,000, the sellers gave up an additional $94,000 (minus taxes).
Another way to potentially lose money? Buying a home without a real estate agent. Many times, the seller's agent has it worked into the client's contract that if the buyer doesn't have an agent, the commission that would normally go to the buyer's agent will go to the seller's. So if you're working like a madman, and your seller's agent isn't breaking a sweat and later gets the commission that would have gone to the agent you didn't hire, you might feel like you lost.
You may lose more time than you bargained for. People work full-time selling homes. Granted, a typical agent is trying to sell a lot of homes every week, and you're only trying to sell one. Still, Jason Saft, a New York City-based real estate agent with Compass.com, a technology-driven real estate platform, says that a lot of people simply don't have the time and energy it takes to sell a house.
Saft says: "Ask yourself: Can you take on a new full-time job?" He adds: "When you boil it down, there is a striking similarity between real estate sales and dating. You must remain consistently available and constantly on your 'A-Game'. Do you have time to handle every inquiry in a timely manner? Are you ready to have people come in and out of your home on their schedule and not yours? Can you keep the space looking clean and fresh for all prospective suitors? While this may seem intuitive, it's important to understand the implications of these factors on your day-to-day life."
Of course, even if you have an agent, you have to be ready for people to come in and out of your home, but you can generally live your life and go shopping or off to your day job while your agent shows your home. But that's not to say you shouldn't sell or buy a home on your own. If you're detail-oriented, have a type-A personality or are perhaps retired and could use a time-intensive hobby, selling or buying a home on your own may be just the type of pastime you've been looking for.