When I lived in Florida, there was a local realtor named (I am not shitting you) Polly Esther. Poly Ester. Polyester. Not only did Polly not shy away from her unfortunate name, she wore it (and by it, I mean the near-eponymous fabric) like a badge of honor in her bland, smiling real estate ads. So fucking what I'm named after a synthetic remnant of the eighties - you'll still deal with me! As far as I can remember, this was the moment I began questioning the legitimacy of realtors.
In my previous post, I went through the costs associated with buying and selling a house. These costs are really important; for many people, the primary residence will be the primary vehicle for accumulating wealth (mostly through principal appreciation, tax advantages, and real estate appreciation, in that order).
One of the benefits of "saving via homestead" is that the process is fairly automatic; just make the payment and you're moving in the right direction. As I previously reported, the only risk to your nest egg occurs during buying and selling. In addition to locking in a gain or loss, this is the time when you can bleed money to a slew of fees, taxes and commissions associated with buying and selling. We all know I hate to waste money. As I went through the recent sale of my primary residence, I scoured the process for ways to reduce or eliminate needless expenditures.
Obviously, there are certain parts of the process you can't really do anything about. Taxes and fees are set by the state and local government. Other major costs, like real estate attorney fees, are, as I discovered, unavoidable necessities.
But there is one big line on your closing statement you can do something about - the realtor commission. In Chicago, the typical realtor commission is six percent of the purchase price, split evenly between the buyer's and seller's realtor.
As a buyer, I never thought much about the realtor's value in the home buying process. Since realtor fees came from the seller, "hiring" a realtor was essentially a free service, a knowledgeable chauffeur who would drive me around, burning their own gas to show me places I was interested in. Now that I was the seller, however, things look a little different - the real estate commission that would come out of my pocket would be fifteen to twenty thousand dollars, and for that much money I wanted to see significant value.
There are a slew of ways out there to undercut the traditional realtor's fee, ranging from flat-fee services that only list your property on the MLS to pay-per-visit agencies that show your place to prospective buyers. Never one for moderation, I asked a more dangerous question - do I need a realtor at all?
The answer to this question lays in whether the realtor provides significant value. So - what do realtors do to earn their money?
What a loaded question. I'm sure a pro realtor could write a novel on all the valuable services they offer. However, since mine was the only opinion that mattered, I came up with my own list of typical realtor services provided to a seller:
(1) Evaluating and Properly Pricing the Property
(2) "Selling" the property. This includes listing, marketing, staging, networking with other realtors, etc.
(3) Showing the property to buyers and providing feedback to the seller.
(4) Handling negotiations and facilitating communication between buyer and seller.
(5) Handling/managing the subsequent transaction.
Looking at this list, I found a lot of fluff. Nearly every aspect of their service seemed like something I could do pretty easily. Examining this point-by-point, along with my perceived value.
(1) Pricing the property. Minimal value. I live in a high rise. There are many copies of my unit, some of which were recently sold. Even without this advantage, I can read Zillow and identify comps as well as anyone else.
(2) Selling the property. Possible value here - Going in, I didn't know if staging my place would be necessary, and while I could certainly list my place on the MLS for a flat fee I didn't know much about advertising. Even so, I doubted a realtor would have too many tricks up their sleeves that I couldn't achieve through realtor.com and Craigslist.
(3) Showing the property. This was the main value I saw, the convenience of having showings taken care of. However, because we have pets I didn't want strangers coming through when we weren't around, realtor or no. Knowing that we would likely restrict tours to the weekends, I was simply willing to sacrifice a few Saturdays to show the place.
(4) Handling negotiations. Zero value. I do not like this function from realtors. I have a sneaking suspicion that realtors put a firewall between you and the buyer simply to prevent them from being cut out of the deal. I also have sneaking suspicions that buyer and seller's agents occasionally collude to get a deal done. Since it's more difficult to get a buyer to pay more than scare a seller into missing a likely sale, I would get the short end of the stick.
(5) Managing the subsequent transaction. At first, I thought this was a major part of a realtor's function. After learning about the process, I quickly discovered a realtor provides, at best, zero value (at worst they fuck things up by interfering). Realtors write a few numbers on an offer sheet, offer a little common sense, then - once the doc is signed - turn things over to a real estate attorney (who you also have to pay out-of-pocket) to do all the real work. Realtors I've worked with acted like they were involved, but their advice was no more useful than that of a friend who once bought a house.
So, twenty grand to show my house and MAYBE do a little marketing. Nah, I'm good. I decided to go solo. And while this seemed risky, it really wasn't; DIY real estate marketing costs very little. Were I to screw it up, I could simply hand things over to a real estate pro and have them fix my mistakes.
Let's walk through my experience and see how it went:
Properly Pricing The Property
What I was working with: a condo on the Chicago lakefront in Lincoln Park. High-rise building. Fortieth floor. 1175 square feet, two beds and baths. Desirable place to live in a well-run building. Still all of these things. It's why we bought it in the first place.
Pricing needed to be analytical, rather than emotional. Start with history - we paid a 291K base price on a unit listed at $315K*. Since then, I'd plowed $16K into renovations. Next were comparable property (comps). We had 41 units with identical floorplans - what could be better? Chicago's real estate market had been kind of stagnant in our part of town - units that were a little nicer, but on lower floors were selling fairly briskly for around $300K. I figured that, with my renovations and the height of our unit that $300K would be a good final price that would produce a brisk sale. Working backwards, I added 5% to this (for the expected price negotiation) and came up with a list price of $315K. Time invested, about 15 minutes.
"Selling" the Property
I began by looking at my schedule. We wanted to move out around February first. We began in early November. Please note that this is traditionally the shittiest time to sell a property, particularly in the Midwest.
As a precaution, I constructed a tiered sales plan. Each phase of the plan was progressively more expensive, but - in theory, at least - increased the probability that the place would sell. Phase one was free local advertising plus Craigslist plus whatever I could do on my own for free (or mostly free). Phase two was paying a flat fee to have the place listed on the MLS. Phase three (the "OK, now we're desperate" phase) was to hire a realtor. This was possible because I gave us plenty of time to sell.
We began phase one by cleaning up (just normal cleaning) and taking some pictures. I like photography, so I was able to take some quality photos using my own equipment (fun fact: the wide-angle lenses used for this are about $270 bucks, which can be less than a "pro" photographer would charge). Using these photos, I made a 5x8 flier with three photos (the living room, the master bedroom and the view of the lake). I listed our contact info on some strips at the bottom, gave a brief description, and posted it in our building's laundry room on the resident notice board. Periodically, I would remove strips to simulate interest, although a fair number of these strips disappeared on their own. We did absolutely no staging whatsoever; we even left up our own pictures, which is supposedly a big no-no.
Showing the Property
Not much activity occurred for the first couple of weeks. It was now mid-November and I was preparing to list on MLS when we got a nibble. A younger couple that already rented in the building was looking to buy. They were in the early stages and not working with a realtor. We set up a meeting for them to see the place. A few days later they asked to come back with some parents. A few days later, they decided they wanted to make an offer.
With no realtors involved, these were direct negotiations between us (mostly me) and the buyers. Using a publicly-available offer form, the potential buyers floated an initial offer of $290K. After briefly deliberating with Susan, I wrote back, barely a single sentence suggesting we split the difference between their offer and my $315K asking price. They agreed, and that was it. A revised offer came back. I signed it and sent it to the attorney they had hired and we were under contract.
The Inspection/Mortgage Process
A quick aside: As a seller I had little to do with this part, but our buyers were busy getting an appraisal, inspection and a mortgage. Agents normally help you with all of these things, which is undeniably helpful to first-time home buyers who don't know who to call. However, let's not pretend there's great value in this - our first-time homebuyers managed to find an appraiser (to verify the home's value to the bank making the loan) and an inspector (who ensured the mechanical/structural soundness of our property) with no outside help that I could identify. They also managed to obtain a mortgage just fine.
Two notes on this process: If I had to point to a part of the process where a realtor might have saved the buyer money, it was the inspection. I'm sure there were a few minor things wrong with our home, and the buyers could have probably wrung out a thousand bucks out of me by pointing them out. An experienced realtor might have pushed for this. On the other hand, there's the potential for a realtor abusing a new buyer. Realtors are famous for steering unsuspecting clients to "preferred" inspectors, appraisers and - most often - mortgage brokers, who pay kickbacks to the realtor while cutting a shitty deal for the borrower.
Managing the Sale
Having agreed on a price, we then needed an attorney to draft docs for the actual sale. As I mentioned, the seller had retained a RE lawyer, who immediately began sending me terse emails requesting documents and disclosures I'd barely heard of.
Going in, I thought one lawyer could handle a transaction like this. Well, either their guy was lazy or I was mistaken, because I learned that I needed to cover quite a bit of stuff. When I asked him if he would prefer me to simply hire another attorney, I got a non-answer saying that "the decision to hire an attorney is yours alone" and a reminder that he would expect me to follow legal and customary practices in this transaction (whatever the fuck that meant). Attorneys note - this type of shit is why everyone hates your kind. A much better answer would have gone like this: "dear self-service idiot: you will quickly drown in your own shit if you attempt to complete this solo. Hire a goddamn lawyer and do whatever s/he says."
No such advice was forthcoming, however, and in the absence of common sense I wasted several stressful days (far more stressful than the selling part) trying to play lawyer. One morning as I struggled to learn how to pull the title from county records, I said "fuck it" and picked up the phone to call a real lawyer.
To make a long story short, I learned that the real estate transaction is still shrouded in secrecy, probably deliberately; with enough effort I could have probably done it myself, but the whole industry seems designed to deter amateurs from getting involved (and, as one such amateur, I can't say this is a bad thing).
The attorney took care of everything. Everything. Well worth the money. I showed up, signed some docs (including one allowing him to represent me at the closing) and walked away. I got my money the next day. This really underscores the whole point for me: my attorney charged $1,500 to handle the whole soup-to-nuts transaction, whereas my realtor wants six times that. For what???
There may be a realtor reading this who's screaming to themselves, Noah! You set your price too low! You had an easy time because you walked away from a fat profit. You NEED me!
Do I, though?
Let's examine the possibility that I priced badly. There are 41 identical copies of my floorplan in this building. In the past few years, many of them sold. The listing and sales data, along with pictures showing the address and condition of the units, is publicly available through any number of websites. Yes, this may be a unique situation, but I'm seeing more and more anecdotal evidence that "professional" realtors don't do much better. Here in California, I can't tell you how many 1.2-million dollar homes I've seen sell for $990K. That's a 20%+ miss.
Even so, let's play along and say the angry realtor is right. Maybe I underpriced the house by a whopping 10%. If this were true, then I would have sold for 332K instead of 302K. A paper gain of $30K. But then I have to pay the realtors their six percent. That's $20K gone right there. Maybe they convince me to spend three or four grand to stage my place, and maybe I lose another $5K in carry costs while they show the place over and over, trying to get top dollar**. In the end, all of my probably-ludicrous profit is gone.
There's also an excellent argument to be made that, as a seller, your interests and those of your realtor are fundamentally at odds. While both of you want to turn the house quickly, the homeowner wants the highest price. Waiting and/or making more effort to secure an extra $10K of house price is only worth about $300 for a listing realtor (half of a six percent commission on the extra). This is getting to be fairly common knowledge. Were I a realtor even remotely driven by money, I would push the first halfway decent offer and clear the property off my plate. And while deciding to sell is ultimately the homeowner's decision, you are, at best, paying someone to give you bad advice. Not unlike a financial advisor. More likely, I would have sold the place for the exact same amount (or a paltry amount more), paid $18K in realtor fees and lost big on the decision to go with the realtor.
I should think that avoiding a realtor as a buyer would also be beneficial financially. Although it's more difficult to see places, you can ask for a decent (maybe 2%) discount on the final sales price, on the logic that they won't have to pay your realtor a commission.
To recap my experience:
Listing-to-contract time: 24 days (delayed over Thanksgiving)
Contract-to-sale time: 47 days (delayed over Christmas)
Typical realtor commission: $18,120
Actual DIY costs: $0.03 (three sheets of paper for fliers)
Total saved: $18,119.97
Cost of this awesome-looking 2008 semi truck: $18,000 (about $18,120 with a full tank of gas)
What about the extra work of selling your own home? What about the stress? What about the extra work? I worked a total of maybe six hours on the deal. Most of that was cleaning up enough to take pictures. That's a pay rate of about $3,000 an hour. Not too shabby. I will admit a certain amount of stress - a first time home seller trying something new should be stressful. But I always had something in my back pocket - if I fucked it up, I could always go to a realtor.
Not that I ever see myself making that mistake again.
*What we paid is almost totally irrelevant - it's what we could sell it for.
**This assumes I get the unicorn of realtors who's willing to go to war to sell a place for a few extra bucks.
Noah's Inner Monologue
Scribblings of a man who can barely operate an idiotproof website.