Saturday, July 07, 2007

The Hidden Costs of Selling Your Own Home

So you've decided to sell your home. You're moving into something bigger, or you need a yard and a den for the impending little one, or a third bedroom for the second child. Maybe you're moving closer to family or relocating for a new job.

Should you hire a Realtor? How hard can it be to sell a house?

You're a smart and business savvy person. You've sold your own cars in the past. You sold your old bike and your stereo on Craigslist. You know you need a sign, you'll have to put an ad in the newspaper, and then you'll have to answer the phone and show your home. Why pay a Realtor a 5-7% (let's call it 6%) commission? I mean, that's a lot of money!

The reality is that selling your home is much more complicated than that. What's more, you don't actually keep that 6% that you were weighing against the effort required. It costs money to sell your home, pure and simple, and if you're going to spend that money, use it to hire a professional. You cannot afford not to.

Why does it cost money to sell a home? Where are those costs you've overlooked?

  • Co-operating commission - This is the commission or "finder's fee" paid to an broker/real estate agent who brings the selling party a buyer. If you are not willing to pay a co-op commission, you will have a hard time finding a Realtor eager to bring you a buyer. The vast majority of home buyers are now represented by an agent, according to a recent RealtyTimes article, so you've just eliminated most of the buyer population if you insist on not paying a co-op commission. [Incidentally, I've yet to meet a For Sale By Owner (FSBO) who refused to pay one.]

    In 2006, 12% of all home sellers sold "by owner", according to NAR. Almost half of those sold their home to someone they already knew. That leaves about 7% of FSBOs who sold to a stranger. If the majority of those buyers are represented by an agent, that means out of 1000 home sellers, about 25 are avoiding a commission altogether.

    A typical co-op commission in Chicago is about 2.5% (some higher, some lower). Either you pay that, or your Realtor does, if you've hired one. That takes your cost of hiring a Realtor down to 3.5% not the original 6% we'd estimated.

  • Reduced Sales Price - That's right, you will (statistically speaking) sell your home for less money when selling by yourself than when you hire a professional Realtor. According to NAR:
    Homes sold with the help of a real estate professional in 2006 sold on average for 32 percent more than FSBO sales. The median FSBO selling price in 2006 was $187,200, compared with $247,000 for agent-assisted transaction

    Now I don't claim that a Realtor will get you 32% more money for your home than you can get yourself. Maybe its the case that there are more people are willing to try to sell their lower priced home than there are mansion-owners who attempt to "go it alone". That said, we're looking at $187,000 versus $250,000 in home price - that isn't the difference between Gilligan and Thurston Howell in most towns. Let's generously assign 2/3 of that discrepancy to other factors (not agent expertise). That still leaves us with 10% higher sales price for a Realtor than without one.

    Why would that be? Well, a Realtor sells homes for a living, they do this every day. They study the market daily. They have been in half the homes on your block. They know what you're competing with, and what all the neighbor's homes sold for and when. They know how to stage a home to make it most desirable for home buyers. Why? They've sold a lot more homes than you have. They know which features to promote, and how, and where. And, maybe most importantly, they know how to negotiate the sale of a home. They can remove emotion from the equation, they can quote statistics and empirical evidence, and they know how to find those extra dollars.

    Where does that put our 3.5% commission now? You've just cost yourself 6.5% of your home's value by not hiring a professional. Your 6% commission is now -6.5%. We don't need to continue, but we can...

  • Marketing costs - How will your new buyer find you? Will you go on the MLS? If you do, (though you're not technically a FSBO now), you're paying someone a flat rate. I've seen companies that will do this for as cheap as $450, and you can pay as much as you want (I've seen over $1000). This is weighed against your savings of course. What about ads in the paper? What about marketing on all the big websites (the vast majority of home buyers conduct their search online now)? You can post to Craigslist for free - again and again every week - though I've had only moderate success on Craigslist. As an agent, I take advantage of all these marketing vehicles at no extra cost to the seller. How about pictures? Will you take a dozen snaps with your digital camera? I'll hire a professional photographer, and they'll look great. Don't forget to go buy that generic "For Sale" sign for the front yard. Does that scream "this is a deal!" or what? Your agent has a fancy, classy sign for your front yard.

    How will you spread your message? I share all of my listings with literally hundreds of real estate agents, all of whom have buyers in your neighborhood. I email hundreds more local residents with my newsletter featuring your home. And then I mail out full color postcards to "move up" buyers, and those postcards feature those professional photos. Will you do that?

  • Your Time - It's worth something, isn't it? Will you enjoy your weekends with friends and family, or will you sit inside waiting for passers by to come to your open house? How many times will you show your home before it gets painful? The average market time for sold homes in Lincoln Park (as a representative example) is 91 days as of today (this is an MLSNI statistic, and they're the keepers of the data). If you show your home 3-5 times a week (that's pretty average), you'll show it 60 plus times. Does that sound like fun? Of course, you may not not get 3-5 showings a week unless you're really marketing the home.

    You'll show to lots of unqualified buyers too - another waste of time. Your Realtor can screen them to determine if their serious and qualified.

    How about all of those contracts, disclosures, and forms? Many FSBO home sellers indicate that this is the most daunting and time consuming of the process. There's the purchase contract - will it be a CAR contract? Multi-board? Something new, different, and proprietary? Don't forget the Real Property Disclosure, its required. Lead Paint Disclosure? Energy Disclosure? How about riders? Why does the home sale contingency have two different riders? What's a 22.1 and how do you get all THAT information? Your Realtor can certainly help you with that. So could an attorney, but how much will that cost? You don't think he/she's going to do an unrepresented closing for a flat fee do you?
Selling your home seemed like a fun challenge when it first occurred to you, but it can be an overwhelming and emotional process. The thought of "saving" $15,000-$17,000 on a $300,000 house seemed to make it the obvious choice - only you don't actually save anything. The reality is you will net less money and more stress over a longer period of time. How many larger transactions will you make in your personal life? Isn't it worth hiring a professional?