Just Pay The Realtor

August 10th, 2011 · 10 Comments · Buying or Selling Your Property

5100236577 6800eee3f4 Just Pay The Realtor
cc Just Pay The Realtor photo credit: Dana Moos

Next time you’re at a party and want to have some fun, just say the following:

“Do you know who I think are underpaid? Realtors.”

Most people don’t know the first thing about real estate. They have no idea whether they got a good deal on their home or not, since they can’t accurately compare their property to others. They always assume the market will go up since they probably have the vast majority of their net worth tied up in their house. They blindly buy real estate with the assumption that it’s an asset, without realizing that something that costs you money to own is actually a liability. They will gladly leverage their money at a 20:1 ratio to buy property, being blissfully unaware that just a 5% drop in the property’s value will wipe out all their equity.

I guess what I’m saying is that you should ignore all your neighbour’s advice on the real estate market.

A particular beef of these people is the amount that real estate agents get paid. At first glance, they’re onto something. A commission of 5% is commonplace in the industry. If the market is good, a property can sell at close to asking in just a few days. All an agent really has to do is input the listing in MLS, arrange a few showings, handle the offer and deal with the paperwork after. This isn’t really much work for the amount they get paid.

The homeowner looks at the amount of work done by their agent and say “I paid 20 grand for this?” They usually follow that with some sort of cuss word. And I agree with them. I’ve seen agents make a $20,000 commission in just a few hours work. I’ve seen agents whine about houses that take more than a couple weeks to sell. I’ve seen agents push a seller to take a substandard first offer so the Realtor gets paid quicker. Public opinion of real estate agents is a little unfair, but like every stereotype, there’s an element of truth involved.

This post isn’t to bash real estate agents. In fact, I’m going to take it one step further. You should just stop whining and pay your Realtor. Here’s why.

They Get The Place Sold

There’s a reason why I believe the fixed price brokerages will never catch on. There’s no incentive for anybody to sell the place.

Real estate agents always tout this as an advantage to their service, and unlike some of the other BS they spout, this is bang on. By creating an incentive to sell the house, you’ve given an agent the motivation he needs to make it happen. How are the guys who take a $99 listing fee motivated to sell your property?

This extends to other areas of the sale as well. A veteran agent will recommend a listing price with one goal in mind- a timely sale. They don’t want to screw around with the listing any longer then they absolutely have to, so they price it to sell. Sometimes they’ll price it too low (in an attempt to get a quick sale) and other times too high (if they’re trying to impress you). Whatever the value the agent comes up with, ask them to verify it with comparable sales. Which brings us to point #2.

You Suck At Valuing Your Property

In the industry they call this subjective value versus objective value. What it means is that you value something higher than you should because you own it.

Whether it’s your principle residence or rental, you have a special emotional attachment to something you own. It might be the pride of ownership. It might be because little Timmy took his first steps RIGHT OVER THERE AWWWWW! Whatever the reason, the fact remains that most people are really bad at valuing their own property.

So they try and sell it anyway, listing it at 10-20% above where it should be. We all know what happens if you do that. Let the Realtor price it for you, even if you leave a couple thousand bucks on the table. What’s better- paying a Realtor or not selling the place?

They Have The Tools

Finally, we’re onto the most important reason why you should just hire a Realtor. They have the tools that make selling that much easier.

Unfortunately for all the FSBO folks out there (FSBO means For Sale By Owner BTW. BTW stands for… forget it) they’ll always be at a disadvantage to the licensed agents, thanks to the tools the Realtors have. MLS is the granddaddy of them all. They also have the contacts, the buyers coming to them and access to good mortgage brokers and inspectors, both of whom are invaluable to buyers.

Besides, when you bought your house, did you do it through an agent? Of course you did! Most buyers won’t even look at properties that are sold by the owner directly. The prospect of┬ánegotiating scares the crap out of them. There’s a constant mistrust, the buyer assumes the owner is withholding important information. The buyer is uncomfortable walking through the house with the owner still present. And, like I mentioned earlier, since most buyers don’t know squat about real estate, they’ll stick close to their Realtor throughout the whole process.

Conclusion

Like all of you, I hate paying real estate commissions. I think agents are overpaid, and if I hired one to sell my house, I’d be harassing them on an almost daily basis just so I could feel like I was getting my money’s worth. Rather than complaining about it though, I’d rather just pound them on their commission. Paying high commissions suck, but it’s a whole lot better than not selling the place.

Don’t forget to check out Nelson’s blog the humerous and irreverent Financial Uproar. If you click over you can read his awesome post about the merits of expensive toilet paper.

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10 Comments so far ↓

  • jesse

    There’s nothing wrong with paying a salesperson to sell a high-valued capital asset. A better question is how to choose a good Realtor. Subject for another post!

  • Andrew F

    Rachelle, I think we need to separate the questions of whether real estate agents are worthwhile from how and how much they are paid.

    I’m sure real estate agents can add value. But paying them the same % commission regardless of market conditions, sale-worthiness of the property, how competitively priced the house is, etc. seems foolhardy.

    So it a sellers market, either do it yourself or grind the agent relentlessly on the commission. In a buyers market, go with the agent and let them do the leg-work.

    I think ‘alternative’ brokerages will have a place in the market. By this I do not mean the places that offer $100 MLS listings. These shops can add value, too, by offering a la carte services. Need help with the paperwork? That’ll be $250. Want someone to do the in-between work for the negotiation? $75 per hour. Want an appraisal, photos and comparables for the feature sheets? $500. You can do as little or as much as you want, and you don’t pay 5x as much to sell a property that is 5x higher in value.

    The other thing we desperately need to do is get buyer’s agents paid by the buyer. It it totally unreasonable that a client who goes to an agent with a house they want to put an offer on pays the same as the impossible client that wants to view 100 properties and doesn’t quite know what they are looking for. Buyers might be a little more serious if they were paying $75/h for an agent’s time.

    • Rachelle

      I have to agree with you, personally if I was to sell my house it wouldn’t make sense to get an agent, but…I’ve been working in this industry for many years, and I am also in a sales position. Selling a rental to a tenant is very similar to selling a house in many ways except for the paycheck.

  • EPROM

    Who’s Nelson?

    (His name was first mentioned in the closing-para comment-bait, of the blogpost, without notation as the author).

    And yeah, I read the post about a while back where Rachelle was going to have some subs in, so I can figure it all out.

    But it does lead me to the observation that as a reader it would be nice to have the guidepost of the blog author’s name atop each so we can decide if we want to read or not (for me I’m interested in pretty much only LL/T matters, and like Rachelle’s annoyingly charismatic writing style) so Nelson’s not on my shortlist.

    However, having read it I’d say this – proposing the extraordinary conclusion that RE agents are underpaid (or even appropriately paid) – demands something resembling extraordinary proof or argument. Instead I don’t see much that could be construed as substantial. That they ‘get the job done’ is poor support for why their *compensation* quantum is appropriate. It’s irrelevant, because they are not the only way to ‘get the job done’.

    In terms of comparing the alternative(s), comparing only to the *far* other end of the spectrum seems disingenuous. Is there really no middle ground?

    Kinda feels like the article was written by an RE agent, or someone who has a direct interest with the pay scale of one.

    • Rachelle

      Nelson is writing for me, but he is actually being sarcastic about real estate agents being underpaid. Sorry you missed that point. Regardless, in some cases it does make sense to pay a realtor.

      When you have no time or no interest in marketing the property yourself mostly.

      And stop complaining about Nelson, because he nominated for hot blogger babe on his site a while back, an enormous compliment for someone long in the tooth and round and low to the ground. After that he can write about just about anything he wants :) I’m not at all immune to flattery.

  • Devore

    The thing that bugs me most is the % based commission. It does not, no matter how you want to argue it, take 3 times as much work, time, effort, pictures, open houses, balloons, whatever it is agents supposedly do, to sell a $1M house vs a $350k house.

    Can agents add value (emphasis on ‘can’)? Sure! like any service. Is there a way to figure out ahead of time the crappy ones, so you’re not locked into a 6 month contract with them? Not really. There are enough of them around, that almost everyone personally knows at least one, and that’s what people tend to use.

    I suppose if long time home owners weren’t facing windfall profits when selling their 70s bungs, there would be more scrutiny on commissions.

    But instead of commissions getting cut in a hot market (quick turn over) and going up in a crappy market (more effort to move property), the exact opposite happens. As usual, people lose their heads when it comes to real estate, which, I guess, is reason enough to use an agent.

  • Ravi Shanghavi

    Should update this article, the very key point of MLS now being available to flat fee services. for 199/299 you can now list on MLS. Which you’re now in front of all the prospective buyers you would be with an agent. Cheers, Ravi Shanghavi, Ottawa

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