The FSBO Temptation

Temptation
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It's One Hot Market

It’s One Hot Market

Everyone knows, the market is pretty hot right now. Depending on where you are, you could add some superlatives to that – “blisteringly hot” would not be too hyperbolic to describe, say, the Silicon Valley real estate market, particularly up around the neighborhoods where Facebook, Google, and Apple live. In fact, California is home to 12 of the nation’s 20 hottest real estate markets!

If this were a supermarket, you might say that the inventory is just flying off the shelves. The amount of available inventory in many parts of the country can be measured in weeks, not months – and in some neighborhoods, it can be measured in mere days. Now that’s hot!

Temptation

It’s Tempting to Sell by Owner in a Hot Market!

In times like these, many a home owner thinking about selling their home will be tempted by the idea of selling it themselves – becoming a “For Sale By Owner” (FSBO). And why not? In many neighborhoods of Silicon Valley, an entry-level fixer-upper goes for $1,000,000. A 6% commission comes in at a whopping sixty grand! And for what, loading the home on the MLS, putting a sign in the ground, and waiting for the offers to flood in?

If that’s all there were to it, then obviously, that would be $60K poorly spent. Instead of looking at the issue from the perspective of the cost of a commission, a homeowner would do well to consider, rather, how much they would net from the sale using an agent, versus not using an agent. The bottom line is really what counts, right?

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If you believe the National Association of Realtors (NAR), 8% of homes were sold “by owner” in 2015, and the average “by owner” sale price was $210,000 versus $249,000 for homes sold “assisted by agent.” Of course, there’s all kinds of reasons why a home sold “by owner” might sell less for one sold by an agent, and the disparity (if indeed there is one) may be attributable to a number of different causes.

Let’s say you are going to buy a home, and the seller is not using an agent. To calculate the home’s asking price, the seller using comparables that he pulled from the MLS, and all those comparables were sold by agents earning a commission. As a buyer, what’s your first instinct?

FSBO Buyer with the Knife

The FSBO Buyer’s got a Knife Out

Exactly! Chop 6% right off the seller’s asking price, because nobody is using an agent. There goes the seller’s savings right there – at least, if the buyer has his way. Now let’s imagine that you’re a buyer, and you are working with an agent…and your agent finds a nice FSBO home. As it happens, 87% of  buyers in 2015 worked with a real estate agent, and most of those buyers are going to want to see their agent make some money on the deal. That’s why it’s common for a FSBO seller to cooperate with agents – paying them 2-3% of the sale price as a “cooperating broker fee.”

Let’s say the seller and buyer’s agent work out a co-op broker fee of 2% – $20k on this million-dollar home. Now the seller is looking at a savings of $40K for selling “by owner.” Still, though: the buyer is thinking that the seller’s cost is $40K lower than the comps, why should he get to keep it all? Even though he knows his agent is getting something, the buyer is still going to work to get the sale price down, because he knows the seller is paying out less in commission.

The thinking goes that any saved commission should be taken out the sale price to more fairly contrast to the the “comparables” used as a basis for the asking price. For the sake of argument, let’s stipulate that an agent does bring some value to a real estate transaction. Maybe not $60,000 – but if it’s just someone to make sure the i’s are dotted and the t’s are crossed, an agent’s services might be worth $500…right? If we can agree on that much, let’s also consider the possibility – just the possibility! – that an agent might also bring some additional value beyond handling the paperwork. Any individual might consider these “value adds” to be of greater or lesser worth, including:

A seasoned, experienced agent (which is the kind of agent you’ll probably want to work with) is someone who has done those things dozens, hundreds, and in some cases, thousands of times. It is not unreasonable to suppose that someone with a greater depth of experiencing in those aspects of home sales could do a better job than a less-experienced home owner, resulting in either a) a higher sales price for the home or b) a higher net to the seller. There are some circumstances where it makes more sense to sell without an agent: specifically, if you already have a buyer in mind. If you believe NAR statistics (grab your salt shaker), in 2015 about 38% of FSBOs sold to someone they already knew. If you are selling to a friend, family member, or neighbor, then indeed, the need for an agent is much diminished – but even in this case, don’t expect to pocket the agent’s commission, as the buyer will likely be looking for a price break for that same reason.

For those of you who are interested in going the “by owner” route, there are a number of resources out there which you can draw upon. A lot of these resources are available in my newly-updated-for-2014 “For Sale By Owner” guidebook, which you can download for free on this web site.

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