U.S. home owners paid over $60 billion in real-estate commissions last year. Despite new technologies to make it a lot cheaper to do business, the cost of selling a house remains high at about 5 percent. Commission rate only dropped about 15 percent in twelve years. If you sell your house at $200,000, you have to pay $10,000 at 5 percent commission. Nowdays computers become more powerful and cheaper every 6 months, and you can pay $20 per month for unlimited domestic and international long distance calls. $10,000 sound a lot. Does it really cost so much to sell your house?
Let me briefly explain how realtors get invovled in residential transactions. The seller of a house finds a listing agent to sell the house. They define the term and commission rate in the listing agreement. The listing agent then helps to set a market price for the house and market it to potentials buyers. The major marketing mechanism is to publish the sale information in local multiple listing service (MLS). MLS is simply the realtors' private database to list all the houses for sale. For example, you can find most houses listed for sale in Chicago area in mlsni.com. Buyer's agents find this house through MLS listing and bring in potential buyers. If the house is sold, the seller will pay the agreed commission at the closing.
About 2 year ago, my wife and I decided to sell our first house and relocate to somewhere closer to her job. We talked with 4 listing agents from big firms such as Re/Max and Coldwell Banker. We discovered 3 truths about real-estate bussiness before we sold our house.
Truth Number One, it is hard to determine the true value of a house even for the realtors. The 4 listing agents suggested us 4 different market prices for the house. The biggest difference is almost $20,000. Yes, the final sale price for a house largerly depends on its location, marketing timing, supply and demand on the market. However, the individuals, i.e., the seller and the buyers have substantial impact on the price. If we have two almost idential houses for sale in the same block, Sir "Patient" might get a lot more dollars for his house than Sir "Speedy" if he is willing to stay on the market longer. If we have two couples living in the apartment bidding at the same house, Mr. and Mrs. "Would-be parents in two months" might be willing to pay more than Mr. and Mrs. "Double Incomes No Kids".
Truth Number Two, realtors are more interested in making the deal than getting their clients a better price. In most cases, the buyer's agent and the list agent will get 2.5 percent each for 5 percent commission. However, each agent has to split with his or her broker on the commission. In the end, each agent might only get 1.5 percent commission. If the sale price goes up or down $10,000, that just means only $150 to each agent. Moreover, some agents have to pay a flat fee such as $2,000 per month to their brokers, so they don't have to split the commission with their brokers. They have a lot more pressure to push the deal through.
Truth Number Three, listing agents might do nothing to market your house other than publishing your house information into MLS. In a hot market, a house sells itself in a week, maybe even within two or three days. Broker firms normally pay a flat fee to list in MLS, and they don't have to put any money up front on advertising your house in the newspapers or magazines. I remember in one episode of Seinfeld, postman Newman revealed the truth: when you control the mail, you control information. The truth about MLS in real-estate bussiness is, when the realtors control MLS, they contro the entry of the housing market. The sellers are forced to pay commission to access the market.
So is there any way to lower the cost of selling a house? There are at least two alternatives. One is to list the house in MLS through discount brokers. Thanks to the fierce competition among brokers, a seller only needs to pay a flat fee like a few hundred dollars to these discount brokers, and they will list the house in MLS. The seller will save at least half the commission by becoming his or her own listing agent. The other is through FSBO (for sale by owner) web sites on the internet. They offer their own local listing other than MLS for a flat fee. Just like E-Bay to provide a public market place, the seller can directly negotiate with the buyer without paying any commission at all. In fact, we decided to choose the third way - marketing our house directly through Chicago Tribune and Daily Herald. Without paying any commission, we sold our house for more than the highest suggested retail price. So if you are willing to put down some effort to save yourself a lot of money in selling a house, FSBO is the way to go.
