About one month ago I posted a rather lengthy discussion of the truth about Chicago area housing prices. The Case-Shiller price index that I referenced in that article has just been updated through March so here is a quick update on what it shows for Chicago. First, let me show you the trend going back to January 1987:

Just a quick reminder that the price tiers are defined as follows:

• Low - Under $227,766
• Middle - $227,766 - $348,054
• High - Above $348,054

Prices peaked approximately in September 2006 and have since declined between 9% for the low tier to 12% for the middle tier. That puts home prices back to where they were in December 2004. When you look at it that way it doesn’t seem quite so bad, does it?

I wish that over the last 8 years I had recorded all those debates with people who kept insisting that Chicago real estate never goes down.

When looking for a real estate agent, there are different tasks you should expect your agent to help with completing, depending on whether you are buying or selling.  

BUYING   - when you are working with a buyer agent, an agent should: 

1. Understand your needs and desires for your purchase.  The agent should spend some time getting to know you to ensure that he or she is providing you with the information tailored to your needs.
2. Help you understand how much you can afford to comfortably spend.
3. Help ensure you are pre-approved for a loan and connect you with qualified lenders.
4. Be knowledgeable about any special funding or home buyer grants available to you for your purchase.
5. Routinely provide you with information regarding the properties on the market that meet your specified criteria.  The information can be shared with you in many ways.  Let your agent know your preferred communication method and times.
6. Plan and attend your “house-hunting” days.  Provide you with maps of the properties to ensure that your time is spent wisely.  Research and provide detailed information on any properties you are touring.  This sort of information could be related to taxes, zoning, property specific features or any number of items.  More information lends to the ability of making an educated decision.
7. Use their experience to obtain any relevant information from the selling agent if it is not publicly documented.
8. Once you have identified property, guide you through the offer process and write an offer and present the offer to the selling agent
9. Negotiate - Help you write the offer that will get your property for the best possible price.  Review the merits and drawbacks of any counter offer.
10. Identify several qualified attorneys to represent you in the transaction, work with the attorney throughout the process.
11. Discuss the benefits of a home inspection  and identify several qualified home inspectors.
12. Understand and coordinate any required inspections in the area where the property is being purchased.
13. Attend home inspection to ensure all of your concerns are investigated.
14. Work with lender to schedule and attend appraisal.
15. Maintain continuous contact with the selling agent and all parties throughout the process.
16. Foresee and communicate unusual issues or circumstances.
17. Coordinate and attend final walkthrough to ensure all items identified in the inspection process are corrected and property is in as expected condition.
18. Participate in closing to ensure follow through on all deal terms and to handle any last minute issues.

 SELLING - when you are working with a listing agent, an agent should:

1. Offer you a fair commission rate.  The agent should make enough for the amount of work the agent is providing, not more.
2. Explain the listing contract and terms; ensure you understand thoroughly  in order to establish a positive working relationship.
3. Provide and guide you through the necessary property  disclosures for your review and signature.
4. Offer the option of a home warranty, explain the benefits of the warranty and then obtaining it on your behalf.
5. Provide you with a list of tasks to complete to ensure your home is in its best possible condition for marketing.  This could be as simple as remove all clutter or to complete a major repair such as adding a new roof.
6. Enter property in MLS.
7. Prospect MLS system for current potential buyers.  This is an often overlooked means of proactively connecting to your target market, people looking to buy homes similar to yours.
8. Market your property via agreed upon channels.  Offer and implement creative channels.
9. Put For Sale sign in yard to attract attention to your home.
10. Coordinate and attend any brokers’ tours and Open Houses agreed upon.  Gather feedback from brokers and potential buyers.  Review the information with you and recommend any necessary property or pricing adjustments.
11. Create high quality, comprehensive and informative brochures to market your home and ensure that you always have enough brochures on hand to give out to potential buyers.
12. Take phone calls from selling agents, schedule and document all showings.  Use the opportunity to point out any special features of your property.
13. Follow up with agents after showings, gather feedback, share with you and offer advice on any changes that would help in the sale of your home.
14. Attend any second showings to personally gauge the interest of the buyer and help in the sales process.  Be aware that most buyers’ agents do not like this idea.
15. Present offers and assist in the analysis of their merits and drawbacks.
16. Manage title work by working with the title agent to ensure a clear title is provide to prevent any delays in the sale of your home.
17. Provide HUD 1 statement at closing for your records.

 Things you should expect from both agents

1. Constant communication throughout the process.  The agent is your eyes and ears during the home buying process, they should share information with you in a timely fashion.
2. Education on steps of the process that you may not understand.
3. Gathering other resources for you to access to help make an educated decision.
4. Help you negotiate offers and assist in the merits and drawbacks of each offer submitted or received.
5. Manage attorney.  Ensure that the attorney review process is handled within required time period and ensure any written communications to other party is shared with you.
6. Fax paperwork to necessary parties whether it be the other agent, the lender, the appraiser, the inspector, the attorney or any other contractors.
7. Manage buyer financing.  Routinely check in with lender to ensure no snags are encountered.  
8. Coordinate closing and provide a list of the items you will need to bring to ensure a smooth closing.
9. Inform you of any transfer stamp costs other village specific requirements that need to be handled to ensure a smooth closing.

The above is a sampling of the activities you can expect from a good real estate agent.  A smart agent will suprise you by doing much more!

Anyone who has looked around Chicago during the last year has probably remarked to themselves that there sure are a lot of cranes in the air building ever more expensive condominiums. The Chicago Spire alone is adding 1194 units to the supply and constructing a building that tall can not be cheap. I for one don’t know where the developers plan on getting the buyers, and especially at the prices I’m seeing. In the South Loop area alone the MLS currently has 1,116 condominiums on the market, 390 of which are over $500,000 with $400+/month assessments plus taxes.

Well, this last week Crain’s Chicago Business ran on article on the Downtown Dead Zone, highlighting the woes of condominium developers. Here are some of the highlights (or lowlights) of the article:

• In the first quarter of 2008 downtown developer condo sales were down 83% from the previous year to only 201 units. This gives new meaning to the word downtown.
• 2007 developer sales were down 54% from the peak in 2005.
• The glut of condos on the market is causing some development projects to be put on hold and other projects are converting to apartment buildings.

Crain’s also supplied this graphic that succinctly summarizes the situation. Judging from the dramatic growth of unsold condos under construction it would appear as though the developers hit the gas just as the market was running out of steam. Interestingly, based upon the fact that the unsold, completed condos have not historically grown from one year to the next, I would conclude that, in the past, most condos have been sold prior to completion. However, the question is whether or not this pattern will continue over the next year or two as these huge projects near completion. I would say there’s a good chance the developers won’t be so lucky since never before has the market needed to absorb so many units still under construction.

As buyer’s consider purchasing into these developments they have to be nervous. What would happen if the developer is left holding a large portion of the building? What if the developer starts to heavily discount the selling prices after the majority of the units have been sold at “list price”? And does the developer have the financial wherewithal to keep the association afloat with only a portion of the units contributing to the funds?

We may soon find out the answer to these questions.

When people are picking a listing agent to sell their home they can fall victim to any number of self-imposed myths or outright lies perpetuated by the agents they talk to. When I hear about these it really gets my dander up. Of course, in reality, I don’t have dander. Dander is “loose scales formed on the skin and shed from the coat or feathers of various animals” so I’m not entirely sure how I can get mine up. But any way, many of these conversations are inane. Here are some of my favorite examples.

“I don’t discount my commission because if I did I wouldn’t work as hard selling your property”. Some sellers already subscribe to a variation of this lie themselves: “I don’t want to negotiate the commission down because then they won’t be motivated to sell my house”.

This is utter nonsense. The reason a real estate agent won’t discount is because they are sitting fat and happy with lots of referral business with people who are willing to pay full commission. They’ve got a strong network that they have been very effective at leveraging to get more business. Furthermore, many of these same agents will take referrals from other agents or take Internet referrals from their broker and forfeit up to 30% of their commission in each case. So, obviously they don’t have an issue with earning less under the right circumstances. If you want a deal, move on to someone else.

Also, if a real estate agent takes a listing at a reduced commission don’t believe for a minute that they are going to work less diligently on it. First, if they took the listing they must have decided it was worth it. Second, if they are the kind of agent that would take a listing and then neglect it you were going to have trouble with them anyway. Third, if their degree of attention was proportional to the commission rate then perhaps you should pay them 15% and get lots of attention, right? After all, there is no reason to believe that you coincidentally get the optimal amount of attention at 6%.

“I will look for buyers in _____________” or “I have a lot of buyers for this type of house” or “My office works with a lot of buyers for houses like this”. This falls under the heading of the listing agent delivers buyers. Many sellers already believe this without a listing agent having to tell tall tales of their prowess with buyers.

More nonsense. The fact of the matter is that the listing agent is usually not the one that delivers buyers. It’s the buyers’ agents that deliver buyers. The listing agent gets the listing in front of the buyers and their agents and positions the house in the most favorable light for them. For instance, I just pulled over 600 sales of single family homes in Lincoln Park over a more than 2 year period from the MLS. In less than 15% of the cases did the listing agent produce the buyer. The other 85% of the time it was a buyer’s agent.

One other thing. If a potential listing agent is talking about delivering the buyers herself or through her office I would get very worried. That might be a red flag that she is trying to get both sides of the commission and might pursue that strategy to the detriment of exposing your house to other agents. I have heard conversations where this appears to be an explicit strategy.

“My list-to-sell ratio is___” or “My average time on market is______”. You’re supposed to be impressed with a high list-to-sell ratio or a short market time. However, how do you know the agent isn’t giving the houses away? That would certainly make both of these numbers look favorable. I’m not suggesting you ignore these numbers entirely, but you should be aware of the limitations of these numbers and take them with a chunk of rock salt.

As always, when dealing with those slippery real estate agents caveat emptor.

I have to be really careful writing this because the last thing I want to do is come across as being self serving. Nevertheless, I want to examine the issue of selling a house on your own.

Starting with my parents, my family has always had a great degree of mistrust with regard to the real estate industry. Therefore, selling a house without a real estate agent is an approach that my parents have successfully taken on several occasions and my wife and I successfully pulled it off just prior to moving back to Chicago in 2000. Faced with the prospect of an $18,000 commission on a $300,000 house my wife and I decided we could do it on our own, despite the fact that we had a strict timetable. So clearly it can be done, but under what circumstances?

First some random statistics of questionable validity regarding FSBOs (For Sale By Owner. This is an almost derogatory term used by the real estate industry which is meant to imply that these people are exceedingly naive to think that they can perform the “highly skilled job” of a real estate agent on their own):

• According to the Chicago Association of Realtors the number of FSBO classified ads that run in the Chicago Tribune is virtually negligible. Of course, I would imagine that most FSBOs don’t run classified ads.
• According to a survey conducted by the National Association of Realtors (NAR), only 11% of people selling a home in an urban area like Chicago sell that home on their own. Of that group approximately half knew the buyer ahead of time so that they really didn’t have to “sell” their home.
• There is an interesting myth out there. What they told us in our training classes on marketing to FSBOs is that 80% of the people who attempt to sell their home on their own will ultimately turn it over to an agent. However, I calculated from the NAR’s own survey data that for sellers that did not know the buyer the percentage is closer to 38%. Perhaps the myth originated with an often quoted December 9, 1998 Realty Times article by Steven Poscente where he claimed that “studies show that 70% eventually hire a Realtor and 80% of those who don’t say, ‘Next time I hire a Realtor’. ” Only thing is, he doesn’t exactly say what studies show this. Looks like this is another one of those industry lies.

The real estate industry would like you to believe that it’s not a very popular or successful option. Maybe. Maybe not. More importantly, let’s examine what you should consider in determining if selling your home on your own makes sense for you. Because clearly it often works.

How much money will you save?

This is probably the #1 consideration for most people. When most people ask themselves this question they are thinking in terms of a 6% commission and if it’s an expensive home the answer will often be “a lot”. However, 6% is the wrong number for a few reasons.

First, even if you sell your home yourself you will likely have to pay a buyer’s agent a “cooperating commission” to bring a buyer to the table. Why? Because, according to the most recent NAR survey of buyers and sellers, 89% of buyers are working with a Realtor and you don’t want to limit yourself to only 11% of the potential market. And the commission you pay the buyer’s agent will usually be 2 - 2.5% and it’s the same whether you are using a Realtor to sell your home or not. The only difference is that a good listing agent can provide you with some guidance regarding what that number should be based upon current listings on the market. So you don’t save the entire commission by selling the home yourself, just the sell side commission.

Second, if you can find a good discount broker (like us!), that sell side commission should be a lot less than 3.5% (6% - 2.5% cooperating commission). In addition, when you sell a home yourself you will still want your home to appear on the MLS and you are going to have to pay a broker several hundred dollars to do that. The bottom line is that the savings of selling a home yourself might only amount to a few thousand dollars.

How much is your time worth?

The other side of the savings equation of course is how much of your time will you have to spend in order to realize the savings discussed above. Selling a home yourself can be a lot more time consuming than you realize - especially if you’ve never been through the process on your own before. As you read through some of the issues raised below stop to think about how much time it will take for you to duplicate these efforts. You’ll be surprised at the time that will be spent gathering the proper documents together, becoming familiar with the legal requirements, coordinating various services, obtaining feedback, negotiating the deal, and coordinating closing. If these activities weren’t that time consuming we would be able to lower our commissions even more or we would be a lot more profitable.

Then there is the question of whether or not you even have the time to devote to selling your home. When my wife and I sold our home in Richmond we just about ran out of time after 3 months in a fairly hot market. We lucked out when a buyer materialized at the last possible moment, just prior to us throwing in the towel and listing the home with an agent.

Do you really know what your home is worth?

My wife and I were lucky in this regard as well. We lived in an area where all the houses were pretty much the same - two story colonials built at approximately the same time. The difference in prices was pretty much driven by the square footage of the homes. If you live in a development like this or you live in a large condominium complex with fairly identical units currently for sale then putting a price on your home should be pretty easy. Unfortunately, not many people in the Chicago area have this luxury and even if they do there are always some people (actually a lot of people) that think their home is somehow special and worth a lot more than everyone else’s - after all it does have that special gold embossed maroon wallpaper in the kitchen. For instance right now there is a home for sale by owner right around the corner from me for $850,000, which is clearly priced higher than very similar units in the development by approximately $130,000. It’s just not going to move, which is a very expensive mistake. And of course, underpricing a house is also an expensive mistake. Back in the days of the real estate boom I used to always cringe when a FSBO would tell me that they sold their house in 1 week, at list price. That tells me they under priced their house.

The fundamental question you need to ask yourself is what is the probability that you will lose at least as much on mis-pricing your home as you will save by selling it on your own? A one or two percent error is pretty easy to make and will wipe out anything you saved on the commission.

Are you sufficiently familiar with the home selling process in Illinois? In your city?

Some examples of the process issues to be aware of:

• There are a host of legal obligations that you need to be aware of, such as disclosures.
• Then there are the various closing costs for which you will be responsible. You don’t want surprises at the last minute so you should make sure you accurately estimate your proceeds.
• And there are the various land mines that some prospective buyers bring with them - contingencies, skittish lenders, buyer’s remorse, unethical behavior.
• There are also other last minute surprises to be on the lookout for such as unfavorable home inspections, title problems, survey problems, local government obstacles.

How do you navigate all of this?

Do you know how to market your home?

It’s all about exposure. Better exposure means a quicker sale and a higher price. A good agent will provide a fairly standard package of marketing tools:

• MLS Listing
• Professional photos - a variety of studies have shown that a good set of photos will improve the ultimate selling price by 4.2% and the number of days on the market has been shown to be shortened by 30 days
• Virtual tours
• Public open houses
• Broker open houses
• Print ads
• Distribution of your listing on over 100 Web sites
• Perhaps an “exclusive” relationship with Yahoo! Real Estate
• Your home’s own Web site

Some of these are bogus - a topic for another blog post at some point. However, there is a necessary combination of these that are critical to a successful sales process. For the individual trying to sell their home on their own it’s actually difficult to replicate these because of the cost and the learning curve. Because Realtors use these tools frequently they get better pricing and can execute a marketing plan much easier than you can.

In addition, a good agent will provide you with staging advice, which can prove invaluable. This is another area where my wife and I lucked out in Richmond. A parade of real estate agents vying for our affections offered lots of staging advice, which we took.

How will you handle letting total strangers into your house?

This is pretty straight forward. There’s a certain value in letting the real estate agent take the bullet instead of you.

How will you conduct yourself when showing your home to a prospective buyer so as to maximize your negotiating position?

I’m always amazed at how much information people will inadvertently divulge about their situation. They freely discuss personal matters, life events, and their motivations - all of which a skilled buyer’s agent could leverage for a lower price. Even their demeanor can leave clues regarding their vulnerabilities or convey nervousness.

How effectively can you negotiate the contract?

There are actually several traps that sellers can fall into on their own and any one of these can easily wipe out any commission savings.

• Believe it or not people often get emotional when negotiating the single largest transaction of their life and this impairs their judgment. They are inclined to argue over trivial points, over complicate the deal terms, allow themselves to get offended, or offend the other party.
• A seller might not have access to the right data or know how to leverage the data to improve their negotiating position.
• I have been shocked by people who sold their home on their own who have told me that they were able to drop their price during negotiations because of the money they saved on the commission. Aside from the fact that they overestimated the commission savings, it was clear that they were far too eager to forfeit their savings.
• Armed with an unrealistic belief in the superiority of their own home, sellers can often overestimate the likelihood of a better offer in a reasonable time frame.

My wife and I lucked out again in this area since the other party was not represented and willingly paid our asking price. However, as a coldly rational negotiator I was aptly suited for a much more vigorous negotiation.

The Bottom Line

If you really feel like you are up to the task of selling your home yourself then go for it. My wife and I were definitely up to the task and we benefited from a fair amount of luck. On the other hand you should also realize that there is a point at which the value provided by a good Realtor is worth at least as much as the savings from selling your home yourself. That premise has served as one of the guiding principles in establishing our commission model. Our goal has been to set our commission so that when a seller looks at what we offer and compares it to the cost they will feel absolutely certain that it is worth it. That’s usually not the case for a full commission broker.