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.

One of the most important decisions in buying or selling a house is finding a good real estate agent. Unfortunately it’s not an easy process for one simple reason. There are a lot of really bad real estate agents out there. The following quote in the November 2007 issue of Realtor Magazine from Bert Waugh Jr., CEO of Prudential Northwest Properties in Portland, Ore., sums it up nicely “Most of the surveys you see on how people think about real estate professionals don’t paint a good picture. We as the brokers are the ones at fault, because we’re still hiring 100 percent of those who get into this business. It takes a beautician 1,700 hours to get a beauty license in Oregon; it takes a sales associate 150 for a real estate license.”

You can get a good feel for just how weak the playing field is by actually reading the direct mail pieces that come to your home or browsing through the online profiles of some real estate agents. For the most part there is nothing that distinguishes these agents from each other - there is no value proposition and in some cases… well, check out some real examples:

• Mission Statement: to assist my clients in utilizing other peoples (sic) money to aquire (sic) appreciating assets of which the profits can be 100% tax free
• I have excellent customer service skills and always put my clients first.
• My #1 priority in the course of business is my clients.
• As a __________ agent, I have a commitment to my clients to provide them with exceptional service.
• I am a client advocate…I am customer focused and work at clients’ pace.

I think you get the picture.

So let’s talk about how you should go about making this decision and, just as importantly, how not to make the decision.

Knowledge

One of the key reasons for using a real estate agent is to be able to tap into their knowledge of the market and the real estate transaction. Don’t be afraid to quiz prospective agents about information that you are looking to access through them. However, no agent can know everything so it’s also important to find an agent who has…

Intelligence

It’s critical to find an agent that is resourceful, knows how to deal with unusual situations, and knows where to go to get answers to questions. Unfortunately, determining how smart an agent is is a bit of a squishy undertaking. You can start by talking to them to see how they come across. You can also find out about what educational background they have, in what academic area, and what business experience they had prior to their real estate career.

Integrity

As you can surely appreciate, when dealing with the purchase or sale of a home integrity is a major consideration and the real estate industry has not done a great job of making people comfortable with the integrity of their agents. In the absence of direct feedback on the integrity of an agent there are a variety of questions you can ask to reveal an agent’s integrity:

• Have you ever served as a dual agent? In that case describe for me how were you able to balance the interests of both the buyer and the seller?
• Have you ever discouraged a buyer from considering a home that they liked? Tell me about it.
• Tell me about how co-operating bonuses work and how you deal with them when working with a buyer. See if you can draw them into a discussion of the possible conflict of interest in showing a buyer a home with a bonus and whether or not they disclose these bonuses to buyers. Of course, if you come right out and ask them if they do, they will answer “yes”.

Business Model

What type of business model does the agent/brokerage employ? Will you be getting full service or will you be expected to do a lot of the work yourself? Find out exactly what services and support you will be receiving. If you are selling your home find out what vehicles will be used to market it. Here is the typical list:

• MLS listing
• Professional photos
• Brochures
• Direct mail
• Newspaper
• Newspaper Web site
• Specialty magazines
• Open houses
• Broker open houses
• Email
• Craig’s list
• Other Web sites

This is a fairly standard list, yet agents will present this list as though they are the only ones that can provide it - and consumers fall for this all the time. On the other hand, the list is useful for what an agent might leave out in an effort to cut costs. The only trick is that several of these are ineffective at selling your home and are used to merely pacify you, raising their operating costs in the process. So you need to carefully consider the options being presented.

One other consideration. Find out how the agent will communicate with you and how often. During what days/hours are they reachable?

Cost

Don’t let anyone fool you. Cost does matter. Find out what the agent charges and how they justify their commission. And if you are buying find out if the agent provides a commission rebate and how much you will be getting back. At this point most agents will look at you like you are from another planet.

Skills

Find out what capabilities the agent has in key areas. There is no better way to do this than to get specific:

• Negotiation skills. Ask the agent to describe for you in detail a particularly difficult negotiation that they handled.
• Communication skills. Is the agent articulate? If they can not communicate clearly to you then not only will you have difficulty in working with them but they will not be able to communicate effectively with the agents on the other side of your transaction.
• Marketing skills. This is key if you are selling. Ask the agent to write up a description of your property for the MLS to share with you. Does it capture the essence of your home? Does it set your home apart from other properties in the area?

Avoid These Pitfalls

Friends or Relatives in the Business

Friends don’t let friends handle their real estate business - unless they are the most qualified to represent them. Many people make the mistake of using a friend or relative simply because they feel like they are expected to do so. In fact, this is a key element of the traditional real estate model: get your friends to do business with you because they won’t try to negotiate the commission down. However, this creates a serious problem when the friend or relative is not really qualified. In fact, from our observation of the characters in this industry we would guess this happens at least 50% of the time.

Getting a Referral From Another Agent

Agents love to give referrals - for a very simple, self serving reason. They get paid handsomely to do so - anywhere from 25 - 30% of the commission. They will give you a glowing recommendation of someone from the other side of the country whom they have never met - just so they can collect that fee. Often that person is just some random agent from an affiliated office. So beware of referrals and ask the referring agent specifically what their experience has been with the referral.

Getting a Referral From a Friend

There is nothing wrong with getting a referral from a friend but just make sure that your friend’s referral is based upon a rigorous examination of objective criteria. Ask them what they specifically liked about the agent. If all they can talk about is the annual wine and cheese picnic or birthday cards or pumpkins at Halloween then you should look elsewhere.

Going With the High Volume Agent

Everyone wants to work with the winner but there are a couple of problems with this approach. First, top producers don’t discount because they don’t need to. They have all the business they can handle. Second, they have so much business that they won’t have much time for your transaction. You will either have trouble getting the time of day from them or they have a team of agents working for them and you will be passed off to one of them.

Going With the Highly Visible Agent

The agent that has high name recognition usually spends a lot of money and time building up that recognition. They advertise, they belong to civic groups, and they do lots of charity work. But that says nothing about their capabilities. The only thing you will know for sure is that they are brilliant at marketing…themselves. And all their marketing activity raises their operating costs.

Going With the Big, Highly Visible Brokerage

Some people get a sense of security from going with an agent from a large, highly visible brokerage with a particularly appealing image in the marketplace. Similarly they might be impressed with a fancy office on Michigan Avenue and CMAs that are bound in leather. But it’s a false sense of security. First, all that “brand building” is really expensive. They do that to justify their high commissions and they need their high commissions to pay for their high overhead. Second, real estate agents move between brokerages like bees pollinating flowers. The agent that works today for the broker with pictures of clients in formal wear was wearing a yellow jacket yesterday. When the rubber meets the road you will be dealing with the agent, not the brokerage, and most of the time that agent is just an independent contractor.