For Sale by Owner?

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.