Let me start off by saying that I am a neophyte when it comes to real estate; besides buying my own home a few years back, I have no practical experience with real estate. I know that there seem to be real bargains out there due to the Mortgage Meltdown and subsequent Credit Crunch. We are no doubt in an economic pickle (official economist term) but it's unclear whether we're in a recession. We'll know many months after it's over.
Nevertheless, I think it's important to discuss whether having a real estate agent is beneficial when buying or selling a home.
For a buyer, it seems as though having an agent is free. After all, there is no out-of-pocket money that a buyer has to come up with when buying a house with the assistance of an agent. Agents can also be very helpful in getting data on existing inventory (real estate lingo for "houses for sale"). Real estate agents, because they play both sides of the transaction (though generally not at the same time), often do not show homes that are for sale by owner (more terminology that means that the seller of the house is doing so without an agent).
So, when buying a home, you'll have a wider variety of choices if you use an agent and do some looking on your own through the FSBO (For Sale By Owner) network; you get the best of both worlds.
Getting back for a moment on the idea that a buyer's agent is free. This is a foolish way to look at things; of course, somebody is paying for two agents to be involved in a sale. Typically, when there is an agent on both sides of the transaction (on the buying and selling sides), the agents split the commission, which is usually around 6 percent. Think about that.
A house that sells for $500,000 will have a commission of $30,000. Your agent will get $15,000 and the seller's agent will get the same (usually the split is 50/50, but not always). So the seller's net after paying the agents is $470,000. If the seller used no agent, you could conceivably buy the house for $470,000. Viewed from this perspective, the buyer paid 6 percent and the seller paid nothing.
This is how commissions, fees, and taxes are always paid. The seller may be responsible for paying the tab, but he gets the funds from the buyer.
On the other hand, if an FSBO seller uses no agent, he may think he can get $500,000 for his house. You were willing to pay that before, with an agent, so why not without an agent? It's the same house, after all, whether agents are involved or not.
At the end of the day, an FSBO seller will get somewhere between $470,000 and $500,000. This difference represents the implied value of an agent.
Also consider this: When buying a car, you don't bring an agent along to help you buy it. And when selling a car, you don't hire an agent.
Where agents can make a difference, it seems, is not necessarily in the selling price, but in the length of time a house is on the market. According to Stanford economist B. Douglas Bernheim and Stanford grad student Jonathan Meer (How Much Value Do Real Estate Brokers Add? A Case Study):
Sales commissions for residential real estate brokers historically average nearly six percent of a home’s closing price. Do brokers add sufficient value to justify those commissions? We address this question using a unique data set pertaining to sales of faculty and staff homes on the Stanford University campus. We find no evidence that the use of a broker leads to higher average selling prices, or that it significantly alters average initial asking prices. However, those who use brokers sell their houses more quickly.Here's where I think a seller's agent proves his or her worth: Right now. When the real estate market was hot, anybody could have sold a home (and they did -- everybody got a real estate license). Yet, all these real estate agents got fat with commissions that I argue they didn't deserve.
Now, in a poor real estate market, people are finding it very difficult to sell a home, even though interest rates are very low (they've come down quite a bit and just might be lower than they were at the peak of the boom).
An agent can help in this situation. Using his expertise in staging a house (getting it ready to sell), his connections, his knowledge of comparable sales, etc., a real estate agent worthy of a seller's commission can get a house sold in this market quicker than an average agent (read: just got into the business because it was easy money).
A successful real estate agent in this market uses all the tools available. An also-ran goes about things like in the "good old days" where selling a house meant putting up a sign and collecting a fat check.
According to a US News report, Is For Sale by Owner Right for You? - US News and World Report,
But while the potential savings are large, so is the task of selling one's home in today's downtrodden market. "It's much more complicated than just putting an ad in the paper and showing your house and having someone buy it," says Judy Moore of Re/Max Landmark Realtors in Lexington, Mass. "The value that a Realtor brings to the transaction is that they are able to provide services on so many different levels—things that sellers can't even anticipate in many cases—because they have that kind of professional experience."So there you have it. Transacting real estate is a scary proposition for a lot of people; after all, buying a house is most likely the biggest financial transaction you will ever make. Until, that is, you sell that same house for a profit several years down the road. Using an agent as a buyer seems free, but it's not, for you'll pay more for the house than if no agents were involved. Using an agent as a seller would seem to get you more for your house in a down market and sell it faster, but less in an upmarket.
The choice is yours. I know which one you'll most likely take: You will get an agent. Why? Because it's the established, safe way. It's also the most expensive way. If you do use an agent, on either the buying or selling side, make sure that the agent earns his money. If your house isn't selling fast enough for you, fire your agent and get another one.
The only way the real estate market will become more efficient is to squeeze as much of the extraneous costs out of the model while extracting as much value out of all the players involved.
Sources
More Bad News for Real Estate Agents
Real Estate Agents, Revisited
Is For Sale by Owner Right for You? - US News and World Report
