It’s no secret that Mike and I aren’t big fans of real estate agents. A couple times when we’ve gotten together, it’s been clear that the value of agents is a running debate in the Pillars household, and I was delighted to throw my support behind Mike (at least when his wife was out of earshot).
Our general view is that while agents provide value (advertising and showing the house, providing referrals to mortgage brokers and lawyers, and helping explain some of the relevant laws on the seller side) it’s not worth 5% of the sale price. What we REALLY take exception to, if Mike will let me speak for both of us, is that they get a percentage of the sale price, which gives them an incentive to sell as quickly as possible, rather than to get the highest price.
Larry MacDonald wrote about the agent monopoly, and recently sold his house himself (without an agent).
As with many things though, there is another story. Part of the reason agents get paid so well on the sales that go through is that MANY of them don’t. Much as volatile stocks have a greater return, jobs with uncertainty of compensation (such as commission work), often pay better. An agent can easily have a run of bad luck, not make any sales (and therefore not make any money). Additionally, they have to put a brave face on it and not complain (since who would want to work with an agent who was struggling? We all want the best!).
The buyer’s agreement is another double edges sword. It’s an agreement that you’ll only buy from the agent you sign with (if you buy a property on your own or with another agent, they can sue you for part of the commission). Some agents try to sell this as a benefit to the buyer, which is insulting. HOWEVER, some buyers pull a dirty trick where they get an agent to help them find a house, then buy it themselves (or with a friend who is an agent), and cheat the original agent out of their commission. A rant on a real estate agents blog I found recently details her… passionate… reaction when she saw this happen on HGTV’s “Property Virgins”.
Speaking of which, my ex and I were ALMOST on “Property Virgins”. We wrote them a nice little e-mail (attached a picture) and they called us back. Unfortunately my ex spilled the beans about my rental condo, and they said I wasn’t a virgin (which kind of hurt) and we therefore weren’t eligible. In retrospect it might be a good thing, as the show probably would have been about us breaking up rather than buying a property 
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Excellent post, and oddly enough, I completely agree with you!!
I’m planning to do my anti-agent post sometime in the distant future…maybe we can do a series??
That’s funny that you guys could have been on PV – I would have loved to have seen that.
Mike
I’ve got to disagree with you, Mr. Cheap (and I guess Mike), on this one. I’ve seen some statistics that suggest that an agent listed property will sell for more than a for sale by owner, but I’ve also seen some statistics that suggest that the price difference does not amount to the commission paid.
I always wonder though whether, given a choice, any person would choose a fee-based service rather than the contingent percentage of purchase price method. I doubt many. Some may do fine selling themselves. I always think this is worth consideration–just like it is in deciding to forego hiring an attorney to start your business or handling your own financial planning. But the expertise of an attorney or financial planner has value, for their knowledge and experience. I think the same can be true for a good real estate agent. And certainly, not every home-seller will have the necessary knowledge or skill to go it alone. Those people should almost certainly hire an agent, and I doubt many of them would pay a fee for the service other than based on a successful sale–a standard to which we don’t hold attorneys or financial planners.
In closing to this overly long comment, Mr. Cheap, I think you should still feel completely comfortable wearing white to your next closing. So don’t feel so bad.
Hi Mike, that’s a good point that the fee might have to be paid even if the house isn’t sold/bought.
I would suggest that the fixed fee be paid only when the house is bought or sold.
I personally think that people are still better with agents partially because of their expertise but because of MLS. I’m not sure if this is true everywhere but up here, if you list a house for sale by owner you can’t get onto the MLS which means that most buyers won’t even know/consider it.
Mike
OK, I’m a computer consultant, we bill my time at $3000 / week (though it should probably be more
). I have a 4 year degree plus additional professional certifications and a little over 5 years in the field. I build systems that are core to operation of your business and that deal with all of your sensitive data.
A realtor requires nowhere near my level of education. They certainly deserve to get paid for the work that they do, but if I’m going to pay a realtor 12k for selling a house I want to see 160+ hours of work done (and when did you ever see that?)
You see for 12k you can get 160 hours of my (or probably Cheap’s) very valuable time. An average professional is making somewhere in the $25-30/hour region so 12k = 400+ hours of that professional’s time. If you’re a regular stiff looking to sell your home with a commission in the 12k region, then your break even number is 400+ hours!
And this about sums up my problem with realtors: they’re grossly overpaid, they’re not useless, they’re just too expensive. If I’m going to sign a Buyer’s Agent Agreement, this is basically the same as signing a contract for a work order. But I don’t want to pay you some interest-conflicted rate / dollar which is what’s happening. Really, I want to pay you 2k for 40 hours of your time and I want you to generate a bunch of good leads. If none of those leads pan out, you still get to keep the 2k. If you paid an agent 2k/week that would be $50/hour, which seems to be a pretty good bill out rate for an entry-level job.
Obviously my philosphy on selling with an agent is another post entirely
It really varies in situations
I have seen both cases
We sold our condo for $255K, through our lovely agent on her own ads, and 3.5% only (not even on MLS), when we only expect to get $240K after everything. We were happy
My friend just sold their semi for $242 when my agent recommend $249900 price, so he is a bit ahead
Unforunately I don’t have $$$ houses to try, but I am sure “million dollar homes” get sold through agents way more than FSBO. That is one niche market and agents should bring in their own $$ clientales.
I see a $$$ house with FSBO sign for couple months without being sold, and I guess rich people = cheap people
Great comment Gates.
On the buy side I think RE agents should be paid by the hour (like a lawyer), but a much lower rate – ie $20/hour with a 2 hour minimum. If a sale actually takes place then you might have to pay a closing fee (for paperwork etc) ie $1000.
I agree – I think agents are worthwhile, in fact I really like the one that I used but they (and their brokerages) are too expensive. Because they charge a percentage and because real estate values have gone up so much over the last 10-15 years, their fees have gone up way more than inflation.
Mike
NSB – congrats on the sale of your house.
I don’t think the agent has anything to do with the sale price. I think that if it’s listed on MLS (or advertised in general) and the house matches the price then it will sell itself.
Mike
Agents love to trot out the “houses sold by agents make more then enough to cover the commission” stat. I’d love to see the actual research behind this, but I think its also one of those situations where the average investor would be best served by buying index funds, but there is the possiblity for people willing to do a bit more work (such as asset allocation) to get a higher return.
Those of us in the PF DIY world would be the types who would learn how to market our houses, how to stage it, how to show it, and how to complete the sales, and I’m sure we’d be at the upper end of sale prices.
Mike-TWA: Why don’t you, as an experiment, try to sell the next property you sell yourself. Do the research, figure out market rate, and if you don’t think you’re getting a good price, don’t sell. If you don’t sell in month, turn it over to your agent, and see if the offers he brings to you are more then 5% higher then the offers you were getting yourself.
There’s a book, “How to Sell your House in 5 Days” that gives some ideas for DIY house sellers.
PropertyGuys signs have been popping up a lot more lately around Charlottetown. It’s certainly worth looking into if you’re selling a house. Flat-fee over %. You do have to do the marketing but you also get the leverage of a pre-existing network.
http://propertyguys.ca/
Mr. Cheap,
Indeed I will sell properties myself, but probably via lease purchase. But for a multitude of reasons, I’ll probably continue to use a real estate agent for a market sale. But as I say, there are situations where it may make sense to go it alone. Selling my primary residence, while I am still living in the residence and have some time flexibility may be one. We’ll see on the investments. For now, no immediate sales of TWA property planned.
Yeah, lease-options are great. Unfortunately they’re legally complicated north-of-the-border and apparently they can be a can of worms to use.
If I had property in the states, I’d definitely try to get into lease option (heck, I’d probably offer a lease option to anyone who rented from me).
John T. Reed has information about lease-to-own (how to do it legally and some potential pitfalls) that might be interesting to you at http://www.johntreed.com/leaseoption.html (maybe ask Rob for it as a Christmas gift?
)
Try using a referral service like: http://www.cutcommission.ca
You get to work with an agent (full MLS ect) and get a rebate on the commission. Costco also does something like this but they pay $20/10K or something like that.
If you buy and sell you would get double the rebate. As a buyer this repersents totally ‘free’ money since you do not apy the commission at all. Certainly helps to offset some of the closing costs.
Hi Andrew, the only problem with those commission referal sites is that they don’t reduce the commission by very much and in fact you can negotiate yourself with the agent and get as big or a bigger reduction. That’s what I did when I sold my house.
Mike
The problem isn’t the agent themselves but the system. They are the only ones with access to MLS. If given choice between selling/buying your own home or hiring an agent where access to MLS was equal (i.e. no barriers for us non-agents), I suspect the competition would result in a much more equitable fee schedule and people wouldn’t feel ripped off. Those who could do it themselves would and those who could not could negotiate a fair compensation package. Our current system doesn’t afford such choices so we are all frustrated by it. Guess the solution is to smash the MLS monopoly!
You got that right TMW.
I think another problem is by charging a percentage, higher priced homes pay a lot more when in actual fact they are just as easy to sell.
Mike
Wow! Quite a scathing review of real estate agents….since I haven’t purchased a house, I can’t say that I agree or disagree. However, I think 5% sounds unbelievably high! Now, I know why so many of my friends went into real estate a few years ago (they’re college friends that I’ve kinda lost touch with, so I’m not sure how they’re doing now).
Lets not forget that you are paying for two agents, the buyers agent and the listing agent. You will still have to pay half of the commission to the agent that brings you a buyer.
Now add the cost of advertising, taking the time to find inspectors and vendors you can trust, focused marketing and keeping it all legal.
An agent may not put in 400 hours on your sale, but he/she should have the systems to save YOU that much time.
Most of the time it is not worth the cost of having your home sit for six months before you realize an agent was the right idea.
Yes I am an agent and well worth it
Hi folks…
I’d like to be paid $20 an hour, sounds great. I’m on call 9am to 11pm, seven days. Can I get overtime for working before or after this (which I often do?) Time and a half would be fine.
Commissions are split between the brokerages; or more simply, your agent isn’t making 5%.
Gates, training doesn’t equal money, or my friend who’s working on a postdoc in maths would be better paid. Real estate is not salaried. Every listing is like a mini startup; you invest your own money and time and risk losing them both.
Agents have better MLS access because the MLS is built and paid for by agents. For about 10k/year in professional fees, you too can enjoy the same access, assuming that you can pass the exams and the background check.
Mr. Cheap, you could look into vendor-take-back mortgages.
I don’t want to be snarky (ok, maybe a little, but I’m holding back.) I don’t think it’s always a bad idea for people to sell their own homes. However, I’m also sure that most people could use their time better.
I’ve done everything for my job from cleaning toilets to phoning bank managers. There’s no life like it. It’s fun. But it’s a lot of work.
Elbie & ATNP – thanks a lot for the comments, it’s great to hear from some agents on this issue.
You’re correct about the 5% being split by the selling and buying agent but the point of the article was not to advocate selling without an agent but rather to question the entire structure of compensation for agents.
I can’t imagine every agent is happy with the current system since they have to give a big chunk of the money to the brokerage, plus you could spend a lot of time with a client and not make any money with them, if for example they end up not buying a house.
Mike
I just started my own brokerage down on the gulf coast. Some brokerages down here keep 2/3 and only offer 1/3 to the buyers agent.
I offer I will do the listing and follow thru for 1% and suggesting you offer at least 2% to the buyers agent. I will also rebate 1/2 of the buy side to the buyer, if you
use me to buy property.
I’m very cheap and have designed this around how I would like to be treated by a broker. Any feed back would be appreciated.
If you want to talk about real estate rip offs, I mean everything from lawyers to agents to sellers, I have been taken.
The following comment you made makes no sense at all: “What we REALLY take exception to, if Mike will let me speak for both of us, is that they get a percentage of the sale price, which gives them an incentive to sell as quickly as possible, rather than to get the highest price.”
If real estate agens made MORE MONEY by selling a house quickly, the incentive would be too sell as quickly as possible. But since they make more money the higher the sales price, the incentive is to sell as high as possible.
Perhaps you could apologize and retract your statement containing very faulty reasoning.
Dee: It makes perfect sense, sorry you’re have trouble understanding it.
I’m pretty sure you’re intentionally misunderstanding, but in case you’re not: if you sell MORE houses at a lower price, you can make a higher salary.
Imagine I have a $100K house. If it takes me 10 hours to sell it at 10% below value, 20 to sell it for fair value, or 30 to sell it for 10% above value.
First case:
Sale Price: $90K
Commission (5%): $4500
Earnings / hour: $450
Second case:
Sale Price: $100K
Commission (5%): $5000
Earnings / hour: $250
Third case:
Sale Price $110K
Commission (5%): $5500
Earnings / hour: $183.33
If I can sell houses quicker, I can sell more. Since I get paid a commission on each sale, this translates to a higher income. Of course, this screws the homeowner who wants to be in the third case, not in the first (since its a difference of $20K for him).
Dee: actually agents are loosing money longer the property is on market… they have expense for advertising, showing (gas, time..) so it make perfect sense that their first goal is to sell as quick as possible
a good realtor will work to help you reach your goals which is usually the most money in the smallest amount of time (unless you’ve got emotional attachment issues and you really don’t want to sell it)
if i am serious about selling my home and i want top price, it’s going to be 5 star hotel quality, 10+ showing condition at all times – and quite frankly, i’ve got better things to do then spend months dusting, vacuuming, etc in hopes that that i will get a higher offer it i keep it on the market longer.
often the first offer is the best because the buyers have likely been waiting for your home to come on the market, they’ve seen a bunch of others and are growing weary of the buying experience. buyers do a lot of searching before spending their money and seeing a home sit around only raises doubts.
think about it, when you see a home that has been on the market for more than 30 days don’t you say to yourself… hmmm, what’s wrong with it? i bet i can talk them down in price since nobody seems to want to buy it… or are you naive enough to think wow, 30 days and no other buyers have seen this gem?
sigh…
Hi,
I am going out on a limb here because I am a real estate agent and I want to let your readers know that not all real estate agents are money hungry mongers. I’m relatively new to the profession, started July 2007, right before the economy started its downward spiral. I went into the profession because I wanted to help people and yes I thought I could make good money. I also have two young children so I wanted a flexible work schedule, so I wanted to be at home when they needed me. I loved all those home improvement, house hunting shows, and property virgin shows. Let me tell you, they make it look so easy. However, I found out that being a realtor is harder than it looks and a lot more expensive. First of all, real estate agents need to go through 60 hrs of training and pass a test to get their initial license and then we have to take continuing classes to keep our license. True, the classes are not overly difficult, but they are expensive and very time consuming. In my case, after I received my initial license, I was paired with a seasoned agent that showed me the ropes for a year, kind of like an internship. I had 3 transactions that year and didn’t come close to breaking even, but I learned a lot. During that year, I was amazed by how much time, stress, and energy each transaction entailed. I also found that I was working 40-60 hrs a week and was on-call 24/7. It is a lot of work. I was never home and I hardly spent anytime with my family. It has been an uphill battle trying to make a name for myself. I am still not there yet, but I am still trying. Have I mentioned how expensive it is to be a real estate agent. The overhead is unbelievable. Half of everything I make goes to my office. Then there’s insurance, training, Realtor dues, MLS fees, lockbox, signs, office supplies, etc…. I actually had to take another job just to stay a real estate agent. I believe I am worth every cent of my commission. I can’t speak for all agents but I do know the agents in my office and I work our butts off to ensure our clients are happy with the sale of their home and/or the purchase of their new home. Regarding your points on real estate agents using their knowledge and experience to manipulate their buyers and sellers. Realtors, adhere to very strict ethical guidelines from NAR (which I applaud) and there’s also Agency Law (equally wonderful) . In addition, I, personally have an office policy and a very strict broker (which I love to work for) to deal with. I love working at my particular office. All the agents that I work with are not in it for extrinsic reasons and are genuinely there to help their clients. Yes, there are agents that are in it for the money, but not all of them. I like to believe that the money mongers tend to weed themselves out eventually-especially when the market goes down. Unfortunatly, they leave a bitter taste in peoples mouth and give all real estate agents a bad reputation. My recommendation to anyone that is buying or selling a house is educate yourself, ask questions, and interview a handful of agents before you decide on one in paticular. Personally, I work primarily on referrals, so it is important for me to do every job well and I will because I one of those good agents.
Sincerely, Bridget