The TV show 60 Minutes recently did a segment on homebuying using what I will call “low-advice services.” These are discount real estate service providers that reduce the cost of buying and selling homes by reducing the commission structure from the traditional 6%. The question is, “Do these services make sense for homebuyers and sellers?”
I don’t want to defend or criticize the traditional real estate brokerage industry because there is no simple answer to the question stated above. The bottom line is that sometimes these services are a bargain and sometimes they are a rip-off. Your goal, dear reader, is to figure out the answer for yourself.
America is well into its love affair with the concept of do-It-yourself. As American manufacturers have produced better tools and packaged easy solutions to home-improvement projects, the do-it-yourself industry has taken off. Go to Home Depot today and you’ll notice the huge variety of products; this selection simply was not available twenty or thirty years ago.
Ever since Charles Schwab pioneered discount stock brokerage back in the 1980’s, the financial services industry has been on a similar kick. One big discount brokerage firm talked about do-it-yourself investing with the motto, “You can do this!”
Well, can you do this? I think it turns out that a small few can, but for most people, do-it-yourself investing was a disaster. How did YOU do with the tech boom of the late 1990’s? You may not have suffered as badly as others, but I’ll bet you know people who lost most of the money in their 401(k).
John Ruskin, 19th Century English philosopher, said, “There is no product some man can’t make a little worse and sell a little cheaper, and the buyers who consider only price are this man’s lawful prey.”
The same can be said of services too, and that includes real estate brokerage where commissions have traditionally been 6% of the purchase price, typically split equally between the seller’s agent and the buyer’s agent. Home prices when I bought my first home almost 40 years ago were in the $50,000 range in my area, so the real estate commission was a mere $3,000. Today, that same home would sell for $1,000,000 and the brokers would split $60,000.
Forgetting the fact that you could buy a brand new car for $3,000 back then, the question is whether buyers and sellers would get $60,000 of value for their money today. Stated another way, if you were to choose not to hire an agent with the traditional compensation, what would you gain and what would you lose?
Let’s discuss a few realities here. The first is that there are a lot of differences between people. If you have lived in your neighborhood for years and are familiar with the schools and all the things that make the homes in one area worth more than those in another area, you are probably better equipped to do your own research and make your own decisions.
If you keep records of sale prices, you will have a pretty good idea when a bargain shows up. Compare that with someone moving to town from some other area or maybe from out of town. How much do they know? Zip! Zilch! Nada! For them to try to do it themselves is beyond silly. What’s more, it could have potentially tragic consequences.
Then there’s the question of who gets to keep whatever savings occur. A FSBO (For Sale By Owner) seller thinks he’s saving 6%. But the buyer thinks that he ought to get the benefit. Assuming each side knew EXACTLY what the home was worth, it would be easy to discount the price EXACTLY 3% and give each side half of the savings.
Does it happen that way? Probably not. Neither of these folks knows the EXACT value. If they are off much on the price, and let me assure you that it’s easy to be off more than 3%, one side will make out like a bandit. Real estate agents always get to laugh up a storm on FSBO transactions because the prices rarely represent the market. Someone sold too low or paid too much because he or she was ignorant.
The fact is that good real estate agents who specialize in an area know what the values of homes are. When you hire an agent, you get his/her expertise. That keeps you from doing something dumb. They will guide you to the right price to offer, or urge you to move on to the next house.
Finally, if you have done a transaction recently, you know that there are a ton of forms to sign. Each one exists for a reason. Some are only CYA forms for the brokers, but there are others that are really important, like ones that give legal protection. If a form is missed, buyer or seller may find himself in an expensive “situation” down the road.
I know it seems as if a real estate broker sticks a sign in the front lawn and then collects a huge commission. But there is a lot of hard work between those two actions. Most of that hard work benefits a client. I’ve been a party to something approaching 2,000 purchase transactions. I can assure you that if you work with a good agent, one who is dedicating to really helping you, you will end up a lot happier and will know without a doubt that what the agent gained in the transaction was well earned.
http://www.credit.com/credit_information/mortgages/Do-it-Yourself-Real-Estate-Services.jsp
