Eventually, you will sell (or exchange) one or more of your properties. At that time, you choose whether to sell the property yourself or employ a real estate agent. To decide this issue, think not only about the amount of sales commission that you will pay but also about the services that an agent can provide.
Selling a property involves time, money, effort, and expertise. Investors who are unwilling to take on these obligations will seldom sell their own property successfully.
Because most investors would rather delegate these activities, the real estate brokerage business exists to provide service to sellers. The full range of services that a top agent can provide to a seller are too numerous to mention here, but the more important ones include the following:
• Works full-time for the seller to find buyers for his or her property. Agents are not just available after work, on certain evenings, or on Sunday afternoons.
• Relies on sources other than newspaper advertisements to supply a majority of prospects. Agents get prospects from referrals by past customers, Internet and e-mail inquiries, financial institutions, hotels and motels, educational institutions, other professionals such as lawyers and insurance agents, company personnel departments, builders, other types of advertising, canvassing, and For Sale signs.
• Provides sellers with comp sales that indicate the values of their properties. This market analysis is based on what similar houses have sold for, not what their asking prices may have been.
• Gives helpful pointers on how sellers should prepare their properties to improve their value and achieve a quick sale.
• Calculates how much sellers will net from a sale after all expenses have been paid, including any balance on a mortgage, taxes, or other liens.
• Shows the property to its best advantage and brings out the features that appeal to each prospective buyer. Remember that agents get to know their customers' needs so that they can show only those properties in which a specific buyer is likely to show an interest.
• Performs the services that will facilitate the sale, thus freeing the sellers' time for other activities.
• Aids sellers in finding their next property and setting up a Section 1031 exchange to save on taxes (see Section 14).
• Helps negotiate the sale and gives advice concerning the pros and cons of each offer.
• Helps buyers overcome obstacles to buying the sellers' property, such as obtaining financing, selling an existing property, working an exchange, or getting finances in order.
• Follows up on prospects who have shown an interest in a property.
• Exacts from buyers their true objections to a property, so that sellers can attempt to overcome them. Usually buyers will be more direct with an agent than a property owner.
• Prequalifies the prospect and helps sellers avoid wasting time in accepting an offer from buyers who cannot put together the financial resources to close the sale.
• Handles any details and questions about selling a property that a seller may have from the time of listing to after the closing.
A majority of buyers rely on agents to help them find properties. Therefore, by-owner sellers may miss that large number of buyers who want the services that top agents typically provide.
Obstacles to By-Owner Sales
Although many factors may account for an investor's difficulty in selling a property, the following items are most common:
• An emotional involvement with the property such that buyer criticism results in disputes between the buyer and the owner
• An unwillingness to price the property in line with its market value
• A failure to remain available during the evening hours and on weekends waiting for buyers to call or come by
• An inability to help potential buyers to understand or secure financing of the property
• An overdependence on newspaper advertising to bring buyers to the property
• A personality or emotional makeup that does not lend itself well to direct negotiations with buyers
• An inability to attend to the technical and practical problems associated with selling and buying a property
Cost of Brokerage Services
Instead of focusing on the agent's commission, property owners should focus on the amount they will net from a sale after paying off all necessary mortgages, liens, closing expenses, and selling fees. In effect, the real cost of the brokerage service is the difference between what sellers would net if they employed an agent and the net amount they would receive if they chose to sell the property themselves.
On the surface, it might appear that the difference in net between using an agent and selling by owner would be the amount of the real estate sales commission. However, this situation would result only if all other things were equal. In practice, though, they seldom are.
To obtain a better picture of what this net difference might be, consider four separate items: (1) the selling price of the property, (2) selling expenses incurred by the owner, (3) federal income tax law, and (4) opportunity costs.
Selling Price. The selling price of a property by owner is usually less than that of a similar property sold through an agent. This fact, then, reduces the difference in nets by the amount that the price by owner is less than the agent's price.
Selling Expenses. The selling expenses when using an agent are fixed fairly closely by the amount of the sales commission, which in the United States may range between 3 percent and 10 percent depending on the type of property and the type of listing.1 (Types of listings are discussed later in this section.) When an owner sells a property, the amount spent out of pocket on selling expenses varies directly with the length of time the property is on the market.
(1 Sales commissions in other countries tend to fall below the percentages typically paid by sellers in the United States.)
In some cases, a for-sale-by-owner (FSBO) seller may get lucky and spend no more than $500 to $1,000 out of pocket. In other instances that expense may go much higher, and the owner may still not succeed. The difference in net is reduced by the amounts a by-owner seller must spend for expenses such as advertising, signs, additional legal costs, appraisal fees, and other miscellaneous items.
Federal Income Tax. As discussed in Section 14, out-of-pocket selling expenses may be deducted in calculating the capital gain resulting from the sale of a property. Therefore, even if out-of-pocket expenses of a by-owner seller are less than those incurred by a seller who uses an agent, the sum is less than the absolute dollar difference between these amounts because of the tax deduction. Again, this factor will reduce the difference in nets between the by-owner seller and agent seller.
Opportunity Costs. Opportunity costs are costs incurred by a by-owner seller for the time, effort, and aggravation that selling a property entails, such as the cost of time wasted waiting for appointments that mayor may not show, or sitting by a telephone that mayor may not ring.
No one can predict how the net proceeds of sales figures (agent vs. by-owner) will differ for any specific seller. Only in unusual instances, though, would the net received in a by-owner sale exceed the net received in an agent sale by a substantial amount after you account for differences in sales price, out-of-pocket selling expenses, tax deductions, and opportunity costs. The actual "cost" of the brokerage services to a seller can be a positive (benefit) amount, and even in a worst-case situation, the seller's true costs would rarely approach the dollar amount of the sales commission. This fact explains why 80 percent of owners avoid the FSBO route and sell their properties through a realty firm.
In her book, Housewise (Harper Collins, 1987, p. 196), rehab investor Suzanne Brangham points out, "Frequently-about twice a day-someone asks me why I don't get a real estate license and avoid paying someone else the commission on each property I handle. My answer to this is that I don't want to sell real estate-I want to invest in it and renovate it. ... More importantly, if I did try to sell my own properties, I'd lose some of the most valuable assets in this business-the agents I work with. Good agents know what properties are selling for, which areas are strong, and which neighborhoods are getting hot. They know what's gone up in value and which areas maybe coming down."
In other words, Suzanne is saying that the agents she works with don't cost her money. Instead, the information, knowledge, and services they provide help her make money. Naturally, only you can figure out the sales method that's best for you. But whatever you decide, weigh all potential costs and benefits. Don't naively believe that you can simply sell the property yourself and "save" the commission.