The real cost of using a real-estate agent

When it comes right down to it, is your real-estate agent really working for you?

By MSN Money Partner Jun 23, 2011 10:33AM

This post comes from partner blog The Dough Roller.

 

I knew something was amiss when my wife and I bought our first home way back in 1993. We had a "buyer's agent" represent us. That means in theory the agent was representing us, not the sellers.

 

But when a problem with the inspection surfaced, our agent wanted us to eat the cost of repairs.

 

It wasn't much, about $500 as I recall. But for us (read: my wife) it was the principle of the matter. So we held our ground. Eventually, the real estate agent took the $500 out of her commission. But she made it abundantly clear that she thought we were being ridiculous.

 

What become clear to us, however, was that the real estate agent was first and foremost looking out for herself.

Fast-forward almost 20 years and the folks at Freakonomics have reached the same conclusion, as you can see in this most excellent video.

 

The folks at Freakonomics also point to a study by Stanford economist B. Douglas Bernheim, who reached the following conclusion:

Sales commissions for residential real estate brokers historically average nearly 6% 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.

And that brings me to a great business idea if you are so inclined: Start an FSBO (for sale by owner) website in your area.

 

That's exactly what Christie Miller and Mary Clare Murphy did, as reported by Jeff Bailey of The New York Times. Their site, www.FsboMadison.com, brings homebuyers and sellers together without the cost of a real estate agent. For just $150, a homeowner can list his or her home, and FsboMadison even throws in a "for sale" sign.

 

Once again, we see an example of the Internet cutting out the costly middleman. Power to the people!

 

More on The Dough Roller and MSN Money:

VIDEO ON MSN MONEY

9Comments
Jun 23, 2011 6:11PM
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I've frequently bought homes, but less frequently I've sold homes (I'm an investor/landlord).  On one hand, I value the experience and training that comes from working with a good real estate agent.  But I think the standard 3% (to each broker, totaling 6%) gets way too expensive, especially when I consider how much work they actually did.  When I'm buying a $50K 2BD/1BA townhouse, I think the $1,500 commission to my agent for about 40 hours worth of work is fair payment.  But when I'm buying a $200K-300K house (for myself), I think the $6K-$9K commission is a bit much, considering that they still only put in maybe 40 hours (tops).  I'd have to work my full-time job for a month (almost 350 hours) to make that much, and I'm a CPA with a Masters Degree!  Yet when I've tried to negotiate with a real estate agent on their commission, they often get out of sorts and say "well, 3% is the industry standard."  (This is partly why I've converted most of my own residences into rentals, so I don't have to pay exorbitant realtor fees.)  In those cases, I've found a friend or relative agent who is more than happy to accept a more reasonable 1.5%.  Again, I value the advice and experience, but there probably needs to be more of a sliding scale for commissions.
Jun 24, 2011 3:56PM
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This article is overly simplistic and rather naive.  First, the average sale takes much more than putting a sign out and collecting a commission.  Second, if an inspector identifies something to be fixed, it can be negotiated between the buyer and seller as part of the sale or the buyer can elect to reduce their offer (or not).  The realtor has no responsibility for the condition of the house other than helping the buyer be sure they understand what that condition is.

We have bought and sold 8 houses and used a realtor all but one time.  In that case, we were in a neighborhood where houses were in such demand that you just had to spread the word to neighbors and they sold themselves.  We used a FSBO site that time and it did not contribute to our selling the house.  They have probably improved since that time. 

An earlier contributor pointed out that the best realtors offset their costs.  I concur in most cases for homes of average value.  We have two realtors that we still use to point us to quality contractors and services well after the sale and they do it gladly, knowing it will improve their reputation and lead to referrals.  We had another who found us a very thorough and knowledgeable inspector who identified several problems we overlooked and saved us $25000 in the cost of the house.  It pays to dig around and find realtors with experience and knowledge who know your market.

In the case of high end homes, realtors  can generate exorbitant commissions on a flat commission rate. However, one cannot forget the marketing costs (advertising in high end outlets is extremely expensive).  And, building a strong brand name and reputation that attracts interested parties is a long and expensive process.  Not everyone uses or trusts the internet. 

Realtors will tell you that those big sales commissions offset the many situations where the realtor spends infinite hours in chasing prospects, doing marketing and never making the sale.  Personally, I think a more complex compensation system of a fixed fee plus a declining commission rate tied to the sale price would be fairer for all parties.  The fixed fee would cover the average sized sale, and while they would get more for making more expensive sales, the rate would not go up as fast. 

Jun 24, 2011 9:40AM
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Buyer beware - an honest, hard-working real estate agent who is looking out for you is worth every penny they earn.  You should look around for the best because there is a lot of information most of us don't know about property transactions that your realtor does --- he or she can save you lots of headaches in the future.  But, many of you are correct there are a lot of unmotivated, uneducated realtors out there -- so look for one with credentials and a great reputation.  Just like everything of such importance, spend the time researching for the best is important.  My realtor has a double degree in business management and marketing and is the slickest website designer out there.  He is definitely worth his commissions! 
Jun 23, 2011 4:27PM
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This is a tough one. AND it really depends on the agent...IMHO....if the real estate commission is worth it. I was a licensed real estate agent for over 16 years and always felt my commission was well deserved and earned. However I did get to work with some "buyers' agents" who I felt did not represent their client fairly. To be clear an agent has a fiduciary responsibility to be fair to all parties. But if I chose to sell real estate I would more than likely go "solo" as I know how to "pre-qualify" someone, how to price the property fairly and what is customary and expected at settlement. BUT there is a lot that can go wrong so one may want to hire a professional to handle the details...
Feb 3, 2012 2:52PM
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I worked as a full time agent and now as a part time Real Estate agent and I do agree with a lot of the comments here.   I really enjoyed working with my clients and several times cut my commission to make a deal come together.  I believe in loyalty and did a lot of the things I did in hopes that they would refer others to me and come back to me when it was time to sell their homes.  Most did and most didn't for whatever reason.  I have had some try and knock me down and some times I did without a problem but when I have a client who has their Dad call me and yell and scream at me over things about his son's deal..then I have a problem.  I have a problem when I have spent hours upon hours, writing contract after contract for a couple who refused to sign with me but did continue to call me when they wanted to look at homes and then use another agent to purchase. I then have lost out and get paid NOTHING.  Yes 3% is a lot in some cases.  But I don't receive all of that 3%.  Some companies will take up to 50 or more of that.  Which leaves us with not much after all the monthly, quarterly and annual fees we pay.  I have ran across several low life agents that I refuse to do deals with and these are REALTORS that have a code of ethics to follow.  I no longer belong to the Realtor association, I got tired of paying $500 a year so I could call myself a Realtor.  The Association really does nothing for you.  Some companies don't give you an option.  Good agents are hard to come by, I do agree with that.  I enjoy my work because I don't have to make a sale to feed my family or make ends meet.

 

Feb 2, 2012 8:09PM
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This is a great article!  I loathe real-estate agents.

 

I believe that they are the exact greedy, self serving individuals that drove home prices beyond real values...so they can can get a bigger paycheck.  Banks are not setting or suggesting the price on homes...its the real-estate agent because they are "qualified" to do so.  Follow me here?

 

I also had an experience where we had one of our homes FSBO, on Zillow.  We had a great buyer lined up...unfortunately, this buyers' agent killed the deal for both parties. 

 

Get this...the people that had the agent, found our house FSBO on Redfin.  They contacted us directly, even stopped by on their own,  and we showed them the property (no agent working for them here!), we struck a deal. 

 

They came back with their agent, unfortunately, they had made the mistake on signing a contract with this scum bag.  Agent expected ME to show the house again...umm, isn't this your job Mr. Agent??? (Ken Ryerson of ryersonrealty.com)

 

So we talk every thing over again, nothing changes on what the buyer and I agreed to initially. 

 

We just about get out the door and the agent has the balls to bring up his 3% commission due on the deal, and had the nerve to ask if we wanted to be represented as sellers.  I literally laughed in his face.

 

Since this agent had not found the property for their client, had not made any of the initial contacts to me, and had not shown the property either originally or the second time, I was pretty sure of myself that this agent had not earned his expected draw.

 

Anyway, I outright refused.  He did not earn his commission in any respect.  Blew the deal for his clients.

 

Yeah, agents really are complying with their duty to act in the best interest of their clients. LMAO!  The whole realtor association is an even bigger joke of an organization.  Pay dues for MLS access...lol, what a great scam.

 

 

Jun 23, 2011 8:35PM
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Useless job, useless people. And very, very greedy. Most of them uneducated. A couple of classes mean nothing. Do it yourselves! Since when this is considered a job?

Being a doctor, a teacher or an engineer is a real job. Not a realtor. All of us can do better than they do.

Jun 23, 2011 4:16PM
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It is not the cost of a Real Estate agent but the hidden cost of FSBO's. As an agent for Coldwell Banker we have to go through 21 hours of classes every 2 years as well as dues to the real estate division and join the MLS. and it is not cheap. Sure you can sell your own house, consider the cost of advertizing, you are planning on advertizing right? The escrow fees transfer tax home inspections repairs that might be needed to bring the house up pair. What if the potential buyers can' really get a loan, who is going to pre-approve them. What about holding an open house? Anyone can walk in off the street. As an agent the only people we show houses to are the qualified buyers, Consider this a $100,000.00 at 6% commission is only $6000.00 divided between the other agent and brokerage doesn't leave much. With the 6% you get the advertizing you as a FSBO couldn't afford, let alone getting qualified willing buyers. In Real-estate everything is negotiable right down to getting reimbursed at the Close of escrow for shelling out $500 in repairs, But if it is your dream home it might be worth the $500, than passing up a great deal.If you are going to spending several hundred thousand dollars on a home why make a mountain out of a mole hill over $500.00 the CLOSING COST are costing you a lot more.
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