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Note from Kalen: Today I have a very detailed and comprehensive post from Carl Weisman on your true objective when selling your home, and how to accomplish it. If you’re interested in knowing even more, Carl has been generous enough to include a special offer for MoneyMiniBlog readers (see at the end). Enjoy the post!
When you go to sell your home, if you’re like most people, you’ll hire a real estate agent to help you. They’ll come over to your home and do what they call a listing presentation. The listing presentation is where they tell you all the things they’ll do to market your home, what they think your home is worth and how much you’ll pay them (customarily 6% of the sales price) when the home sells. And if they’re like most agents, sometime during their listing presentation they’ll point out that the objective is to sell your home for the highest price. But that’s not true. It’s a lie. Actually it’s a sequence of lies.
The sequence goes something like this: what you want, Ms. home seller, is to sell your home for the highest price. The only way you can guarantee that is to hire a top notch real estate agent (i.e., me). And the only way to do that is to pay the full, customary commission.
It’s all a bunch of lies
Your goal is NOT to sell your home for the highest price. At this point you probably think I’m crazy, and if you do, all that means is that the lies worked on you. Your goal when you sell your home is to pocket as much money as possible, and that my friends, requires a formula:
What you pocket = sales price – commission
Of course real estate agents will tell you your goal is to sell your home for the highest price because they don’t want you to even think about the commission you’re going to pay them. It’s just a little misdirection.
Do you need a top notch agent to pocket the most money? Maybe not. I can envision a scenario where that’s not true at all.
Imagine you hire a top agent to sell your $500,000 home. Being a top agent they charge you 6% total commission, but they deliver on their promise and help you sell your home for $500,000, which means you pocket $470,000 (after paying commission).
Now, imagine instead you hire one of those “crappy” discount agents who only charges 3% total commission and without fail, they screw things up and your home sells for only $490,000, which means you pocket $475,300 (after commission). Which agent would you rather use? A crappy agent can still put more money in your pocket, which IS your goal.
That result is more profound in light of the research conducted by Consumer Reports that found paying less than the customary commission does NOT hurt the quality of service.
You may get top price paying full commission, but you will almost certainly not pocket the most amount of money, which is your true objective. Paying the full customary commission seriously damages your chances of maximizing what you take from the sale of your home, no matter what anybody tells you.
So, if you’re committed to your true objective of keeping as much of your hard-earned equity as possible when you sell your home, then you actually have two separate goals: sell your home for top dollar AND pay as little as possible in commission and other fees along the way. We’ll deal with these one at a time.
The trick to selling your home for top dollar
Of all the things required to sell your home for top dollar, one of them is more important than all the others put together: price. No matter how perfect your home or how well marketed it is, there exists a price above which nobody will buy it. The single biggest mistake a home owner can make when they list their home is to overprice it.
Regrettably, many home sellers have an emotional attachment to their home which makes them think it’s worth more than it is. With all the information feely available today, buyers are well-informed when it comes to home prices. They know when homes are overpriced and when they’re priced to sell. Overpriced homes just sit there; homes priced to sell can spark a bidding war. If you overprice your home, all your home will do is help someone else sell their properly-priced home because their home will look like a deal next to yours.
Maybe you think the best strategy is to overprice your home a little to leave yourself some negotiating room. But, that too is a mistake. It may seem counterintuitive, but you get the highest price for your home by underpricing it slightly. Why is that?
Buyer’s want a deal. When they see an underpriced home they are more likely to make an offer. Therefore, underpriced homes are far more likely to get multiple offers. Here is the part most home sellers don’t realize. When a buyer makes an offer to buy your home, they don’t just submit a piece of paper with some numbers on it. They make an emotional commitment to living in your home. They already see themselves living in it. They’ve already picked out the paint color and carpeting. They do not want to go through the devastation of losing out on your home AFTER they’ve made an offer.
You get top dollar for your home by starting a bidding war among potential buyers who are ALREADY emotionally committed to buying your home. And the only way to do that is to slightly underprice it.
Why commissions are so high in the US
So, now that you know how to get top dollar for your home, how do you limit what you pay in commission? The first thing to know, if you don’t already, is that when your hire a real estate agent to help you sell your home in the US or Canada, you’re expected to pay for both your agent and the buyer’s agent.
This custom of having the seller pay for the buyer’s agent leads to commissions which are way out of line with the rest of the world. In the US and Canada, the customary commission to sell a home is around 6% of the sales price (split evenly between the buyer’s agent and the listing agent). In other countries where the seller is not expected to pay for the buyer’s agent, such as Australia and the UK, the commission is on the order of 1% – 1½%. So, the commission to sell a $300,000 home in the US is around $18,000 while selling that same home in the UK would cost around $4,500 to sell. What does the American home seller get for that extra $14,000? Not much. Properly priced homes sell just as quickly and easily there as they do here.
The trick is to realize that you don’t have to pay 6% commission, ever.
Options for paying less than the customary commission
Saving money on the listing agent’s commission is very easy to do today. While traditional full-service listing agents will try and convince you to pay them 3% commission (half of 6%), there’s no need to do so. First, there are plenty of full service discount agents. What’s a discount agent? Any listing agent who charges less than 3% commission. But if they charge less, they must be inferior, right? That’s what the full price agents would have you believe, but it’s not true. The truth is there are good and bad full price agents and there are good and bad discount agents. Paying more doesn’t guarantee you anything.
Most of the discount agents (who charge between 1% and 1½%) simply recognize that selling a home today doesn’t take as much as it used to, so they pass the savings along to the home seller in an effort to capture more of the market. You should not be afraid to consider hiring a discount agent.
Another option to save money on a listing agent is to use a flat-fee agent. Flat-fee agents do exactly the same thing as the other agents, but they charge a flat fee (typically $3,000-$5,000) instead of a percentage of the sales price. These agents acknowledge what everybody already knows: it takes about the same effort to sell a properly priced $200,000 home as a properly priced $800,000 one, so why should it cost four times as much?
Flat-fee agents are especially beneficial when selling an expensive home. Suppose you’re selling a $700,000 home. A traditional listing agent would expect you to pay at least $17,000 commission whereas a flat-fee agent might do it for $5,000. That’s a savings of $12,000 tax free just for choosing an agent with a different compensation formula.
One final option for saving money on listing agents is to choose a fee-for-service agent, also known as a real estate consultant. Unlike the other agents, fee-for-service agents charge you by the hour. They don’t care what your home sells for (or even if it sells at all). You only pay real estate consultants for the service you need. This is an especially good choice for do it yourselfers who only need a little help from an agent to sell their home.
How much can a real estate consultant save you? Suppose you only need 20 hours of their time and they charge $150/hr. That’s only $3,000. That’s a heck of a lot better than paying $15,000 to a traditional listing agent to sell your $500,000 home.
There you have. The primary strategies for achieving your true objective when you sell your home: to pocket as much money as possible.
If you’re thinking of selling your home
If you’re thinking about selling your home this year, I encourage you to check out my new online course, The Intelligent Home Seller, where I teach you how to pocket an extra $2,000 to $14,000 when you sell your home WITHOUT selling it yourself. And if you enroll in February, I’m offering 80% off exclusively for readers of MoneyMiniBlog. You can find out more about The Intelligent Home Seller course here:
I hope you got something out of this post. If you have any questions about selling your home, you can ask me anything at http://www.ReaListing.com
About the Author:
Carl Weisman, MS, MBA
I teach home sellers how to preserve their hard-earned equity