FOR SALE BY OWNER VERSUS USING A REALTOR
Usually, the first thing on the mind of the person that wants to "Sell By Owner" is saving money on the commission paid to a real estate agent. It is true that they can save money. But, most FSBO’s will work with a Realtor® if they bring a buyer to the table.
A comment often heard from a real estate agent is that what the seller nets is most important. They feel that the FSBO doesn’t know the market. As we see it, in a rising market, the FSBO doesn’t see the rising market and could have received a higher net. In a falling market, they are pricing behind what homes are currently selling and the house simply does not sell. In a market that has fallen, FSBO’s have trouble facing the reality of the current market. Most FSBO’s end up using a Realtor® to finally sell their house. And, for some more details on the differences:
BUYERS—WHAT KIND OF BUYER IS LOOKING FOR A FSBO?
- The people that are relocating do not have the time to cruise all the neighborhoods looking for yard signs. Once they find the yard sign in a house that looks desirable, they have to find someone to answer the phone. Then they need to arrange a visit only to find out that the house does not fit their needs.
- Investors will show interest and offer to pay cash. There is nothing wrong with investors, but their goal is to resell your house and make money.
- Bargain hunters are looking to buy the house under the market. They often are in tune with local market conditions. And, they have a lot of time to search for their property.
- Then, there is the rare group that is looking at a specific house or neighborhood and the FSBO property is the only choice.
FSBO’s typically have little expertise in the real estate market. One of the first issues is pricing. Their very first thought, and the start of the equation, is what they paid for the house. Then they add in repairs and expenses to their home. In general terms, finishing a basement would add to the “cost basis” in the home and add value to the property. Painting the walls would be considered general maintenance and not add to the cost basis. As far as value goes, not painting and letting the house run down decreases the home’s value. Maintaining the home maintains the value. When it comes to renovating kitchens, bathrooms, etc., the issue becomes more complicated related to age, neighborhood, etc.
Their next step is to think about what other people’s houses in the neighborhood have brought. This is important, but we need to look at all houses in the area and not cherry pick one or two.
In accounting, we are concerned about how much we have invested in the house. On another accounting sheet, we know how much we owe against the house. This could be the first mortgage, second mortgage, and/or a HELOC (Home Equity Line Of Credit). Does this influence how much we ask for the house? It should not. The persons that are in the market for a house don’t care what you owe against it. They are interested in what they can buy your house for, or one like it. One caveat here. If you owe more than the house will clear, it is a short sale situation. The prospective buyer does care about this as it will affect how long it will take to close and raise questions about routine maintenance of the property. If there was ever a case for a Realtor®, it would be a short sale. There are many hurdles in this sale.
NEGOTIATING ROOM—nobody wants to price their home too low and leave money on the table. Yet, it needs to be priced where it attracts buyers. It needs to fall in their price range. Even if the “negotiated” lower price falls into their bracket, they may not have been looking at this house in the beginning. Buyers don’t want to waste their time looking at houses that they cannot afford. Your real estate agents are typically paid on a percentage of what they house brings, so they want every penny that the market will justify. A price that will attract the most buyers in the shortest amount of time is best.
BUYING A LISTING—some real estate agents would tell you that your house will bring an inflated price knowing it will not. This is known as “buying a listing”. Their thought process is that once they get the listing, they can lower the price until it sells. If a FSBO is unrealistic on price, this is one way to capture the listing.
PRICE FOR WHOM?—we price a home for three people. The first is the real estate agent that will show our house. He likely will be the first to spot our listing. The second is the prospective new owner. He needs to like our house, and price, well enough to come take a look. The third person is the bank appraiser. If the bank appraiser doesn’t value the house as high as the purchase price, it can be a deal breaker.
How does the FSBO market their property? A yard sign is a start and the people that drive by will see it. At this stage, there is very little money or time spent. In a buyer’s market, it usually takes much, much more to consummate a sale.
PREPARATION—a Realtor® will probably help in giving advice on how to present the property in its best light.
QUALIFIED—a Realtor® will probably only bring in pre-qualified buyers. The agent wants to make sure that they are not wasting their time showing houses that their clients cannot afford. It also gives them credibility when dealing with sellers or sellers’ agents.
THE VISIT—buyers are typically not comfortable being in the same room with the sellers. They may want to talk among themselves or ask their agent about something as they view the house. On the other side, sellers often have an emotional attachment to their home and take offense by many comments. Agents should have none of these feelings.
CLOSING—seems like it shouldn’t fall under this category, but it does. FSBO’s have a higher failure rate at bringing the “sale” to the closing table. The For Sale By Owner needs a good real estate attorney and he needs to be able to work through any of the legal minefields or pitfalls in the closing process. Many agents do not want to deal with the unsophisticated sellers because of the failures to close.
As the buyer is searching for a FSBO property, he is concerned with several things. Trust would be one concern. Does he trust the seller? Advice from someone that has objectivity is important. The real estate agent will be able to point out the pros and cons of the property and most buyers recognize this. So, what happens is that most buyers use a Realtor® for this reason alone. Speaking of trust, as a real estate agent looks at a FSBO property, they see it as “unsecured”. On a house listed by a real estate agent, they know that their commission is secured and that they will get paid by the seller. The real estate agent doesn’t know if the FSBO property will pay a commission.
The real estate agent is typically compensated by the seller and it costs the buyer nothing to use an agent. With this thought process, most buyers are going to use an agent if for nothing else than the convenience. Typically, the prospective buyer is looking for the right house at the right price with the least amount of effort.
On the seller’s side, do they have the time to sell by themselves? Taking off work can be an issue to not only show their home but to go through the entire process from sale to close. Look here for what the buyer will be doing.