We rarely use travel agents to book holidays, given easy access to online information, thus saving money. Selling your house without employing a real estate agent is just as doable, writes Eden McDonogh.
MOST PEOPLE would never think of selling their house without a real estate agent or don’t realise that it is even possible.
Anyone can negotiate, fill out and exchange the necessary contracts. Better yet, you could have a solicitor or conveyancer draw up the contracts and ensure all the legalities are followed for a flat fee of roughly $1,000. So why does everyone still use real estate agents?
Once upon a time, real estate agents helped market your property to a wider audience and connected you to buyers. Additionally, agents possessed knowledge and expertise in the industry.
Today, the internet provides unbridled access to the marketplace. Buyers and sellers are connected like never before. Moreover, the informational edge agents once possessed has been quickly eroded. Anyone can now go online and find anything they need to know about availability in their area, sales trends, median prices, mortgage rates and so on.
These days, you are more likely to hear a real estate agent tout their negotiating skills as the primary reason for acquiring their services. Real estate agents handle all the conflict and discomfort of negotiating so that you can get the best price.
An obvious issue with this is that a real estate agent has about as much expertise in negotiating as anyone who has read Donald Trump’s The Art of the Deal. Keep in mind that real estate agent training is typically done online and can take as little as a month to complete.
But this is a moot point because getting the best price for your house isn’t even in a real estate agent’s best interest. This might seem counterintuitive. After all, the more an agent sells your house for, the higher their commission.
However, economist Steven Levitt, a professor at the University of Chicago and co-author of the infamous book Freakonomics: A Rogue Economist Explores the Hidden Side of Everything, demonstrates that the incentives of real estate agents and sellers are not necessarily aligned.
Consider this example. You are selling your home for $500,000 through an agent who will take a 5% commission — or $25,000. Roughly half of that commission will go to the agency and the remaining half is typically split between the agent who lists the house and another agent who finds a buyer and performs the sale.
This might mean that your agent only takes 1.25% of the sale price or just $6,250. Now imagine that your agent is a “good negotiator” who fights to get you the best price and sells your house for an extra $50,000. He or she will only take home a measly $625 for all that extra effort.
What’s more, getting the best deal often means keeping the house on the market for longer and showing it to more people. Thus, intelligent agents will pressure you into taking a lousy deal so that they can make a quick sale without serious effort.
For the same amount of time and effort, an agent is better off making two or three cheap deals instead of working on getting one great deal. So, even if real estate agents were expert negotiators, they are probably more likely to negotiate you into selling for less rather than the buyer into paying more.
Levitt conducted an ingenious study to prove that real estate agents are not getting the best prices for their clients.
He looked at public real estate records and gathered a data set of over 100,000 property sales in the Chicago area. In this data set, he found that roughly 3,300 of the sales were made by agents selling their own properties.
Levitt then looked at how much these agents were selling their houses for and how long they kept them on the market compared to the houses they were selling for clients. The study found that agents kept their property on the market for an average of ten days extra, waiting for the best offer and sold their property for 4% more than the average client’s — even after controlling for every conceivable house and neighbourhood factor.
For the hypothetical $500,000 house we discussed above, that’s an extra $20,000 in the agent’s pocket that wouldn’t be going into yours.
You could easily save 90% or more of the money you would have given to an agent in commission. Even if you paid to get a professional valuation, got professional photographs taken, paid a company to post your listing online and got a solicitor to sort out all the contracts, you’re only looking at a fraction of the cost.
This is not to say that selling without an agent is for everyone. Merely that it is possible and something to consider if you are a savvy and confident seller.
Eden McDonogh is completing a Bachelor of Psychology (Honours). He has a passion for neuroscience, evolutionary psychology and behavioural economics.
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