It’s still a buoyant real estate market – and with rates heading lower, the market may pick up steam toward year’s end.
That means that if you’re looking to sell your home, you have more options than ever before.
Selling through a realtor is still the way most Americans choose to go. It’s expensive at a 6% commission, but realtors have the market almost cornered through the Multiple Listing Service (MLS). The downside of this is that they are loath to show homes that are not on the service for fear of losing out on the juicy commission.
The 6% commission is an archaic fee that began in the mid-20th century. It was accepted as the norm and buttressed by a massive lobby: The National Association of Realtors. This group lobbied the government and kept a hand in its practices. (This is now being challenged in court as a violation of antitrust law.)
Commissions are pretty much the last racket left in the market, though. According to Forbes, the U.S. is an outlier compared with the rest of the world. In the U.K., 1% to 2% commissions are normal. In Sweden, they average 1.5%.
You can negotiate commissions, but when you consider that transaction costs for just about everything have plunged, real estate commissions are due to fall sharply as well.
Look at brokerage commissions, for example. I remember my first trade costing me 2.5% for commissions on the way in and then another 2.5% on the way out. And back then, I was the CFO of the brokerage firm! On a $10,000 trade, that’s $500 in commissions when all is said and done (forget about day trading!), whereas today you can trade for free on many platforms, including Robinhood.
Newer Strategies for Selling a House
There are alternatives to using a full-service realtor. Companies like Redfin (Nasdaq: RDFN) will list your home using various services, and they will charge you less: between 1.5% and 2%. Listing services Trulia and Zillow (Nasdaq: ZG) guesstimate the value of your home and provide a broad reach for those looking to buy or sell.
There are no real savings from using these services, but you’ll get extra exposure if you’re going the “for sale by owner,” or FSBO, route. Zillow also has a pilot program that buys homes from individuals and holds them for resale, which can save you a headache, but not much cash. (It has a very cheap cost of capital as a public company.)
In fact, using Zillow and Trulia can actually hurt your chances of selling for a profit. These services use algorithms that determine the value of your home based on proprietary inputs that can severely undervalue your property. Because so many people use Zillow to search for homes, you may end up getting a barrage of “Zillow says your home is worth only this much” comments.
The cheapest way to sell a home is the old FSBO route. Unless you’re on a great street, you’ll get lower traffic and less insight into who’s coming to check out your home. You’ll save a bundle in commissions for sure, but it will be work holding open houses and finding a title company, a closing agent, etc.
Still, I have done this many, many times, and I will do it again. Six percent is 6%! The FSBO route will probably cost you about one-tenth of that commission for time and trouble.
Redfin, Zillow and Trulia have fallen into the mainstream when it comes to putting your home on the market today, and the tried-and-true FSBO method is still viable for most homeowners – but now a new alternative for buying and selling real estate is gaining steam.
On the surface, this new alternative may seem like a game changer; but digging deeper, it can be more expensive than it seems. Check back in next week as I reveal which ostensible blessing may actually be a devil in disguise.