A Seller's Question: For Sale By Owner or Realtor?
In the past month I have noticed an increased number of "For Sale by Owner" or what Realtors call FSBOs in the Summit, NJ area. For those of you unfamiliar with this terminology FSBOs are real estate homeowners who decide to sell their home without a Realtor. My observation is somewhat surprising considering a consistent decline in the percentage of homeowners that decide to sell unrepresented. In fact national research conducted in 2006 placed the percentage of FSBOs to 12 percent of all sellers. About 40 percent of this 12 percent actually sold to buyers they knew prior to the transaction. Therefore the percentage of open market real estate sales from FSBO transactions more accurately represents 7 percent of all homes sold in 2006. With such a low rate of FSBO transactions it caused me to question why a FSBO would make this decision. I decided to research the topic in greater detail in order to factually support what I already knew to be true.
Let's face it, as a Summit, NJ Realtor I am somewhat biased against the FSBO strategy, but maybe not for the reasons you would expect. FSBOs do not steal business from Realtors. There are plenty of homes to be sold so those people who choose to sell their own home are not impacting my wallet. By deciding to sell their own homes sellers are essential hurting themselves. Working with a Realtor is a mutually beneficial relationship for both Realtors and sellers alike. Allow me to explain.
Saving the Cost of Commission
Why do FSBOs decide not to use a Realtor? The same reason people decide not to use a lawyer, accountant, or stock broker; to save money. I realize I am a Realtor, but I am still human and the idea of saving money sounds appealing. Who wouldn't want to save thousands of dollars?
The problem with life is that some things are not as good as they look. I want to stress that I do not condone the use of scare tactics to gain business or dissuade homeowners from selling their own home. I do, however, support the use of research and statistics to both prove my point and help educate sellers from making poor financial decisions. With that being said let's examine some industry averages to make conclusions about just how much money FSBOs are saving.
For starters only 1 out of every 4 FSBOs are actually successful in selling their own home. This means 75 percent of the homes being sold by owner either never receive an offer, never accept an offer, or more then likely had a deal which fell apart.
Let's say you, as a FSBO, are lucky enough to be part of that remaining 25 percent. You sell your home by yourself without paying any commission and walk away with a big smile. In fact you tell all of your friends, "Who needs a Realtor? I just sold my house in one day to the first buyer that walked in." What your friends don't know is that you just lost thousands of dollars on the transaction and have not realized it yet. How could this be considering the money you saved in commission costs? Let's do the math.
Although real estate commissions are always negotiable most of them range from 4 percent to 7 percent. This means that selling a million dollar home would cost you a commission of $40,000 at 4 percent or $70,000 at 7 percent. Seems like a good amount of money doesn't it? Why not just skip the Realtor and sell your home yourself?
Simple, the average FSBO sells for 32 percent less money then the average home listed by a Realtor according to a national survey conducted in 2006. On a million dollar home 32 percent would equal $320,000 dollars. This means that the FSBO who was bragging about saving the commission could have just lost 25 percent or more of his/her home's equity.
Obviously an average means that these numbers could swing in either direction. Some sellers lose more then 32 percent, some sellers lose less. The problem is that most Realtors do not charge 7 percent. This means that as a FSBO you have to sell your home at least 26 percent higher then the average FSBO seller just to break even with Realtors. 26 percent on a million dollar home is $260,000 more. Do you understand how difficult this becomes?
By now I'm sure you are asking yourself how Realtors are able to out perform FSBOs by such a large margin. Sit tight because I will explain everything. First of all let's forget about selling homes for a minute and focus on something less complicated.
Pretend you are trying to sell a book. The book is in mint condition and is a desirable topic. You want to get as much money for the book as possible, yet you aren't really sure how much the book is worth. Your friend had a book similar to the one you have and sold it for $50. You feel that this is a good price to shoot for. Now, how do you go about selling the book? One way is to try and sell the book to the people you know. You decide to tell your neighbors, friends, family, etc about the book and hope for one of them to make an offer. No one does so you go to the local book stores to try and sell the book to one of them. You receive a couple of low offers, yet nothing close to $50. You decline, yet before you leave someone suggests that you visit a local book expert who charges $25 to examine the book. You think about it, but decide it's not worth the money you would be losing. Finally you decide to put the book on EBay and it sells for $75. Obviously you are excited having received $25 more then your friend so you rush down to the post office to ship the book. Once you are there you bump into another one of your friends who happens to notice the book in your hands. The friend explains that one of his hobbies is book collecting and the book you just sold for $75 is actually a rare version worth at least $300. Now instead of feeling excited you are depressed because rather then seeking the expert you took at least a $200 loss on the book.
I realize this story may seem juvenile, yet it incorporates everything necessary to selling your home. The difference between Realtors and FSBOs is similar to the difference between selling your book to your friends and going on eBay. Realtors expose your home to potential buyers. Realtors also have a fiduciary responsibility to their clients. It is this real estate expertise that enables us to price your home correctly. A home priced correctly, marketed accurately, and exposed properly will always receive more money.
Marketing a Home - FSBO Vs Realtor
Let's apply this same example above to the world of real estate. When a homeowner makes the decision to become a FSBO he/she will usually advertise. Typically an ad will be placed in the paper, a sign on the lawn, and every Sunday will be dedicated to having an Open House. 17 percent of FSBOs will also place their home online on one of the many FSBO websites. All of these marketing techniques are good, yet wouldn't it be nice to know what percentage of homes are being sold from each technique.
Thankfully as a Summit, NJ Realtor, member of the National Association of Realtors (NAR), and expert in my field I know these statistics. NAR conducts annual surveys of home buyers to find out how they learned about the home they purchased. NAR's research has found that 89 percent of home buyers were working with Realtors, yet not all home buyers found their home from these agents. When asked where they first learned about the home purchased, 36 percent of buyers identified a real estate agent; 24 percent the Internet; 15 percent from yard signs; 8 percent from a friend, neighbor or relative; 8 percent home builders; 5 percent a print or newspaper ad; 3 percent directly from the seller; 1 percent a home book or magazine, and 1 percent from open houses. Local multiple listing service (MLS) web sites were the most popular Internet resource, used by 53 percent of buyers, followed real estate company sites, 41 percent; real estate agent websites, 40 percent; local newspaper sites, 14 percent and real estate magazine websites, 6 percent; other categories were smaller.
If NAR's home buying statistics are accurate we can assume that FSBOs will only attract 32 percent of buyers. Remember this is based on yard signs, word of mouth sources, open houses, and newspaper advertisements. For the 17 percent of FSBOs that use FSBO websites to advertise they will pick up an additional few percent of buyers. Remember 24 percent of buyers use the internet, yet less then 6 percent of this 24 percent accounts for FSBO websites. Just to give FSBOs the benefit of the doubt let's say they expose themselves to 40 percent of the market. How can a FSBO compete with a Realtor who exposes the same property to 100 percent of the buyers?
They can't, yet many try to compete by paying for ads, website exposure, and various other marketing resources. I wish each of these sellers good luck because marketing expenses are extremely costly. In fact one of the reasons I work for a full service brokerage firm is the fact that my company pays for most of my marketing costs. As a Realtor I could never properly market my listings without my company. Remember homes do not always sell overnight. Carrying the marketing costs for a listing over months of time can become extremely costly. Especially if I were tying to compete with companies that invest millions of dollars to develop sophisticated websites and marketing affiliations. Many FSBOs and Realtors working for discount brokers find out the hard way that competition is tough and their marketing budgets just can't compete.
Ok enough about marketing; I think we understand by now that FSBOs cannot compete with Realtors, but what about other aspects of the selling process? Let's take a step back and discuss pricing a home. How do FSBOs price a home?
Home Pricing Strategies for FSBOs
FSBOs do a number of things to price a home. One way is to see what the neighbor down the street sold for and adjust accordingly. Another way is to go online and get a free price quote from one of the many sites online offering these services. A third way is to get the property appraised by a professional appraiser. A fourth way is to interview a number of Realtors and see what numbers these agents propose. I realize there may be numerous other ways, yet let's focus on these due to their overwhelming popularity among FSBOs.
The idea to use your recently sold neighbor's home as the yard stick to pricing your own home is extremely bad idea. Even if your neighbor's home is an exact replica of your home you are not accounting for the real estate market. Remember if your neighbor sold his/her home yesterday it was most likely for sale about three months ago. This means that your neighbor was competing in a completely different real estate market. The market could have become better or worse since then and your price will not reflect this change.
Even worse then using your neighbor's home as a gauge would be using an online real estate quote provider. This includes sites like trulia.com, zillow, or any other service claiming to provide accurate free price quotes without every having seen the inside of your home. Pricing a home is not as simple as square footage versus price. These sites provide completely false data and actually cost many people thousands of dollars by inaccurately supplying this data.
The idea to use a property appraiser to price your home does seem like an excellent idea. Why not hire an expert to give you a fair market value of the home? The problem with this idea is that property appraisers do not specialize in selling homes. They are taught to appraise property for bank loans which is a completely different agenda then Realtors. Banks make a profit on the money they loan so they obviously want an owner to receive a favorable appraisal. The other problem that exists is if you brought 10 different appraisers into your home you would most likely be given 10 different price quotes. It's not an exact science.
This actually brings me to the final method of using Realtors to gain insight on the price and then using this price to sell privately. Two problems exist with this theory. The first is that no matter which Realtor prices your home he/she will never know what a fair market value for the home will be until it enters the market. Some times buyers respond to a home's charm and push the price up to unexpected levels. Other times the market does not respond to a given price and Realtors will have to alter the price to meet the market. The second issue is that Realtors price a home with the expectation that this home will receive all of the necessary exposure. If a home only receives 40 percent of the exposure it should it will most likely not reach the price Realtors value the home.
As I mentioned during the introduction 40 percent of FSBOs sell to people they already knew prior to the transaction. This 40 percent includes sellers that sold to both family and friends which may not be the most ideal situation. Yes, these people may be a pleasure to deal with throughout the transaction, yet when it comes to price sellers have a difficult time forcing the ones they love to pay top dollar for a home. By selling to a loved one sellers might be giving up the opportunity to profit from their investment. This is yet another risk to pricing as a FSBO.
How Realtor's Price a Home
Depending on which Realtor you speak with you will hear different methods for pricing a home. Although all methods are more reliable then the techniques used by FSBOs I am obviously impartial to my own method. To price a home I must first see the home, yet this is only the first step. I wanted to point this out because Realtors are not miracle workers. Anyone who walks into your home and immediately decides on a price is incompetent. Ironically it is during this first step that I have already gained an advantage over any online pricing source.
The next step is to research the real estate market. To do this I pull up a broad search on the local MLS. I usually will begin with a $200,000 price range for homes priced under a million dollars. This means that if I feel a home should be priced in the area of $500,000 I will generally pull up $400,000 to $600,000. This method allows me to get a better feel for the market right now in that price range. For homes priced above a $1,000,000 I might select a larger range; especially if the home is $2,000,000 or more. I do this because someone looking at a $2,000,000 home will most likely be able to consider a $2,500,000 home. This is not the same for someone considering a $600,000 home because relatively speaking it is a much larger percentage increase.
Once I narrow the search by price I add additional constraints. This includes the status, towns, and status dates. For status I always use active, pending/ under contract, and sold homes. This enables me to see a home's competition, the most recent homes buyer's have perceived value in, and which homes have closed. For towns I generally restrict my search to the town the home is located, yet certain exceptions do apply. One example of this exception is if the home is located on the border of two towns. In regards to status date I only pull up homes active, under contract, and sold within the past three months. I realize many agents will go back at least 6 months, but I feel that this data is no longer pertinent to the current market. In fact old data is what gets a number of homeowners in trouble because they rely on what a comp sold for last year and the market has long since changed.
When I have reached this point of my search I am able to focus all of my attention on the individual homes this search yielded. I methodically shift through each home and compare it to the home I'm pricing. Since I attend Broker Open Houses two times a week I have already been inside the majority of these homes and I am familiar with what they offer buyers. I can now begin to narrow my broader search down into a more specific price range. For homes under a $1,000,000 this range will usually incorporate a $50,000 market segment. For instance the $600,000 home in the example above may yield a search between $575,000 and $625,000. This is not always the case however. In fact sometimes I estimate a home to be $600,000 and the market data causes me to change my mind to a range closer to $650,000 or $700,000. It is crucial to keep an open mind because the market is forever changing.
After I establish this price point I can now present this data to the homeowner, yet unlike many Realtors I will never give a single number as a price. I believe the seller's motivation, situation, and feelings are crucial to pricing. Consequently I always give a price range. Some seller's believe in pricing a home aggressively to sell and select the lower end of the range. Some sellers would rather begin at the higher end of the range and take a chance. I feel it is important that the sellers make this decision because it is their home and how they wish to promote that home should always remain their decision. I personally feel smart sellers will select the lower end of the range because this gives them the best chance to sell quickly and for the most money, yet I can only offer my advice. The decision is always theirs to make.
As you can see pricing a home is more then just walking into a house and handing out a number. Pricing a home is based on the most current real estate market data available and involves knowing the inventory currently on the market. Selling a home is a competition and knowing your competition is half the battle. This is yet another reason why Realtors have a distinct advantage over FSBOs.
Staging a Home or Preparing a Home for Sale
NAR's survey of FSBOs included a portion which questioned these sellers as to what the most difficult part of selling a home without a Realtor was. 18 percent of FSBOs said that preparing a home for sale was the most difficult part. How could it be that difficult to prepare a home to sell? Well there are a number of reasons that FSBOs struggle at this step. Probably the most likely answer to this problem is the lack of experience. Realtors preview homes for sale practically everyday of the year. Some of these FSBOs have not been inside of a home for sale since they originally purchased their current home. Remember a home ideal for living is not necessarily ideal for selling. Buyers are looking for certain characteristics from a home and Realtors are trained in accentuating these positive aspects. Sellers may have pristine homes meticulously designed for their own personal needs that will never appeal to buyers. That is why it is always beneficial to have an outside perspective who is an expert at creating an environment which attracts buyers. The more interest created through staging the more offers and like a domino effect the higher the price of the home.
Are there other aspects of the selling process that Realtors can aid sellers? Of course there are. In fact the documentation for a contract of purchase is complicated enough to rely on a Realtor's assistance and expertise. Other aspects include home inspections, buyer contingencies, selling within a desired time frame, and a less stressful selling experience among other things. The important idea to remember is that using a Realtor is more then just exposure, marketing, pricing, etc. Using a Realtor incorporates everything a seller needs to be successful into one package. In fact by deciding to list with a Realtor a FSBO is essentially taking all of the questions and unknowns about the selling process and exchanging them for one question and endless answers. The one question is, "What Realtor do I choose?" The answer is simple. Choose the Realtor who provides the best answers to all of your questions. Not necessarily the answers you want to hear, but the answers you need to hear. I promise that if you choose an Realtor as dedicated to his/ her profession as myself the cost of commission will pale in comparison to the value you are provided.
Finally I just want to wish all FSBOs good luck. I truly do wish you success with any decision you make. As I mentioned in the start of this article I am not interested in converting every FSBO I see into a listing. As an expert in my field, I am, however, interested in educating sellers about the value of a Realtor. Buying and selling a home are two of the largest financial decisions an individual could make. It is important for people to know how valuable having a trusted advisor can be during this process. I hope you enjoyed this article and look forward to hearing from you in the future.
If you have any questions about this article or about buying or selling a home feel free to contact me at (908) 656-3858 or email me at Michael-Pennisi@Burgdorff.com
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