Sunday, March 13, 2011

The Real Dope on Buying and Selling Real Estate

Note:  This is a revised re-posting of an article that originally appeared on December 19, 2008 under the title "The Real Dope on Real Estate" .

Buying or selling a home is something most people do only a few times in their lifetime.  As a result, most folks don't understand the process or the players.

Buying and selling a home is something that most people do maybe two or three times in a lifetime. So most of us do not get enough experience in Real Estate transactions to understand what is going on. Many home sellers (and buyers) make the same common mistakes, over and over again.

Now that the bubble in Real Estate has burst, we are going back to the "old ways" of doing things in Real Estate - making money slowly, over a long period of time. But even in this new market (or especially in this new market) it pays to understand what Real Estate agents are all about, and how they can help you, or hurt you. It also pays to understand the basics of how to sell a home.

The following is a summary based on my years in buying and selling Real Estate for investment purposes, and also based on my experiences with friends who were Realtors(R), Mortgage Brokers, and Closing Attorneys:

Commissions: Real Estate agents generally charge a 6% commission on sales of Real Estate. This commission may be divided between the "listing agent" and the "buyer's agent" if separate agents are used in the transaction. As we shall see, one of these agents has to work for the money, the other gets mostly a free ride. During the bubble, many folks got tired of handing over a big chunk of the profits to Real Estate Agents and as a result, commissions have been dropping to 5% or even 4.5%. Usually the broker who brings a buyer keeps the full 3% while the listing agent takes a cut. Some Real Estate Agents have tried to raise fees to 7%, on the theory that "inflation" justifies this raise. However, since home prices have skyrocketed in recent years, this argument makes no sense at all.  (And in addition, percentages match rises in prices, so increasing the percentage of a commission makes no sense at all, but then again, "you don't need to know math in real life" - right?)  In reality, this raise is used as a gambit to get customers to accept a "reduced" commission of 6%. In many markets, however, a seller should shop for a reduced commission.

REALTOR(R): The term "Realtor" is a licensed trademark of the Realtor association. You do not have to be a "licensed Realtor" to sell Real Estate, but you may have to be a licensed Real Estate Agent in your State. The Realtor organization provides a lot of benefits to its members, including the Multiple Listing Service (MLS). In the past, the Realtor organization and specifically the MLS have been accused of monopoly practices.

MLS: The Multiple Listing Service is what sells houses, period. When you list your house, the Real Estate Agent enters the data on the MLS database. How this data is entered is critically important, so be sure to ask for an Agent's copy of the listing and scrutinize it carefully. Whether an agent shows your house or not to a prospective client depends on how well the listing reads and how good the photos are. Make sure the information is accurate, and don't be afraid to put in laudable details. If the photos are no good, take some of your own and give them to the Agent or ask for new ones. 90% of houses are sold through the MLS, so your presentation on this database, as we shall see, is of the utmost importance.

REALTOR.COM: This website of the Realtor(r) organization has MLS listings for consumers to look at. Many home buyers are now using this website, or ones like it, to find listings. The listing on is based on your MLS listing, so again, it is important that your MLS page not suck. You'd be surprised how many do.

LISTING AGENTS: There are two basic types of Real Estate Agents - those who list houses for sale (listing agents) and those who work with buyers trying to find a house (buyer's agents). Some do both. There is no formal breakout between the two. However, generally the newer agents tend to do the harder job of working with buyers while the older, more experienced agents try to list houses. Listing a house is the better part of the deal. You put your sign up crooked in the front yard, screw up the MLS listing, and then go to Starbucks and get a Latte and wait for the money to roll in. Seriously, many listing agents do little or nothing to sell a house, other than list it. And yet they get 3% of the take. Cramming down the listing agent's commissions is not a bad idea, provided the agent does at least some minimal marketing of your home. Nothing is for free, and if you cram down her commission, expect less in the way of services.

BUYER'S AGENTS: Again, this is not a formal title, but many agents end up spending more time with buyers, trying to find them homes, than they do with listings. It is the harder of the two jobs. The buyer's agent works with the buyer to determine what kind of house they want, and then goes on the MLS to search for houses meeting that criteria. Again, if your MLS listing is poorly done, with vague wording and bad photos, the buyer's agent might pass it over. Note also that pricing can put your house just out of reach of some search criteria. The buyer's agent then drives around showing the buyer maybe as many as a dozen houses or more. It is hard work and time-consuming. Once a house has been selected, it is the buyer's agent who puts together the offer and then tries to push it through. Buyer's agents help with getting financing, completing inspections and paperwork, and lining up a closing attorney, and the like. Without the buyer's agent pushing to get all this done, no house would ever sell. Listing agents typically will not raise a finger to help. They just want to get paid, thank you. The buyer's agent does the lion's share of the work all the way to closing, so trying to cut their fee is foolhardy. If the buyer's agent has 10 houses to show, and yours has a reduced 2.5% buyer's commission, do you think the buyer's agent is going to show it or promote it to his buyer? Heck no!

HARRIET HAIR HELMET: These are agents who have been working the system for years, and are usually listing agents and they are usually wildly successful, at least for a time. They can be Harry Hair Helmets as well - either gender. You can spot them by their immaculate hair, which can survive a Cat-5 hurricane, and the fancy car (usually a Mercedes or Jaguar) they drive. These agents get a lot of listings because...they get a lot of listings! One mistake many homeowners make is that they see Harriet's listing signs and advertisements everywhere and they say to themselves, "That Harriet sells a lot of houses! We should list with her!" In reality, it is some unsung buyer's agent that "sells" the house. The listing agent shows up in a nice suit, fancy car, and gets the listing, but does little else to "sell" the house. Again, most houses SELL through the MLS listing.

OPEN HOUSES: If you list with Harriet Hair Helmet, don't expect her to show up at your open house. She will pawn this task off onto a young associate who is looking for buyers to represent. Harriet wants nothing to do with driving around buyers all day long. She wants LISTINGS! Open houses sell houses - not your house, though, other people's houses. Young agents do open houses in order to attract business. Curious would-be buyers show up, and the agent shows them the house (usually out of their price range, anyway) and then tells the would-be buyers he can run some listings for them and show them something next week. The young Real Estate Agent gets a client, but not for your house. The major traffic for an open house is usually the curious neighbors, who are dying to see exactly what sort of squalor you live in. If your agent suggests an open house, go for it. But don't expect miracles from it. Also, lock up all your valuables. There are groups of criminals who prey upon open houses - with one person distracting the agent on duty while another rifles through your possessions. In addition, there are some "perverts" who might try to collect your soiled undies (eeeeeew!). Yes, that's an open house, I'm afraid!

FSBO or Fizbo (pronounced "Fizz-Bow"): Real Estate Agent slang for "For Sale By Owner". Selling your house yourself is often a difficult process. The typical Fizbo owner thinks that since he is selling the house himself, he'll make 6% more. In reality, if you are going to go the Fizbo route, you should lower your asking price at least 3% instead, as you will save money, but the extra hassle involved for the buyer is worth something. One problem with either route is that home prices are hard to quantify with that certainty. So if you claim you are "lowering" your price 3%, but your house was overpriced to start with, you are offering no bargain. If you are not in the MLS database, chances are, people are not going to find your house, unless they drive by it. If a buyer is working with a broker, the broker has no incentive to show them the house, if they are not going to make any money on it. For this reason, you should always put "broker protected" (meaning you will pay 3% to an Agent bringing you a buyer) on your listing so that brokers will have an incentive to bring you buyers. Very few Fizbo sellers are successful, and most end up listing with an agent. It takes time and talent to sell a house, and if you don't have either, hire an agent to do it for you.

Seller's Assistant: (HELP-U-SELL, etc.): There are a number of quasi-FSBO services that have sprung up in recent years to help the Fizbo seller with his listing. For a small flat fee or percentage, the Seller's Assistant, usually a licensed broker, will list the house on MLS and give you some ideas on marketing, perhaps a yard sign, and maybe a video or book on how to properly market your house. Some of the advice is just common sense - pick up your dirty laundry, clean the house, fix the small broken things, etc. Making your house show well is half the battle. If you are going to try the FSBO route, I would suggest a seller's assistant, as most folks are not equipped to deal with selling a house, and getting that MLS listing is essential to selling the home.

PRICING: Pricing is one area where many people fall down flat when selling their home. Forget about what you "think" your home is worth, what it is worth is what similar homes in the neighborhood are selling for. Condition and options are not going to add much to the sales price. Some items, like swimming pools, can actually detract from the price in some areas. If you have a hard time setting a price, consider spending $300 on an appraisal - and then list for below the appraised price, so it appears to be a bargain. Many folks fall into the trap of selecting a listing agent based on which one tells them their home is worth the most. "Harriet Hair Helmet told me our house was worth $500,000 while Joe Trenchcoat said it would fetch only $450,000 at best! We're going with Harriet!" Unless Harriet BUYS your house, she is not going to "get" you any price above market value, no matter how popular her signage is. What ends up happening in this scenario is that the house SITS and SITS for months, and then finally the sellers lower the price to where Joe said it should be - if not lower! By now, though, the listing is "old" and thus harder to sell.

PRICE BRACKETS: When Agents run listings in the MLS, they select criteria such as location, size and, of course, price range. For this reason, think about the range you are in when picking price. For example, if many homes in your neighborhood are selling for $275,000 or more, you may find your house hard to sell at $305,000 as most agents will run a printout of listings between $250,000 and $300,000 for their buyer - and your listing will not show up. If you plan on negotiating down to $295,000 anyway, it might make more sense to list at $299,999 and end up with more hits. Note that this can cut both ways - sometimes if you list too low, your house may not show up when a buyer is in the market for a $300,000 to $350,000 house. Figure out where the price breaks are in your neighborhood for your type of house (starter home, family home, condo, whatever) and then price accordingly.

COMPS or Comparables: When pricing your home, ask to see prices for houses recently SOLD in the same area in the last six months or so. Make sure you are comparing equivalent homes in the same school district and the same layout or size. In some unique areas, this is hard to do. But for a subdivision or urban area, comparable homes are not hard to find. Note that a comparable LISTING is not a "comp" but may help you in your pricing decision. If there are three homes like yours on the market for about the same price, list yours for a few thousand less and watch it sell the first weekend.

DAYS ON MARKET: Why the number of days a home is on the market should affect its sale-ability is a mystery to many. In a brisk market, any home that SITS on the market has "overpriced" or "has something wrong with it" written all over the listing. Why has it sat for so long, when other homes are selling faster? Some sellers will actually take the house OFF the market and re-list it, in order to get a lower "days on market" number. Note also that new listings are touted by the MLS system to Agents, so when you re-list, it brings the listing back to the agent's attention.  In a typical scenario, a homeowner will over-price their home, watch it sit for too many days-on-market (months, if not years) and then have to fire-sale price the home to sell it.  Overpricing a home is often not a wise move!

PREPARING YOUR HOME FOR SALE: A surprising number of people are clueless when it comes to preparing their house for sale. I've been to houses like this, with dirty dishes in the sink, laundry on the floor, and many personal items scattered throughout the house. If you are serious about selling your house, then you are serious about MOVING. Get a head start on this and rent a storage locker and put at least 1/4 to 1/3 of your stuff (as much as HALF in some instances) into storage. Family photos and personal items go first. Buyers want to project their lives and possessions into the space, so your "wall of family photos" is very distracting and a turn-off. The buyer feels he is in someone else's house, not his. This is one reason why builders have such an easy time of it - every house they sell is impersonal. Excess furniture is next. Most homes have too much furniture, making navigation difficult and making rooms seem crowded and small. Take out extra end tables, lamps, chairs, and whatever else you need to do to make the place seem bigger. Clean out the basement, attic, and garage - they should all be empty of boxes and junk. Throw it away or put it in storage. Renting a storage locker for a few months does not cost a lot. The goal here is to make the home as blank and impersonal as a hotel room. It should look good and it should be attractive, but it should not look like the owner is coming back in 5 minutes, either. "Homey" does not often sell a home.

MAKING A HOME UNSELLABLE: Bear in mind that every home ends up getting sold, either by yourself, or your executor. So think long and hard before altering the home with odd additions or other "improvements". Disconnecting from the grid and going solar might be the "green" thing to do, but bear in mind that few people want to tend to your bank of car batteries in the attic. That geodesic dome addition may be all Bucky Fuller, but it just makes your house "odd" and hard to sell. Redecorating your home as a medieval castle may be fun, but few folks want to live in a house with a built-in dungeon. Personalizing your home is all well and fine, but be prepared to de-personalize it before selling, or your house may linger on the market or sell at a steep discount as a result. Note that additions (See my article "Should You Remodel or Move?") can add some value, but if poorly done, may detract from value. Many homes have tiny, awkward additions that look odd (e.g., flat roof addition with a peaked roof house) or require that you go through one room to reach the other (e.g., bedroom leading to another bedroom)

CHOOSING AN AGENT: When picking a listing agent, find someone who is familiar with your area. Picking an agent from out-of-town because you used him in the past is often a bad idea. For example, here on the Island, there are two agencies who sell most of the Real Estate on the Island. Yet there are some sellers who will pick an agent from another city entirely, and then wonder why their home does not sell. The local agents are reluctant to show houses listed by out-of-town Agents. Local agents know the market and conditions, and can realistically price your home. They also can "be there" when the house is shown to answer questions and generally show up on occasion. The out-of-town agent just wants his check. While Harriet Hair Helmet's sign may be "everywhere", that does not necessarily mean she is the best person to list with. You will have better luck sometimes picking an agent that is less well known, but more hungry to make a living in the business. Harriet has hundreds of listings - whether yours sells or not makes little difference to her.

BOTH SIDES OF THE DEAL: For a buyer's agent showing homes, oftentimes the sweetest deal is selling a home that he is also the listing agent for - and getting a full 6% commission. For this reason, many agents will try to steer buyers toward houses that they are also the listing agent for. This is unethical, of course (act shocked). Some agents will discount their commission if they sell their own listing, and this is definitely a good idea. Some Agencies give agents bonuses if they sell listings by other agents in the Agency. So you see, buyer's agents have motivations to steer sellers toward certain homes and away from others.   In your negotiation with your selling agent, be sure to ask if he will discount his commission if he "gets both sides of the deal" and have that in writing in the listing agreement. Most good Agents will have this in the agreement before you even mention it.

INCENTIVES: One other quasi-ethical thing done with listings sometimes, is to offer a cash bonus to the buyer's agent who brings a buyer. Such incentives ($1000 or more) create a conflict of interest, as the buyer's agent may be thinking of the bonus, rather than whether the house is right for the purchaser. If a house is not getting a lot of showings, this can be a way of generating interest in the property, however.

BUYING A HOME - get a buyer's agent: If you are a first-time home buyer or inexperienced, finding a buyer's agent to show you homes may be the way to go. A good agent will run listings that will find homes in your price range in the neighborhoods you want - and show you those homes. Bad agents will do shoddy work, try to steer you toward listings you don't want (but have cash incentives for the agent) or generally ignore you until you find something on your own. Pick an agent carefully, and walk away from any agent who is showing you homes that clearly are not what you had in mind.

BUYING A HOME - go to the listing agent: If you are a more savvy buyer and don't mind spending the weeks or months necessary to research a particular area and properties (much easier today with and other MLS websites) you may be able to get a better deal by dealing directly with the listing agent. If you have already retained a buyer's agent, you should go through that agent, particularly if you have a signed agreement. But if you've done the legwork on your own, you might find you can drive a better bargain by dealing with the listing agent directly. The listing agent can make as much as 6% on the deal, twice as much as usual, so they have great incentive to "sell" your offer to the seller as the best deal (again, act shocked). An offer for more money, through another agent, will result in a lower commission for the listing agent. In addition, since the listing agent is making more money, she may offer to lower her commission in order to "sell" the seller on your low-ball offer. For the sophisticated buyer, this can be the best option, if you know what you are doing and have done the research.

EXAMPLE OF POOR SELLING: Suzie and Harry think they want to sell (mistake #1, they are not SURE they want to sell) so they hire the agent who sold their last home in another town (mistake #2, agent doesn't know the area). They think they owe that agent a "favor" (6% of their last home wasn't enough?) and besides, he has so many FOR SALE signs all over their old town (mistake #3, assuming popularity means effectiveness). They sign an agreement listing the house at what they "think" is a good price, but is far above the asking prices and sales prices of neighboring houses. Their price is based on what they owed on the house and how much they wanted to make on it (mistake #4, overpricing the home). They also neglect to negotiate the listing agent's fee, particularly for situations where the listing agent sells the home (mistake #5, not cramming down the listing agent).

The listing agent puts up a sign and leaves. He puts the house in the MLS with some unflattering photos that fail to mention the new roof, new furnace, and also place the house in the wrong zip code (mistake #6, not policing the MLS listing). Since Suzie and Harry are not serious about selling, they do not properly present the house - and their listing agent gave them no guidance in this regard. The house is overcrowded with furniture and family mementos, and there is dirty laundry, dishes and other detritus throughout the house and the garage is full of boxes (mistake #7, not properly merchandising the house). Some brave selling agents show the house to prospective buyers (mostly to make other properties look more attractive), but at the price they are listed at, most of these buyers are expecting a whole different level of home. (mistake #8, pricing in the wrong bracket).

Months go by with no offers (mistake #9, too many days-on-market) and the sign out front is tipping over, dented, rusty, and covered with lawn clippings. Discouraged, they take the home off the market.

Oftentimes this scenario can result in a home staying on the market for months, if not years. Or, desperate, the sellers take a "low ball" offer that is lower than even the local market values would dictate.

Few people become "expert" in buying and selling a home, and as a result, many folks make the same mistakes over and over again.

EXAMPLE OF STELLAR SELLING: Sarah and Bill decide they need to sell their house as it is too small for their growing family, and adding on an addition would not increase the value much and the hassle of construction would be too much (kudos#1, being serious about moving). They contact three listing agents and pick one that is familiar with their area, and suggest ways in which they can make their house sell quickly for a reasonable price - based on local "comps". (kudos#2, picking a reasonable price).

The agent put a sign in the yard and left Sarah and Bill with a laundry list of things to do before putting the house on the market. They took out 1/3 of their furniture and re-arranged the remaining furniture to make the house look roomy and spacious. They got rid of family photos and knick-knacks and put it all in a storage locker. They then cleaned the house from top to bottom and threw out garbage bags of stuff they had no intention of taking with them when they left. (kudos#3, merchandising the home) They also packed up everything in the attic and basement and garage. Bill went through a list of small "chores" - fixing a broken gutter and repainting the mailbox. He painted the garage floor to cover years of oil stains. They put bright fluorescent lights in the basement laundry room and painted the concrete basement walls to make it bright and airy (kudos #4, fixing up broken stuff). Once done, the house showed like a model home.

Meanwhile, their agent entered all the data in the MLS, including flattering photos of the home. Sarah and Bill read the listing and made some suggestions for improvement (kudos #4, making your MLS listing shine!), Meanwhile, on a daily basis, Sarah and Bill made it a point to keep the house spic and span at all times - doing laundry daily and washing and putting away dishes after each use. It was hard, but the house was always ready to show on a moment's notice. And show it did. Since it was priced realistically and attractively, it went to the top of many buyer's agent's lists. Buyers who saw the home were impressed with how clean and well-maintained it was, and could see themselves living in it. In no time, they had multiple contracts on the home and were able to get MORE than the listing price for the house.

* * *

As you can see, with some hard work, and a little foresight, you can sell a house effectively and quickly.  Sadly, most people fail to understand these basic principles, and wonder why their house "won't sell" after months, or even years on the market.

Pricing attractively and merchandising your home for sale, and policing your listing agreement are the smartest things you can do.  Most people instead, assume that getting the "right listing agent" is what will sell your house, when in fact, whose sign is on your lawn has little or nothing to do with a quick sale.

Now in this market, some of this advice may be of no use to you. If you own a condo in Las Vegas, it ain't selling, period. The bubble condos will probably revert to rental properties much as they did in the 1990's during the last bubble, many after going through foreclosure. For most folks, a deed-in-lieu-of-foreclosure may be the best option. But not understanding Real Estate is what got those folks in trouble in the first place, frankly.

Note that this article deals mostly with SELLING your home.  In a future article, I will address BUYING a home.  Buying a house is a task doubly-fraught with hazard, as there are so many emotional issues tied up in a home purchase.  And I can say this first-hand, having bought homes on little more than impulse in the past!  Fortunately, it has generally worked out for me.  But for others, it can end up being a life-changing and costly mistake.  So, more on that, to follow.

UPDATE:  I mentioned some of these tips to a friend of mine, and they said, "You know, a Real Estate Agent said the same thing to me when we tried to sell our last home!  But I don't see why I should have to take down my wall of family photos in MY house!  After all, it is MY house!"

That is true, but when you are selling your home, you are trying to make it someone else's home.  And a good first step is to stop thinking of it as your house, but instead as a generic product to sell - something other people want.  And other people don't want your person effects.