 I work in the Real Estate Brokerage industry and I am amazed at how poorly most of the industry is at explaining their value proposition. The FSBO (For Sale by Owner) market is growing and REALTORS in Canada and the US are losing ground. Now I realize I am biased because of the work I do, but surely Residential REALTORS (and commercial ones too—but that is a subject for a separate blog entry) can do a better job at explaining what it is they do and how they add value to a transaction. In my view, most Residential REALTORS do a great job. I can say this because I do mostly commercial work and I must say I admire the stick-to-it’ness of most of these folks. They work seven days a week (most showings are on weekends and evenings), they are always on call (their clients want 15 minutes or less response time so they are tethered to their cell phones and email phones*), they drive around clients they don’t know much about showing them two dozen homes only to find out that: a) they are not qualified to buy (maybe they exaggerated their ability to purchase) or b) they find something on their own (despite sometimes having signed a Buyer Agency Agreement tying them to their Sale Representative) and put the transaction through the Listing Agency (not realizing that the Listing Agency is now a dual agent representing the Seller and the Buyer and not necessarily looking out for the Buyer’s best interest). (* A residential REALTOR who was helping me out in a commercial transaction this summer answered his cell phone on a Saturday night while sitting around a camp fire after the deal blew up and we needed to speak with him urgently. I said: “George, you are amazing. No Commercial Sales Rep I know would answer his phone at this time. I salute you.” I couldn’t believe his dedication.) Here is another example. I was at a Sens versus Leafs last year and with five minutes to go in a tight game, one of my buddies got up to leave. “Mike, where are you going? The game’s not over.” “I have a client who wants to meet me at Tim Horton’s at 10:00 pm to make a counter offer on the home they are buying. Got to go, thanks for the game…” Now that is dedication and, if you know Ottawa, Residential REALTORS are out there at night in 20 degrees below zero doing deals and servicing their clients. Commercial people like me have it much easier—our clients get in early but by 5 or 6 pm, that’s it, they go home and they don’t want to hear from you evenings and weekends unless it is REALLY urgent. Now Residential REALTORS aren’t just heroes because they brave cold weather, waste their gas on clients who are not really serious or get left at the altar by clients who ditch them at the last minute. They add real dollars and cents value to transactions. Here are some of the ways they can do that: 1. A decent Residential REALTOR does dozens of Agreements per year. The FSBO does only one or two in a lifetime. The Residential REALTOR is going to have much higher levels of expertise in doing these transactions, in all likelihood. Most people don’t know that REALTROS in Ontario must go through six quite difficult courses and exams to become fully licensed and, if they want to become Brokers, they must do additional study and examinations. They must get 75% or better to pass and the OREA College is completely inflexible on this*. Then, every two years they need to do 24 additional credits. In another generation, REALTORS will go from being a second career to being a first choice career and a profession and maybe even a calling. (I know the latter sounds corny but I certainly enjoy working with clients and I feel good when a client buys his or her own building for their company and they walk in and they have realized their dream to own their own real estate…) (* Some of my very smart University of Ottawa students are taking their real estate licenses. Some are scraping through with 75s and 76s. Some are failing with 74s! So the courses are non-trivial and, in my view, actually quite good.) 2. If the FSBO fails to sell his or her property and then enlists an Agency, the likely selling price may be lower because the listing has become ‘tired’. 3. The Agency has access to MLS.ca and a list of established buyers. More than half of all real estate transactions are deriving from web based searches and from existing clients. 4. The chances of not completing the FSBO Agreement is also much higher. Real estate transactions are the only area of commerce that I know about where, by law, the Agreement must be in writing. I guess because of the importance for most people of the sale of their home, Ontario made it compulsory that these transactions be in writing. Real estate is tricky and a lot can go wrong*. Introducing the probability of failure would significantly increase the value brought by the REALTOR to the transaction. (* The list of what can go wrong is endless. Conditions that are waived before building inspections or financings are completed. Chattels or fixtures that are thought to be included that aren’t. Lawyers who don’t get the paperwork on time to complete deals. How about an Oklahoma Offer? Ever heard of those? (The term comes from the Dust Bowl of the 1930s in that State where some smart Yankees fleeced naïve Okies out of their farms. Read on…) Suppose you get an Offer on your home from a nice young couple that you think are terrific. You are a FSBO and they need a ‘bit of help’. Will you give them a second mortgage for just a couple of years so they can buy your home? Sure, why not! So you sell your home to them for $300,000 with a $75,000 Seller Take Back Mortgage with interest at 8%, interest only paid monthly in arrears. But what you don’t know is that you have to specify what is the maximum first mortgage they are allowed to place on the property. You didn’t know that. So on completion, they have arranged a 95% first mortgage which together with their second mortgage that they got from you they have $360,000 to buy your $300,000; that means, they have an extra $60,000 in their jeans. If they default, you can repo your house (by a foreclosure proceeding) or order its sale (through a Power of Sale proceeding) but, you have to deal with the fact that the mortgages on the property are now worth more than the home’s market value. God forbid that they used it for a grow op too. Many grow op homes have to be condemned because of the uncontrolled spread of mould due to the high humidity levels in the house. Anyway, this is how sleazy con men defrauded many innocent Okies out of their farms and walked away with huge fortunes from the misfortunate of the hardest hit folks during the Great Depression. Use a professional REALTOR, people.) 5. Legal disputes are also a costly reality: for example, if there are certain fixtures or chattels or outbuildings in dispute, this can further increase the value of the REALTOR’s services by avoiding costly litigation. REALTORS are insured in Ontario to provide the Sellers and Buyers with additional protection. The FSBO is not insured against these risks. What if the FSBO takes the deposit and the conditions in the transaction are not fulfilled? Will the FSBO return the deposit? In the case of REALTORS, the deposits are in trust accounts, which also happen to be insured. 6. Legal fees for FSBO transactions may also be higher as lawyers attempt to fix mistakes. 7. The benefits of Agency are likely to be higher for higher priced homes. 8. The Agency also brings other services: for instance, experts on home staging that cost as little as $260 but can add significantly to the value of the home. Other experts such as home inspectors, home appraisers or mortgage brokers can also be brought into a transaction. 10. One other item needs to be mentioned and that is the value of a person’s time. It takes time to gain the expertise of a REALTOR and also it takes time to sell a home: to list it, to put it on MLS, to show it, to draw up the Agreement, to arrange for inspections and financing, to waive conditions, to provide the lawyers with documents, etc. If a person’s time is worth $20 per hour or $100 per hour, you have a significant saving for 11. The Agency saves the FSBO their marketing costs and their costs to join a FOR-SALE-BY-OWNER network. 12. The Agency will do the open houses and showings and negotiating. It is not easy representing yourself and Canadians especially find it difficult to tout their own horns… 13. Now when people hear that a home is For Sale By Owner, they immediately discount the price by 5% (because the client is not ‘paying any commissions’) and then takes a bit more off so that they have some negotiating room. 14. Buyer’s will often not feel comfortable representing themselves, so while they may show up to look by themselves, when it comes time to present an offer, they will engage a Buyer Rep to do that for them. 15. Of course, the Buyer Rep will ask the Seller if they will pay a commission but only 2.5% instead of 5% because they are only representing the Buyer and giving what is known in the trade as “Customer” service to the Seller. 16. The Seller figures they are still coming out ahead by ‘saving’ 2.5% of the Sale Price but they could be fooling themselves—they could actually be paying the full commission and more because: the price offered is more than 5% below what they would have otherwise received because of the strategy employed by the Buyer and their Buyer Rep. 17. Compounding this, they may end up with less money from the transaction than if they had used an Agency while doing all the work and taking all the risks. 18. It may also take longer to sell your home if you go the FSBO route. If you are changing jobs, moving cities, need the money, whatever, that extra time to sell could place quite the burden on you. I am sure you have heard the one about the Lawyer (or Doctor) who represents (treats) himself. He has a client who is a fool. Dr. Bruce ps. I have summarized the value proposition of a Residential REALTOR on a spreadsheet. You can download it in .xls format. Here is the URL: http://www.ottawarealestatenews.com/ValuePropositionFSBOVersusAgency.xls I estimate that for the sale of a $315,000 home, the Agency will receive a commission of around $15,435 but the Agency will add a total of around $38,000 to the transaction. So if my calculations are right, the FSBO is better off to enlist the services of a good quality REALTOR to the tune of approximately $23,000. The spreadsheet shows the assumptions I used to get there. You can download it and fool around with the variable—higher selling prices, lower selling prices, higher or lower commissions, more or less time spent selling a home by a FSBO, etc. E&OE. |