Real Costs of \'For Sale

¶ … Real Costs of 'For Sale by Owner'

Realtor Sale

Sale by Owner

Costs for Both Realtor and for Sale by Owner

Estimating Costs and Returns

Fig. 1. Sale by Realtor

Fig. 2. For Sale By Owner

Buying or selling a home is one of the biggest decisions that anyone will make in their lives. In the past, the only real option was to go through a realtor. However, with the internet, low cost printing services, and low cost newspaper advertising, many are now considering selling their home on their own and avoiding having to share their profits with the realtor.

At first, this seems like a good idea. They only see the money that they will save in realtor fees. However, many never stop to consider the real costs involved in selling one's home themselves. This research investigates the real costs of hiring a realtor or the For Sale By Owner option. It compares the costs of each option under optimum conditions and using a worst-case scenario where litigation occurs as a result of the transaction.

This feasibility study found that under optimum conditions, selling one's own home contains many hidden costs and when these are included in the equation, one does not make that much more than if they had used a realtor. For a $300,000 house, the owner only made $12,000 more than if they had used a realtor. However, if litigation occurs, this profit could quickly turn into a loss.

The study concluded that although, it may appear that using a realtor is more expensive than handling the transaction for oneself, in reality, it could mean financial disaster. The expertise of the real estate agent could help to avoid many costly mistakes. There is much more to selling a home than in selling any other asset. The real savings in using a real estate expert for outweigh the costs of the fees. The seller gets much more than they spend in terms of peace of mind, professionalism, marketing, and convenience. Homeowners need to look not only at realtor fees, but also at the hidden costs involved in selling their home themselves.

The Real Costs of 'For Sale by Owner'

Selling your home is stressful, regardless of how one decides to do it. There are two paths to finding the right buyer. The first is to hire a realtor to find buyers, advice on how to make the home bring the most, and help with the legalities of the transaction. The second is to save the costs associated with a realtor and to sell the home on your own. There are advantages and disadvantages to either method that is chosen. This study will explore the considerations and 'costs' associated with both types of arrangements.

The study will not only explore the monetary costs associated with both methods of sale, it will explore the intangible costs, such as time and trouble. It will also examine the legal considerations of both types of sale. There are many other considerations besides the monetary costs associated with the sale of one's home. Let us explore these options and the real 'costs' associated with them.

Realtor Sale

Tangible Costs. When a realtor sells your home for you, they charge certain fees, or may take a certain commission from the sale. There are many different fee structures. Some charge flat fees, while others charge a certain percentage of the final sale price. Some ask for fees up front, while others ask for their fees at closing. In terms of deciding which is cheaper cost-wise, this is difficult to determine because there is wide variability in realtor fees. The seller must shop around for the best deal.

On average, realtor fees are typically 6% of the selling price, with 2% going to the selling agent and 3% going to the buying agent (Waxler, p. 1). Even a 1% difference can mean thousands of dollars lost, as compared to the savings. Fees may be negotiable, but many are not willing to drop their commissions to make the sale (Waxler, p. 1). This can be a big expenditure to the seller and can be a deal breaker.

It is important to understand that fees different according to the area of the country and neighborhood (Spors, p. 1). The value that the seller receives from the fee can either seem worth it, if the home sells rapidly, or not so worth it. The seller also gets different value for their dollar. Some bargain basement realtors may be just that, bargain basement. They may only list the house and nothing more. Others may go out of their way to market the home, taking the burden of showing the home from the sellers.

Intangible Costs. The realtor may mean a cost of thousands of dollars in fees and expenses, but they often save the seller valuable time. The buyer does not have to take time away from their lives to sell their home. If they do not use a realtor, then they may have to burn vacation time, or take time away from work. This time away from work may be a good investment, or it may be wasted effort with no fruitful results. A realtor represents a significant savings in time for the seller.

There are many legal aspects to selling a home. The realtor has specialized training in these legal considerations. They are familiar with the laws and process of selling a home. They are much less likely to make a costly legal mistake than the person that is not familiar with the laws and processes involved. The realtor is an extra layer of protection against costly legal mistakes in the selling process.

Sale by Owner

Tangible Costs. When a seller chooses not to use a realtor for sale of their home, they save the thousands of dollars in realtor fees. However, there are still costs involved. In order to sell their home without paying commissions and fees, some will sell their own home. There is a one-time flat fee to list the home in the MLS, typically from $200 to $500 depending on the part of the country (listbyowneronmls.com).

In addition to this, the seller must take on all of the costs of advertising, taking time off of work to show the home and all other miscellaneous costs. These costs can range from very little or excessive. It depends on how hot the market is in an area and how desirable the house is to the buyer. It can depend on the location and the general market conditions.

Intangible Costs. The person who decides to sell their own home must take on all of the responsibilities of advertising, showing, and footwork. They must be able to price their home to sell, yet still make a profit. They are often not experienced in this aspect of the sale. It can take much longer to sell a home that is not properly priced.

The seller may need to invest considerable hours selling their own home. Often the non-real estate seller does not have the marketing expertise of the experienced realtor. The realtor is experienced and knows many tips and tricks that the average homeowner may not be aware of, but which can be costly in terms of length of time to sell (Weintraub). Marketing mistakes can be costly to the final selling price as well. Marketing mistakes could give the buyer a negotiating advantage that could mean thousands of dollars or more lost (Weintraub).

In addition, the average homeowner is often unfamiliar with many of the legal aspects of selling their home. These mistakes could be costly and may mean lost money in litigation and the expense of having to hire an attorney to undo a mistake. Of course, some homeowners are more experienced and knowledgeable than others. Some may not have these additional costs, but for those that do, it could be a devastating blow to their profits.

Costs for Both Realtor and For Sale by Owner

There are some costs that will apply regardless of the method used to sell one's home. For instance, the mortgage must be paid off, as well as any taxes owed. There may be a prepayment penalty for early payment of the mortgage, depending on the terms that were negotiated. Other potential costs include the purchase of a homebuyer's warranty, which averages $300. This warranty is good for approximately one year after the sale of the home and will cover any undiscovered flaws that may appear after the sale. This may represent a small additional fee at closing, but it can save thousands if a problem is discovered. This is optional, but many buyers may require it.

A home inspection may also be required by the seller, which costs approximately $300. In addition, repairs and improvements may also be required as a condition of the sales contract. These additional costs apply whether the transaction takes place using a realtor to whether it is a For Sale By Owner transaction.

Estimating Costs and Returns

There are many variables that could affect the final costs associated with either sale with a realtor or sale by owner. For instance, in a hot market, with a highly desirable home, For Sale By Owner may be the most profitable option, foregoing any realtor fees, and retaining much of the selling price. However, if something goes wrong, this equation could quickly turn to favor the protection of a realtor. The following chart summarizes the advantages and disadvantages of both selling methods. It uses a $300,000 home and several assumptions to explore the feasibility of both selling options. This scenario will assume that the home is already paid off and there is no mortgage. It will also assume that all taxes are paid and that no litigation results from the sale. It will also assume that the home needs no outstanding repairs as a result of the sale.

Fig.1. Sale by Realtor

Revenues

Losses

Total

Asking price of home

$300,000

Realtor fees (avg. 6%)

$18,000

Home Inspection

$300

Home Owner's Warranty

$300

NET PROFIT

$281,400

Fig. 2. For Sale By Owner

Revenues

Losses

Total

Asking price of home

$300,000

Listing in MLS

$300

Home Inspection

$300

Home Owner's Warranty

$300

Advertising/Marketing Costs

$500

Lost time from work to show home

$5,000

Misc Costs, copying, filing fees, gas

$500

NET PROFIT

$293,100

As one can see, it is possible to retain approximately $12,000 more by selling the house yourself under this circumstance. However, this scenario makes many assumptions that reflect perfect conditions. When considering selling their home themselves, many people do not account for the time they will have to spend selling and marketing the house. They also do not account for many of the miscellaneous costs. The amount that one saves by selling their house themselves is offset by the amount to time, hassle, and worry that they spend.

Now let us consider the worst-case scenario and the seller makes a mistake. In this case, the buyer claims that a leaky pipe was not disclosed at the time of the sale and water damage resulted from the error. Now, the seller must retain a real estate attorney. Fees for real estate attorneys can range from $100 to $250 an hour (KeytLaw.com). That can add up quick. If the case becomes complicated, 1,000 hours of work quickly mounts to $250,000. Legal fees could quickly turn a profit into a loss. Now the expertise of the real estate agent is more promising and worth every dollar.

Conclusions and Recommendations

Determining the actual costs of selling a home is difficult to determine with any certainty. However, one can make several assumptions and compare many hypothetical situations. The estimates used in this feasibility study are considered to be averages. However, there could be considerable variation depending on location, market conditions, and the overall appeal of the home.