Twilight of the Realtor?
How much value does the typical agent add to the buying and selling of homes?
A realtor* (aka a buyer’s or seller’s agent) earns a commission on a home upon its sale. The commission typically runs between 2% and 3%, with the latter figure the most common.
The median sales price for a home in America is currently ca. $415,000 (likely to increase over the next year in most communities). Accounting for commission splits and professional overhead costs, the “average” realtor can expect to take home between $8,000 and $10,000 upon conclusion (i.e., “closing”) of the sale.
Is the agent’s participation in the sale worth that amount of money?
This is a complicated question to answer.
Let’s first consider what a typical agent does for a typical client, but first,
Quiz time:
Who should the buyer contact FIRST when looking for a new home?
a. Financial advisor
b. Prospective lenders
c. Prospective realtors
d. A shrink
Most buyers choose (c) (but occasionally some will go for (d))
The correct answer is either (a) followed by (b) or just (b) (if confident about finances). A realtor should be contacted only AFTER a ton of other stuff has been sorted out.
Like what?
Knowing how much home can you comfortably afford?
Your agent is NOT the right person to ask this key question. He/she probably wouldn’t be able to tell you in any case, but they also have a serious conflict of interest in advising you financially. So, steer clear of money issues with your agent until much later on in the transaction process.
Instead, get your financial ducks in a row! Bank statements, credit card statements, free cash, financial advice, and so on… You can find the specifics on how this is done at websites like Bankrate.com.
Once you know the upper limits of how much to spend, decide on the sort of home you (and your family) need to live comfortably. Mind you, this shouldn’t be a grand palazzo but rather a realistic, bare-bones specification of the minimum required to meet your everyday needs. Don’t throw out your “if I won the Irish lottery” wish list just yet but keep these “extras” on a wish list just in case some properties of interest also include a few of those desired perks.
How do you do this?
First, decide on the home’s basic layout (e.g., single, or multi-level), style (ranch, colonial, etc.), number of bedrooms, and bathrooms, lot size, amount of natural light and setting, and so on. Although size matters, how the rooms are configured is equally (if not more) important. Many recent listings include a “virtual tour” (usually via Matterport) that allow you to go through the home, room by room, hallway by hallway, to ascertain whether the layout is likely to work. Why waste time visiting in person when you can determine if the home is even in the right ballpark? Time is money, so be frugal with the on-site visits and focus on online photos and virtual tours to winnow down the finalists. In a future newsletter, I’ll provide pointers on how to quickly size up a home listing and why you’ll want to discard most of them.
An important tip … the more detailed your “ideal” minimum home is, the easier it will be to find, first on Zillow, and eventually in person. Too many buyers waste precious time and energy looking at homes that don’t really serve their needs. Focus on homes that truly meet your (minimum) specifications and proceed from there.
Now, most buyers believe their agent will be the one to find their ideal home. In rare instances, this may happen, but most of the time it is you, dear buyer, who is most qualified (and likely) to figure out what you really need. Your agent is unlikely to find the right home at the right price for several reasons.
First, this is not what realtors generally do. Although realtors have seen lots of homes, they are singularly unqualified to figure out which home will work best for you. They are not trained to do anything like this. Moreover, most realtors have zero training in architecture or construction. Rather, realtors are salespeople who negotiate on your behalf with the seller (via their agent). This is (by far) their most important function, as a negotiator. My book, House Hunter Confidential (Chapters 2 and 7), provides detailed suggestions about how to estimate the approximate dimensions, layout, and appearance of the “right” home.
Second, realtors don’t have the time, training, or skill to comb through hundreds of listings to come up with the right match. They may know several specific homes on the market that might work, but the chances of one of these being the best match for your needs are low.
Another quiz…
Your typical realtor spends most of his/her time:
a. Systematically researching new listings to find the right one for a client
b. Showing clients prospective homes
c. Connecting clients with a lender
d. Searching for new clients (“leads”) to keep their sales pipeline full
Most buyers answer (a) or (b), but neither is correct (for most agents). The correct answer is usually (d). Why this is so is easy to explain.
Unless your realtor is world famous (e.g., TV program, lots of well-connected clients) they usually have only two or three clients to work with at a time. To earn a decent living (most agents work on commission, not on salary) a realtor needs to be involved with at least 15 sales a year. A buyer’s agent knows many of their clients won’t close on a home quickly, which is why many realtors require clients to sign a buyer’s agreement lasting (typically) three to six months. Moreover, many of these buyers won’t find the right house (or are outbid) over the entire length of the agreement and drop out of the market (leading to a significant buyer attrition rate). Keeping the sales pipeline full probably consumes half of a typical agent’s time.
So, dear buyer, you can help the process along by selecting the homes to tour in person (after careful consideration), and have your agent focus on the offer and negotiations. But keep the number of in-person visits to a reasonable number (10 or fewer) to conserve time and energy (for yourself and your agent).
If your offer is accepted (more likely now that the housing market is finally beginning to “normalize”) you’ll need to find inspectors (home, pest, septic, roof). You’ll probably have to find these yourself as your agent may have a conflict of interest in choosing these professionals. The best inspectors are highly detailed and scrupulous. Most realtors are leery of such professionals because a job done too well can scuttle the deal. Realtors tend to recommend “safe” choices for inspections, professionals who do a halfway decent job but are not nitpickers. You, dear buyer, want to hire the most nit-picky inspector around. It will help you decide whether the property in question is right for you, and if it is, also motivate the sellers to reduce their asking price (or provide concessions). To find the best inspectors go online and/or ask around (this has worked well for me every time) and consult my article on “The Home Inspection.” It provides lots of useful tips about how to find the right inspector.
As for a lender, you should avoid asking your agent for recommendations for the same reason as above–conflict of interest. Your realtor may receive a commission from a lender for a referral. If so, this commission may be factored into the rate you’re offered (and points charged). You’re better off going online and asking around. Inquire with at least three different lenders. For more information, consult Chapter 12 of House Hunter Confidential.
Besides showing you homes of interest, negotiating an offer, and seeing the transaction through to closing what can you count on from your realtor? Not much.
Perhaps the most valuable service post-sale is referrals regarding renovation and repair. An experienced realtor has a Rolodex full of folks to call for all sorts of specialized services (roofing, heating, cooling, bathroom, kitchen, etc.). These referrals can be very helpful.
So how does a buyer’s agent justify their commission? Successful realtors work all the time and sincerely believe they earn every penny of the commission. Some do, but many don’t because of the excessive overhead associated with being an independent contractor who’s always on the prowl for new clients. The actual amount of time working with an individual client is relatively small (relative to the time spent on other activities). Consult Chapter 13 of House Hunter Confidential for more suggestions regarding hiring the very best buyer’s agent.
The situation is even more favorable for realtors who specialize in selling homes. Most of the work is done by others (the client, photographer, stager, lender). The listing agent’s most important function is recommending the asking price, which is often key to selling the home quickly and profitably. This is typically done by seeing which homes have sold over the past six months and are similar in size and other features. But this approach is problematic on at least two accounts:
1. The market may be moving so fast (either up or down) that using “comp” homes older than a couple of weeks may under- or over-estimate the property’s value. This is indeed what happened during the pandemic (where properties were increasing in value much faster than realtors and appraisers anticipated) resulting in bidding wars and homes selling for way over the listing price.
2. In many communities the number of truly comparable homes is so few that using this “comparative market analysis” is based as much on intuition and guesswork as it is on hard numbers. Zillow, Realtor, Redfin, and other real estate companies use proprietary algorithms to estimate what a home should sell for in the current market. Sometimes the estimates are accurate, but often they’re not (which is why there’s frequently a significant disparity in their property valuations. Appraisers don’t do much better, as their training is based on outmoded principles of valuation that have little bearing in today’s market.
Bottom line: a home is only worth what “the market can bear.” In other words, in a desirable location, even a mediocre or substandard property can (at least until recently) command top dollar because of “supply and demand.” Many buyers purchased “albatross” properties and now regret their decision. They will have to sink tens of thousands of dollars to rectify their home’s problems (or bail). One of the silver linings of the housing market “correction” underway is a reduction in the number of problem properties being sold for much more than they should have (in a “normal” market).
The realtor may spend some time (and money) promoting the client’s property and host an open house or two. As part of the marketing plan, the agent will hire a photographer and videographer and have a listing description written. Such tasks are important for promoting the property. The materials serve as an “attractor” (i.e., magnet), but the most important job of the seller’s agent is setting the home’s listing price. If the price is right, there will be lots of potential buyers even if the photos are not very good (except in a market crash). If the listing price is too high, most of the buyers will move on to more reasonably priced properties.
Besides the marketing of a home, what else does the seller’s agent do for the client? Not much. He/she will negotiate with the buyer’s agent. The agent may also make some recommendations about how to stage the home for maximum impact (and quality of photos). The right photographer can hasten a home’s sale (as I learned while selling mine a few years ago). If some repairs are warranted, the agent will make some recommendations about what to do and who might do it at a reasonable cost.
Certain real estate firms, like Keller Williams, promote focusing on selling homes in their agent training courses. This is where the major money is made for the simple reason that it takes less of a realtor’s time than being a buyer’s agent. At KW, many of the younger realtors start out as buyer’s agents (as a way of learning the trade), before graduating to the more lucrative selling side later. But agents with most realty firms serve as both buyer’s and seller’s agents to maximize their transactions.
So where will real estate, as a profession, wind up in five (or ten) years?
Glenn Kelman, CEO of Redfin (a KW competitor), believes most agents will be salaried (as is the case at Redfin). His logic is simple. Most non-salaried agents spend too much of their time chasing clients, thereby distracting them from their core mission of ensuring the process goes smoothly on both the buying and selling end. In return for a guaranteed salary (typically in the low six figures) with the prospect of a bonus for doing especially well, Redfin agents are happy to know where their next paycheck is coming from (and leave most of the administrative and marketing tasks to others). This is how agents are generally paid in the United Kingdom and a few other countries. The sales commission is typically 1%-2% in the UK (a small fraction of what prevails in the US).
If Kelman is right, a titanic shift in how homes are bought and sold is coming to America. Redfin is very selective in who they hire as agents. If other firms transition to this model, a dramatic downsizing of the profession is likely. Instead of boosting a brokerage’s ranks to 100 or more agents, firms will endeavor to accomplish more with less (i.e., fewer agents). What happened to the travel agency business 20 years ago will be the outcome for realtors. After all, when was the last time you spoke with a travel agent when planning a vacation? (OK, some companies still use travel agents, but their ranks have thinned dramatically since Expedia and Priceline entered the market).
Even if Kelman’s forecast comes to fruition, it’s likely to take many years for the profession’s transformation to complete.
In articles to come, I’ll suggest several ways realtors can improve their practice right now and survive (or even thrive) during the coming downturn.
*The term “realtor” is technically reserved for members of the National Association of Realtors (NAR). Most highly active agents are members. Thus in this article and others, the terms “agent” and “realtor” are used interchangeably despite the technical distinction.
Under the nom-de-plume, Sherlock Homes, I examine residential real estate from the buyer’s perspective (with a forthcoming book written from the seller’s point of view):
“House Hunter Confidential,” available on Kindle, discusses some of the issues raised in this article as noted above.