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Farhan Thawar's rants ... Write today's date on a post-it note (with the year! .... For instance, I used the outstanding Linda Pinizzotto for both the ... |
October 14
Whyte is right
With our recent housing purchase I've been wondering about how real estate agent fees work. Not that I don't understand that the selling and buying agent split between 4-6%, but actually why is it that we pay realtors between 4-6% of our total house cost! Why isn't their value based on a higher percentage of the upside of using a realtor and not a lower percentage of the total asset cost.
Let me explain. While in Negotiations class in the summer of 2004, Glen Whyte gave us the following example:
Scenario 1
I can probably sell my house myself for about $400k. So in theory, if I do sell it for $400k, I get to keep all the proceeds.
Scenario 2
Now, if I use a realtor I may be able to sell the house for $420k. If we assume a total of 5% commission, that's $20k.
That's $20k of upside, that is quickly eaten by the realtor. Why isn't my realtor fee based upon a percentage of the $20k upside that they provide? I'm sure a 20-50% fee could be worked out on the extra $20k. This clearly quantifies the value of the realtor. I think the show Property Ladder quotes a hefty 5-15% price jump if you use a realtor. Their commission should be on that extra 5-15% increase.
While I haven't seen this model pop-up yet, I have seen some different pricing models. In Texas (where I used to live) for example, we're already seeing the emergence of 1% commission realtors.
Now in some cases, your realtor can save or make you money. For instance, I used the outstanding Linda Pinizzotto for both the purchase of my condo (2% below asking), the selling of my condo 4 years later (sold for 2% above asking in 1 day!) and the purchase of our house (3% below asking). The difference here being that Linda goes above and beyond the call of duty. She helped scout out new areas, advised us on cool neighborhoods and expertly negotiated all our contracts (hence all the money saved). We easily saved money even after paying her fee. She even booked our condo elevators, got us a discount on the house inspector and measured our lot for the insurers!
Morale: Think hard about your realty fee, or use Linda :)
