A great realtor is worth his or her weight in gold. A bad realtor is like catching the bubonic plague. Not only will you have to pay a 5% – 6% commission to sell your property, you'll also get a much lower price.
Let me share with you an example of how a bad realtor really screwed a home seller while I was searching for panoramic ocean view properties in San Francisco.
A Bad Realtor Really Hurts The Final Sales Price
Take a look at 25 Lomita Avenue in San Francisco, officially a two bedroom, one bathroom house with 1,529 square feet.
It has amazing views of the ocean with an oversized 5,998 square foot lot (2,500 sqft lot is standard in SF). The house also has about 400 square feet of unwarranted living space with another unwarranted full bathroom downstairs.
The negatives of the house are that the owner removed the garage to create about half of the unwarranted living space. The black garage door in the picture is actually just a wall.
25 Lomita also sits on a bend which may be uncomfortable for some families due to a blind spot when cars drive by. You don't want to be walking your kid too often outside because drivers don't have time to see far ahead.
Finally, there is some normal wear and tear. Some of the exterior shingles needs replacing.
Overall, 25 Lomita Avenue is a nice house in Golden Gate Heights. With $150,000 – $250,000 of work, it'll be really lovely.
Homes in Golden Gate Heights with panoramic ocean views sell for $850 – $1,050 / sqft on average for good to completely remodeled homes.
Based on its average condition and official square footage of 1,529, this home should be listed for $1,300,000 – $1,605,000. The average would, therefore, be about $1,450,000.
But what about the unwarranted 400 sqft downstairs you ask? Let's be generous and add 400 sqft to 1,529 sqft to equal 1,929 sqft, even though the unwarranted space is slightly below grade.
At 1,929 sqft, 25 Lomita should be listed for $1,639,000 – $2,025,000 based on $850 – $1,050 price/sqft. The average price would, therefore, be about $1,832,000.
Now let's take it a step further and average the averages given nobody pays full price for unwarranted space that is not listed on the 3-R report. This is important because when you turn around and sell a property, you will face the same issue of not being able to count unwarranted space as official square footage.
The average of $1,450,000 and $1,832,000 equals $1,641,000. Pricing the property at $1.6XX would have been the logical move. Maybe even $1,599,000 to create a bidding war might be even better.
It is very hard to underprice a home because the market tends to bid the price up to market value. But it is easy to overprice a property and make the market completely lose interest and move on to the next closest comparable.
The Bad Realtor Mis-priced The Property
The agent and the seller decided to get greedy and list the price for an unreasonable $1,975,000. See the price history of 25 Lomita below.
$1,975,000 signaled the seller actually wanted $2 million or more because the strategy in San Francisco is to slightly underprice properties to lure buyers in.
As a result of the high price, buyer agents and buyers decided to not put in any offers. $2 million or more for a house with no garage and only 1,529 of official living space is completely unreasonable.
Once the sellers realized nobody would pay $1,975,000 or higher, they cut the price aggressively by $225,000 a month later to $1,750,000. The problem is, they waited two weeks too long.
During this time period, a house a couple of doors down at 65 Lomita Avenue came onto the market. However, the 25 Lomita agent and seller already knew this house listing was coming because it had a “Coming Soon” sign staked on the property before 25 Lomita was listed. See picture.
This is where a good selling agent is really worth his or her weight in gold. 65 Lomita is a smaller lot, with lesser views, no deck, half as much unwarranted space, and only one full bathroom in the entire house. The official square footage is slightly larger at 1,590.
But what it did have is a garage, an official third bedroom, and an agent who priced the home appropriately at $1,699,000.
The pricing really was key.
While 25 Lomita was busy lowering its price over a two month period, 65 Lomita listed and sold within 30 days with a final selling price of $1,750,000! What a much better experience for the 65 Lomita seller.
25 Lomita ultimately sold for $1,700,000, or 14% below its original list price of $1,975,000 after spending 3.5 months on the market. But what's really sad is that 25 Lomita sold for $50,000 less than 65 Lomita, even though it had a bigger lot with better views, a second bathroom, and more overall space.
If 25 Lomita had been priced at $1.6XX as I calculated above, 25 Lomita would have sold for between $1.8 – $1.85 million, or $100,000 – $150,000 higher than it did.
Bad Realtors Really Hurt
Not only did the seller of 25 Lomita have to pay a 5% commission on $1,700,000 = $85,000, they also lost out on $100,000 – $150,000 if the realtor had priced properly. All told, using the bad realtor cost the seller $185,000 – $235,000.
Here are some lessons to review from this case study.
1) Price your property properly. Do not get too greedy with your asking price. It's better to price slightly below market to draw people in and create a bidding war rather than price too high and have the property sit.
2) Do not blame the homeowner. I spoke to the listing agent at 25 Lomita after the first big price drop to ask what was going on. She said she wanted to list the house closer to $1.79 million but her sellers insisted at $1.975 million. She is supposed to be the real estate expert, not the sellers. She needs to take ownership of the pricing.
3) Do not bad mouth other listings. I asked the listing agent about a couple other comparable listings in GGH and she said one was, “a piece of shit.” I was completely turned off by her response because that piece of shit was a diamond in the rough that was already in contract unbeknownst to her! She said, “buy this property, not that piece of shit.”
4) Staging and freshening up works. Most new buyers lack imagination and are extremely picky, which is why staging is big business. New buyers may also be feeling financially stretched or unsure. As a result, they want everything to be perfect. For example, even though it might only cost $3,500 to refinish the floors, new prospective buyers might assign a $20,000 value to the refinished floors that smell new because they have no idea. The same thing goes for appliances and newly painted walls.
Experienced buyers, on the other hand, want to see a “piece of shit” like the 25 Lomita listing agent said because they can see the potential. They realize that it doesn't cost too much to paint and switch out appliances.
5) Move quickly. The listing agent took too long to lower the price for San Francisco's standards. She waited 30 days to lower the price from $1,975,000 down to $1,750,000. Then she waited another 30 days to lower her price down to $1,725,000. Instead, she should have initially slashed her price down after the second or third week if she really was listening to feedback.
The seller might have truly been stubborn and had strong-armed the listing agent into keeping the asking price high. Just be aware of what might happen if you think you're the expert instead of your real estate agent. Listen to your agent. That's what she or he is there for.
If you're the listing agent, you're doing your seller a disservice by being a “yes sir, yes ma'am.” You will not only hurt your seller's chance of getting the highest price possible, but you will also hurt your reputation and future business if your listing doesn't sell at a price within the standard period of time.
Real Estate Recommendation
If you want to invest in real estate but don't want to bother with realtors, commissions, maintenance, and tenants, look into real estate crowdfunding with Fundrise. They are my favorite platform that allows investors to invest as little as $100 into commercial real estate projects around the country. The income is completely passive and hands off.
Fundrise was founded in 2012 and they are free to sign up and explore. I've personally invested $810,000 in real estate crowdfunding after selling one of my SF rental properties for 30X annual gross rent in 2017. It's been great to earn income passively with higher net rental yields now that I'm a dad.
About the Author: Sam worked in investing banking for 13 years at GS and CS. He received his undergraduate degree in Economics from The College of William & Mary and got his MBA from UC Berkeley. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $250,000 a year in passive income, most recently helped by real estate crowdfunding. He spends most of his time playing tennis and taking care of his family. Financial Samurai was started in 2009 and is one of the most trusted personal finance sites on the web with over 1.5 million pageviews a month.