Wondering what does it cost to sell a house? A lot! Even with technology lowering commissions, it still costs a lot to sell a house. When you add on commissions, taxes, and fees, it can easily cost anywhere from 6% – 8% of the value of a home to sell a house.
Despite the creation of Zillow, Redfin, and a bunch of other internet real estate companies, commission rates still haven't come down as much as they should. Just look at the wealth management industry. They used to charge 2% – 3% of your assets to manage your money. Now the industry charges under 1%.
As a result, I'm on strike for having to still pay 5% – 6% in commissions to sell a property. The selling fee is too damn high. Only when it costs 4% or less to sell a house might I even consider.
However, with the housing market strong, I'd rather just hold onto my properties for as long as possible. If you don't ever sell your house, you never have to pay any commissions or taxes!
The Internet Should Lower The Cost To Sell A House
Every property I've bought since 2003 I found through the internet. It's why I've always asked for my realtor to share some of their commission once the deal closes. They always oblige since they didn't do anything except help write the offer I deemed was fair. Today, you can just write an offer in minutes using DocuSign.
Then in 2014, I decided to take saving money a step further by getting the listing agent to also represent me to save an estimated 8% off the purchase price (1% commission refund, 7% lower offer price FTW). It was a no brainer because I understood the transaction process after writing a couple dozen offers already.
Selling a home for top dollar does require skill because marketing a property well and having a large network makes a big difference. The listing agent who sold me my current home basically left $120,000 on the table for his sellers. As a retiree, he didn’t have a network, didn’t market the property over the internet, priced too high, and became friends with me! You don't want to be friends with me if you're trying to get the best deal possible.
A great realtor is absolutely worth her weight in silver. But that weight is still worth less than 5% of the value of a home when home prices are now so steep in major coastal cities in the U.S. Instead of a fee based on a percentage, a flat fee seems much fairer to consumers.
Let's look at a real cost breakdown for a home that sells for $1,850,000 in San Francisco. It was part of the presentation the visiting realtors gave me if they were to sell my home. I think you'll be shocked to see how much selling a home costs!
How Much Does It Cost To Sell A House? Cost Breakdown
Here are all the costs it takes to sell a house. Included in the cost to sell a house are the real estate fees, transfer and excise tax, inspection costs, 3R reports, staging costs (optional), water compliance costs, and any home beautification costs.
To sell a $1,850,000 home in San Francisco costs a whopping $116,735! That's 6.3% of the value of the home chopped off right there. The cost also assumes “only” a 5% commission. In comparison, the cost to sell $1,850,000 worth of stock in 30 positions will cost $150 based on $5 a trade.
In the realtor's defense, half of her 5% commission goes to the agent who brings the buyer. Not a bad deal for the buyer's agent (curiously labeled as Selling Office in the chart).
Meanwhile, depending on the listing agent's contract with the real estate firm, she will have to give at least 20% of her 2.5% commission to her firm as well. So instead of taking home $46,250, the listing agent may take home at most $37,000 for roughly 2 – 3 months of work.
$37,000 is still a healthy take, but it is a far cry from the $92,500 you may think she gets for charging 5%. Most realtors don't have many listings each year. Most realtors help people find homes. In a competitive market like San Francisco, you lose out on bidding wars more often than you win.
City And County Costs
The cost to sell a house also includes Transfer / Excise Tax of $13,875. Every city and state has one, so check yours. The tax rate is variable, depending on the purchase price OR the fair market value, as shown in the chart below.
For a $1,850,000 property, the math is therefore $1,850,000 / $500 = 3,700 X $3.75 = $13,875. The city loves an increase in transaction volumes. Not only do they get to collect a large transfer tax for filing a piece of paper at City Hall, they also get to revalue your property higher and make more in property tax income.
For example, my home was being taxed at an assessed value of roughly $100,000 because the one owner bought it for only $50,000 back in 1946. We have a law where the assessed value can only go up by no more than a determined index (~1-2% a year). The city's take was therefore $1,200 a year ($100,000 value X 1.2%). Given I bought the home for $1,230,000, the city is now making $14,760 a year for the same property!
But holy crap. Look at how there's almost a 3X jump in Transfer / Excise tax if you sell a house for more than $5,000,000. We're talking a minimum $100,000 Transfer / Excise tax bill here. What a waste of money. Can you blame city officials for not doing as much as they should to fix our housing shortage?
Other House Selling Costs
The cost to sell a house also includes Other Costs equaling $10,300. All these costs re necessary except for perhaps the $8,500 staging. Because most buyers have zero imagination, staging is generally recommended.
The house will look cleaner, brighter, and as good as it ever will to attract max money. $8,500 alone sounds like a lot to rent furniture for 2-3 months. But the hope is that staging will more than pay back its cost. The higher priced your home, the more staging is worth it.
The house I'm currently living in was not staged back in 2014. It had gross shaggy green carpet and green paint throughout. Some of the aluminum windows were cracked and everything seemed untouched from 1946. As a result, competition was sparse.
Because the listing agent also priced it too high, he scared away the flippers as well. This was a perfect scenario for me. I love buying un-staged homes because after seeing thousands of open homes over the years, I know what things could be.
Related: Home Seller's Disclosures: Documents Required
Taxes As A Big Selling Cost Of A Home
The final cost to sell a house is Taxes. Although the property may sell for $1,850,000, the net proceeds is only $1,733,000 in this example. All these costs are deductible.
Further, if the sellers are a married couple, they can make up to $500,000 tax-free if they’ve used the property as their primary residence for at least two of the last five years prior to selling. A single seller can earn up to $250,000 tax free under the same terms.
Any overage is taxed at the applicable long-term capital gains rates, which is 20% for higher-income taxpayers ($413K single /$464K married), 15% for most individuals and 0% if you are in the 10% – 15% income tax bracket.
Never Selling My Properties Due To High Selling Costs
Given the cost to sell a house, I NEVER plan to sell my properties until there's at least a sliding scale in commission rates. For example, 3% commission for homes under $1M, 2% commission for each $1 over $1M, etc.
The longer you can hold onto your property, the better. In a high inflation environment, keeping your rental property makes even more sense. You want to benefit from high inflation for as long as possible.
There should preferably be a flat fee for selling a home, just like there should be a flat tax above a poverty income level. The internet should have lowered commission levels by now. However, they haven't because realtor advertisement revenue is a key source of revenue for internet real estate companies.
The irony is that if real estate commissions were lower, there would be a lot more transactions. More transactions would generate a lot more revenue for the entire real estate industry. Post-pandemic, the average homeownership tenure has ballooned to 10.5 years, partly because of a strong housing market. But also partly because selling costs are still stubbornly too high.
Given each city also has a huge Transfer / Excise tax for simply pushing paper, lower real estate commissions would boost city revenue as well. The real estate industry is ripe for disruption.
Selling causes leakage. Further, you never want to sell a cash cow in this lower-for-longer interest rate environment. All income generating assets must be cherished like a spoiled only child.
Take advantage of people who don't have the discipline to hold on. 20 years from now you will probably be very glad you did.
My best advice for lowering house selling costs is:
- Aggressively negotiate with the listing agent
- Get the listing agent to find a buyer and have the listing agent remove half the selling fee as a result
- List the house on your own
As as a seller, you have leverage to ask for a lower selling commission rate because volume is down. Further, you may want to let your listing agent act as a dual agent to try and save on the buyer's commission. For example, if are a selling a $1 million home and the total commission is 5%, you might be able to save $25,000 or 2.5%.
Frankly, I wouldn't sell a home now unless you really need the money. The selling costs are still way too high. Further, the housing market is likely going to continue going up for the next several years.
Post-pandemic, people have pent-up savings and looking to buy property. In addition, there was a massive real estate ruling against the National Association Of Realtors, Keller Williams, and more that states the industry colluded against buyers and sellers to keep real estate commissions artificially high! The penalty is at least $1.8 billion.
As a result, the cost to sell a home should be coming down over the coming years. Stand strong home sellers and buyers!
Here's my fascinating conversation with Mike Ketchmark, the attorney responsible for winning the landmark real estate collusion lawsuit against the National Association Of Realtors.
Invest In Real Estate More Strategically
Real estate is my favorite way to achieving financial freedom because it is a tangible asset that is less volatile, provides utility, and generates income. Stocks are fine, but stock yields are low and stocks are much more volatile.
The combination of rising rents and rising real estate prices builds tremendous wealth over the long term. Meanwhile, there are more ways to invest in areas of the country where valuations are lower and net rental yields are higher thanks to crowdfunding.
Take a look at my two favorite real estate crowdfunding platforms that are free to sign up and explore:
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and has consistently outperformed the stock market during down years. The platform funds invest primarily in residential and industrial properties in the Sunbelt, where valuations are lower and yields are higher. The real estate platform has over 400,000 investors and manages over $3.3 billion.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends.
I've personally invested $954,000 in real estate crowdfunding across 18 projects to take advantage of lower valuations in the heartland of America. My real estate investments account for roughly 50% of my current passive income of ~$380,000.
What Does It Cost To Sell A House is a Financial Samurai original post.
If I had only read this in 2011. At that point i sold my property in Nashville without a loss (but no profit either). Since then it has doubled in price. Monday morning quarterbacking can hurt the soul!
The real estate industry in general needs to be more transparent. Not long ago a listing agent gave me the run around on a property because he had a potential buyer lined up and wanted double commish.
As a buyer in this market would you be extra cautious? Because as you said you never want to sell a cash cow in this low rate environment.
Always good to be cautious whenever spending an enormous sum of money relative to one’s income and wealth!
There is always another property if you miss one. Hence, I recommend folks incorporate the Spray N’ Pray method for property hunting at this current time.
I would also look more surgically around the country for better returns with smaller investment sums through real estate crowdsourcing via RealtyShares. I’m planning on allocating capital at $10,000 – $30,000 a pop now instead of $1.5M a pop.
I am glad someone wrote this article. The inflated real estate broker fees is a very good arbitrage opportunity for a creative technology entrepreneur.
Let us summarize the dead-weight loss to society due to the real-estate agents first —
1. Fewer transactions: Sam, as well as many of the readers, admitted that they will never sell their houses or think long and hard before buying a house about how long they can stay in it. In other words, the market is less fluid because of this high overhead transaction cost.
2. Buyers and sellers pay the middle-man: Obviously the cost of the transaction (realtor fee + taxes) is built in and reflected in the ultimate listing price of the house, making real estate more costly for the consumers.
What are the social benefits of #1 and #2? The “knowledge” of the realtor? In the few real-estate transactions I have had so far, the realtor did not bring much knowledge to the table: (a) The houses for sale were listed online and in hot areas most have open houses; (b) The home inspectors do the job of checking if there is anything wrong with the house; (c) The offer price must be determined based on the buyer’s knowledge of the market, and in today’s world, Zillow, Trulia, Redfin etc. give a list of comparable properties/prices, which is the most a realtor will tell you; (d) The selling requires putting up a listing online and sitting around for an open house for a few hours – something any reasonably polished/pleasant person should be able to do. So, the benefits brought to the realtor on the table are rather small in value, and as many feel, entirely unjustifiable for 5-6% commission fee in higher property priced coastal areas.
So why do people put up with it? It is not just a “bad social equilibrium”, it is the barriers to entry. As some readers have stated, getting real-estate and/or brokerage licenses are expensive. But they are not that expensive. For someone selling $1 million + properties, it may well be worth it. The other barrier to entry can come from skill, but most of us can agree that getting one of these licenses does not require tremendous skill or hard work.
I have to conclude that the missing ingredient here is the technological innovation. Like online brokerage made stock brokers obsolete, like Uber made Taxis run for their money, and like Airbnb disrupted the hotel industry, a real-estate disruption is likely and should/will come from technological innovation. I wouldn’t list that as a career of choice for young people choosing a profession.
In the meantime, like other readers, either I am not selling my properties and contributing to a non-fluid market thanks to realtors, or I am getting my own license before the sale.
I looked into becoming a real estate professional in my state and found the problem here isn’t agents but brokers. To be a broker has barriers to entry (ex 3 years as an agent) and a license in the thousands of dollars. This makes it cost prohibitive for people to justify getting and maintaining a broker’s license unless they are serious about the enterprise. Therefore the casual sellers wind up as agents, and the typical agreement around here has the agent portion of the commission as less than half of the broker’s portion.
With that being said, as others have pointed out discount brokerages, the woman we purchased our house from negotiated directly with a local broker who put her listing on MLS for a flat fee, then referred all inquiries directly to the owner. She did a fair amount of work, and the transaction was a bit more of a hassle, but it wasn’t too bad and she saved a bit of money and managed to have an agent list the property in MLS.
The true commission rate is 40-60% on most homes not 5-6%.
Example
$400,000 Home
$ 40,000 Equity
$ 24,000 Commission at 6%
The commission is 60% of your equity! $24,000/$40,000=60%
This is why 1 in 8 homes is now sold direct and 1/ in 5 homes is bought direct. “Highlights from the 2015 Profile of Home Buyers and Sellers by the National Association of Realtors” showed that FSBO homes were priced more accurately and sold slightly faster. Add that to studies done by Northwestern and Stanford that FSBO homes sell for 4-7% more plus the commission.
There are some amazing platforms for FSBO sellers that take an intimidating process like FSBO and break it down into actionable steps similar to what TurboTax, Etrade, and LegalZoom have done. Simple and SOLD is a great book that walks you through the process.
My friend is an immigration attorney who worked in mortgages before law school. Watching her go through the home buying process has been fascinating. She is not using an agent, because she knows the forms and Zillow is great. She is getting precisely what she wants. I intend to use her expertise when I buy.
An important point to note is that the commission and the who pays the commission is completely negotiable. If you’re selling in a strong seller’s market, why not just set terms where the buyer pays for any and all commission fees?
When buying a home (purchased for $223K) for my mother-in-law in Georgia earlier this year, I had asked the seller’s agent to cut her commission from 6% to 3%, if we didn’t get our own agent. She said that she couldn’t do that due to her agreement with the seller, either she would get 6% if we were unrepresented, or she would get 3% and our agent would get the other 3% if we were represented. So we ended up getting our getting our own agent. I would have preferred getting a 3% discount on the price, rather than agent.
Ever heard of this already being agreed upon by the agent & seller and unable to change?
You’ve left out one more reason not to sell–applicable perhaps only in California: Proposition 13 which limits the property tax increases as long as one owns the property. The longer I own a property, the more valuable this benefit becomes, assuming future appreciation matches historical appreciation.
With Proposition 13 and the transaction costs, it makes much more sense to do a cash out refi to invest in another property or anything else rather than sell the property. Of course, people may need to sell for all sorts of reasons (e.g., bad investment, relocation, etc.) or may be unable to refinance so this strategy doesn’t always work out.
One challenge with refinancing a single family home (as the Financial Samurai has documented) is that it is highly dependent upon the financial picture of the owner and W-2 income is preferred by most lenders. Apartment (i.e., 5+ units) financing is much more dependent on the financials of the building. If the building cash flows, one can typically borrow up to 70 to 75% of the appraised value.
Yes, to put an even finer point on it, if you buy a fixer and do beautification that does not require a permit, they can’t raise your tax, but you can make more on a rental, so you have income on a 2M asset, but tax on a 1M asset.
That real estate commissions haven’t dropped is crazy. The problem is, as others have pointed out, Realtors own and control access to the MLS. That’s the major way residential property is sold in the U.S. As a real estate investor, I have also heard stories of agents refusing to show properties not listed on the MLS, so I can understand the reluctance of people to go it on their own.
You should be able to negotiate a lower commission, especially if you are an investor and can offer the agent regular listings.
But you can also use the commission to your advantage. Got a property in a not so good part of town and it’s taking a while to sell? Increase the buyer’s agent’s commission! You’ll be amazed at how well that works. I’ve even selling raised the price to offset the increased commission and the property still sold. It’s all about motivating the buyer’s agent.
I highly recommend checking out the book Freakonomics. There’s a chapter or two in there on selling real estate and what words to include in your listing for a higher selling price. Would probably work for rental listings as well.
I also recommend thoroughly going over the HUD form at least 1 day before closing. I have been through the escrow process more than a dozen times and there has NEVER been one time where I did not find an error somewhere. That has saved me thousands of dollars.
Long time reader, but first time making commentary. I live in San Diego and share your sentiments. I often see Redfin offering a 1-1.5% commission. I think this will grow and expand in higher priced markets. I love my realtor who helped me purchase a few properties here but not enough to sign up for 5-6%! I’m an attorney and he’s not allow to make double+ what I get an hour, in my opinion. Realtors say that the lower fee will lead to less showings, but that is self-interested fooey. However, I think 5-6% is far in lower priced markets.
Two things with Redfin. #1 Many agents boycott their listings, and listing agents boycott their offers. #2 correctly or not listings by Redfin are perceived to be in worse shape than a regular broker, and agents help perpetrate this idea.
Do you not incur legal fees on a sale as well?
If you bring in a lawyer, then absolutely. When I bought my other house in 2004, the seller had a lawyer review the documents and handle the transaction. Back then it was just me and my realtor who tagged along. I found my house when he was on vacation for two weeks! But he got to collect a $30,000 check just because I invited him. After that, I promised myself I would do better. I could’ve use that $30,000 to knock off at least $15,000 on the purchase price of my home back then.
I haven’t read all the comments, but I didn’t see the excise tax mentioned. FYI there are no transfer taxes on real estate here in Texas, and several other states have no excise taxes as well. https://www.nahb.org/~/media/Sites/NAHB/SupportingFiles/8/Tra/TransferTaxRates805_625200885333AM.ashx?la=en
A little company called faira is attempting to disrupt the game – I think the buyer pays a .5% fee and the seller pays nothing. I hope they succeed https://www.faira.com/ their listings are Seattle focused now, but I assume if it works out they will expand into new markets.
Just sold a house. At closing, my realtor asked me if I made any money on the sale. After restraining myself from yelling profanities, I calmly stated that there is only 1 person in the room that made a guaranteed return and I told him to guess who that was.
He acted as though he was the reason why the house I sold appreciated in value and why I made a resemblance of a profit.
I clearly need a new realtor, as I have brought this guy (through myself and family) 6 transactions and received a paltry 1% discount on a sale side and one $200 home depot gift card.
Don’t even get me started and the low barrier to entry and every mom, brother, sister, grandma, grandpa, etc being a realtor. This industry is loaded with some of the most lazy, subpar people I have ever met.
Sorry to all of the hard working realtors out there, but you are a rare breed and your peers make you look bad.
Question for you though: why not ask for money back before dealing with your realtor? 6 transactions is a healthy 30% – 36% of the average value of the homes you’ve sold!
As homeowners, the change starts with US. Either go on strike and never sell, or negotiate down the fees. Just b/c it’s “always been 5% – 6%” doesn’t mean anything.
As they say in the commission based business, it’s always a good time to buy or sell.
The only saving grace for this realtor is that he did his job and is honest to a fault, so I was able to look past this. I am not sure if I am giving him or any other realtor business anytime soon.
In my case, I sold as I don’t want a huge portion of my NW in real estate in the particular area I live in. It was simply the cost of doing business, but I sure as hell don’t like it.
Lastly, I am in a market where the majority of homes are 2nd or 3rd homes and the average age of the buyer for what I was selling is mid 50’s. So, selling in an unconventional way would not have been an option.
Great article. I think you are spot on in your evaluation. Even in areas where the mean house price is $200K I have a hard time paying 6%. If a realtor lives in an area that houses are 200k you don’t need to make that much to have a very comfortable lifestyle. I work in the financial industry and the pressure to lower mutual fund fees is enormous. The DOL regs that take effect in 2017 will be a great reduction for everyone with a 401(K) and retail IRA. The real estate market needs to have a similar change! With that, we made the decision to NOT sell our house and rent it out. Yes, a few more headaches, but our net worth just went up 17k noting having to sell!
Which begs the question, WHY aren’t real estate commissions going down like every single other industry today?
6% on 200K is still outrageous, especially if that real estate market might only be appreciating by 1% – 6% a year. Can you imagine paying 6 years worth of appreciation for a home in fees?
People who want to sell their homes have to speak up!
FS, what do you think of REDFIN charging ‘only’ 1.5% for sellers?
I used Redfin last year to sell a condo I had for almost 30 years. At this stage in my life I wanted to take the profit, pay off my primary house, and be mortgage free. I paid Redfin 1.5%. with the buyers agent getting 2.5%. I was happy with the work they did. Pictures are top quality and 3D walk through video they did drew a lot of hits and views of the property.
My current house I bought and live in I used the sellers agent. Circumstances of being out of town when it was due to come on the market, (foreclosure in 2010), dictated that this was the best avenue. We were $1-$2,000 less than a competing bid. My wife, (now ex), wanted us to raise our bid. I stood firm and said just wait. The listing agent knowing he would get commission on both ends worked with us. We raised the bid to beat it by just a few hundred and then he agreed to refund us that money and a bit more. (somewhere between 1/2- 1% if I recall). We got the house.
I knew he was on the level with us because I met the couple that put in a bid that was close to ours. They turned out to be neighbors a few doors down that wanted a bigger townhome and an end unit.
As a Realtor, I admit we are highly compensated. I will often take a flat fee to list a home. Example: 2.5% plus $5000. 2.5% goes to the buyer broker and I can work off or $5,000 as my broker charges me about 10% of that for a deal.
Remember commissions are negotiable by law. Just find one that will work for a reasonable compensation. :)
Another option might be to get your own real estate license as save a lot of cash on your own home purchases. I have to admit, as a real estate investor first / Realtor second. I agree with the Samurai, just hold on to your properties for the long haul as selling this incur high fees. :)
Thanks for admitting Will. I hope more Realtors go towards a flat fee. There would be A LOT more opportunities to sell.
Always negotiate folks! Or be like me and go on strike and hold onto an inflating asset for as long as possible.
I know 5% is the norm but when we sold our home we talked to the agent (top agent in that area) and explained to them that 5% was high they agreed to do 4.5% and if they were representing both buyer and seller they would take 4%. The 4.5% included the staging, cleaning of the property before the open house and after we vacated the property. s. You just need to talk to the agents.
We had an agent who said they would do it for 3.5% but the staging would be our cost and the agent was not as popular as the other agent so we decided not to use them.
In the end the agent we used represented both buyer and seller so we paid 4%.
On the buying side it is very common for the agent to give back .5% to the buyer.( 1% in some cases)
Yes it all ads up pretty quickly. I know if you sell with a Redfin agent you will only be charged 1.5% commission versus the full 3% so that may be something to keep in mind for the future.
Personally I like the plan of never selling best. Every real estate investor I know says that if they could go back in time, they would have never sold any of their properties. Why? Because a lot of them are worth 5, 6, or even 10X what they were worth back when they sold them. I would much rather refinance, pull out some money rather than sell the asset all together. Just my 2 cents on real estate.
Redfin is progress, but you STILL have to pay the buyer’s agent 2.5% – 3% on top of the 1.5% commission you pay Redfin right? 4% – 4.5% is still too expensive in expensive cities.
Agreed. The fees are crazy high for real estate transactions. When we bought our house in TX, we didn’t think the commission the realtors received on both sides were worth it. Then we looked to sell when we moved to STL. We decided against because the fees would eat up the gains. So we are renting the house and not sure if we will sell it anytime soon. Now that we are in a new city, I’m looking at real estate to see if it will be worth it to buy. Right now, the local market is overpriced for a buyer. So we are renting. Plus, if we don’t stay here long term, fees and maintenance will eat up all the gains we may get from owning a place. Right now, I rather invest in mutual funds because there’s no headache or maintenance there and I’ll keep renting. Especially when rent is less than what a mortgage payment would be.
So glad you posted about this. The real estate commission scam totally needs to be disrupted for places like CA and other HCOL areas. Expressing the cost in real dollars vs percents makes it painfully clear how disproportionately the RE industry is being compensated for taking extremely limited risk and the services provided. Unfortunately, the RE industry has very strong ties with govt and services which help their entrenched positions. When you look at the costs you are paying per hour of their time for the transaction, the prices exceed even the highest price lawyers (by an order of magnitude) – and this for people who are basically glorified sales people who often have very little academic background or credentials (a person slaved for an MBA or MS CS/EE? you dumb ass – you could have cut out all that and learned to schmooze and get a simple real estate certificate/credential and been paid bank for nothing).
One hack here is to use RedFin, which the real estate industry hates, so of course, I love them. They were one of the first to have an excellent web site and app and kicked realtor.com’s ass (which I believe may be the RE industry’s MLS service) for years and IMHO still does – for instance they have their own value estimators which realtor.com didn’t do (maybe they do now,out of need to compete, but I’m sure it would be biased in the seller’s favor. And realtor.com pretty shamelessly copied RF’s home page UI presentation). And whenever I go into an open house and they ask how I knew about it, I loudly explain RedFin (so that anyone else viewing the house can hear, which sends shivers up their spineless spines.
I cant tell you how much contempt I have for 99% of that industry (as if you can’t tell), and Ive been through 10 transactions and out of all of them, only 1 was with an agent that truly seemed professional and earned their keep.
The barriers to entry for new agents are too low. For one, they should make the exam more difficult, or require multiple exams. They reformed the mortgage industry for loan officers, so they can do the same for real estate agents.
High barriers to entry would increase the cost, not decrease it.
You might be more likely to get your money’s worth if the agents were more highly qualified, but you would still be paying a lot of money.
Reform the qualification process *and* the pay structure. They did it with loan officers, so they can do it with real estate agents (who arguably work a lot less).
This is another area where having a diversified family is neat. By using family resources I have access to a lawyer, Doctor, cop, realtor, general contractor, and financial advisor. Although when purchasing property I may not get a massive discount, a lot of the money stays in the family and loved ones get to benefit.
I have to say, growing up I discounted the usefulness of family quite a bit. Now that I’m an adult, I’m concerned it isn’t given enough importance!
Good point about having a good family network with professional qualities. I ask my radiologist and cardiologist buddies since high school for some advice all the time.
I think a lot has to do with where one lives, his or her ability to do the homework, meaning prepare the house for sale (including staging it), right price it on the basis of comps and be professional and versed on the negotiation and tax/legal aspects of the transaction.
if you live in large cities such as NYC or SF where the supply is tight and the comps can be easily identified, then I believe that paying a realtor is a waste of money. I recognize, however, that some cannot do it.
I recently sold a house. I used a realtor charging a fixed-fee of $7,500.
Saved THOUSANDS of $$$.
+1 for flat fee selling agents.
I’ve been looking into this a lot since we’re planning on selling our Silicon Valley place in a year or two. FSBO or flat fee selling agent seem the most promising.
Another item I’ve considered is specifying the buyer’s agent commission in the listing, e.g. 1.5% commission for my $800k place. It will reduce the number of agents showing my place but given how hot my neighborhood is, I’m not that worried about that.
I’d imagine I’d go on strike too! I have yet to sell a property (bought my first house about 5 years ago). I will say that my wife and I thought long and hard about the chances of living in this house 5+ years. Not a good thing to buy/sell often.
Most likely, transaction costs stay high simply because of lack of transactions by each person and lack of knowledge. Most people are only selling a home one or twice in their lifetime, so that contributes both to very little knowledge about real estate transactions and very little incentive for a regular person to wonder why costs are so high. If you’re selling a home once in your life, you’ll probably just assume that’s the cost of it and not think anymore about it.
For myself, that probably means we’ll never sell our house. My own parents own four properties in the DC area and have never once sold, instead opting to keep them and rent them. It’s likely something I’ll do as well.
We are going to be selling our house soon, and I’ve been asking the exact same thing about commissions.
In the internet age, 5-6% is ridiculous (at least in high cost areas). You mentioned that realtors do 2-3 months of work to sell a house, but I think that over-estimates the amount of effort that goes into it. They may be working on the project for 2-3 months, but there’s no way they are working on it full-time.
For the two house purchases I’ve been involved with, I suspect each realtor spent a maximum of 40 hours on the project. Probably much less. That makes their hourly wage pretty spectacular
In my opinion, people in the real estate industry have gone out of their way to make the process of buying or selling a house much more complicated than it needs to be. They have done this to justify their existence. I’m not sure why we let them get away with it, but it has to stop.
I am about to start seriously researching ways to avoid paying commissions to realtors when we sell our house soon. The obvious solution is “For Sale by Owner,” but it looks like there are “discount brokers” out there who will help sell your house for a reasonable fee. The problem is you are still obligated to pay the buyer’s agent.
If any readers know how to avoid paying realtors an arm and a leg, I am all ears.
The easiest way is to avoid paying realtor fees is to market your own property such that you find your own buyer.
You can post your home for free on Zillow (including pictures and video), which syndicates your listing to their partner sites. It’s not the MLS, but it’s a great platform for lookers. And so is Craigslist if you want to get low-ball offers from investors. The advantage of this method is that Zillow and Craigslist is used by many, many people who are looking for a home.
The problem is as you stated, most folks who are looking to purchase a home are still using buyer’s agents, which means that it’s difficult to escape that fee unless you, again…find your own buyer. As a buyer, there is comfort in knowing that a realtor will use the right forms (regardless of how State standardized they are and can be easily obtained using a local Title Company) and give you hopefully unbiased advisement as to home much you should pay for a given property.
As for discount, flat-fee brokers, I’ve used them in the past. Assist-2-Sell comes to mind. But again, their fee is flat; The buyer’s agent fee is not. Still, these fees are geographically driven. My broker in GA charged $2995 but I just checked and found that a broker in CA charges “as low as” $6,995. A far cry from $46k but still a lot of money.
So, it goes without saying. Unless you can bring yourself your own buyer, who’s not using a buyer’s agent, you’re going to pay the fees.
Thanks for the info Sam. I am hoping to get into Real Estate within 5 years, or before 30 at the latest and never really thought about these cost. I will likely buy and hold the property like you are.
I suppose the only benefit to selling a house as oppose to a rental property you live in is the tax free portion of the sale if the property appreciated and you lived in it for the last 2 out of the past 5 years.
Believe it or not, not every city/state charges transfer/excise taxes. Fees, yes. But not necessarily taxes.
https://www.firstam.com/assets/commercial/myfirstam/your-guide-to-real-estate-laws-and-customs.pdf
But your point is well-taken; selling a house costs a lot money. As soon as I bought my house, before adding it to the asset column of my net worth statement I estimated sales-related costs and shaved those off of the value.
Is there incentive for you to capture 500k tax free, then buy and move to another (badly marketed) house ?
There will be if my cash flow dries up. Need to live for 2 out of last 5 years to take advantage. But, I’ve got to live somewhere. If I decide to move back to Hawaii and buy the dream house, then I will take advantage of the 500K tax free profits rule.
It makes me ill to think about the money I’ve paid in taxes and fees over the years when I’ve sold a property. On the plus side, I haven’t sold very many properties either.
It is surprising that real estate commissions haven’t dropped. I just think there hasn’t been a good enough model to disrupt the industry. If you think about it, Uber and Lyft are still relatively new at least in many markets (maybe not in SF). Same with the FinTech companies and AirBnB.
Most people probably only buy and sell a house a few times in their life. So they tend not to focus on finding a better way to do the transaction. Those that do buy and sell regularly learn how to work the system – i.e., they get their real estate license.
It would be pretty amazing to see what would happen to the volume of houses sold if commissions dropped to 0.25%.
Uber and Lyft are a great example of technology further reducing costs for consumers. It used to cost ~$25 to take a taxi downtown from the west end of SF. Now it costs $6 with Uber pool, and $3 when they have a promotion! That’s a 76% – 85% price reduction.
Only real estate stubbornly stays high due to lobbyists and everybody being in cahoots with each other.
I think the reason Realtors still command 5-6 percent lies in the ability to control both sides of the transaction and the power of their associations to keep their members in line. Its not unheard of for a buyer’s agent to refuse to show a non realtor home. There’s also a lot of fear in society to go without a buyer agent. This drives their fee levels. As people get more comfortable with going without a buyer’s agent it will decline. I’m thinking the millennial buyer uptick will change that as they are hard wired to do it themselves over the Internet. Imagine if you lived somewhere that homes had appreciated a more normal 5 percent. The costs would be even more painful to bear.
That’s the truth, and a failure by the buyer’s agent due to a desire for more money. I’ve been told dozens of examples where a buyer’s agent downplays a listing with a lower commission payout. Luckily, consumers are much smarter now due to the internet.
I’m hoping more articles like this will give more consumers the conviction and confidence to ask for lower commissions because they are doing more of the work.
Hi Sam
Your table of the value of your income producing properties at different interest rates got me thinking – do you think interest rates will stay this low for much longer? There’s so many varying opinions on this, I would love to hear your thoughts given your finance experience.
I think interest rates will stay low for the rest of our working lifetimes. The 10-year bond yield has gone down for 35 years. Sure, interest rates for mortgages and the Fed Funds rate can rise by ~2% at most IMO in the short run, but the long run is flat to down.
See this post for more interest rate insights: https://www.financialsamurai.com/should-i-buy-a-home-in-a-rising-interest-rate-environment/
Our real estate agent is a lucky guy, we have used him for 2 home purchases and he showed us under 15 homes total. The fees are outrageous even after he knocked a percent off because our family is a long time customer.
I am surprised that this industry hasn’t been disrupted – the closing costs alone make it very difficult to take a decent profit on a lower priced house
Same goes with taxes. Higher taxes, less income. People will do everything to avoid paying high taxes, taking money elsewhere (offshore), whereas they don’t mind paying reasonable amount or flat rate.
We are going to struggle with the decision to use a realtor too next summer when we try to sell our house. I hate the idea of losing that money, but most homes in our area that are listed by owner end up listed by agent too. Poor pricing or poor staging – just not sure but we’ll do a lot of homework this winter. We had a realtor contact us with a buyer for our 8 unit apartment complex a few months ago (it wasn’t listed for sale). With a half hour showing – (where we did all the work of showing the buyer around – explaining all details of the units/properties) – he wanted a 3% commission – $12,000??? He sent us a postcard and brought a buyer and now wants $12,000 for an hours worth of work? No way… We bought that property from the seller’s with no agents involved and we did the same thing with a Florida condo a few years back. I agree that the industry is ripe for disruption. Spend time reading, researching and looking at properties and have a good lawyer and home inspector (if you need one). And hang onto those properties too whenever possible!
There is an old engineering joke where a man comes out of retirement to fix a machine that has been having problems and no one else can fix it. He spends 5 minutes on it, fixes it perfectly, and sends a bill for $10,000. Outraged, the owner demands an itemization for the bill since he only took 5 minutes and it read:
5 minute fix – $20
Knowing how to fix it – $9980
Knowledge has value, and he knew who the buyers were. There is value in bringing you together. I don’t know if $12k was fair, but if it wasn’t you were free to say no or walk away from the deal. After all, you weren’t under contract to him. But saying that his value to the transaction was only in an hour of his time isn’t right either.
I’m about to sit for my real estate license in Florida and I think it’s dependent on the market. In Florida, the median price is $181,000 (average is a bit higher). A far cry from the seven figure market SF is facing. Here, the average home grosses around $6700 in gross commission. Then take out 20-40% for the broker, a 6% franchise fee if the broker has one, another 3% for omissions and errors insurance, marketing and networking costs, and standard operating costs and you’re looking at a much smaller takeaway.
That said, I don’t think a REALTOR in SF can justify the commission price. The median home price is $1.1 Million. How much more work does the REALTOR in SF do for that median price that I wouldn’t do for the same median price in Florida? After a COLA, the homes are going to be roughly the same in living utility. Yet the SF agent takes home a way healthier income.
Commission have not come down because there are still many people who have no idea what to do regarding a real estate transaction and have no inclination to learn. They pay top dollar.
There are not enough people who could easily do it themselves to drive the price down. Most people only have 1-2 transaction in their lifetimes and it is not worth it for them to bother learning, I believe.
That being said, I think commissions will slowly start drifting down over time.
You are right about most people having only experience doing 1-2 transaction, since the median age for first time homebuyers is around 31-32, and the median duration of ownership is 7 years.
The thing is, the value at stake is so high, and perhaps the highest value transaction ever in one’s life, that’s it’s foolish not to figure everything out about a home sale.
In this day and age it does seem like the real estate industry needs some disrupting. I wonder how the agents would react to earnings based on actual time spent with a client versus percentages of the sale price. A lot of professionals charge by the hour or a flat fee per project so why can’t the real estate industry consider something like that or at least lowering fees? Imo self sufficient clients who do a lot of the leg work themselves shouldn’t have to pay the same percentage as clients who are super needy and need a lot of help.
Interesting idea. If they charged by the hour, then I guess it’d be similar to other professionals; they’d charge more than a gardener, but less than a lawyer. I can see most people paying somewhere in the range of $100 – $150 per hours for the help of a “real estate professional”. Realtors would probably only make a fraction of what they do now though, and so I wouldn’t expect them to agree unless they were desperate.
Also, if they were paid by the hour, then they’d have a strong incentive to just sit around as many open houses as possible and *not* sell.
I think the best arrangement would be for the buyer’s agent to be paid by the hour, with maybe an additional flat fee for each offer they write up (something like $75 per hour, plus $100 per offer), but no commission for completing the sale, whereas the seller’s agent should be paid a percent commission as an incentive.
I am a Realtor who does some consulting in the real estate industry for a variety of things such as consulting on rehabs for flips, business growth etc. I bill out at $350 an hour. Not a lot of retail consumers are willing to pay on an hourly basis.