Are 'For Sale By Owner' Homes Cheaper?

Are 'For Sale By Owner' Homes Cheaper?



Real estate editor Maryann Haggerty and columnist Elizabeth Razzi expand on a question submitted in a recent online chat.

Q: When I was home shopping back in the hot market days, my agent took me to for-sale-by-owners who cooperated -- that is, gave the 3 percent fee to the buyer's agent. She had many examples where FSBOs greatly underpriced their homes, which led to a great savings on the buyer's part, but only a small difference in the commission.


A: Maryann Haggerty: Ah, the questions about how real estate agents and sellers who don't use agents interact. Do agents shun FSBOs? Do FSBOs overprice their houses? Or do they underprice them, as your agent seemed to believe? And what does all of this mean for would-be home buyers?

Elizabeth Razzi: I wonder if the appraised values of those homes reflected such below-market prices. And were you able to scoop up an underpriced deal at the height of the hot market? Sure seems like it would be a pity if you passed it up.

In the go-go market of several years ago, bidding wars tended to break out even on properties priced at what was thought to be the market value. It's reasonable to expect an underpriced FSBO would draw multiple bids as well. Even with the market as slow as it is now, I've had real estate agents tell me that it's "impossible" to underprice a home, because if it is underpriced it will draw multiple offers. I'm not sure I buy that argument, but it sure makes the theory that FSBOs routinely underprice homes more interesting.

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Should you use a real estate agent or go it alone?

Should you use a real estate agent or go it alone?
By JEFF BAILEY New York Times

It sounds like the setup for a dull economist's joke. Who gets the better deal: the cautious economist who sells his house through a real estate agent, or his risk-taking colleague who finds a buyer on his own?

Two Northwestern University economists used Madison's real estate market to find the answer.

The question and the research it helped prompt are serious. And the answer will be of interest to anyone who has paused to consider whether paying a real estate agent's commission, typically 5 to 6 percent of the sale price, is worth it.

The conclusion, in a study to be released today based on home-sales data from 1998 to 2004 in Madison, is that people in that city who sold their homes through real estate agents typically did not get a higher sale price than people who sold their homes themselves. When the agent's commission is factored in, the for-sale-by-owner people came out ahead financially.

Madison is home to one of the biggest for-sale-by-owner Web sites in the country, FSBO Madison,

ww.fsbomadison.com

The economists pitted that site against the local multiple listing service operated by real estate agents.

There are asterisks. The authors cautioned that they did not know whether the results from Madison applied to the country as a whole; certainly, selling a house without a real estate agent would be harder in a city without a heavily trafficked for-sale-by-owner Web site. The authors are also analyzing Madison data from 2005 and 2006, when the housing market cooled after a long run-up, to see how their findings might have changed.

Some aspects tilted in agents' favor. The researchers found that homes on the multiple listing service sold somewhat faster than houses on the for-sale-by-owner site. The study also did not place a value on other services provided by agents in selling a home.

The authors have presented their paper at forums at many leading universities, but it has not yet been submitted to a journal for peer review.

For all its caveats, though, the study is highly unusual in comprehensively measuring the impact on the sale price of a home of hiring, or not hiring, a real estate agent.

The findings fly in the face of studies by the National Association of Realtors. The group has said that houses sold via its members' local multiple listing services get a 16 percent premium over homes sold by their owners.

The economists' study is likely to be seen as ammunition for critics and lower-cost competitors who question the need for 5 or 6 percent commissions -- which deliver about $60 billion a year to agents and their employers.

Homes sold on FSBO Madison fetched an average price of $175,068 during the years examined. Those sold on the multiple listing service brought an average price of $173,205, roughly equal when taking into account the study's margin of error.

The FSBO (pronounced FIZZ-bo) sales results were adjusted for timing, for house and lot size and characteristics, and for neighborhoods to make them comparable with sales by agents. They were also adjusted for what the researchers came to believe is an extra bit of shrewdness that FSBO sellers possess.

"Greater patience, greater bargaining leverage," said Francois Ortalo-Magne, an associate professor of real estate and urban land economics at UW-Madison and one of the three authors of the study.

His co-authors both joined Northwestern as professors of economics about three years ago and sold homes elsewhere before moving to the Evanston, Ill., campus.

Aviv Nevo came from the University of California, Berkeley, and used a real estate agent to sell his house, pocketing a profit from five years of ownership, he said, that may have exceeded his salary for that period as an assistant professor.

Igal Hendel, three years ahead of Nevo as a graduate student at Harvard and a collaborator on previous research, moved from UW-Madison and sold his home by advertising it on FSBO Madison.

"It started by us arguing about who did the right thing," Nevo said. "Igal said, I saved a commission.' I said, yeah, but who knows how much you lost on the price?"

The National Association of Realtors has been defending its fees. In a 2005 survey of home buyers, it reported that FSBO houses sold for a median price of $198,200 and those sold through an agent went for a median price of $230,000, or 16 percent more.

Two-fifths of those FSBO sellers were selling to a friend, relative or neighbor, and that might have led to lower prices, but agent-assisted sellers still enjoyed a huge premium, the association said.

(Nationally, about 13 percent of home sales were for-sale-by-owner in 2005, the group said. For the seven-year Madison study, the market share of homes sold on the FSBO Web site was 14 percent.)

And in a March 2003 issue of Realtor Magazine Online, the association, in advising its members how to persuade a seller to switch from a FSBO ad to listing with an agent, said to tell them that a 2002 survey found "on average, people who sell their homes through a real estate professional receive a price 27 percent higher than people who sell their home themselves."

"So even with my commission, you'll probably come out ahead."

Walter Molony, a spokesman for the trade group, said in an interview, "It's certainly ... a lot more than the 5 to 6 percent you're going to pay in a commission."

Those studies had their own asterisks. The 2005 survey was based on buyers' written responses, rather than actual records of transactions, and included data only from people who chose to reply -- 7,813 responses out of 145,000 questionnaires mailed out.

The association also did not disclose data on house size, lot size and some other factors that could affect price differences between the sales techniques. The association does not consider that a weakness of the study, though.

"When you're looking at this large of a survey, the aggregate numbers smooth those things out," Molony said. "We feel it's representative."

Molony and colleagues at the national association have not seen the Madison research. He said, however, that local markets vary so widely that "it wouldn't be surprising to see a market where there is no difference between an agent-assisted and FSBO price."

The economists studying the Madison market received listing data from both the FSBO site and the Realtors Association of South Central Wisconsin, which operates the local multiple listing service. Those were checked against records at the assessor's office for actual sale prices. The study looked at 15,616 listings from 1998 to 2004.

Not every real estate agent agrees with the national association's strategy of claiming a higher sales price. After all, it may sound great -- to a seller -- that a real estate agent could help get a higher price. But agents typically also represent buyers in such transactions and, obviously, buyers do not want to pay 16 percent more.

"We're trying to tell the public that they pay 16 percent more if they use us?" said an exasperated David K. Stark, owner of the Stark Co., one of Madison's largest real estate firms, when asked about the national association's claims. If that were true, he said, "all buyers should shop FSBO."

Stark is not worried that every seller will stampede to FSBO Madison. "Most people list with a Realtor because they don't want to hassle with it," he said. "It's complex. There's a lot of drama."

Plenty of people agree. Katie Mohr, who manages a stock trading desk for a bank and is moving to Milwaukee, hired one of Madison's busiest agents to sell her five-bedroom house on the city's West Side. The agent, Sherry Lessing, handled everything, and within five weeks the Mohrs got the price they wanted, $560,000.

"I couldn't take the personal interaction of people walking in my house and making nasty comments," Mohr said. "I don't want to hear that people didn't like my wallpaper. Six percent was well worth paying for."

Lessing said that price parity between FSBO sales and agent sales is not surprising because buyers can now comparison-shop on the Internet. "Even the inexperienced buyer can walk into a home and tell if it's overpriced -- based on competition," she said.

John Deininger, executive vice president of the Realtors Association of South Central Wisconsin, said the results of the study are not surprising and that his organization has never contended that using a Realtor will get more money for the seller.

"I see value in professional services," Deininger said. "I pay a CPA to do my taxes and it costs me a significant amount of money but I want it done right."

Deininger and Kevin King, general counsel for the more than 18,000-member Wisconsin Realtors Association, both say the data in the study is old and focuses on a time when the market favored the seller.

"It has nothing to do with today's marketplace," King said.

Some buyers think a 6 percent commission -- $33,600 in Mrs. Mohr's case -- is too much. Dr. Harry Sharata, a Madison dermatologist, listed his four-bedroom West Side house on FSBOMadison.com. "We try to avoid the Realtors as much as possible, thinking we can have more room to negotiate if that fee isn't built into the price," he said.

Dr. Sharata listed the house two weeks ago at $649,000 and received an offer on Wednesday. He would not disclose the amount of the offer. Like many FSBO sellers, Dr. Sharata said he would gladly pay an agent representing the buyer a 3 percent fee, or $19,470 at his asking price, but felt little need for an agent's help in selling.

"For the most part, these transactions are straightforward," he said.

The study found, however, that homes listed with agents sold more quickly -- with a 25 percent probability of selling within 60 days versus a 16 percent probability for FSBO-advertised homes.

On average, it took FSBO homes 125 days to sell and agent-sold homes 105 days. A faster sale, of course, can save money on mortgage payments, taxes and insurance, the economists noted.

FSBOMadison.com charges $150 for an ad on the site and a yard sign. Taking advantage of antiestablishment sentiment in Madison, which has a highly educated and liberal population, it quickly grabbed a market share of roughly 20 percent. That made it among the most successful challengers in the country to real estate agent domination of home sales.

That scale, along with the cooperation of the site's owners and of the local Realtor group, made the economists' study possible. "We don't have national data," Nevo, one of the authors, said. "FSBOMadison is unique."

The results, from another perspective, show that with agents failing to bring a higher price, their commission pays only for the actual work they do. "That was surprising," Nevo said.

He suspects that sellers will begin to examine more closely the cost of all the small tasks handled by agents. To justify a $12,000 fee on a $200,000 house, he said, "you'd have to have a very high hourly rate" for an agent's work.

Nevo, who employed an agent to sell his Berkeley house, said that, so far, his FSBO-using colleague Hendel is winning their argument. "I probably owe him lunch," Nevo said.

Buying into FSBO movement

Buying into FSBO movement
No-commission sale appeals to Arizonans

Susie Steckner
Special for The Republic
Jun. 2, 2007 12:00 AM

In any given month, Mesa businessman Jamison Manwaring is juggling 100 or so clients who are selling very different homes with one goal: making a sale without using a real estate agent.

Instead of paying commission, they hand over a few hundred dollars to his For Sale By Owner affiliate for some professional guidance, an Internet listing and a yard sign. Last year, about 250 homeowners decided to go it alone with the company's help.

They're not the only ones striking out on their own. advertisement




In the past decade, homeowners across the country have joined the FSBO - for sale by owner - movement. Lured by the idea of cutting out commissions, they are largely relying on the Internet, plus tried-and-true For Sale signs and word-of-mouth advertising, to market and sell their homes.

The FSBO phenomenon has spawned numerous Web sites to connect buyers and sellers, such as Manwaring's www.byowneraz.com, how-to books, and guides such as Selling Your Home Without an Agent, an online tip sheet from the popular Dummies series of reference books.

The prospect of selling a home without a typical 6 percent commission is especially appealing in Arizona and elsewhere where the housing market has cooled.

"In markets like this, you tend to see more for sale by owners. They're cutting the sales price as close as they can, so they want to cut out the commission," said Jay Butler, director of realty studies at Arizona State University's Polytechnic campus in Mesa.

If selling a home on your own seems a daunting task, it can be. The thought of pricing a home, getting the property ready for sale, picking out the serious buyers, negotiating a deal and completing the paperwork are enough to send some homeowners into the arms of a real estate agent, commission and all.

Butler said that a good, experienced agent can be well worth the commission.

Just screening potential buyers is a major challenge, Butler said. "This is the best thing a good agent brings to the game. Is this a meaningful buyer or a looky-see?"

Handling the paperwork - from inspection and disclosure forms to a purchase contract - is another hurdle.

Richard Keyt, a business, real estate and estate-planning lawyer with Keyt Law LLC in Phoenix, offers a range of document preparation services for people who sell their own homes. He charges a flat fee depending on a client's needs and also notes that sellers can buy documents themselves through the Arizona Association of Realtors.

Keyt said it is crucial that sellers have documents, such as purchase contracts, that are relevant to Arizona and not something found online and adapted for a sale locally.

"It could have some fatal flaws in it," he said.

FSBO experts say successful sellers must do their homework, commit to the time-consuming home-sale process and hire reliable professionals. And they have to learn to do without the hand-holding that agents traditionally offer through, say, a bad inspection or tense negotiation.

Among the things FSBO hopefuls should consider:


• Interview several real estate agents. This could bolster your decision to do the work yourself or convince you to go with an agent, and also may provide information and tips that can help with your sale, according to dummies.com.


• Put the right price on the home. Check what comparable homes have sold for in your area. Homes sales often are published in newspapers, and some real estate Web sites, such as www.for salebyowner.com, can help sellers find comparables for a fee.


• Market the home. Use a combination of methods to advertise and sell, including the Internet, classified newspaper ads, yard signs and flier boxes. Some FSBO companies offer listings on their Web sites and, for an additional fee, a listing on the traditional Multiple Listing Service used by real estate agents.


• Be available. Once your home goes on the market, be ready to take phone calls, show the home when potential buyers want to see it and hold open houses, if necessary. Though there may be inconveniences to this, sellers also can take advantage of personally showing off upgrades and other special features of the home.


• Stay in the game. Don't take the home off the market with an offer alone. Make sure that a buyer will qualify for a mortgage, and beware of buyers who want to make your sale contingent on the sale of their own home, according to Dummies.com.


• Hire professionals. Use a title company, real estate lawyer and other professionals to help with the necessary paperwork.


• Get some help. Consider using companies such as Help U Sell or Manwaring's For Sale By Owner affiliate, which charge a fee to provide some services, such as preparing documents.

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