Selling a house is a path often crowded with Realtor traps for even the savviest sellers. CAARE wants to help you avoid the pitfalls and help you reduce the risk of a bad transaction or being exploited. Our instructions are not meant to be thorough and can vary from state to state so be sure to talk with an attorney first. One rule appears to be universal, avoid large real estate brokerage firms.
Hire a Real Estate Attorney First.
A good real estate attorney can help you negotiate your Realtor fees or provide good advice if you are going to sell your home yourself without a Realtor – a For Sale By Owner (“FSBO”). An attorney can help you negotiate the terms of representation and be instrumental in protecting you throughout the process. Some state bar associations have a specialist certification for real estate attorneys. Quiz prospective attorneys about their conflicts and try to find an attorney that does not receive a lot of agent related referrals. Some attorneys routinely represent real estate brokerages and agents and receive lots of referrals from agents. Those attorneys are the most likely to look the other way when there is agent malfeasance. More about attorneys here: Real Estate Attorneys. Once you find an attorney, show them CAARE’s website – especially our forms.
Determine Your Strategy (but don’t hire anyone yet)
For Sale By Owner (“FSBO”). Many sellers are successful selling their homes for the full market value without a Realtor. In fact, over 80% of home buyers are finding the home they want to buy on their own and without a Realtor. You can make it easy for them to find your house by creating a great ad and placing it on Zillow. Zillow is one of the only real estate search engines that allows FSBO’s to advertise on their site. Be prepared for lots of Realtor calls offering to help you for free or claiming to have an interested buyer and asking you to sign a “One Time Listing or Showing Agreement.” Warning – Realtors often try to deceive sellers into paying a 4 or 5% commission for a “One Time Showing Agreement.” Remember, buyer brokers are accustomed to getting 2.5 or 3% for their work. If they claim that they will have to do more work, tell them that won’t be the case on your transaction and hand them a letter addressed to their buyers that you are willing to pay ____% to their broker.
List Your House With a Broker. Warning – We recommend that you only consider a smaller brokerage firm as the larger brokerage firms almost always employ tactics that are extremely predatory and that will put you at more risk and cost you more money. Large firms often utilize Pocket Listings, Open Houses, unfair arbitration clauses, exploitive forms and are less likely to negotiate terms and fees. Whether you use a discount broker or a full service broker, it is rare that your broker will attend showings. They schedule showings with you and assume that the buyer’s broker is reputable and won’t steal anything. While this may be a great opportunity to really “sell” your house by meeting the buyer broker and their buyers, listing agents have a multitude of rationalizations for not attending – few of which we agree are good reasons.
Discount Broker – They should be called “Fairly Priced Brokers” because these brokers understand how price fixing has infested the commission structure of the brokerage industry. These brokers unbundle the services for you and provide you only with the services you need. They can put your property in the MLS and typically provide far better service than the full priced brokers. Many highly qualified agents from small full-priced firms are offering severe discounts on commissions to savvy sellers and even those who do not offer these discounts can often be convinced to negotiate their fee substantially. Consider the fact that almost all brokers are willing to pay 25% of their commission to another brokerage who refers them a buyer or seller. And that is just for dropping a name. At the very least you should be able to negotiate that amount off the commission. Traditional brokers perceive discount brokers as a threat to their over-priced commissions and often will try to degrade them unfairly.
Full Priced Broker – We like to call these “over-priced brokers” or “equity stripping brokers” because there is rarely a good reason anyone should pay a broker 5 or 6% of the value of their home. Even the so-called “high end” Realtors who specialize in luxury homes don’t really offer anything special. In fact, the most “successful” Realtors know that the best way to sell a house is to put a sign in the front yard and market it on Zillow, Realtor.com and the MLS. Since they don’t even attend showings, are often the worst abusers of Pocket Listings (click here to learn about: Pocket Listings) and often engage in dual or designated agency (one of the worst betrayals possible), what exactly are they doing to deserve a substantial amount of your home’s equity?
Getting Ready to Sell Your House
Prepare Your House. This is possibly the most important thing you can do that will help your house sell quickly and for the highest price. Buyers who are in the market for a home are not going to look past your clutter, worn carpet and old paint or out of date wallpaper. They are accustomed to seeing homes that are show ready and often staged. Some low cost improvements often have the highest return – especially cosmetic improvements like paint and carpet. There are a lot of things to consider when preparing your house to sell and Realtors, stagers and hundreds of websites can provide you with lots of good advice on this topic.
Determine a Selling Price for Your Home. The best determination of value for a house is the price a good faith buyer is willing to pay in an arm’s length transaction. Unfortunately, you don’t know that value until a price is agreed upon and you are probably not an expert on property values. The value of your house is a moving target and determining that value is not an exact science. And most Realtors are not great value experts either – they will typically provide you with a so-called “market analysis” and enter your address into their automated MLS application and have a computerized result that is similar to what Zillow does. They have lots of leeway to manipulate the results too. The only professional who is qualified to make a determination of the likely market value of your home is an appraiser. Try calling around to appraisers to see if they can provide a value range for your house at a reduced cost. Realtors will provide you with a free “service” and give you some price ranges too (these are not appraisals but only automated market analysis’). However, Realtors typically have very little training in appraisal methodologies and are in a position to manipulate the results so as to tell you what you want to hear.
Determine How Much You Will Net From the Sale of Your House. It is important to have an understanding of the costs you are likely to incur selling your house and how much will be left after the transaction closes. This net can vary from locality to locality and is driven by local customs and laws. Typical costs can include closing or escrow fees, recording fees, deed tax, proration of assessments and property taxes, mortgage payoffs with interest calculated to the day the mortgage company will receive the payment and possibly title insurance fees. If you search for “sellers net sheet” in your area you are likely to come across some useful tools to help you calculate this figure.
Negotiate the Terms of Your Broker Representation
Negotiate the Fees. There are typically three fees to be negotiated. Do NOT negotiate a bundled fee. Most brokers offer up a bundled fee of a 4-6% commission (some firms actually go as high as 7%) when in reality the lion’s share of that fee is being offered to the buyer’s broker (the broker who does the majority of the work). Do not let your broker determine how much will be offered to the buyer’s broker (another reason to avoid large firms). There is the fee that gets offered to the buyer broker (typically 2.5 – 3%) or the buyer directly (we prefer the latter method). There is the remainder of the fee that gets paid to your listing broker. And then there are the junk fees often buried in the boilerplate of the listing contract (strike these). Click here for some specifics on negotiating this fee: How to Negotiate a Real Estate Commission (for sellers).
Offer Fee Directly to Buyer. Instead of allowing your broker to secretly advertise a buyer brokerage fee through the MLS, require your broker to offer the compensation to buyer brokers or unrepresented buyers. Give the money to the buyer and let the buyer decide if they want to pay for the services of a broker and if so how much they want to pay them. If a buyer sees two identical houses and one of them is offering 3% (don’t call it a “commission” or “fee”) to unrepresented buyers which one do you think they will choose? While some MLS’s may prohibit this practice (they are owned by Realtors), this information can appear on your broker’s website and anywhere else that they advertise. Brokers have accomplished price fixing by bundling the buyer broker’s fee together with the listing broker’s fee. You are forced to pay for a buyer broker whether you use one or not. This creates an incentive for brokers to keep other brokers away and some large brokers have gone to great lengths to do exactly that by keeping houses off the MLS for a “trial” period (homes receive the most exposure during the first two weeks of being marketed). This practice is called a Pocket Listing (here is a story about a state regulator warning Realtors about this practice: Don’t keep listings off market to boost pay). Some even exclude their listings from the most buyer frequented websites like Zillow.com, Realtor.com and others. Here is a story about one of the largest brokerages in the country that has actually done this: Edina Realty, in the Web Business or House Selling Business? These kinds of problems would not occur if the listing broker didn’t have a financial incentive to keep other brokers from showing your house. You can address this by only using a smaller broker and by paying your listing broker one fee – the portion that gets paid to the listing broker. Do not let your broker keep both sides of the fee if an unrepresented buyer finds your house. If you do allow this, you will forfeit both your and the buyer’s representation and unnecessarily pay your broker double for doing the job you originally hired them to do. Warning – Make sure that the buyer reports this seller’s contribution to their lender immediately to avoid closing problems later on.
Negotiate the Terms of Your Representation. Realtor and Mandatory State Fee Agreements (drafted with the “assistance” of Realtors) are all self-serving forms that are designed to protect real estate licensees from consumers who want to negotiate the terms of their representation. Follows is a partial list of some terms that are often included in these forms that you should consider changing with the help of an attorney. You can also find additional ideas here:Consumer Friendly Listing Contract (by CAARE) and Consumer Friendly Listing Clauses. Especially watch out for forms provided by large firms and builders.
NO Dual Agency or Designated Agency. Never agree to either of these forms of “representation” that is really no representation at all. Both are legalized forms of betrayal (not an exageration). Realtors are the second most powerful lobby group in the United States and have been successful passing laws that make this form of representation legal ONLY for them. Consider the fact that attorneys who are trained in conflict management cannot legally engage in dual agency in most circumstances. In fact, even though an untrained Realtor can do this, a law firm could not legally represent the buyer and seller in the same transaction. It is considered to be fraud. Pick a small firm that does not practice dual or designated agency. Here is more about dual agency: Dual Agency and More About Dual Agency.
Say NO to Pocket Listings or “Coming Soon” Listings. It rarely makes financial sense to keep your property off the MLS or other marketing sites for a trial period or for any other reason. The first two weeks are usually the most active time for a listing and you don’t want to miss the opportunity to expose your property to as many competing buyers as possible. Unfortunately, brokers are incentivized in the form of a double fee (that is a lot of money) to keep your house away from other brokerages. Read about pocket listings here: Pocket Listings.
Say NO to Arbitration Clauses. Many brokerages bury arbitration clauses in their Fee Agreements (aka Buyer Representation Agreements) and their clients unwittingly sign them (another reason to avoid large brokerage firms). Have it stricken or go to another firm. Arbitration clauses are there to protect brokers from you. They typically forbid clients from starting class action lawsuits, they keep disputes private, the costs to file an arbitration are often outrageous and many of these clauses require you to use an arbitration firm under contract with the broker.
Say NO to Open Houses. Open houses serve only your Realtor’s interest of using your home as a marketing platform to find buyers and sellers who have no interest in buying your house. The chances of selling a house at an open house are extremely slim and Realtors know this. Learn more about the Open House scam here: Open Houses Do NOT Sell Houses.
Watch Out for Junk Fees and Strike Them. More than 10 years ago, most brokerages started charging additional fees on top of their already price fixed and outrageously high commissions. They go by a variety of names and are often buried in the contract. And even if you do strike the junk fees, if you use your broker’s title company (we highly recommend that you do not) they will often automatically charge you.
Say NO to Using Your Agent’s/Broker’s Title Company. These clauses are often buried in the Realtor’s Fee Agreement and often not disclosed until it is too late. The choices provided to clients are typically very unfair – use our title company or go find your own. It used to be the case that Realtors would investigate title firms and provide their clients with a list of three firms that they had vetted. That option is not on any of the contracts we’ve seen (but you could include it). In fact, the news is full of stories about Realtors receiving kickbacks for referring their clients to over-priced and conflicted title companies. In exchange for title referrals, large brokerages with in-house title companies often pay their Realtors better commission splits, give them more referrals and nicer offices. A title company investigates and examines the title of real estate and is an important decision maker as to whether or not your transaction should close. Also watch out for title firms that have cozy relationships with Realtors. Kickbacks are a terrible legal problem in this industry. Title companies often compete for Realtor and lender referrals by treating them to all kinds of illegal spiffs. It is the consumer who ends up paying for these spiffs in the form of higher prices and other hidden costs. We recommend that you choose a truly independent title company (one not affiliated with Realtors, brokerages, lenders, builders or attorneys) and look them up on the BBB: www.bbb.org and the state licensing authorities for licensing violations. Here is more about title companies: Watch Out for One Stop Shopping and Affiliated Title Companies.
There is so much more. Home Warranties are the most complained about service on Angie’s List and Realtors and brokerages receive hidden fees for forcing these on their clients through “standardized” forms. Hidden referral fees that brokers collect when they refer a client to another brokerage. These often amount to 25% of the commission for little more than dropping your name. Protect yourself by prohibiting these things in your Representation Agreement.