Tuesday, June 18, 2013

How to Choose a Real Estate Broker (Seller's Edition)

The time comes to sell your house and move on. The real estate landscape you found so interesting years ago, when you bought the home, is suddenly a foreign country. What's your house worth, what can you net and how much do you have to pay to get the job done? Do you need a real estate broker?

The answers, really, are somewhat easier for sellers than buyers. For buyers, the money they pay a broker is embedded in the transaction. For sellers, however, the broker fee is right out there and is likely the second biggest charge on the HUD-1 settlement statement right after the mortgage payoff. I've previously written on whether or not sellers should use a broker. Today's post assumes you will use one.

The relative transparency of the sales commission (or other fee) helps frame the transaction as a business deal: The broker will sell your home, and you will pay her to do so. The question a seller needs to ask, then, is "How much do I pay and what do I get for that?"

Buyers look for homes by price and neighborhood. Therefore, the most important task your broker has is to make sure each and every buyer looking in your area and price range knows your home is for sale. Placement in the Multiple Listing Service is especially important, as brokers have tools to syndicate listings on dozens of websites. Buyers use sites such as Trulia, Zillow and Redfin to shop, and your home needs to be there.

That narrows the discussion with brokers you interview. You want to know how they'll get your home out there and what they'll charge you to do it. Keep your discussion focused on that element. Make sure you know, in concrete terms, what you'll be getting and what you'll be paying. By "concrete," dismiss phrases such as "I have buyers out there who want your home." What you want to hear is "I'll do Y and charge you X."

In a perfect world, sellers would create a formal Request For Proposals (RFP), a tool any project manager is familiar with. With an RFP, you'd list every desired service you can think of, by category, along with incremental pricing, and send out the form to a host of real estate brokers for them to respond with services and concomitant pricing. Your choice of brokers would result from an apples-to-apples comparison.

Unfortunately, sellers aren't always sure of the services they need and set out interviewing brokers with little basis for a discussion. That's asking for even more uncertainty, as they'll hear something they like with each broker, and come away pondering which broker they liked the most or was the nicest or whatever.

You don't want to do that. You may not know all the services, but you know the most important: Listing, advertising (not the annoyingly misused "marketing"), sales forms, CMA, signage, and so on. 

What to be wary of: 
  1. A real estate agent contacting you with an offer of a "free" CMA (Comparative Market Analysis). Don't bite. It's not really free. It's a tool used to begin and control the discussion. Any real estate broker will provide you with a CMA or other help in pricing your home, but don't have the CMA discussion until after you've decided who you want to retain.
  2. While I'm on it, there are still brokers out there who will suggest too high a price for your home to induce you to give them the listing.
  3. The sales agent answering your questions with other questions. It's a sales tactic used so the agent will tell you what you want to hear. For example, a seller might say, "Do you think our home will sell quickly" and the broker says, "Would you be happy if it sold in three weeks?"
  4. Overly fancy presentation materials. You need to focus on the pig, not the lipstick on it.
  5. Brokers who say they "negotiate." Negotiation is about leverage, and brokers have none with a prospective buyer. Brokers present offers and counter offers, over which buyers and sellers make decisions. Good brokers (and there are lots of them) will counsel their clients. Whatever else that is, it's not negotiation.
What should it all cost? I once calculated my actual hours including travel time on a $275,000 listing and came up with eighteen hours. At my $125 per hour rate, that came to $2,250--a good bit less than a 2.5% ($6,875) or 3% ($8,250) sales commission. Most listings require a few more hours (the above example sold quickly), but it gives you an idea of actual time worked compared to compensation.

Traditional brokerage firms' commissions range from 1.5% (Redfin on homes $200,00 and up) to 3%. An additional 2% to 3% is added to pay the buyer's agent, so you'll be looking at sales commission quotations ranging from 3.5% to 6%, depending on local practices. Real estate brokers claim that fees aren't fixed and are negotiable. Most don't like talking about the commission, though, so you may have to bring it up and offer what you want to pay. And don't forget--if you retain a broker to sell your home, he or she is usually amenable to giving you a lower rate if you use him or her to buy your next home.

If you pay a 5% commission on a $300,000 home with your broker receiving half that amount, you're paying her or him $7,500. For that much money, you're certainly entitled to know what you're paying for. That's why you really need to have the what's-this-include discussion in advance.

And there are unique situations. If your home is a short sale, where the sales proceeds will not pay the underlying debt without the lender taking a haircut, it's a different set of rules. Lender short sale guidelines generally require the use of a real estate broker, and a full sales commission rate is expected. 

Short sales take an inordinate amount of work and are enormously frustrating. Things may be different now, but I found one of the biggest reasons for short sale fails was incompetent listing agents--even those who claim to be "experts" with dozens of sales in their histories. I would not list my short sale home with a broker who did not have a short sale negotiator he or she used, whether that negotiator was in-house or an outside service. 

I know of one exception to this statement in Oregon--a broker who does nothing but short sales and was doing them before the crash. She was amazing, both personally and professionally. She's also an exception.

Investment properties have a slightly different set of guidelines I won't go into here.

Just remember the takeaway: Know in advance what services you're paying for, and how much you'll be paying for them. This transparent arrangement makes the relationship between broker and selling client stronger.