Setu Mazumdar, MD, CFP, sold his first house recently and learned some hard lessons along the way about buying and selling a home.
It’s been several months since I wrote my last column here on Physician’s Money Digest. No, I haven’t been slacking — I was a bit overwhelmed with moving across the country. Along the way I learned some hard lessons about selling and buying a home. Over the next several weeks I’d like to share some of these with you.
Back in 2005 I bought my first house. It’s the only house I’ve ever owned. After eight years, my family and I decided to relocate due to my wife’s job promotion. The problem was that her company wanted her to move quickly. Since I’ve never sold a house before and with the huge housing market downfall, I was a bit nervous.
How much of a hit was I going to take? How long will it take to sell my house in this market?
Lesson 1: Real estate commissions create a conflict of interest
When I interviewed real estate agents to list my house, just about all of them get paid after the sale is completed. In other words, their compensation is tied to the sale of a specific product — in this case that product is a property.
From a seller’s standpoint, I felt like they just wanted to close the deal and get paid quickly rather than providing objective advice. What I want to know as a seller was:
• What’s our pricing strategy?
• When do we lower the price of the house?
• What improvements do I need to make in the home before putting it on the market?
Anytime compensation is tied to a transaction, in the back of my mind, I always wonder whether the agent’s “advice” is really in my best interests.
Lesson 2: Find a listing agent that charges a flat fee or a smaller commission
Typically, the commission across the buyer and listing agents is 6% of the value of the transaction, with each getting 3%. On a $300,000 house, that’s $18,000 gone in commissions. I understand that real estate agents should get paid and I’m OK with spending a few grand, but nearly $20,000 is a bit much for a single transaction.
So I found a real estate agent that charges a flat upfront fee for listing my house and then gets paid one-third of 1% as a commission after the house sells. I thought that was reasonable, but like anything you buy, you have to consider the fee in relation to the value you get. Was a lower cost real estate agent going to spend less time with me?
It turns out the answer was yes, and that’s why the fee was lower. But interestingly so much of marketing in real estate is done now on the internet using MLS listings and popular websites such as Zillow, Trulia and others, that I simply didn’t see much point in paying five times more for a traditional listing agent.
I still had to pay 3% to the buyer’s agent, but my savings with my listing agent gave me more flexibility. For example, I could lower the price of my house so it sells more quickly. Or I had the option of increasing the buyer’s agent commission to 4% so that more buyer’s agents would show my house to prospective new owners.
Next time I’ll show you what it really costs to sell a house and how that relates to your overall finances.