The Worst Reason to Choose a Real Estate Agent

Of all the mistakes home sellers make when choosing a real estate agent to sell their home, this is probably the biggest.

As most home sellers know, when working with a real estate agent to sell their home, one of the first things the agent does is to assemble a Comparative Market Analysis (CMA) for the home seller. The CMA includes the prices of recently sold homes in the area, prices of currently for sale homes in the area, and maybe even prices of homes that failed to sell recently in the neighborhood. The idea is to use this information to come up with an asking price for the seller’s home. But who determines that price…and how?

Deciphering a CMA is a lot like reading tea leaves. Because pricing a home is not an exact science, you can pretty much see any number you want in it (and justify it). When employed correctly, the CMA is used by the seller and agent together to strategize about an asking price for the home. When employed incorrectly, it is used by the real estate agent to get the listing. The agent “gets” the listing by reading the tea leaves and promising the seller that they can sell their home for more than any other agent. And that is the worst reason for choosing one agent over another.

The reality is that agents have no idea what you home will sell for. All the can do is help you enact strategies to ensure you get the highest price possible, within a certain time frame, given the current market conditions. So, choosing an agent who promises you the highest sale price based on the CMA is choosing the agent who is the biggest liar. But do not blame the agents for this. There are two parties that encourage this behavior.

First, the real estate industry is complicit in this behavior. It has established, as standard operating procedure, that the CMA be done before the agent has secured the listing. This only encourages the agent to use your CMA as their marketing tool. A better way to operate would be to first choose the agent and then, after the seller has “hired” them, conduct a now-unbiased interpretation of the tea leaves. But it is not just the industry that is at fault.

Sellers themselves are just as much to blame for this behavior. They either do not know any better, or just want to believe the lie. I liken to those who lose money in a Ponzi scheme. Deep down they know it is not true, but they want so much to make that money that the suspend judgment and common sense.

If you really want to know what you home will fetch, I suggest you pay for a professional appraisal. That is the number the bank lending the money to the buyer is going to use, and you will have a hard time getting much more than that unless you can get a bidding war for you home between cash buyers.

Next time you are interviewing a real estate agent to list your home, don’t ask them what they think your home is worth. Ask them how they will go about getting you the highest possible price for your home. The realtor that answers that question the best is the one who should get the listing.

To learn how to keep more or your hard-earned equity when you sell your home, check out The Intelligent Home Seller eBook and The Intelligent Home Seller eCourse.

It’s My Job as the Listing Agent to Get the Appraisal to Come in Right

I couldn’t believe what I just heard. Those words were spoken by an experienced and highly regarded real estate agent. Did he really believe what he just said?

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To offer a little background, I was watching a video of a real estate agent conducting an open auction to sell a home. It really is quite a clever idea, and something that is done often in other parts of the world.

Whenever there are a great number of buyers interested in a particular home, it is in the seller’s best interest to make it a competition. And the best way to do that is with an auction.

There are two different kinds of auctions the seller can employ. The first, and the one home sellers are probably most familiar with, is the sealed bid auction. With a sealed bid auction, the seller requests that the buyers submit a “best and final” offer to purchase the home. In this manner, buyers do not know what other buyers are offering and are left to guess as to what price it will take to win the home.

The other auction type is the open auction. You know the kind where the auctioneer speaks a mile a minute and looks around the room for buyers to raise their hand as the price goes up. And that is what this real estate agent was doing. He gathered all the interested buyers into the living room of the home for sale and began a live auction. It was fascinating to watch (although he did speak a lot slower).

Before the bidding began, one of the buyers asked the obvious question: what happens if the final bid is above the home’s appraised value? It does no good to submit a winning bid of $400,000 for a $300,000 home, unless you are an all cash buyer, of which these buyers clearly were not.

The agent responded to that inquiry with the line in the title of this post. In essence, he told the buyers in the room that it was his job to make sure the home appraised for whatever price the highest bidder offered. Now I am under the impression that it is the appraisers job to submit an objective and unbiased (by anyone, especially real estate agents) opinion of a home’s value.

Perhaps what the real estate agent meant was that he would take it upon himself to make sure the appraiser had all the relevant comparables. And by relevant, I assume he will be including all those “comps” that support the offered price and conveniently omitting all those that do not. I am okay with that, if that is what he meant.

I doubt there was a buyer in the room that picked up on what the agent said regarding the appraised value. They were probably too preoccupied with formulating their bidding strategies. But I did. And because of that I got a glimpse into the mindset of those operating in the real estate industry. There are just too many commission dollars at stake to leave a home sale up to the findings of a lowly appraiser. With thinking like that, I cannot imagine why we had a real estate bubble back in 2008 (and will probably have one again real soon).

To learn how to keep more or your hard-earned equity when you sell your home, check out The Intelligent Home Seller eBook and The Intelligent Home Seller eCourse.

Is an Instant Sale an Instant Rip-off?

“Sold. The minute you’re ready,” declares the home page of upstart real estate company Opendoor. They certainly have a new take on selling your home. Rather than deal with real estate agents and months of hassles and stress, they will buy your home from you, right now, no questions asked. You can get your money in as little as three days. The only question is, should you?

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Generally speaking, anything that eliminates the middleman in a transaction, I am all for. Eliminating the middleman eliminates their expense, which should result in a cost savings for the consumer. Since Opendoor is eliminating real estate agents, I would expect some cost savings there. The only problem with Opendoor is that it is not clear there is any cost savings to the home seller. In fact, I suspect using their service is extremely expensive.

It is hard to know for sure if there is any net-benefit to using Opendoor. They have only been around for a few months and it appears as if they only operate in Phoenix, Arizona as of this writing.

Here is what we do know. Their transaction expense is very high. They charge the home seller 5.5% commission, which they brag about being less than the standard six percent charged by real estate agents. It is true that 5.5 is less than 6, but with a little shopping around, any home seller can sell their home for 4.5% total commission. That seems to be the new standard, especially in markets where Redfin is present. And in more expensive neighborhoods, with some negotiating prowess, a home seller can secure the services of a real estate agent for 3%, or less, total commission. So, using Opendoor is definitely going to cost you thousands (or tens of thousands) of dollars in transaction fees compared with using agents. But the more important questions is, what will they pay you for your home?

Like most venture-backed companies these days, Opendoor is a data analytics company. It is not a real estate brokerage. They operate by taking publicly available pricing information, plus information from the home seller, cranking it through some magical algorithm and coming up with an amount of money to offer you for your home. But is the amount fair?

Intelligent home sellers know that their objective is to sell their home for its appraised value. That is the best most home sellers can do. So, the big question for Opendoor is, will they offer you the appraised value (or something very near it) for your home, or will they build in “a little” profit for themselves by low-balling you? Time will tell. If I had to guess, I would speculate that the Opendoor business model includes paying less than the appraised value for your home. Anything else probably does not provide enough profit margin.

If that turns out to be true, using Opendoor will simply be a really fast, really expensive way to sell your home. Home sellers desperate for cash just may take them up on it. Unfortunately, those taking them up on it (i.e., desperate for cash) are probably those least able to sacrifice their hard-earned equity.

I have no idea what the future holds for Opendoor (and any imitators likely to pop up if they are successful). Who knows—maybe they are the future of residential real estate. What I do know is that the three companies touting the benefits of the Opendoor with testimonials on their website are fortune.com, venturebeat.com and techcrunch.com. You know what company I do not see? Consumer Reports. Hmmm.

 

 

To learn how to keep more or your hard-earned equity when you sell your home, check out The Intelligent Home Seller eBook and The Intelligent Home Seller eCourse.

What Drives Real Estate Agents Crazy and Makes Home Sellers Stupid?

I do not know what makes me laugh more, the home seller who auctions off their listing to the agent who promises to get them the highest price, or the agent that takes their listing. There is no bigger hot button in all of real estate than establishing a home’s listing price, and the stupid way some sellers act drives real estate agents crazy.

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Let us agree to a simple fact up front: every home seller that has ever sold a home in the history of home sales wanted to get the most money they could for their home. The sellers know it and the agents know it. And I am sure you have heard many times that what the seller wants (or needs) for their home is irrelevant. It turns out that what the agent tells you they can get for your home is also irrelevant. You might as well choose an agent based on their astrological sign.

Home sellers listen up. Here is the cold, hard truth. For most homes, there is a maximum a home can sell for and it is not determined by what you want or the real estate agent’s genius marketing plan. No, the maximum your home can sell for is determined by…drum roll please…the bank lending money to the buyer.

Before they lend any money, the bank is going to get a professional (and impartial) home appraisal. In fact, they may get more than one appraisal just to be sure. And that is the amount that becomes the maximum price for your home. In a standard mortgage with 20% down, they will lend 80% of that maximum amount to the buyer, and no more.

The only mathematical way you can get over the maximum price is to find a buyer who can put down more than 20% or can purchase your home for cash. Now, if you happen to have one of those homes that people with lots of cash just have to have, then yes, you may get over the maximum. But for most of us with the three bedroom, two bath ranch house smack dab in the middle of suburbia, it is a long shot.

Now, to be sure, just because your home has a maximum price (as determined by the lending institution) does not mean your real estate agent can get it for you. That is what you are paying the agent for: to get you the appraised value of your home.

So, if you want to know what the maximum amount your home is worth, pay a couple hundred dollars for an appraisal. (Do not use those online services like Zillow and Trulia. Research shows their estimates are just not that accurate.) That should be your sales goal when selling your home: to get the appraised value. Any real estate agent that promises you more than that is just being crazy, and there is no reason for you to be stupid and believe them.

To find out how ReaListing takes the guesswork out of selling your home, click here.

To learn how to keep more or your hard-earned equity when you sell your home, check out The Intelligent Home Seller eBook and The Intelligent Home Seller eCourse.

The Biggest Mistake You Can Make When Using a Competitive Market Analysis (CMA)

As most home sellers know, when working with a real estate agent to sell their home, one of the first things the agent does is to assemble a Competitive Market Analysis (CMA) for the home seller. The CMA includes the prices of recently sold homes in the area, prices of currently for-sale homes in the area, and maybe even prices of homes that failed to sell in the neighborhood. The idea is for the agent and seller to use this information to come up with an asking price for the Sellers’s home, but that may not be such a good idea.

One of the biggest challenges, when it comes to any financial transaction, is that we as human beings bring our own biases and blind spots into the deal. What is the seller’s bias when pricing their home? They tend to think more highly of their home than home buyers, and therefore want to price it too high. And what is the agent’s bias in pricing a home? They do not get paid unless and until the home sells, so they want to price it for a quick sale. There is even evidence-based research from the Nation Bureau of Economics Research to support this behavior. Quoting from the report, “Because real estate agents receive only a small share of the incremental profit when a house sells for a higher value, there is an incentive for them to convince their clients to sell their houses too cheaply and too quickly.”

If you really want to know what your home will fetch, without bias, I suggest you pay for a professional appraisal. Unlike a price determined by the agent and seller, the number an appraiser comes up with actually has contract implications: the bank lending the money to the buyer is going to use the amount from an appraiser to fund the loan. You will have a hard time getting much more than that unless you can get a bidding war for you home between cash buyers.

Real estate agents may tell you that they are experienced home pricers, and that an expert appraisal is not needed. But real estate agents are not professionally trained on how to establish value for the unique aspects of a home. For instance, my home is in excellent condition in a desirable neighborhood but comes with a unique blemish: we live under a high voltage power tower. There are many families, especially with small children, that would never consider buying my home. As such, my home must be discounted from the other surrounding homes, but by how much? Do I want to leave that decision to an agent with “a lot of experience,” or do I want to entrust that to a professional who has been trained to accurately estimate the degree of the discount? Am I willing to pay a few hundred dollars for an appraisal to avoid making a several thousand dollar mistake in pricing my home? You bet.

It is true that apprising is not an exact science. Therefore, selling a home for one or two percent above the appraised value should not be a problem. That would be equivalent to selling a home that appraised at $200,000 for $204,000. Probably doable, even from the bank’s perspective. But selling a home for ten percent above appraised value is a different matter. That would be like selling a $200,000 home for $220,000. Even if you could get a buyer to offer that much, it will probably fall out of escrow, unless you can find a cash buyer.

So, what should a CMA be used for, especially if you already paid for an appraisal? The real benefit of the CMA is to establish a pricing strategy for your home. What do I mean by pricing strategy? Given what your home is worth (from the appraisal), where should the asking price be set to maximize your chances of getting it? Pricing strategy takes things like market activity and momentum into account when determining asking price. Strategies change when markets change.

For instance, in a seller’s market where quick sales and bidding wars above asking price are common, the right pricing strategy might be to price the home a little lower than the appraised value to get the most possible bidders involved. On the other hand, in a buyer’s market where home sales take awhile and almost always result in a 10% discount to asking price, the right pricing strategy might be to price the home 10% high (and be really patient). Pricing strategy is where an experienced agent will use the CMA to its full advantage for your benefit. Keep in mind, that for most home sales, your goal is to end up at the appraised value (or slightly over). Anything else is just wishful thinking.

To learn how ReaListing is changing the way homes are bought and sold, click here.

To learn how to keep more or your hard-earned equity when you sell your home, check out The Intelligent Home Seller eBook and The Intelligent Home Seller eCourse.

How to Incentivize the Hell Out of Your Real Estate Agent

Talk to any real estate agent and they will tell you how valuable they are when selling your home. They will tell you that studies show homes sold by a real estate agent sell for 12% more (love to know where that number came from) than those that don’t.

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The truth is, when it comes to selling most homes, there is actually a maximum amount the home can sell for, and it has nothing to do with what the seller wants or how good the real estate agent is. The maximum amount for most homes is determined by the lending institution that is going to be holding the note against the home. 

One or more home appraisals will be conducted by professional, impartial appraisers to come up with a value for the home, and that is the value the lender will lend against. So, to sell a home for more than that value, one of two things has to happen: either the agent has to find a buyer who is willing and able to put down a larger down payment (to make up the difference between the appraised value and the sell price), or the agent has to find an all cash buyer. Finding an all cash buyers means finding someone smart enough to amass enough cash to buy a home outright but too dumb to know its appraised value. Now, if a real estate agent can find one of those buyers, that would really demonstrate their value.

Unless your home has some unique appeal that can foster a bidding war amongst wealthy people who simply have to have it, you are not likely to sell you home for much over its appraised value. However, it is possible. And since you know going in that the best you are likely to do is sell your home at the appraised value, why not put your real estate agent to the test by putting your money where their mouth is.

Here is how it works. First, get an appraisal of your home by a professional appraiser, ideally one who specializes in your neighborhood (or even your street). Then, offer to spit (50/50 or 75/25) any amount your realtor can get you over the appraised value. Talk about an incentive. With this system in place, the real estate agent can potentially make more money on the split than the base commission. You will come out ahead because you are getting over the appraised value and the agent wins because they just bumped up their take on the sale.

This may sound crazy, but it happens all the time in the world sales. Companies are more than happy to give a bigger cut of the pie to the sales people who go over, sometimes way over, their quota. It is called an accelerated commission schedule and it would actually help combat one of the biggest problems in the real estate industry: the conflict of interest between seller and agent where the seller wants the highest price and the agent just wants to get the home sold at any price (so they can get their commission). The accelerated commission just might get a real estate agent to convince you to hold out for a higher price, if they know it is in their best interest too.

To learn how ReaListing is changing the way homes are bought and sold, click here.

 

To learn how to keep more or your hard-earned equity when you sell your home, check out The Intelligent Home Seller eBook and The Intelligent Home Seller eCourse.