LET’S SAY YOU bought a few stocks on the advice of your financial advisor for $300,000. One year later, that same advisor says you’ve done really well on the stocks—which are now worth $400,000—and you should sell. After the sale, you net a $100,000 profit. Would you be willing to pay your advisor a 6% fee on the $400,000, equal to $24,000, for the advice he gave you?
If so, I’d think you were crazy. He took no risk. All he did was make a suggestion. Even if you had a $2 million portfolio and he was charging 1% of assets, you would have paid just $20,000.
Yet people think nothing of paying that same 6% commission if the $400,000 investment is a house or condo. Why would they pay such an exorbitant fee to someone who took no risk, and literally spent a fraction of that commission on marketing?
As a young airline pilot in the 1970s and ’80s, it occurred to me that I needed a backup plan since I worked in such a volatile industry. That plan was building houses. Of course, those houses needed to be sold to generate income. The first house, which I built for $80,000, we lived in for two years and then sold for $150,000. No agent. No commission. We sold it to friends. That’s where the backup plan idea came from.
During construction of the second house, I had a real estate agent stop by and ask if I’d be interested in listing the house with him. He said he’d sell it quickly and for top dollar, charging only a 6% commission. I told him I’d be interested if he’d be willing to share the risk with me by covering the payments that I needed to make on the construction loan until the sale. After all, he said he’d sell the house quickly.
He looked at me like I had four eyes. That’s not the way this works, he explained.
I listened to his pitch, politely said no, and proceeded to build and sell one or two houses a year for the next 20 years. No real estate agent. No commission. And this was at a time when there was no internet, no cellphones and no mass marketing opportunities other than the local newspaper. By some miracle, I was able to sell those homes without using a real estate agent.
Another example is when I developed a small neighborhood. I bought the property from a relocating family without an agent being involved. I started the project and eventually ended up with 25 nice-sized lots in a desirable area. A large number of real estate folks wanted a piece of that pie.
In each case, I offered them the same deal—sharing the risk to make some money. None of them accepted. None. We sold all of the lots and not once did we use a real estate agent. The average sale price was $40,000. The total commission savings on that project were about $60,000. The commissions I avoided nearly paid for the initial price of the property before improvements.
Today, there’s a variety of ways to bypass a real estate agent’s 6% fee. Most involve you doing some work, but it seems well worth the effort. I imagine that most of you reading this have already figured this out since HumbleDollar is about doing the right things with our money and investments.
Sometimes, you may need to use a real estate agent. When we moved from Ohio to South Carolina, we hadn’t sold our home in Ohio before our move. It took another 11 months to sell that home, and I wasn’t able to be there to show it or keep tabs on potential buyers. We used a reputable real estate agent and negotiated a flat fee for that transaction.
The sale price was about $400,000 and the flat fee was $10,000. The savings over a 6% commission were $14,000. The fee was acceptable to me because of the circumstances. It was also acceptable to the real estate agent because things were slow at the time. Most reputable real estate agents are willing to negotiate their fees if you take the initiative to bargain. If they aren’t willing, move on to the next agent. You’ll eventually find one.
If, however, you can show and advertise your property yourself, you should consider doing so. The savings can be substantial. There are several “for sale by owner” sites you can peruse to find a company that suits your needs. Some will even list your house in the valuable multiple listing service (MLS), which can be essential in making buyers aware that your property is for sale.
These companies vary according to state, so I won’t link to them in this article. Look for them using a search engine. Type in “flat fee MLS listing services.” You’ll be surprised at what pops up.
Just so you know, I’m not knocking real estate agents. They have their place and I don’t doubt that some of them earn what they charge. There are people out there who have no interest in selling on their own or who can’t sell on their own. There absolutely is a place for real estate agents.
I think most of us would agree that 1% of assets is an outrageous amount to pay for investment advice, especially with all the tools now available and when we know that simplicity generally yields solid results. I believe the 6% real estate commission is equally outrageous. It’s not hard to advertise or show your property to a buyer—and hanging on to that 6% is a pretty good return on the effort involved.
Tom Kubik recently retired from American Airlines after 42 years as a pilot. Working on both the management and union side of the business, he saw prosperity, bankruptcy and the disappearance of pension plans. Today, Tom and his wife still travel extensively. Three children and seven grandchildren keep them on the go. Tom’s previous articles were Why Am I Late and The Unfriendly Skies.