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Cutting Their Cut

Tom Kubik

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.

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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.

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Steve Spinella
Steve Spinella
11 months ago

It was not very long ago that company stock were also sold with significant transaction costs and margins. There are still many markets, perhaps including real estate, where only insiders can “make a market.” However, I can certainly agree with Kubik that I would and do save money when I can avoid commissions and negotiate direct sales. Sometime technology-assisted sales get so cheap they almost seem like direct sales. I can also spend a lot of time managing transactions that I’d rather spend doing something else. But if I’m willing to spend a few hours on the sale or purchase of a bike, a couch, or a computer, why not spend a few dozen hours on the sale or purchase of real estate?
I advocate for making this decision thoughtfully and counting the costs both ways.

Laurynas K
Laurynas K
11 months ago

Sales commissions for residential real estate brokers historically average nearly six percent of a home’s closing price. Do brokers add sufficient value to justify those commissions? We address this question using a unique data set pertaining to sales of faculty and staff homes on the Stanford University campus. We find no evidence that the use of a broker leads to higher average selling prices, or that it significantly alters average initial asking prices. However, those who use brokers sell their houses more quickly.

Real Estate Agents, Revisited – Freakonomics

Chris Sciora
Chris Sciora
11 months ago

6% commissions are past history at this point, but I’m still surprised at how many people pay 5% instead of using a discount or flat rate broker. Those provide exactly the same services at a lower cost. Unlike FSBO, the seller doesn’t have to do anything. The problem facing the realtor industry is the same as in many others – technology has automated most or all of the tasks once traditionally done by the Realtor.

Something like 70% or more of people research online and bring specific listings to the Realtor. Showings are handled automatically with internet connected lockboxes that can provide access at particular times. Offers, closing documents and revisions are handled online with services like DocuSign. The majority of valuations are now handled through algorithms. 3D virtual walkthroughs are an excellent option to live showings and have only grown more popular during Covid.

We’re traveling for a year and I’m writing this while renting a home that was listed for sale on Feb. 1st in a *very* popular area. Aside from a handful of text messages to coordinate showings, the real estate agent is basically non-existent. The photographer and 3D photographer are the only people we’ve seen aside from prospective buyers.

At a listing price of $925K, the sellers agent will receive over $45,000 for the sale. I understand that will be split with the buyers agent who typically gets 2.8% based on MLS conventions. That leaves the buyers agent with $20,000 for listing a property in one of the hottest markets in US history with a typical closing in 39 days. That’s pretty tough to justify in my mind.

In contrast, Redfin offers full service agents to sell your home for either 1.0% or 1.5% (plus the additional 2.8% buyers agent fee). If you’re willing to take the full FSBO route, it’s only a few hundred dollars to have it placed on the MLS. I’ve since learned that the 2.8% buyers fee is a convention, not a requirement so you could potentially offer far less in the listing.

Is any buyers agent really going to say “Sorry, I’m not willing to show you the property that you just found because the fee isn’t high enough?” Pretty doubtful. The scare tactic about selling undervalue is exactly that. It’s in the agent’s best interest to sell as quickly as possible regardless of price and the easiest way to accomplish that is leaning toward the lower end of estimated value.

Stacy Thomas
Stacy Thomas
11 months ago

One important thing not mentioned: What sale documents did you use? Who recorded the real estate transfer with the county clerk?

Chris Sciora
Chris Sciora
11 months ago
Reply to  Stacy Thomas

The necessary paperwork is readily available from sites like Legal Zoom or real estate investor sites. If you’re uncomfortable using those directly, you can hire an attorney for a few bucks to review or make changes. Although they’re overly complicated, you can also use the same “official” boilerplate docs that Realtors use.

Either the owner, attorney or title company can file with the county clerk. Some states require attorneys for closing in which case they’d handle all the paperwork. My wife usually filed for our own sales. In Colorado, it was one or two pieces of paper and a nominal fee.

Paula Karabelias
Paula Karabelias
11 months ago

Thank you for the lead on the flat fee MLS approach . I was unaware of it as it’s been decades since I’ve sold a house but I hope to next year. It seems like it could work well where I live (Boston suburb) where even a modest house is approaching a million dollars and houses at every price level and in any condition sell within a couple days.

Mr Moderate
Mr Moderate
11 months ago

So what IS a reasonable percentage to pay for investment advice?

gregorit
gregorit
11 months ago
Reply to  Mr Moderate

0%, unless they are absorbing some of the risk associated with bad advice. Alternatively, flat hourly fee works like many other professions.

John Yeigh
John Yeigh
11 months ago

Seems inevitable that real estate fees will eventually get squeezed as with all digitally assisted transactions. We’ve found Zillow to be very helpful when shopping.

R Quinn
R Quinn
11 months ago

As someone whose son is a real estate agent trying to provide for his wife and three of my grandchildren, not my favorite point of view.

But more practically selling on your own is usually not as easy as you make it appear. I know several people who tried it but then reverted to an agent. A good agent will provide services beyond just showing the house.

R Quinn
R Quinn
11 months ago
Reply to  R Quinn

I don’t understand all these negative clicks. What did I say that was so bad?

Nick M
Nick M
11 months ago
Reply to  R Quinn

I think the problem is, you are turning a limited anecdote (people have tried and then reverted to an agent) into general financial advice. I know several people who tried going to college and it didn’t work out, so by your logic most people should avoid going to college. More generally, you’re using fear of failure as motivation to pay an agent, which seems like exactly the wrong way to make a financial decision.

mytimetotravel
mytimetotravel
11 months ago
Reply to  R Quinn

I agree with you. There have been several sales in my neighborhood lately, at prices much higher than a year ago, but the couple of “sale by owner” houses did not move. Still, I think the percentage charge is excessive, and a flat dollar amount would make much more sense.

gregorit
gregorit
11 months ago
Reply to  R Quinn

Speaking only for myself, expressing a POV based on your own familial interests rubbed me the wrong way. What if your kids survived by kidnapping dogs for ransom, would you be advocating for paying higher pet ransoms?

More seriously, OP expressed an opinion that was eminently logical. I have a brother who’s a real estate agent and hear more than enough about the shenanigans in that industry to realize Americans wanting to buy and sell homes deserve better.

John Goodell
John Goodell
11 months ago
Reply to  R Quinn

Haters gonna hate, Richard, don’t let them keep you down🤣

I actually think you’re right, but so is Tom, and much probably depends on the market you buy or sell in.

wtfwjtd
wtfwjtd
11 months ago
Reply to  R Quinn

FWIW, I happen to agree with you Richard. A good agent can more than earn their fee in aiding a buyer in getting a higher price more quickly for their house than they ever could get on their own. Around here, for sale by-owner listings don’t generate near the interest (or traffic) that a traditional realtor listing will, and in most cases sell more quickly at a higher price. Is it really such a bad thing if a realtor is able to fetch a higher price more quickly for a listing, and more than offset their fee? I don’t see what the problem is, but apparently there’s a lot of people out there who disagree. To each their own, I guess.

Nick M
Nick M
11 months ago
Reply to  wtfwjtd

Please show us data, that is not from a real estate company, that supports your claim that an agent will, on average, sell a house for more money than their fees. Basic supply and demand would suggest this would be highly unlikely, to the point of absurdity, so I would be very interested to read something peer reviewed showing otherwise.

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