Is it Better to Buy Real Estate Through an Agent or Directly from the Owner?

FSBOs/For Sale by Owner

There are numerous FSBO-type businesses out there, as well as the standard homeowner who simply puts a “For Sale” sign in his or her yard. This is especially prevalent during seller’s markets, or when there is a high demand for housing and relatively low supply.

They are simply trying to take advantage of the market conditions and get a high price for their home. There is absolutely nothing wrong with people trying to sell their own homes, but that doesn’t mean you have to rush out there and buy one! Let’s take a couple minutes and look at how a home normally gets listed by a real estate agent and put on the market for sale.

Selling through a real estate agent

When somebody wishes to sell a property, he or she contacts a real estate agent (or interviews several agents) and ask for a current market analysis to inform the person approximately how much to list the house for. Agents accomplish this market analysis by looking at the comps for homes sold in the past six or twelve months in that neighborhood. By accessing the local MLS, they can get an average, low, and high price per square foot. Based on the seller’s home square footage and the amenities, an approximate listing price (market value) is determined.

If the seller decides to list the home with an agent, a listing agreement or contract is drawn up that basically says the agent and agency will perform certain functions in advertising and promoting the sale of the home, and in return, the seller will pay 6 percent (typical amount but can be negotiated) of the sales price. If another agent brings a buyer who eventually buys the home, the seller’s agent splits the 6 percent, giving the other agent 3 percent.

Your agent receives the compensation from the seller, not you. Since you don’t pay your buyer’s agent any money, why would you ever not use an agent when buying a home?

With FSBOs, this process rarely happens. The seller normally sees the other homes for sale in the neighborhood and finds out through neighborhood gossip the price for which they were sold.

Invariably, all sellers think they have the nicest homes in the neighborhood, and that’s when emotions take over. “Barbara sold her home for $250,000. I have coffee over there every Wednesday, and my home is much nicer than hers.” Bang, asking price $275,000! No evidence, facts, math, science—nothing. Just pure emotion.
Maybe Barbara’s home was two hundred square feet larger. Maybe she sold it to an uninformed buyer who wrongly paid too much. The point is that no market-driven justifications go into a majority of FSBOs’ asking prices.

Now I don’t want you to think that all FSBOs are bad deals. We sell/buy about half a dozen a year, but we are involved throughout the process, providing our buying client with our real estate expertise, advice, and assistance. We tell our clients that if they happen to drive by an FSBO property that they are interested in, to simply call the number on the sign and ask the seller if they are willing to work with your buyer’s agent—i.e., willing to pay your agent 3 percent of the selling price.

Many sellers are more than willing to do that because they would still be saving a significant amount of money (3 percent). Once again, if you do not use an agent to represent you as the buyer, you don’t have anybody to run the comps and tell you what the fair market value of the home is. You will be forced to simply take the seller’s word for it. And since you are not paying your agent, why in the world wouldn’t you want to take advantage of their expertise and advice?

Other reasons sellers sell by themselves

Other than a strong seller’s market, why do people try to sell their homes themselves? There are several reasons. Maybe they cannot afford to pay 6 percent to sell their home. Maybe they paid too much when they bought it themselves. Maybe their home has not appreciated in value enough for the time that they’ve lived there. Do not make the seller’s financial problems your financial problems. It’s usually best to just walk away. Sometimes deals just can’t be done, not because of some deficiency in the property, but due to some underlying financial reasons.

As I alluded to earlier, many FSBOs will not have a problem working with and paying your buyer’s agent. But occasionally, you’ll find an FSBO who absolutely will not work with any agent. Don’t walk away – run away as fast as you can! From my experience, there are usually only a few reasons why this might happen.

One, their financial position is so tenuous they cannot even afford to pay 3 percent to your agent. Again, don’t make the seller’s financial problems your financial problems! Two, there is something going on with the home/property that they know a real estate professional will likely find – termites, structural issues, water damage, roof damage, and so on.

Do not make the seller’s financial problems your financial problems.

When a buyer walks into a home, they look in all the rooms and imagine their stuff in that space. They look at the paint colors, tile and carpet, cabinets and appliances. While that is indeed important, real estate professionals walk through the house looking for the red flags mentioned previously—damage, deficiencies, big items that are going to be expensive to fix.

Another situation just makes me cringe. Not because the offer is so horrible, but because so many people fall for it. When an FSBO is trying to sell a home (say a $200,000 home), he or she tells the prospective buyer, “Hey, if we do this deal without the real estate agents, I’ll save $12,000 in agent fees, and I’ll split the savings with you. Otherwise, I’ll have to increase the price of the house.”

First off, the home is worth what the home is worth – the market value regardless of the seller’s expenses! Whether or not there are real estate agents involved is irrelevant to the value of the home. Second, and most important, I ask you to tell me how often in your entire life a complete stranger has come up to you and offered you thousands and thousands of dollars. It doesn’t happen.

If they tell you that they’re going to split the savings with you, they’re lying to you. We see family members try to take advantage of other family members when it comes to real estate deals, and it can get really ugly really fast. If you have an agent working on your behalf, it eliminates much of the uncertainty concerning price because your agent will show you the current comps for that home and neighborhood.

You will then have the confidence that you bought the home for the right price, and you will therefore enjoy the home that much more, rather than worry the entire time you live there that you paid too much.