Buying Without An Agent
Find Your Home
At the Fool, when it comes to stocks, we encourage individuals to use discount brokers since we have little confidence in the services provided by full-service brokers.
The real estate broker generally takes about 6% of the sales price as a commission. On a $250,000 house, $15,000 in fees ends up going to the broker. So it's natural to ask if there is the equivalent of discount brokers in the world of real estate.
Let's look at what the broker does, and how she's compensated. The broker is essentially a middleman who gets paid for a service. It's commission-based. Fools would do well to wonder why real estate brokers aren't paid a fixed amount rather than a commission, which would very likely result in substantially lower fees. (And -- surprise! -- this idea would not be very popular with the real estate brokerage community.)
How valuable is the service that brokers are providing?
The broker's argument goes like this: "It's the seller that pays that money, not the buyer -- so you're getting the broker's services ABSOLUTELY FREE! Without a broker, you won't find all of the homes available to you, and you may not be informed about all of your rights and responsibilities. Buying a home is a serious endeavor. There are a lot of legal and financial hoops to jump through, and you need to know that you have someone on your side. What's more, the real estate agent can help you find and evaluate financing, and steer you toward a good home inspector and settlement attorney."
Now let's look at the counter-argument: Supposing there were no agent in the picture, would the price be $15,000 less for the house? You and the seller could save that money and split it.
No one can predict precisely what that market will do -- it's a bit like asking how many agents... er... angels can dance on the head of a pin -- though it certainly makes sense that the price would be less. Any time you can leave out a middleman, you're going to save money.
However, this is not always practical. It's for that reason that most of us go to retail stores and not wholesalers -- we'd rather buy that pen at Wal-Mart than go to Bic's manufacturing plant and ask if we can buy them direct. The retailer is providing a service (convenience, chiefly) and, for that, we are prepared to pay the markup.
FSBO: For Sale by Owner
If you are able to find a house that is for sale by owner, one that you like, which you feel is priced at or below market -- by all means, go for it. It may be that someone you know has decided to sell, or that you've found the place simply by driving through the neighborhood and noticed the sign out front. You may have found the place through the classifieds in your local paper. You'll need an attorney to step you through the legalities and the paperwork, but you could end up saving a pile of money.
Similarly, if you can find a seller-financed home, where the seller may even be amenable to a rent-to-own situation (wherein the rent you pay goes toward buying the house, if you should decide to buy at a later time), then, again, go for it. The opportunities do exist.
What About the Web?
Let's say that you're moving to (choosing a city at random) Phoenix, or (a state) Maryland. You boot up your computer, log onto the Internet, and type "For Sale by Owner" into one of the search engines. Sure enough, you'll come up with a list of sites. The problem, as of this writing, is that the sites carry few listings.
For example, By Owner Online lists only two cities in Maryland, and a search for a standard-sounding single family home turned up zero matches. Another site, the National For Sale By Owner Network, says that it is a network of FSBO publishers with a combined readership of 10 million people and "represents tens of thousands of homes for sale." But it currently lists no homes in many states, including Arizona. It does have several homes listed in Maryland.
Down the road, though, as this practice becomes more widespread, you may not only be able to type in the city and state, but the neighborhood, and several dozen possibilities will come up. It's only a matter of time before this happens. When it does, the real estate industry will very likely begin undergoing some changes.
There is another option: Realtor.com. That's right, you'll be dealing with Realtors.
Conclusion? It's much more difficult to find a house without an agent, since the overwhelming majority of houses are listed with agents. If, however, you do so, more power to you.
Assuming that you do need an agent, you need to make sure you have a buyer broker. We cover that in an article entitled, aptly, The Buyer Broker.