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Understanding Real Estate Commissions
Selling a home can be one of the most stressful things that a family or individual goes through, but it doesn't have to be a horrendous process. In fact, many people are able to make a lot of money by selling real estate. In order to be successful however, a person or family has to understand the process of selling, make a decision about using a realtor, prepare their home to be sold, and actually complete the selling process.
How Realtors Work
Many people assume that they have to go through a realtor when selling their home. While this isn't necessarily true, a good realtor can get more money for the home and help it to sell faster. The reasons for this, however, can be complicated. Realtors have the experience to deal with a wide variety of properties, and they're able to bring in a lot more potential customers than most people who try to sell on their own. They're also good at dealing with properties with liens, that are going through a short sale, and/or have structural and cosmetic issues.
In exchange, a realtor typically charges the seller a commission based on the selling price of the home. Typically, this rate is six percent, but in certain circumstances and locations it can go as high as ten percent (note that this is very rare). A lot of people are surprised to learn that their particular agent is not pocketing the whole amount, however.
In fact, the commission is split between several different agents and companies. To start, the commission is split between the buyer's agent and the seller's agent. The exact formula for this can vary based on a number of factors, including the location of the property, the customs of the area, and the market conditions. When a house has been on the market for a long time, many realtors are willing to sacrifice more of their share of the commission to get a place sold.
After splitting with the buyer's realtor, however, the seller's portion of the commission is split between the agent and the company that the agent works for. Typically the split is 50/50. The company uses their share to cover the advertising and overhead costs, while the agent uses his or her share of the commission as salary. Portions of the agent's commission can also be shared with professionals who stage the home and other agents who assisted in the sale. Nonetheless, a typical seller's agent will get a payday of about 1.5% of the total selling price of the house.
A very limited number of agents work on a flat fee scale. These agents charge a flat amount of money for each service they provide. Because it can be so difficult for realtors to parse out their individual services, however, very few realtors will charge customers in this manner.
Because their pay is tied to the selling price of the home, a realtor is very motivated to get the highest price possible. Because they do not get any money until a home sells, however, they can also be very motivated to simply get a home sold at any price.
What Happens if a Realtor Can't Sell My House?
Of course, hiring a realtor is not a guarantee that a home will get sold. Despite their experience, a realtor cannot guarantee a sale, and they certainly cannot guarantee the price it will be sold at. In fact, it's common for some properties to not get sold in every kind of market. In these cases, a realtor has invested time and money into getting a property sold, and will expect some kind of compensation.
In fact, most realtor contracts specify a flat fee that a seller has to pay in the event that a house does not sell. Depending on the area and market conditions, this fee will usually range between several hundred and a thousand dollars. While this can seem like a lot to pay, it generally just covers the basic services a realtor provides. Advertising on the MLS (the listing service for real estate) can cost several hundred dollars alone.
In cases when the market is particularly bad, a realtor might demand this fee upfront before starting to list and market the property. If the house sells, the fee is then subtracted from the total amount of commission paid.
Also, if a house does not sell by the end of the contract period (typically six months), a seller and a realtor can choose to renew the contract. Keep in mind that the realtor might not always choose to renew. This is often the case when a seller will not work with the realtor to make his or her home sellable.
Should I Use a Realtor?
One of the biggest decisions that everyone has to make when they decide to sell their home is whether or not to use a realtor. While there are many factors involved in the decision, ask yourself the following questions when trying to decide.
Do I know what my home is worth? Staging a home is helpful, but the truth is that your price is what will really sell your home. Until recently, all homeowners had to go on was the word-of-mouth price quotes they heard from friends and neighbors. Today, however, there are a number of websites that promise to give you the fair market value of your home in minutes. If you live in an area with a fairly active real estate market, electronic property records, and your home is very similar to a lot of other ones, these websites can be a good resource. Many people who houses with unusual features, however, will probably discover that these websites aren't as accurate as they need.
Does my home have any special features? Everyone thinks that their home is special, but homes in unusual locations (on the beach, next to a highway, etc.) will probably need some marketing help to get top dollar and the right buyer. If your home has any special construction features, such as being handicap accessible or having a secret passageway (don't laugh, we've seen it), you'll also want some professional help to find a buyer that will see these features as an asset.
Am I selling under special circumstances? If you can be available to show the home at any time and have a long time frame (several months or more) in which to get the home sold, you might do really well by trying to sell on your own. People who need to sell quickly or who live far away from the property are going to need some help, however.
Are you able to prepare the home to be shown on your own? A house that is in great condition will typically sell a lot faster than a house that isn't. “Great condition” can mean a lot of different things. Visit a few open houses and see how realtors present the home. Be honest, can you get your house in similar condition? If you're working a lot and can't declutter, and/or if you're helping an elderly relative sell a home who can't really get ready for potential buyers at a moment's notice, you'll probably do better by going with a relator.
Can you afford to pay a commission? This might be the biggest factor for many people trying to sell a home. After talking with a realtor and determining a good selling price for your home, figure out how much you will have to pay in commission if the home sells for that much. With so many homeowners underwater or owing very close to what their home is worth, many people are discovering that they cannot afford a realtor to sell their home. If this is true for you, really consider if now is a good time to sell, if you can sell on your own, or if you want to rent the property while waiting for the market value of the home to increase.
Preparing to Sell
After deciding how you want to sell your home, it's time to get a plan into place. Ideally, you'll give yourself several months to prepare a home to be shown, although this can vary a lot based on the condition of the home and the amount of time you have. Whether you're using a realtor or trying FSBO, make sure you cover these basics.
Clean up your yard. Curb appeal is one of the biggest selling points of a home. Mow the grass, trim back anything overgrown, and make sure there is no trash. Also remove anything dead or dying and if necessary replace it. This includes sod. In the backyard, make sure all ponds, waterfalls, and pools are working properly and clean. If you live in a flood zone, plant grass or other plants in any area with standing water. Finally, be sure that your water, sewer, and other utility equipment is easily accessible and visible. A lot of potential buyers will want to check the condition of these gauges.
Clear the clutter. For some people, this can be the hardest and most time-consuming part of selling a home. If you have lived in your home for years, it can be hard to see clutter when you see artwork, useful items, and beloved objects. Try to stick to a rule of no more than one object on any surface. That means no more than one flower arrangement, sculpture, utensil, etc on every kitchen counter, table, and floor.
Rearrange the furniture if you need to. If you have rooms that are stuffed with pieces that make it difficult to move around (or that block access to a door or hallway) you'll need to move them somewhere else for a while. Don't rearrange furniture to hide spots on the carpet or other damage unless it looks natural. No one is fooled by an armchair in the middle of a playroom, and it will probably cause buyers to wonder what else is being hidden.
Make small cosmetic repairs, especially if they could be taken as signs of a bigger problem. For example, replace any cracked floor tiles. While these are common in houses as they settle and people set down heavy furniture, they are often taken as a sign of foundation problems, causing buyers to flee. Fortunately, this is a cheap and simple repair to make. If you have any tape line cracks in the drywall, make sure these are fixed as well. You'll probably have to do it when the home is sold, anyway.
Clean everything. Keep your home spotless. Some people hire a housekeeping service for this task, while others just develop a daily routine that makes it easier to keep the house show-ready. If you have kids, this can be a big chore, but a clean house will sell faster and for more money. Also make sure that the house smells fresh. Avoid very strong scented candles (you never know what people won't like), but do try simple, clean scents.
Get your paperwork in order. Take some time now to make sure you have all the deeds and other ownership documents you'll need when it comes time to close. Also go ahead and assemble your last month or two of utility and insurance bills. A lot of buyers will want to know their potential costs to own the home.
If you are selling on your own, also make sure you get the following items in order.
Hire a real estate attorney to guide you through the selling process. It's rare that a person can figure this out on their own, and you'll want the protection for what is most likely going to be your biggest financial transaction.
Make signs and set up advertising. While a yard sign and an ad on craigslist might be enough to attract buyers in some areas, most people will need to add their home to several online registries, post multiple signs, and advertise in newspapers and/or local real estate magazines. Also be sure to schedule several open houses and make sure the home is ready for them.
Depending on your area and market conditions, you might have several weeks to several months of showings before your home is sold. A realtor can show you how long homes that are similar to yours have been on the market and how long they took to sell.
Once you Get an Offer
After going through the entire showing process, getting an offer can be very exciting. Be careful not to get carried away, however, since this is the part where the real work begins. If you're working with a realtor, you'll get a call as soon as he or she receives the paperwork for the offer. After you calm down, sit down and really read through the offer.
To many people, the most important part of the offer is the price the seller gives, but there are many other important details. Be sure to pay attention to the repairs that they want made and the schedule they want to move in. Consider the price of the repairs they want to have made, and compare it to the amount they want to pay you for your home. Keep in mind that you will be charged a commission on every dollar of the offer amount while the repairs are coming out of your own pocket. Make sure to consider the move-in schedule in conjunction with your own schedule and the time it will take to make the necessary repairs. In other words, if you need a new roof and have to paint five rooms, you probably can't let the buyer move in next week.
After reading through the offer, you will either accept or provide a counter-offer. Keep in mind that most buyers expect a counter-offer, so the initial offer will probably be low and include a lot of items that they want fixed. Also remember that a realtor can often informally ask about details such as a move-in schedule before submitting a counter-offer, but he or she cannot negotiate without any paperwork.
In your counteroffer, feel free to ask for more money, the removal of certain items from the repair list, and/or a change in schedule. In many cases, offers and counteroffers will go through several rounds of negotiations before everyone reaches an agreement.
As soon as an agreement is reached, the buyer will put down a deposit, known as “earnest money” and the house will go under contract. This ensures that the buyer will purchase the house at closing, and will close the home to any further bids. In very rare instances, a buyer can request that the seller put forth earnest money as well. Typically the amount of earnest money is between 0.5% and 2% of the home's value. The money goes into an escrow account, and will later be returned to the buyer or put directly towards the closing costs of the loan.
Getting Ready to Move
After this, the buyer will begin working on finishing up his or her mortgage paperwork while the seller works on completing the items on the repair list and packing up his or her belongings. During this process, the home might need to be made available to a home inspector and other professionals as outlined in the contract.
As you make repairs, be sure to document that the repair was made. Take before and after photos if you're doing any work yourself, and save all of your receipts for any supplies and tools purchased. If you hire contractors, save copies of their contracts, invoices, receipts, and warranties.
As you pack, be careful not to damage anything, and be sure not to take anything that was specified in the contract as conveying with the house. After both sides have completed their paperwork, a final walk through of the home will be completed by the buyer and any last minute repairs will have to be done or compensated for. Closing will typically take place with a real estate attorney.