6 Reasons Why Real Estate Agents Are Terrible For Your Net Worth
The Latte Factor was a national and international best seller. The book admonishes people to be conscientious about cumulative, habitual spending, a $5 dollar latte being the prime example.
David Bach’s books have sold over 7 million copies and he is regarded as a personal finance expert.
The Acorn app is #17 in finance. They round up your purchases to the nearest dollar and invest the difference:
The common advertising thread seems to be coffee…
It is my observation that these trendy apps and books aren’t designed to increase your net worth, they are designed to increase the net worth of the authors and developers. The marketing is simple — they make you feel like you’re financially savvy. The irony of Acorns is that you have to spend a lot to invest a lot. The most effective way to dramatically advance your net worth is right under your nose. You don’t need a book or an app, you need only think about real estate commissions a little more critically.
Coffee and commissions just don’t compare:
Lets up the ante say you’re spending $40 on a cup of coffee everyday, a horrifying thing to do. If you own a $500k home, spending $40 dollars a day on coffee for 750 days is equivalent to needlessly paying a Realtor thirty thousand dollar, six percent commission:
Yes, of course selling a home is vastly more infrequent and serious than coffee, but your brain’s struggle to grasp abstract money applies to your financial detriment in the same exact way.
Consumers are spending close to $80 billion dollars a year on real estate commissions. The vast majority of this sum is in excess of the value actually being delivered to you. Here are six reasons why traditional real estate agents are terrible for your net worth:
#1: A five or six percent fee against the entire sales price consumes a much-much-much higher percentage of your equity.
Is your home paid off?
Only when your home is totally paid off is a 6% commission just 6% of your equity.
If your home is halfway paid off, a 6% commission consumes 12% of your equity, and if a quarter of your home is paid off, a 6% commission gobbles up 24% of your equity, and so on.
#2: Realtors are sales people, not asset managers.
“How to sell more, earn more, and become the ultimate sales machine.”
Realtors are not in business to advance your net worth the way an accountant or an asset manager is.
A Gallup poll showed that real estate agents are of the most distrusted professionals. What did we think was going to happen when we let anyone with $300 bucks and three months obtain their license?
One study showed that the self-interests of Realtors and homeowners are so poorly aligned that people who sell their own home achieve a higher sales price than people who use a Realtor, by about $14,800. That’s embarrassing. Essentially, Realtors are charging you an inflated fee for the trouble of selling your home for less money than you could have. You might as well blow a bunch of money on a landscaper who charges more to cut your law with a pair of scissors.
Department of Economics — Center for the Study of Industrial Organization (CSIO), Northwestern University, The Relative Performance of Real Estate Marketing Platforms:
“Nevo and his colleagues found that their raw data confirmed that owner sellers achieved higher prices for their homes. The average premium was 11 percent, or $14,800.”
Stanford University and National Bureau of Economic Research
How Much Value do Real Estate Brokers Add? A Case Study:
“We find no evidence that the use of a broker leads to higher average selling prices.”
Economists Steven Levitt, author of Freakonomics, address this phenomenon is simple terms. When Realtors sold their own homes, they too made out like the by-owners. But when Realtors sell their client’s homes, they knowingly or unknowingly pressure them to take inferior offers.
# 3: We’ve become romantic about real estate, which undermines how serious of an investment it is.
Residential real estate is an extremely important asset. Home equity makes up the majority of most American’s net worth.
Unfortunately, consumerism has managed to spread its tentacles into real estate. You can’t decorate your stocks and bonds with purchases from Crate & Barrel and Pottery Barn, but you can treat your home like a consumer packaged good, rather than a good investment. The REALTORⓇ brand has done a great job blending in with pop culture.
We aren’t likely to see accountants and financial planners and other effective people get their own reality show anytime soon. Every homeowner is doing their finances a disservice by not seeing through the glamor, charm, charisma and bull shit of sales people that aren’t incentivized to help you accomplish your financial goals. Marketing is the ability to get a consumer to pay ten times as much for the same product. Personal responsibility is being able to see through that. It is financially irresponsible to pay a five or six percent commission to see your home.
#4: Fixed, percentage fees cause commissions to fluctuate wildly, while effort stays about the same. This leads to “social waste”.
Appraisers are not allowed to base their payment on a percentage of the home’s value. It is considered unethical. The effort is mostly stagnant, so a percentage fee would cause the fee to fluctuate wildly, which is unfair and unethical. Realtors do this all day long every day.
As a conscientious real estate agent, I can tell you the effort involved in selling a $250,000 home is inherently no different than the effort involved in selling a $500,000 home. I’ve sold $500k homes in two days and sold $250k homes in two weeks, and vice versa. As a homeowners, you’re paying two and three times the commission when there is not two or three times the work. Economists refer to fixed commissions as a social waste:
Real estate agents typically charge a 6 percent commission, regardless of the price of the house sold. As a consequence, the commission fee from selling a house will differ dramatically across cities depending on the average price of housing, although the effort necessary to match buyers and sellers may not be that different.
#5: Why should sellers have to pay their buyer’s agent’s fee?
The United States has some of the highest commissions in the developed world. What’s more is our home sellers pay their agent and their buyer’s agent.
In the UK, Germany, Israel, Australia, and New Zealand, buyer brokers are paid directly by home buyers, rather by home sellers. Sounds reasonable, the buyer’s agent is going to beat the seller up on price and inspection items. Their client is the buyer, their fiduciary duty is owed to the buyer, so why in the world should their fee come from the seller’s pocket?
What’s more is this assumed arrangement creates antitrust problems with devastating financial implications for homeowners. Recently a class action lawsuit was filed to address this.
Buyer’s agents essentially hold their buyers hostage for an arbitrary 2.5% fee. What’s to stop that fee from being 4%? If buyers paid for their own agent, it would end the price fixing and the true and fair market value of a buyer’s agent would be revealed. Shielding a buyer from a home they want because the fee isn’t what you want is illegal.
#6: Traditional real estate brokerages operate just like Blockbuster.
The reason Blockbuster crumbled so quickly was because Netflix has an identical product, with a virtual delivery. Brick and mortar locations come with a cost; late fees, restocking fees, salaries, electric bills, massive overhead. All of this gets passed onto the consumer. Blockbuster had to lease millions of square footage to shelve millions of DVDs, when only a small portion of them generate any meaningful revenues. Homeowners spend about $80 billion dollars a year on real estate commissions. The vast majority of these costs are completely unnecessary, but are imposed on homeowners as a result of the very costly traditional brokerage infrastructure and business model. ReMax has 7,841 brick and mortar locations. They need space for agents when the vast majority of them, about 87%, fail within the first couple of years. The sales force recruitment business model is not at all consumer-centric. If we distill home selling down to what matters (expertise and service), and we align it with the needs of the homeowner (retaining as much equity as possible), we can accomplish this for a fraction of the cost by deploying a business model that focuses only on delivering exceptional service:
By contrast, a firm like Homie.com, a full-service real estate brokerage in Utah, can help everyone in the state of Utah sell their home with just one location managed by a handful of employees. They charge $199 up front and $1299 at closing. That isn’t to say there is some kind of compromise, they have salaried agents in close proximity to all the markets they operate. Similarly, Uber doesn’t need a physical location in Pittsburgh to be able to service that location. There is nothing involved in a real estate transaction that necessitates a brick and mortar location. The days of walking into a brokerage to flip through a binder of listings are over.
If you’re going to enlist a broker, do your net worth the favor of finding one that is consumer-centric, not Realtor-centric. Door, Trelora, Rex, Homebay, Reali, and Houwzer, to name a few, are full-service, not to be confused with the “discount brokerages” of yesteryear, e.g., helpUsell, flatfee4u, etc. These firms are advanced, efficient, and highly intelligent. They do everything a traditional agent does and more, without all the superfluous costs.
Tony Hawk sums it up: