The “By Owner” Business Case

By sign with house in the background.Who gets the check at closing – you or the agent? Many of today’s sellers bought with little or no money down. They may have taken out home equity loans to further ‘invest’ in their houses…only to find that the unprecedented collapse of the American housing market has nearly wiped out all their equity.

Here is how to figure out if an agent’s commission would carry away all of your equity. Do the math to pinpoint how much equity you have in your house. Then, using a conservative market value for your house,  calculate the dollar value of the 6% commission.  Deduct the dollar value of the commission from your equity. What’s left over is how much equity you have after the a traditional, full-commission closing.


First mortgage balance outstanding: $180,000

Home equity line of credit balance outstanding:  $35,000

Likely sale price of house:  $240,000

Equity before sale: $25,000

Standard 6% agent’s commission: $14,400

Equity remaining after commission: $ 10,600

If there is little to no equity remaining, your best bet for holding on to your equity is selling directly.  By doing it yourself, you can better control the fees and expenses of the transaction.

If you do find that there is equity remaining, is it enough to put down on the type of house you hope to buy? Would the dollar value of that 6% increase your down payment enough to qualify you for a lower-rate mortgage…or eliminate the private mortgage insurance requirement…or simply enable you to buy the house you really want?

Many sellers are realizing that their equity is so slim that most or all of it will be carried off at closing by the agent.  That hollows out your economic and emotional investment in your house. Why buy if it turns out that the agent’s commission turned you into a renter, after all?

Experts agree. Here are the dollars and sense of selling by owner.

Real estate agents love to say that the commission structure is aligned with their clients’ best interests. After all, they don’t make money until YOU make money! Right?

Right. But they don’t say how much money they make when you make money.

As documented in this just-released study of the Massachusetts real estate market by those lovable data geeks at Freakonomics, the commission structure incents real estate agents to sell your house quickly, for somewhat less than you would likely get if you waited a bit longer. The tiny slice of the commission that the listing agent loses by urging you to take the first offer that comes along  — “that’s the market speaking!” – is not enough to keep them working to find you a better offer. A better offer for you could mean thousands of dollars, but the agent gets only 25% of the 6% commission on that additional thousands

As of late 2011, about half of all mortgageholding homeowners could not afford to pay an agent’s commission when selling…not if they wanted to put 10% down on their next house.

As explained by mortgage analysts in this CNBC article, ‘effective net equity’ is the equity you actually can use as a down payment on your next house.  If you use an agent to sell your home, you’ll forfeit 6% of the sale price to a commission. For about 25% of American homeowners, that 6% means that they don’t have enough of a down payment to meet the standards required by most mortgage lenders (which take their cues from secondary lenders Fannie Mae and Freddie Mac).

In other words,  the agent commission has forced these homeowners under water – owing more than their house is worth, after the transaction expense.
Officially, 28.6% of mortgageholding American homeowners owe more than their houses are worth. If they sold, they would have to arrange for their lenders to take less than they owed on the mortgage – the classic  definition of a ‘short sale.’ At that point, agents typically accept a smaller commission, as the terms of the sale are dictated by the lender.

But by the ‘effective net equity’ definition, about half of mortgageholding homeowners are under water.

Researchers agree: commissions are only good for agents

Academic studies prove that the 6% standard agent commission is simply too rich for the extra value that agents provide. A study by Stanford University economists factored out the effect of the multiple listing service under the rationale that the MLS is inexpensively, universally accessible to all sellers – and therefore does not represent a special marketing advantage available only through agents. That left only two activities justifying the agents’ commission: actually showing the house, and negotiating the terms of the sale. The Stanford economists questioned if those two functions made enough of a difference in the selling price to justify the commission. In fact, selling for slightly less ‘by owner’ still netted the sellers more than they got selling at a higher price, then paying the 6% commission. The Stanford economists did note that houses sold by agents sold somewhat more quickly. A Northwestern University study came to similar conclusions.

A report by the National Association of Realtors validated a different set of “by owner” advantages. It found a slightly lower sale price for houses sold ‘by owner,’ but after the commission was factored in, the ‘by owner’ sellers ended up with a higher net. This research validates what many buyers suspect: that agents simply jack up the market value of a house to cover their commission. Of course, that means that buyers expect to negotiate down that cushion..which leaves the agent-represented seller with a lower sale price further eroded by the 6% commission.

The National Association of Realtors claims that in a tough market, more sellers rely on agents to get their houses sold. The truth is that statistics about how many houses are sold ‘by owner’ are fuzzy. Typically, 18% to 20% of all transactions are direct. That was especially true during the 2002 – 2007 housing bubble. But, the collapse of that bubble coincided with the rapid growth of online marketing tools for do-it-yourself sellers.  The best of those tools are shared with agents – such as flat-fee access to the multiple listing service.  The National Association of Realtors counts as ‘agent assisted’ all types of sales, from flat-fee, MLS-only to full-commission, purportedly full-service sales. Thus, any sale through that involves the MLS or is counted by the NAR in its “agent-assisted” category. Of course, those buyers and sellers consider their transaction ‘by owner.’  This overlap makes it difficult to precisely identify how many sales are actually ‘by owner’ and how many are full-commission.