Adventures in Real Estate – Buying without an Agent
In January, I embarked on a quest to buy a home without using a real-estate agent. The reason for doing so is not because I thought that agents have no value, but just because I didn’t value their services at their asking price of $35,000-$45,000. (3% of $1.5M is $45K) There are very few things that I ever spend that much money for; and a few weeks of part time service from an agent does not seem worthy of that price. $4K to $5K seems like a more appropriate price.
The Process
To stake out on your own, the first thing you need is a standard set of contracts. While anyone can write an offer, the fact is that seller’s agents don’t know how to deal with contracts they are not familiar with. In order to accept them, they’d need their lawyers to scrutinize the contract, and they won’t do it. In my area, it turns out that there are two popular sets of contracts used. One is the CAR forms (from the California Association of Realtors), and the other is the PRDS forms (used by the Silicon Valley Association of Realtors). Since these agencies are pro-agent and anti-buyer, you’ll need to contact a Realtor who is willing to give you the forms.
The forms are pretty easy to fill out. You will need to read them thoroughly, and do a little research about who pays various fees in your area. In my county, the seller pays for most transfer taxes and title. I was able to get this information by calling a Title company and asking.
Next, once you are ready to present your offer, you’ll need to collect a set of information. Some homes are listed with a set of disclosures that you must return to the seller’s agent as part of your offer. My offers contained:
– A cover letter
- The purchase agreement
- Signed disclosures required by seller
– A pre-approval letter for the loan
The Offer
The offer is the hardest part of the process for several reasons. First, you may be dealing with an Agent that is fundamentally opposed to buyers working without agents. While Agents are legally required to present your offer to the seller, they are not required to put a positive spin on it. So, when you run into these agents, your offer is may be rejected just because you don’t have an agent. I had this happen to me at least once. The Agent first claimed that what I was doing was illegal. When ultimately convinced that my offer was legitimate, she took it begrudgingly. Nonetheless, the offer was rejected.
The second difficult part is that even if the seller’s agent is open to your offer, they do not know how to deal with buyer’s without agents. One agent said to me, “In 30 years, I’ve never received an offer from an individual”. The process and the forms are all designed to support the agents with minimal liability. They are not designed to protect the buyer or the seller. In this case, the seller has already made an agreement with his agent and his agent’s broker. That agreement probably says that the seller will pay *his* agent up to 6% of the total sales price, with up to 3% of to be paid by the seller’s agent to the buyer’s agent. Because of this, when your offer comes in with 0% needed for the buyer’s agent, the listing agent (a.k.a. the seller’s agent) won’t know what to do with their contract to the seller. The listing agent now needs to write a new contract with his seller to reduce the fees. Unfortunately, because the listing agents never do this, it’s a difficult thing to get done.
Lastly, the listing agent may be afraid of taking on additional liability because you are acting as your own agent. Normally in a transaction, both buyer and seller are represented by an agent. Each agent has you sign all sorts of indemnification waivers so that the agents are not sued. The standard contracts are not designed to cover the case where you act without an agent. Even though I do not believe there is additional liability, you may not be able to convince the seller’s agent that this is true. Remember, the seller’s agent believes he is a valuable part of the transaction, and believes that he protects the buyers and sellers. If he believes that there is additional liability (regardless of whether it is true), that may be enough to jinx the deal.
My Case
In my case, I was ultimately not able to buy without an agent. We put in four offers on our own, none of which were ‘low-ball’ offers. Three of the four offers were for over-asking, and one offer was for more than $100K over the asking price. However, all four offers were rejected.
Unfortunately, each offer we made was accompanied by at least 4 offers from other parties. When the seller has multiple offers to select from, unless your offer is considerably higher than the others, the seller is likely to take a ‘traditional’ offer in favor of yours. From the seller’s point of view – and this is fair - your offer is riskier. You don’t know the process as well as an agent does, and maybe the reason you don’t have an agent is because you are less serious than other bidders. The seller doesn’t want the transaction to fall through, and taking someone else’s offer may be the safest bet, even if they are leaving a small amount of money on the table.
So, in conclusion, I don’t think you’re likely to buy a house without an agent if there are competing offers. If yours is the only offer, I do believe this process can work, but it is a lot of work to you.
Taxes
The saddest part of real-estate commissions is that you pay them every year after you purchase. In addition to paying $90,000 up-front for real-estate agents on a $1.5M home, you’ll also pay $1080 each year in increased taxes as long as you own your home, since the agent’s fees are rolled into the assessed value of your home!
(Note: Services are normally not taxed in California. This is a great example of how the CAR/PRDS real-estate contracts are designed by the agents for the agents. Although these agents pledge to work on behalf of the buyers/sellers, neither the seller nor buyer benefits by having the service rolled into the cost of the home. The seller pays additional taxes on their realized gains, and the buyer pays additional property tax forevermore. The only winner is the agent.)
Other Options
After having gone through this, I think there are other options which are better.
My favorite option is to just find an agent that is willing to do the “paperwork only” for a greatly reduced price. One of these in my area was Menlo Atherton Realty, who will act as a buyer’s agent for only 1% commission. They recognize that you did the work of finding the house on your own, so they don’t need to charge full price just to do the paperwork. This represents a $20K-$30K savings. Unfortunately, the only way to make this work is to credit the savings back to you in escrow.
Another option is to use the seller’s agent in “dual-agency”. This is where the seller’s agent represents both buyer and seller. Some selling agents may not be willing to do this (claiming ethics). But, if you can do this, the seller and his agent will re-negotiate their fees. Since you will not be privy to how they manage their fees, it’s a little riskier to you as a buyer. You should be straightforward with your agent and ask them about how this will work to make sure that it works in a way you approve.
Lastly, if you still want a full-service agent at a reduced price, you can negotiate with your agent to work for a lower fee. Some online brokerages like ZipRealty, for example, will give you 20% of their commission. That’s not a huge discount, but better than paying the full 3%. ZipRealty credits you back through escrow as well.
If you’ve had experience buying without an agent – please post a comment!
April 27th, 2007 at 12:58 am
[...] without an agent – here are some relevant quotes from his most excellent and informative tale: Mike’s Lookout » Blog Archive » Adventures in Real Estate – Buying without an Agent In January, I embarked on a quest to buy a home without using a real-estate agent. The reason for [...]
May 2nd, 2007 at 8:24 am
You’re assuming your offer wasn’t chosen because you didn’t have an agent. I’m not sure that’s a valid assumption. When I was shopping in that area, I overbid on 8 homes (with an agent, pre-qualified financing, as-is offers, etc.). I lost every time to a higher bidder. It seems surplus demand is a more likely reason for your losses than the fact that you were trying to buy without an agent.
May 4th, 2007 at 5:50 pm
Oh, I make no such assumption; I’m well aware that there could be a number of reasons why my offer was not accepted. However, given the amount of time I spent with that listing agent, I know they were interested in the offer and that it was close. I stand by my conclusion though – I think you are very unlikely to win a bid if there are competing offers which are similar. The agents and the sellers will perceive the other offer as less risky than yours merely because the other party has an agent.
May 9th, 2007 at 12:27 am
My agent gave us 1.5% cache back, and she still did all work. I think it should be a standard in the bay area since the housing price is much higher than the rest of country.
May 19th, 2008 at 5:13 pm
Good job, Feng. You can get a good buyer’s agent to negotiate a lower price on behalf of the buyer and a get rebate too.
June 4th, 2008 at 4:41 pm
The Washington Post gives buyers the “heads up” on how a real estate transaction works in the real world.
“Some people just don’t like working with agents. Other buyers go without them thinking they can negotiate a better deal on their own by working directly through the listing agent. Often they think that by working on their own, they are entitled to a discount on the sales price equal to what the buyer’s agent would have received as commission. But the payment structure doesn’t work that way. In that situation, the seller’s agent just keeps the whole commission.”
http://www.washingtonpost.com/wp-dyn/content/article/2007/11/10/AR2007111000046.html
Perhaps the home buyer doesn’t need full service and is willing to incur some of the legwork. In that case, a buyer’s rebate might be appropriate and is merely a price reduction of buyer-agency services.
Finally, a buyer should seek out a good buyer’s agent who is focused on saving the buyer money through strong negotiations throughout the entire transaction.
December 2nd, 2008 at 10:02 pm
I don’t think what the agent did was bad. The bank still need to approve the sale at the price that was offered. Your realtor and the agent already said your offer was too low. You probably would have spend several month waiting and still not get the place even if the agent didn’t do what he did. The agent was trying to gain interest in the place by lowering the price and hopefully have someone bid above the price. He still has a duty to his client to sell the place.
March 22nd, 2009 at 9:21 pm
check out a newish service called redfin. they rebate back 50% of commission.
August 21st, 2009 at 4:33 pm
why not just make your offer without an agent and ask the listing agent to change their listing agreement with seller to 3%, then in the negotiations have the seller credit you the buyer 3%?
September 26th, 2009 at 2:44 am
Dual agency is better option .But you should be straightforward with your agent and ask them about how this will work to make sure that it works in a way you approve.
September 28th, 2009 at 11:44 pm
No – dual agency is far worse. In fact, some agents refuse to act in dual agency because of the inherent conflict of interest. If you sign up for an agent with dual responsibilities – its the same as if you have no agent – this person is NOT negotiating on your behalf. You cannot trust this person with any financial information about you – because you have no way of knowing what information (directly or indirectly) will get back to the seller. Acting as your own agent is the best course – that way you are negotiating, rather than some real estate agent that has no clue except that they want the sale so they can pad their own wallet.
November 8th, 2009 at 6:52 pm
Entering a real estate transaction without an agent is like going to court without an attorney. You can do it, but its generally not in your best interest.
November 19th, 2009 at 6:56 pm
Joy, you’re wrong. While I’m not a fan of lawyers, at least they are trained in something. A real estate agent is a salesperson, with one goal in mind – making the sale and cashing a check. No training is required! A lobotomized monkey could be a real estate agent. There are countless books (including the well known Freakonomics) which also note that a real estate agent DOES NOT have the interest of the buyer at heart.
January 30th, 2010 at 8:01 pm
mike, you’re quite wrong. In this business, I worked with many agents who had my best interest and they saved me quite a bit of money. you may have had a bad experience but it doesn’t give you the right to insult people doing good business.
January 30th, 2010 at 11:04 pm
J – If you, the buyer of real estate agent services is happy, then that is great. I’m just pointing out that Real Estate agents have a conflict of interest. And while they tell you (the buyer of their service) that they are helping you, they’re first-and-foremost a business to make money. Unfortunately, making money for them means selling your house as quickly as possible, not for the highest price.
One example which affirms my claims is the popular book Freakonomics, where he describes how Real Estate Agents are similar to the Ku Klux Klan. You should read it. Here is a blog post which is similar: http://www.wisebread.com/why-you-cant-trust-a-real-estate-agent As the author points out, there is data that shows clearly that when a real estate agent sells *his own* home, he keeps it on the market longer and gets a better price (on average) than when selling someone else’s house. It all makes perfect sense, and you’d be a fool to not recognize this problem.
January 31st, 2010 at 12:20 am
Mike, you make a lot of sense. I am trying to buy without an agent in the North East. It is a buyer’s market now. I get the sense that seller’s agents are very interested when they find out I am ‘not represented’. Some beg me to make them my buyer’s agents, others want to be dual agents. Clearly, it is in their interest, since I have researched the neighborhood and the house I want to buy pretty thoroughly. My understanding is that the Broker (i.e. company they work for), keeps 50%-70% of the commission while the agent keeps about 30%-40%. This is because the ‘Broker’ knows how little skill it takes to be an agent. I am about to make an offer. Where can I find out about a limited service broker?
Thanks.
January 31st, 2010 at 2:31 am
Hi Mani – I would search local classifieds, you can probably at least find an agent that will do the work for a 1.5-2% commission (better than the ridiculous 3% they want to charge). Here in California, these agents are easy to find – I’m not sure about other regions where home prices are lower.
I think going after the dual-agent is just fine too. There are legal risks here, so be careful. But if you are comfortable with doing this yourself, you can simply go into dual agency and then ask for 3% off the sticker price. This should be no problem, since the agent is already getting 3% from the seller, and the amount of additional work is negligible. They’ll probably say, “ok, how about 3% is given back to you through escrow”, and that is not horrible, but kind of silly, because it means your property tax assessment will include the 3% as though it were part of the purchase price, even though you got it back through escrow.
January 31st, 2010 at 2:32 pm
All agents who want to be dual agent for us have consistently refused to part with the buyer’s agent’s commission. Their brokers (Prudential or whatever) will keep all of it since local state law only obligates them to pay the buyer’s agent, provided the buyer has a signed contract with his agent. Since I do not have a signed contract with any buyer’s agent, they are very eager for my business as they get to keep all of the commission. They are even willing to work with the seller to reduce the price of the house (screw the seller), but they (the agent and the brokerage) gets to keep the entire commission (which by the way is as low as 4.5% in some cases). Isn’t that a sweet deal for the agents/broker?
February 9th, 2010 at 11:54 pm
I am thinking about attempting to go without a buyers agent I have a home in mind and the homeowner invited me in while I was picking up a flyer My wife and I were given a tour of the home the owner is an elderly women who has started with building another home right next door but has found that she is unable to get financing (she said 4 banks told her money was tight) I was thinking of putting a proposal together and giving it in person to the owner and asking for the 3% to be taken off the asking price as a condition.Anyone have any feelings about this? Also asking for closing costs and wanted that deducted from cost of home also.