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!

This entry was posted on Monday, April 23rd, 2007 at 11:09 am and is filed under Editorial. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site. Bookmark on del.icio.us