Just do this: if you’re ready to buy a home, don’t bother getting a traditional agent to help you with your search. Instead, take the time to educate yourself on the market using the plethora of online tools, and make the purchase using one of the discount brokerage options that will give you up to 1.5% of the purchase price right back in your pocket, tax free. On a million dollar home, that’s worth ~$15,000 after tax… or close to $30,000 pre-tax (depending on where you live)
Why you should buy with a discount broker
I’m a big fan of primary home ownership. It’s a great way to anchor your investment portfolio with a low risk, inflation protected asset. If you’re ready to take the plunge yourself, you might be considering working with a ‘full service’ agent. But why not save $15K instead? The reality is that, in 2018, you don’t need the high touch efforts of a ‘full service’ agent when buying. You can save yourself up to 1.5% of the purchase price of the property by getting a little more hands on and working with a discount agent like Open Listings or Redfin. On a million dollar purchase, that 1.5% equals $15,000 right back in your pocket. I did exactly that for the purchase of my SF home, using Redfin.
For those who are completely new to the world of real estate, you might be wondering where this magical 1.5% comes from – well, in short, real estate agents generally charge the seller of a home 6% of the purchase price. Traditionally, 3% goes to the selling agent, and 3% goes to the buying agent. In the uber-expensive coastal markets, 3% starts adding up to a lot of money for not a lot of work, so there is pressure for agents to reduce their fees. When you’re buying, you can get up to 1.5% of the purchase price back from your agent when using a service like Open Listings or Redfin. The best part is that they still provide a good amount of service and support – they will take you to view homes, and provide advice along the way, in addition to submitting offers and handling the close if you end up buying. So really, there’s not much a ‘full service’ agent will do that these technology powered discount brokers won’t. I really don’t know why you would use a ‘full service’ agent.
That said, some folks find the home purchase process daunting. I’m here to tell you it’s easier than you think. The role of an agent on the buy side is as follows:
- Educate buyer on different neighborhoods in city
- Educate buyer on what to look for when evaluating specific properties
- Educate buyer on recent sales comps and pricing in target neighborhood
- Handle the creation / submission of bids, and subsequent paperwork when closing
If you’re anything like me, you’re not going to drop $1M on a home without understanding what you’re buying anyhow. Whoever you work with, you’ll still need to get smart on the neighborhood, specific properties and price comps. That means your agent is really there to help with showings and grease the treads of the whole process. Given that, why not get that 1.5% back?
How to work with a discount broker
Let me walk you through what it will take to make this work. The goal when searching for a home is to become a local market expert. You don’t need to know your whole city, but you want to become an expert in the niche neighborhood where you want to buy. You want to be able to look at any listing and have a strong point of view on whether it’s a property you would be interested in, and what you would pay for it.
To become an expert for your target neighborhood follow these steps:
- Define your goals: What do you want in a home? Beds? Baths? Ensuite? Backyard? Location? Schools? Proximity to transit? Parks? Quality of finish? Single family detached?
- Deal breakers: Is there anything that is a must have? Get clear on that up front
- Deal makers: Is there anything that you don’t care about that most other people do? If so, knowing that and looking for it can help uncover potential opportunities to find a deal
- Set up automated searches: Use online sites (Redfin, Zillow, Trulia) to setup searches for your target property – use filters and set up a search covering the neighborhood you’re interested in. Have these searches send you a daily email summary of new listings and sales, and read it every morning while you’re waking up. I prefer the Redfin interface on my phone (it feels faster), but try them all and see what you like
- Visit open houses: For any interesting properties, find the open house date and go there (with or without an agent to accompany you). As mentioned, Open Listings or Redfin will provide an agent to accompany you, but that’s not needed. You can go alone. The goal is to take a look under the hood, see what people are paying for different levels of quality. Talk to the listing agent to learn as much as you can – often times they’ll reveal interesting insights into the area
- Repeat for 2-3 months: Do the above exercise for 2-3 months and you will be a relative expert in real estate for the neighborhood you’re interested in. You should be able to look at a listing and know whether it would fit your criteria, and what the home will sell for within ~5-10% accuracy. Note that in most coastal markets the list price if often way below the market price – get past the shock and realize that the ‘listing price’ is not really the what it will sell for. Those ‘30% over ask’ situations are not by accident, they are by design. Conversely, in less competitive markets (see Midwest), agents will sometimes try to list high and then slowly roll out price reductions – as long as you know the ‘market price’ for your neighborhood, you can see past these games
- Make offers: Once you understand the market, you can start making offers with confidence. Realistically your buying agent will not be able to help much with offer price and negotiations – they can make some suggestions but I’ve found they typically defer to you. This is your hard earned money, so you should make sure you’ve got a strong point of view on things – if the offer gets accepted, you’ll be on the hook to follow through
- Wash, rinse, repeat: That’s all there is. Use the digital tools out there to become a niche market expert, and use that knowledge to guide your bidding strategy. Use the discount broker to submit your bids and manage the process for you
It’s a lot easier than you might think, and you will want to become a local market expert anyhow, so why not get paid for it?
If after reading this you’re still interested in exploring full service agents, here are a few resources to consider (can’t say I’ve used them myself), so YMMV:
Just remember, when working with a ‘full service’ agent you’re leaving a good chunk of change on the table – that’s money that could help you pay down the mortgage, or bid a higher price to get a better shot at securing your dream home.
Best of luck, and enjoy the journey!
Other relevant articles & notes: