Even with the creation of Zillow, Trulia (acquired by Zillow in 2015), and a bunch of other internet real estate companies, I don’t understand why commission rates come down. Just look at the wealth management industry. They used to charge 2% – 3% of your assets to manage your money. Now, thanks to robo-advisors like Wealthfront and Betterment, you can have your money managed with similar results for 0.25% or less. That is a 90% decline in commissions!
Every single property I’ve bought since 2003 I found through the internet. It’s why I’ve always asked for my realtor to share some of their commission once the deal closes. They always obliged since they didn’t do anything except help write the offer that I deemed was fair. Today, you can just write an offer in minutes using Docusign.
Then in 2014, I decided to take saving money on the purchase a step further and have the listing agent also represent me to save an estimated 8% off the purchase price (1% commission refund, 7% lower offer price FTW). It was a no brainer because I understood the transaction process after writing a couple dozen offers already.
Selling a home for top dollar does require skill because marketing a property well and having a large network makes a big difference. The listing agent who sold my home basically left $120,000 on the table for his sellers because he didn’t have a network as a retiree, didn’t market the property over the internet, priced too high, and became friends with me!
You don’t want to be friends with me if you’re trying to get the best deal possible.
A great realtor is absolutely worth her weight in silver. But that weight is still worth less than 5% of the value of a home when home prices are now so steep in major coastal cities in the U.S. Instead of a fee based on a percent, a flat fee seems much more fair to consumers. But as we all know, the world is unfair.
Let’s look at a real cost breakdown for a home that sells for $1,850,000 in San Francisco. It was part of the market presentation the visiting realtors gave me if they were to sell my home. I think you’ll be shocked to see how much selling a home costs!
Cost Breakdown To Sell A Home
To sell a $1,850,000 home in San Francisco costs a whopping $116,735! That’s 6.3% of the value of the home chopped off right there. The cost also assumes “only” a 5% commission. In comparison, the cost to sell $1,850,000 worth of stock in 30 positions on Motif Investing costs only $9.95 versus over $1,000 a couple decades ago, and ~$7.95 per position even today. That’s another 90%+ decline in commissions.
In the realtor’s defense, half of her 5% commission goes to the agent who brings the buyer. Not a bad deal for the buyer’s agent (curiously labeled as Selling Office in the chart). Meanwhile, depending on the listing agent’s contract with the real estate firm, she will have to give at least 20% of her 2.5% commission to her firm as well. So instead of taking home $46,250, the listing agent may take home at most $37,000 for roughly 2 – 3 months of work.
$37,000 is still a healthy take, but it is a far cry from the $92,500 you think she gets for charging 5%. Most realtors don’t have many listings each year. Most realtors help people find homes. In a competitive market like San Francisco, you lose out on bidding wars more often than you win.
Now let’s focus on the San Francisco Transfer / Excise Tax of $13,875. Every city and state has one, so check yours. The tax rate is variable, depending on the purchase price OR the fair market value, as shown in the chart below.
For a $1,850,000 property, the math is therefore $1,850,000 / $500 = 3,700 X $3.75 = $13,875. The city loves an increase in transaction volumes. Not only do they get to collect a large transfer tax for filing a piece of paper at City Hall, they also get to revalue your property higher and make more in property tax income.
For example, my home was being taxed at an assessed value of roughly $100,000 today because the one owner bought it for only $50,000 back in 1946. We have a law where the assessed value can only go up by no more than a determined index (~1-2% a year). The city’s take was therefore $1,200 a year ($100,000 value X 1.2%). Given I bought the home for $1,230,000, the city is now making $14,760 a year for the same property!
But holy crap. Look at how there’s almost a 3X jump in Transfer / Excise tax if you sell a house for more than $5,000,000. We’re talking a minimum $100,000 Transfer / Excise tax bill here. What a waste of money. Can you blame city officials for not doing as much as they should about fixing a housing shortage?
Now let’s look at Other Costs equaling $10,300, all of which are necessary except for perhaps the $8,500 staging. Because most buyers have zero imagination, staging is generally recommended. The house will look cleaner, brighter, and as good as it ever will to attract max money. $8,500 alone sounds like a lot to rent furniture for 2-3 months. But the hope is that staging will more than pay back its cost. The higher priced your home, the more staging is worth it.
The house I’m currently living in was not staged back in 2014. It had gross shaggy green carpet and green paint throughout. Some of the aluminum windows were cracked and everything was untouched from 1946. As a result, competition was sparse. Because the listing agent also priced it too high, he scared away the flippers as well. This was a perfect scenario for me. I love buying un-staged homes because I know what things could be after seeing thousands of open homes over the years.
The final cost we do not see is Taxes. Although the property may sell for $1,850,000, the net proceeds is only $1,733,000 if the seller doesn’t negotiate. In other words, all these costs are deductible. If the sellers are a married couple, they can make up to $500,000 tax free if they’ve used the property as their primary residence for at least two years. A single seller can earn up to $250,000 tax free under the same terms.
Any overage is taxed at the applicable long-term capital gains rates, which is 20% for higher-income taxpayers ($413K single /$464K married), 15% for most individuals and, for some sellers, zero percent if they are in the 10% – 10% income tax bracket.
Never Selling My Properties
Take the annual income your asset generates and divide it by an interest rate to see how much capital you need to produce the same income stream.
Given these costs, I NEVER plan to sell my properties until there’s at least a sliding scale in commission rates e.g. 3% commission for homes under $1M, 2% commission for each $1 over $1M, etc. There should preferably be a flat fee for selling a home, just like there should be a flat tax above a poverty income level. The internet should have lowered commission levels by now but haven’t because realtor advertisement revenue is a key source of revenue for internet real estate companies.
The irony is that if real estate commissions were lower, there would be a lot more transactions, generating a lot more revenue for the entire real estate industry. Given each city also has a huge Transfer / Excise tax for simply pushing paper, lower real estate commissions would boost city revenue as well. The real estate industry is ripe for disruption.
Selling causes leakage. Further, you never want to sell a cash cow in this low interest rate environment. All income generating assets must be cherished like a spoiled only child. Take advantage of people who don’t have the discipline to hold on. 20 years from now you will probably be very glad you did.
Readers, why do you think real estate commissions have not come down while fees have come down in every other industry due to the internet? Why are people willing to instantly lose 6% – 8% of the value of their home due to all these taxes, fees, and other costs?
from Financial Samurai http://www.financialsamurai.com/what-does-it-cost-to-sell-a-house-a-look-at-the-commissions-taxes-and-fees/
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