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The Downside of For-Sale-By-Owner Listings

In the wake of new consumer-direct services and technology, the real estate industry is seeing a rise in For-Sale-By-Owner (FSBO) transactions. FSBO (pronounced Fizz-Bow) is a common ‘Do-It-Yourself’ practice that removes the professional REALTOR® from the equation with the end goal of saving commission fees. But there is a hidden downside to FSBOs that we think you should know about.

 

How FSBOs Usually Work

 

Privately listed sales have just as much chance of finding interested buyers as do registered MLS listings. If a seller places a FSBO ad on Craigslist, Kijiji, or uses a specialty website like PropertyGuys.ca, they will 100% find a buyer. But they won’t find the best buyer. That’s because the buyers who shop for privately listed properties are hunting for a bargain.

Picture it this way, let’s say you won a brand new iPad in a raffle, but you already owned an iPad–you bought from the Apple Store a week before. So, you decide to sell the new one. You click over to Craigslist or Kijiji to put an ad up for sale. After a few hours, the offers start pouring into your inbox. Now, you know what iPads are selling for at the Apple Store because you just bought one, and you notice that the offers you receive are half of what you paid. Why are they offering less? Because the small group of people who shop for privately listed sales are looking for a bargain. Only at the Apple Store will an iPad sell for full market value.

The Apple Store in real estate is the open market Multiple Listing Service system. That’s where a property receives full valuation, not to mention an above-average valuation, because that’s where the bulk of prospective buyers are shopping.

 

The Downside of FSBOs

 

FSBOs shoot themselves in the foot right from the start, because they are marketing to a marginal group of bargain shoppers. The idea behind FSBOs rests on the belief that avoiding the help of a professional REALTOR® saves you the cost of commission and is ultimately a better deal for both buyer and seller. While the commission bit is true, the conclusion is incorrect.

FSBOs come down to the meeting of two unfortunate ends. On one side, there is a seller listing the property with an incomplete sense of the market, and on the other side, a buyer who is specifically looking for a deal. What you get is not exactly a match made in heaven. While the FSBO does save commission fees, it’s not receiving the best offer because it is only ever presented to a small group of potential buyers, rather than the full open market where the best value would rise to the top.

Another hidden downside to a FSBO transaction is the potential for legal conflicts to erupt between the buyer and seller during the process. Real estate deals are complicated. The magnitude of the financial commitment involved, which for many people will be the biggest purchase of their life, combined with the required legal due-diligence over taxes and ownership can easily become a hotbed for emotional distress and conflict. Embarking on this journey without a REALTOR® is like wandering into the jungle without a guide who knows the way to the other side. It’s in this way, as a guide, that professional real estate agents are truly invaluable.

 

The Value of Working with a REALTOR®

 

In the real estate process, REALTORS® have less to do with firming up a selling price and more to do with guiding the process and creating market exposure. When you work with a professional REALTOR®, like our Condo Pros, you don’t just tag a listing price onto your condo and wait. It is the role of the REALTOR® to bring the open market to you and put your property in front of the biggest possible bidding arena to find the best offer. That’s what a good REALTOR® does.

It may seem like saving commission fees in real estate is a sweet deal, because it’s easy nowadays to overlook the value and role of a REALTOR®. With access to online listing services like Kijiji and PropertyGuys.ca, it seems normal to think you can do the work of a licensed sales representative.

But it’s not that easy.

Because the REALTOR® isn’t doing one specific thing that can be replaced. The REALTOR® is working in an entirely different marketplace than a private seller, providing a level of exposure and insight that private listings simply don’t receive. If you want to find the best value possible, then you want to buy and sell with a REALTOR® in the open MLS market, not in the bargain bin of private listings.

  • hernandayoleary2

    Well, unless the FSBO got a lawyer to do the transaction. And it is not like the realtor is a lawyer, he isn’t going to be able to navigate the issues anymore than a lay person because most real estate agents don’t have a legal background.
    The downside of FSBO is that you potentially get far less people seeing your listing. Which means that there is a likelihood that you get a lower offer. At the same time, no way would I ever pay a realtor 2-3% of a $1 million plus home in a hot market like Toronto or the gta or vancouver where you can easily get a good price without a realtor. Real estate agent does work of value in connecting you to buyer, but it is not $30 grand, not $20 grand, not even $5 grand in my view. The exact same sized house in a small rural area is having a realtor paid $1-2 grand. Any realtor that thinks any informed intelligent person is going to just throw away their house equity in fees who can afford to wait, is insane.

    If I was a relator, I’d be looking to make a website to connect buyers and sellers like Amazon or Ali baba because really that is the future. Realtors can get away with it for now because most home buyers and sellers are still older not tech savy people. But in 30 years no one is going to be using realtors. They will be using the internet to find their house and lawyers to close the deals.

  • Hey, @hernandayoleary2:disqus,

    Thanks for your thoughtful comment on this topic! While you’re right that most real estate agents lack a formal legal background, an experienced and knowledgeable REALTOR will most often have strong, reliable relationships with lawyers, mortgage brokers, and other professionals that can help in the real estate process. It’s through these trusted relationships that a REALTOR brings a whole community of knowledge to the table. But this is really about the commission fee. Yes, there’s a cost, but working with a professional real estate agent is the difference between getting a ‘good’ price and the BEST price.

    Looking into the future, we see the role of the REALTOR becoming even more important. Buyers and sellers are already more tech-savvy than they were twenty years ago, but the information available to them is also more complex. Most people still benefit from having a professional to guide them. Connecting buyers and sellers is one thing, but staying ahead of the marketplace, evolving with it, and knowing how to navigate a sale to find the best deal is something you can’t put a price on, and that’s the value of a REALTOR.

    Cheers!

    – Condos.ca Team

  • Hey A_Man_S,

    Your comment raised many excellent points, and we’d like to thank you for taking the time to contribute. It’s great when one of our more experienced readers steps up and provides extra insight that can benefit our newer followers.

    This article was intended as an intro to FSBO for our growing audience of younger investors and first-time buyers, and we recognize that it may have missed the mark for many of our more experienced readers. Rest assured, we pride ourselves on information, research, and fact-based editorials. We hope you’ve noticed our newly expanded PSF Index and Market Report, available on our site, where you can find real-time market analysis. Also, we’re are in the midst of launching a new Investor Edition newsletter that you may be interested in joining.

    Regarding your comment, you’re right that the FSBO option is complex and one should do thorough research before choosing to sell their property privately. Our main point is that FSBOs seem to promise a win-win situation by cutting the agent and saving commission, which is certainly not always the case. You’re also right that information is the greatest tool in real estate, for both the client and the REALTOR. That’s why Condos.ca has been, and still is, strongly invested in providing accurate market analysis to our users. We’ve just had to expand our approach on the subject matter based on our growing readership. We hope that you can continue to admire our data-driven website in the future, and that you’ll continue to share your thoughts on these issues.

    Cheers!

    – Condos.ca Team