An Essay about "For Sale by Owner"

Because the discussion surrounding "For Sale by Owner" (FSBO) "fiz-bo" transactions is so extensive and contentious, I believe this subject warrants this long discussion. My aim is to discuss and explain the various features, risks, and advantages for the seller and buyer in a FSBO transaction. Much of what I say is simply my own opinion (obviously) but I hope to contribute some valuable insights as an industry insider and critic. I also endeavor to provide both reasonable and experiential arguments in favor of and opposed to the FSBO method.


Disclaimer: Nothing I claim herein should be considered legal or financial advice. I am a real estate professional, and I will touch on some legal and economic subjects, but please understand that one should seek the advice of a qualified attorney or financial adviser for any specific questions.


Essentially, I think FSBO is a poor strategy for a large majority of sellers and buyers. However, it can be beneficial in some specific circumstances.


Lawyers, tech-entrepreneurs, and academic economists have much to say about the merits of FSBO sales, and unfortunately it seems to me like real estate brokers have little to contribute other than unqualified rejection. Many brokers seem to intuit, or have learned from experience, that FSBO transactions are unfavorable for both seller and buyer. I believe this opinion is not simply economic self-preservation, but rather a recognition of the various deficiencies of most FSBO transactions.


In the following essay, I hope to clearly and concisely articulate why I agree with this intuition, as opposed to the common sentiment that brokerage is an unnecessary and unjustifiable expense in the "information age."


In Part 1, I will discuss the "lay of the land" so to speak. I will discuss the concept of brokerage, some economic and legal insights into FSBO, the effect of online marketers, and potential future developments in the field.
In Part 2, I will discuss the inherent risks of a FSBO sale.
In Part 3, I will discuss the advantages of a FSBO sale.


Stay with me now! I promise, you will have a much better understanding of the situation by the time you finish this post.

Section 1: Brokers are everywhere.

The word "broker" can mean many different things. There are specific legal definitions of "broker" and "brokerage" in every state's laws. Official brokers operate in many aspects of human life, and we depend on them all the time. However, let's expand the definition for the purposes of this discussion.

Broker: Any entity necessary for a particular exchange of goods or services that is not the buyer, seller, or government.


Under this definition we can see that we operate with brokers all the time. Checkout clerk? Broker. Amazon.com? Broker. E-Trade? Broker. Craigslist? Broker. Physicians? Brokers (for pharmaceutical companies). Car Salespersons? Brokers.  E-Bay? Broker. Pay-Pal? Broker. Travel agent? Broker. Orbitz, Travelocity, Expedia? All brokers.


And yes, I argue that Zillow, Trulia, Hotpads, Realtor.com, and all of the other online real estate marketing websites are actually brokers. No, they're not legally and technically brokers in most states, but they function as brokers and make oodles of money off of you in the process.

Brokers are people...or corporations...or machines...or something...

It used to be that most brokers operating in our economy were living, "natural" persons. The kind of people who eat food, sleep, and have lives. Increasingly though, brokerage operations have been assumed by machines, websites, and corporations. This makes it seem like brokerage is phasing out of our economy, but in reality it is just becoming less obvious and less personal.

The clerk who brokers the sale of groceries between you and the grocery store owner? Replaced by a machine. It seems like the broker has disappeared, and you are dealing directly with the store. This is an illusion however, because in reality the store has acquired a perfectly obedient and tireless mechanical broker. There is no negotiation here. No flexibility on prices, no explaining to it that bruised bananas should get a discount, etc.

The travel agent who brokers the sale of various goods and services in far-away locales? Replaced by a team of human, mechanical, and digital brokers operating on a global scale. Make no mistake, those "free" online travel services make a lot of money, and they do so by brokering the multiple transactions between consumers and service providers. There are simply fewer people in the travel industry, because these people are able to use technology to command much more data, and interface with a vastly larger customer base. Consumers may think they're dealing "directly" with vendors, but actually they're working with a highly sophisticated brokerage. Sure, Orbitz doesn't wear a suit and tie or know your name, but the shareholders do make a lot of money off of the vendors and advertisers for the brokerage service they provide.

Now we turn to real estate. So many commentators from the legal, academic, and tech sectors seem mystified by the persistence of individual real estate brokerages. Surely Zillow and Redfin should have replaced us all by now right? I mean come on. If I can schedule a multi-week trip around the world online for free, I should be able to sell my house on the internet without paying a premium to some agent!

Necessary?

Sometimes brokers are necessary for a transaction to occur. Typically, we consider only the buyer and seller as the necessary parties of an exchange. I also consider a government as necessary for exchange, but don't have time to discuss this here. In addition, brokers are also necessary for transactions where buyer and seller can't communicate or reach an agreement. Essentially, brokers facilitate communication (via marketing, networking, etc) and help parties reach agreements through negotiation and objective assessment. Do brokers always successfully fulfill their functions? Of course not. However, the main point is that some transactions will not or can not occur without the aid of a broker. 

That random book you want from Alaska? I argue that the transaction would not occur without the brokerage of Amazon.com. Think about how much exchange is the direct result of their brokerage! Everyone knows that they can sell random stuff online for a relatively small cost, and everyone else knows they can find the random stuff they want on Amazon. Without the website though, all that random stuff would just be sitting in garages, basements, or attics to make rare appearances at local yard sales. Anyway, I digress. 

Basically, brokers (whether web-based, personal, or mechanical) facilitate exchange, and occupy a necessary and valuable role in our economy, and are compensated accordingly. As I'm sure you know; Amazon makes a ton of money.

How are brokers compensated?

Traditionally, brokers are compensated on a percentage commission basis by the seller. This benefits the seller, because the broker has an incentive to get the highest sale price possible (that's the idea anyway). However, it also benefits the buyer, because the broker earns money only at the close of a sale. The broker has an incentive to get the parties to agree so that a sale will actually happen. They're an economic lubricant. In a market where most of the goods are sold via a broker, the fees are absorbed into the sale prices and all parties share the cost (in theory). 

Increasingly though, online brokers are charging simple or "flat" fees to the seller. Amazon doesn't care about the sale price of your stuff, they're going to get their cut no matter what. Other brokers are making money from advertising, or by monthly fees. Zillow (for instance) is like a broker for brokers and makes money via advertising and from fees paid by brokers in order to get preferential treatment. Please understand, a Zillow "premier" agent pays a "premier" price for that designation.

The situation today

Real estate brokerage is ever evolving, and rapidly. New technology has made it possible for the FSBO seller to market properties on several different websites. Some brokers (often what are called "transaction licensees" in PA) will even allow a seller to upload a listing to the local MLS for a flat fee. Buyers can access information about the various properties for sale, and get in touch with the sellers directly, all for free. An individual can take the pictures, fill out the boilerplate disclosures, write a paragraph of copy, and throw their listing up at very little or no cost. A buyer and seller can interact directly and no one has to pay anyone to sell or buy a home!


Yet, as befuddled observers note, traditional real estate brokers persist. Not only are they persisting, but growing. According to the National Association of Realtors (NAR), 9% of homes were FSBO in 2013. This is actually down from 12% in 2006.  For contrast, the American Society of Travel Agents (ASTA) is reporting that 13% of travelers employed a travel agent in 2013.

OK, so real estate agents are doing 91% of the business in the real estate industry, but travel agents are doing 13%? Why is there such a discrepancy? Why do consumers continue to employ real estate brokers?


In the next two posts, I will offer an explanation and some advice for potential sellers and buyers.

Still reading?

For an interesting and pertinent discussion of related issues, please check out Levitt (yes, the Freakonomics guy) and Syverson's

"Antitrust Implications of Home Seller Outcomes when using Flat-Fee Real Estate Agents"


While I disagree that collusion is the best explanation for the persistence of full-service (and full cost) real estate brokerage, I believe their research and analysis makes a valuable contribution to this subject.

Section 2: Not a good idea

This section will discuss what I believe to be the significant inherent disadvantages for both buyer and seller involved in FSBO transaction. I will focus here exclusively on the disadvantages and ignore all possible mitigating circumstances, favorable interpretations, or potential advantages for now, since these will form the basis of the third part of this discussion.

Disadvantages for the Seller

1) Misguided Expectations: Today's internet savvy seller has access to a lot of data via Zillow, Trulia, and other online real estate sites. I don't mean only automated value modules like the Zestimate, but also things like general pricing trends, recent sales, days on market, market activity (expired/withdrawn/under contract) and other information. An astute seller may well be able to form realistic expectations about the price or days on market for their property. However, many sellers don't realize the data to which they have access is riddled with errors. Municipalities often report incorrect information, and brokers' attempts to manipulate the MLS database can result in goofy and unreliable data.

For instance, in order to disassociate a new listing from a string of expired listings for a given property, a savvy agent will input an alternate spelling of the street, house number, or put in extra punctuation. This fools the database into showing the listing as having never been on the market. Zillow is the same way, and agents can manipulate their database to fool their system also. Obviously this can make the days on market seem to be much smaller. Similarly, "pocket" listings (where brokers withhold some listings from the MLS in order to sell in-house) can make it seem like the properties are selling instantly. These brokers enter the listings into the database after the sale, so it makes the days on market appear to be zero, when in fact the listing could have been up for a month! Experienced agents can spot "pocket" listings in the database, but they often don't even show up on third-party sites like Zillow. Essentially, it is difficult to form realistic expectations about the price and other factors when you don't have access to complete and accurate data. Incorrect expectations can cause the seller to miss out on profit by selling below the market value, or fail to sell by listing too high above the market value.

2) Buyer and Broker Apprehension: Levitt and Syverson, in their 2008 paper "Anti-Trust Implications in Home Seller Outcomes..." suggest that traditional brokers collude against FSBO sellers in an effort to punish FSBO sellers and preserve market share and commission levels. While I don't doubt that this may be true in some markets, where they see collusion I see apprehension. Many buyers choose to be represented by knowledgeable agents, and these agents often actually work throughout the course of a transaction. Typically, people are compensated for work in our economy. When working with a FSBO seller, agents are worried that they won't get paid. After all, what incentive does the seller have to compensate the buyer's agent at the closing? Agents don't want to be in the position of blowing up a sale or suing a seller because the seller won't pay. If the agent's buyers love the house and want to buy it, and the seller refuses to pay a commission, only a very foolish agent would cause his or her buyers to lose the house because he or she won't get paid! Many of these agents think it's better to just avoid this situation altogether.

Sometimes, FSBO sellers employ what are called "transaction licensees" for the purpose of advertising their listings in the local MLS. These sellers are required to pay the commission to the buyer's broker, but they aren't under compulsion to sell like a traditional seller usually is. If a seller hires a full-service agent, and the agent brings in a ready, willing, and able buyer but the seller refuses to sell: the seller would still have to pay the commission to the broker. This creates an incentive for the seller to complete the sale. This isn't the case for FSBO transaction licensees. They're paid upfront.  Since the FSBO seller doesn't have any money on the table, what's to stop them from walking away from a transaction at any time? Agents know their buyers will be very upset if a capricious seller backs out after any minor bump along the way. No agent wants this to happen to his or her buyers! This creates an economic and personal incentive for agents to avoid showing FSBO listings.


3) Legal Trouble: Very few sellers are aware of the laws concerning the sale of real estate in their states and municipalities. The rules are constantly changing, and a FSBO seller could be exposing him or herself to the risk of a suit or prosecution. Some legal concerns: fair housing laws, disclosure laws, inspection laws, tax laws, zoning laws, environmental regulations, and contract laws. The current standard PA agreement of sale is 13 pages of dense, technical jargon. How many sellers have the familiarity with this contract to know whether they are getting a fair deal from the buyer? Sellers need to understand that they are responsible for the content of their online or paper advertisements. The federal, state, and local fair housing laws can be difficult to understand and implement, but one wrong step can land a seller in a lot of trouble. It's not a matter of being a racist or part of a hate group. Seemingly innocuous statements can be violations of these laws. Similarly, disclosure laws can be complicated. It's a federal crime to sell a home built before 1978 without a lead-based paint disclosure. It's illegal to sell a property in PA without a seller's disclosure. Agents carry insurance and continuously educate themselves about laws and regulations in order to protect their sellers as much as possible. A FSBO seller should consult an attorney for more information.

4) Inferior Marketing: If it isn't in the MLS, it isn't being advertised to the most serious buyers. Of course many FSBO sellers know a yard sign isn't going to be enough, but a FSBO ad on Zillow is seriously disadvantaged. Brokers and agents pay Zillow to feature their listings. Everyone is clamoring to make their clients' ads show up first, biggest, and best. FSBO listings get pushed to the bottom. I sometimes suspect that only those looking for FSBO listings will find them. And, often these are people looking for a deal, or are more sophisticated buyers like investors or management companies. A FSBO seller should be prepared to contend with bargain hunters and experienced investors.

5) Inconvenience: A FSBO seller will have to screen calls, follow up on leads, be able to show their home at any time, monitor their online marketing, and spend quite a bit on related services in order to stand a chance against competing properties. Real estate is a 24/7 business, and much of the work is qualifying buyers and coordinating schedules. It is common for a buyer to cancel a showing, especially if the showing is later in the day (after work). If the seller can't be there for the showings, they sometimes use combination lockboxes. If locks such as this won't guarantee the safety of a bicycle, are they trustworthy for an empty house with a big FSBO sign in front?

Disadvantages for the Buyer

1) Tenuous Agreements: When working with a FSBO seller, the buyer must be aware that the seller is not under the same compulsion to sell that a seller working with a full-service broker would be. The seller could back out at any time. Sure, the buyer might be able to bring a lawsuit against the seller for specific performance if the seller backs out without good reason, but how many buyers want to go through a lawsuit? Also, escrow funds are typically put forward by the buyer as a sign of good faith at the signing of an agreement. Who will hold these funds? Who will enforce the terms of the agreement regarding the funds? Why shouldn't the buyer just walk away at any time? Basically, the purchase of a home is rarely conflict free and completely smooth sailing. People disagree about things, and brokers forge compromise and help people complete transactions. Without the economic glue of brokerage, I believe many agreements would fall-through much more often than they do. The home buying process is already difficult and emotional without the added pressure of knowing that a seller could drop an offer for a better one, or just walk away at any time with few consequences!

2) Misrepresentation: Do you know the disclosure laws in your state? In PA, if a buyer buys a property without a satisfactory disclosure statement, the seller could be liable for misrepresentation for up to two years! Let's say, for instance, that the seller failed to disclose a major problem with the heating system. Six months later, in the midst of a polar-vortex induced blizzard, the furnace blows up and there is now a gaping hole in the roof and the heat doesn't work. Is the buyer's first thought "oh boy, now we can sue the seller for misrepresentation?" I doubt it! That situation shouldn't have happened in the first place. Essentially, how can a buyer be sure of what they're purchasing without a full disclosure from the seller? Of course, freak accidents and breakdowns sometimes happen, but if the FSBO seller is looking to save money on the sale, why should a buyer expect that the bargain isn't being made at their expense? A FSBO seller could be looking to unload a lemon on an unsuspecting buyer. An agent would put his or her ethics, reputation, and license at risk if they were to behave in this way, but the FSBO seller undertakes no such risk. 

Probably not the right choice

All of this said, I assume that FSBO is a bad idea for many sellers. However, there are some situations where it might make sense to forego a full-service broker and go FSBO. This will be the subject of the following section.

Section 3: FSBO can work sometimes

After considering the serious disadvantages for both seller and buyer in a FSBO transaction, I believe we can say with some degree of confidence that FSBO is not the right choice for a significant majority of sellers and buyers. However, I think there are certain circumstances that can make a FSBO beneficial for one or more parties, and I will describe these here.

It is crucial to be aware of economic incentives when considering FSBO transactions. Who is going to benefit the most from a FSBO transaction, and why? Who are the winners and losers, and by how much do they lose and win? It is in determining the answer to these questions that we can discover the potential advantages of FSBO.

How can FSBO benefit a seller?

1) You know the buyer and aren't too worried about the price

If you have a solid buyer whom you know and trust, and aren't worried about selling for less than the market value, I'd say go for it. Hire an attorney to draw up the contract. Hire a title company to close the transaction, and save yourself the commission! If you're convinced you're getting a fair deal from the buyer, and you trust them enough to make it to the closing, then absolutely go FSBO and save yourself the commission.

2) You're an industry professional with a lot of spare time

If you're a practicing or retired attorney, loan officer, appraiser, agent, investor, or marketing professional with a lot of spare time and money, go for it! If you're in no particular hurry to sell, and aren't too worried about selling for too little, but still want to save the commission, I'd say FSBO is the way to go. You can always hire an agent later if it doesn't seem to be working.

3) You're the lucky owner of an undeniably unique property

Are you the proud owner of an historic estate? Is your house the former residence of a celebrity? Are you located next to some kind of park, landmark, resort, or tourist attraction? Is it a luxurious 5,000 sq. ft. one-bedroom condo? Does it have a built-in car elevator or helipad? Is there a petting-zoo or wildlife preserve on the premises?

Basically, if people tell you things like "Hey, if you ever plan to move, give me a call" or "Wow, I'd love to live in your house, let me know when you want to move" then you need a lawyer, not an agent. The values of these kinds of properties vary wildly (see: Saudi Prince's Aspen Estate) so your guess is as good as anyone else's, although a local expert agent may be able to help you price it. Call up your friends and reread #1 in this section.

Sometimes, a truly unique or unusual property will appeal to only a very small segment of potential buyers, and you may have to spend quite a bit of time trying to find the right buyer. In this case, expect to be in it for the long haul. Spend a little bit on advertising online or in your alumni magazine, trade journal, or newspaper and wait for the right buyer to appear. Chances are, you know more people who would like your home than anyone else.

4) You're the owner of an undeniably desirable property

Do you live right next to a college campus, medical clinic, military base, etc? Does it seem like properties are sold within a week, or before the yard signs can even go up? Are there "WE BUY ANYTHING, CASH, FAST" signs in your neighborhood? There's a good chance you live in an extreme seller's market, and an agent may not be able to help you get a higher price or sell more quickly. In this case, again, you need a lawyer and a title company, not an agent.

5) You just don't care, and want to unload it ASAP.

Have a run-down piece of junk you just want to be rid of? Is it in the middle of nowhere? Are there tons of problems with the property? Is it next to a toxic waste dump, strip mine, or (active or former) meth lab? Is it a meth lab?

I recommend an auction for these kinds of properties. Here's a good article with more information.

How can FSBO benefit a buyer?

1) You're a sophisticated buyer, and you have a good agent

FSBO's can be a good deal for the buyer, especially if the seller is uninformed about the market. If you're a savvy real estate investor, you may be able to get a fantastic deal on a FSBO property. If you pay your agent directly to do the paperwork, this can be a big win. Sometimes it is difficult to find these properties, but a knowledgeable agent can be very helpful. The information asymmetry between you and the FSBO seller will give you a tremendous advantage in negotiating the price and other terms.

2) You're buying from a family member or close friend

If you personally know and trust the seller, and aren't too worried about overpaying, why bring in an agent? Sure, there is a risk of a family feud or broken friendship due to inadequate disclosure and buyer's remorse, but if the property seems generally acceptable, and you have convinced yourself that you won't hate your cousin or best friend for selling you a piece of junk when the water heater explodes next winter, then you're good to go. Hire a lawyer and title company, you'll probably save a little bit of money.

Closing Comments

This concludes my discussion (for now) of FSBO transactions. I hope these comments have been useful to you. Please feel free to contact me for further advice or opinions if you are considering selling FSBO.

Jay Villella