If you want to achieve the highest sale price for your home, then the two biggest mistakes you can make are to sell with a real estate agent or to sell privately.
Both of these options will guarantee that you will leave tons of money on the table by missing out on the highest sale price possible.
There are three reasons why selling with a real estate agent is irrational and two reasons why selling privately is just as bad.
No Real Estate Agent Can Ever Care As Much As You Do About Your Sale Price
The simple and undeniable fact is that nobody other than the owner of a home will ever have the same vested interest in achieving the highest sale price.
Nobody can or will have the same care factor as you, about how much you sell for.
This includes ALL real estate agents, irrespective of how experienced, helpful and friendly they are.
You cannot outsource your vested interest or care factor to anyone else.
This fundamental truth doesn’t require much explanation, whether you’ve thought about it before or not.
If you believe that a private sale is the answer, you are mistaken, and there are two reasons for this, which you can read about later in this article.
Most home sellers who accept that a real estate agent has a lower care factor mistakenly believe that this is offset by their commission.
They wrongly believe that a real estate commission incentivises agents to achieve the highest sale price.
Let’s look at this a little closer.
Real Estate Commissions Discourage Achieving The Highest Sale Price
Assume that you had a home worth $1M, which you wanted to sell.
If you engaged an agent who charged 2.5% commission, you would pay $25,000 in commission if they sold for $1M.
What is the agent’s commission on the last $100,000 of the sale price?
If your answer is $2,500, you’re correct.
The agent’s commission on the first $900,000 of the sale price would be $22,500.
Do you think that the last $2,500 in commission is as important to the agent as the first $22,500?
Do you think that the last $2,500 in commission is as important to the agent as the last $100,000 is to you?
Does the last $2,500 in commission provide enough incentive for the agent to strive for all of the last $100,000 of your home’s value?
Does it give them enough incentive to show you ALL the ways in which to boost the emotional appeal, perceived value and ultimate sale price of your home?
Do you really believe it gives them enough incentive to negotiate hard for the last stretch?
There are four common symptoms ignored by many home sellers, which scream that an agent is underselling a home. You can read about them here.
Scientific studies have proven that a real estate commission incentivises agents to sell quickly, even at the cost of underselling.
This makes sense considering that agents make most of their commission from the first 90% of the sale price of a home.
The small increase in their commission from the last 10% of a home’s value is simply not enough to encourage them to squeeze the most out of a sale.
This is why two independent scientific studies have found that percentage based commissions lead real estate agents to undersell homes by about 3% on average.
(Levitt, S.D. & Syverson, C., 2005. “Market Distortions when Agents are Better Informed: The Value of Information in Real Estate Transactions,”) (Gautier, P. & Siegmann, A. & van Vuuren, A., 2017. “Real-Estate Agent Commission Structure and Sales Performance,”)
For a more detailed explanation of why real estate agents undersell, click here.
So far, we’ve established two things: Firstly, real estate agents will never share your vested interest or care factor.
Secondly, this is made worse by the fact that they don’t have an incentive to strive for the highest sale price.
Let’s look at another danger of selling with a real estate agent.
There Is Zero Transparency In Selling With A Real Estate Agent
How do you know if a real estate agent is going out of their way to negotiate the absolute highest sale price for you?
When (or if) an agent negotiates with a buyer, it happens behind your back where you will never hear or see what is being said about you or your home.
There is zero transparency on this critical part of the transaction, where the ultimate sale price of your home is achieved.
This lack of transparency starts when an agent tells you to leave your own home for inspections or open homes. You’d be surprised to learn the REAL reasons why they don’t want you around…
The bottom line is that without transparency, there is no accountability.
Without transparency; without a strong incentive to strive for the highest sale price, and without a true vested interest or care factor, how well do you think an agent will negotiate?
How do you even know if they’ve negotiated at all?
Again, the answer is: You don’t.
Don’t you find this concerning, especially when most people engage an agent for their so called negotiation skills?
Considering that real estate agents have no transparency; accountability; proper incentive or a vested interest (care factor) to achieve the highest sale, do you see why it is irrational and absurd to engage one?
So why do most intelligent people make the irrational decision to use a real estate agent?
Part of the reason is because they fall for one or more of the ten hidden traps and false beliefs of selling, which you can read about here.
You may be tempted to think that selling privately is looking like a better option.
Let’s have a look.
Private Sellers Have No Idea About The Formula That Makes A Home Become Buyable For Top Dollar, Not To Mention How To Execute This Formula Well
Private sellers believe that a property sells itself, and all you need to do is advertise it.
This belief comes from the valid experience of almost every person who has ever bought a home:
Their decision to buy their home had nothing to do with the real estate agent.
It is true that nobody buys a home because of a real estate agent, however, a property doesn’t just sell itself.
Having said this, anyone with a heartbeat can sell a property.
The only question is what result they will achieve.
In the case of such a large transaction the potential difference in the sale price can easily be a staggering 10% – 20%.
Most private sellers are really happy to save $20,000 in commission, without knowing that they’ve easily left three times as much on the table by underselling their home.
So what determines the difference in the final sale price?
The correct execution of a certain, immutable formula. The 5 P’s:
- Preparation – much more than just decluttering and cleaning
- Presentation – much more than just what buyers see
- Pricing – much more than just determining the value of the home
- Promotion – much more than just advertising
- Parleying – much more than just communication and negotiation
It is never a person who sells a property, but rather the correct execution of a specific formula that makes a home become BUYABLE and for top dollar.
As you read earlier, real estate agents don’t have the vested interest (care factor), proper incentive or enough accountability to execute this formula well.
Private sellers have no idea that there is a formula in the first place, let alone how to execute it well.
Even if they’re happy with the sale price, it’s only because they have no idea that they’ve undersold or how much better they could have done.
This is the first reason why it is not wise to sell on your own.
Critical Decisions By Private Sellers Are Distorted By The Endowment Effect
Other than not knowing about the formula that achieves the highest sale price, and how to execute it well, the Endowment Effect is the next biggest danger for private sellers.
It is even more dangerous, considering that most private sellers haven’t even heard of it.
Even for those who have, they hardly ever realise when they are under its influence, and when, or how it is impacting on their sale.
The Endowment Effect is a term used in psychology and behavioural economics.
It is a phenomenon whereby we overvalue our posessions, regardless of their objective market value.
And the longer we own something, the more we are likely to overvalue it compared to its actual market value.
This is a simple bias that impacts almost every human to some extent.
When it comes to our homes, most of us have this bias to some degree and this impacts on the three most critical aspects of a sale.
Firstly, how we price our homes, secondly, how we prepare and present our homes, and thirdly, how we negotiate and manage offers.
Let’s briefly look at each of these:
1. How private sellers price their homes
When we overvalue and overprice our home, we limit the chances of a sale.
We also limit the level of interest and competition for the home and therefore minimise the chance of achieving the highest sale price possible.
There is also a false belief among home sellers that they need to start with a high price.
They believe this because they think that buyers will expect to negotiate down to a mutually agreeable price.
Overpriced homes tend to stagnate on the market for a long time, and develop a negative stigma among buyers who think that there is something wrong with the home.
This can turn off the remaining prospective buyers or at least increase suspicion and doubts about the home.
The answer is not to under-price a home.
There is a strategic method which attracts buyers by conveying a perception of value to them.
This helps to attract qualified buyers, and create competition among them, which then helps to drive the price upwards – with the right negotiation strategy.
This method is counter intuitive and private sellers have no idea about it.
2. How private sellers present their homes
Due to our connection with our homes, we often fail to see flaws and buyer objections that are obvious to others – even if these are quick, easy, and affordable to fix.
For this reason, private sellers are blind to incredible opportunities to explode the perceived value of their homes in the eyes of potential buyers.
We assume that others see the same value we see in our homes.
In other words, we think that our home looks better than it does and we assume that others will see it the same way we do.
This is why most private sellers don’t see what changes they should make to the presentation of their home to maximise its emotional appeal, perceived value, and sale price.
For this reason, even if they sell, most of them easily sell for 10% less than they could have, without ever knowing it.
3. How private sellers negotiate and manage offers
The bias that private sellers don’t even realise they have, clouds and distorts their negotiations in ways they will never know.
This reduces their chances of a successful outcome, even if those private sellers consider themselves to be reasonable negotiators.
Unfortunately, the reality is that, in addition to their bias, most private sellers don’t know how to negotiate well.
A terrible negotiator is someone who believes that sellers start high, buyers start low and they eventually meet somewhere in between.
As you read earlier, this is also partly why most private sellers overprice their homes.
They price themselves out of the market, destroying the attractiveness of their homes and any chance of creating competition, which drives the price up.
Not only do most private sellers not know how to negotiate well, but they also don’t know how to encourage and then manage multiple offers if they are spread out over time.
How would you deal with early offers in a way that doesn’t commit you to selling short too soon, without the risk of losing those early buyers, but also allowing for potentially better future offers to arrive?
This delicate dance requires years of experience in strategy, diplomacy, empathy and human psychology, as well as an intimate knowledge of the current market and the buyer journey.
So, what is the solution then?
The fact that private sellers don’t know of the formula that achieves the highest sale price, combined with the distorting bias from the Endowment Effect, leads them to taking huge risks with their sale.
Even if they sell, they are destroying their chances of achieving the highest possible sale price, without realising it.
This is why having an independent, unbiased, and objective expert is essential if you want to achieve the highest sale price that is possible for your home.
Fortunately, this expert doesn’t have to be a traditional real estate agent, with the three fatal flaws you read about earlier.