It took Arthur Melville and his wife the equivalent of 2 1/2 workweeks to sell their expensive Seal Beach home, but the Long Beach psychologist figures the arduous exercise was worthwhile. The Melvilles avoided about $18,000 in brokerage commissions by not using a real estate agent.
Phillip and Lindy Ruan found an owner for their home in Long Beach in one weekend. They received an offer higher than the $167,500 list price, while agreeing to pay a real estate brokerage commission of less than 3%.
Bruce Beck, a public relations executive in Malibu, estimates that he and his family saved as much as $10,000 when they sold their own home in Van Nuys. To keep the deal on track, Beck says, he made about 10 phone calls. As he views it, that was "$1,000 a phone call."
The Melvilles, Ruans and Becks are three families who have taken part in a widening homeowner rebellion against a cherished but controversial mainstay of the residential real estate brokerage business--the 6% commission.
Homeowners are finding that there are increasingly viable options to the traditional--and increasingly costly--brokerage commissions that are paid when a home is sold. The alternatives range from using a limited-service, or discount, broker to selling your home on your own.
Today's housing climate of low interest rates, brisk homes sales and rising prices make the alternatives in California particularly appealing, experts say. Owners selling attractive homes in choice neighborhoods do not need the marketing help of a full-service broker, they contend.
The commission is normally calculated as 6% of the sale price but critics say that that does not represent the true cost to homeowners. A 6% commission on the sale price often eats up at least 15% of the owner's equity and can lead to a real estate version of sticker shock when it's actually paid.
Established real estate brokers, though, insist that the 6% commission is fair. Being your own broker is akin to being your own lawyer or doctor, industry spokesmen suggest: Only fools try it.
Most homeowners do not have the time, disposition, knowledge or experience to handle the complexities and maddening frustrations involved in selling their own property, brokers say.
"Just a myriad of things can go wrong," Fred Sands, a Los Angeles-area broker, said. "A lot of things can go wrong anyway, but it's better if you have someone who has done something a hundred times rather than someone who has done it once or twice."
Selling your home means more than open houses on weekends and classified ads in the local paper. If the home is to sell, experts say, it has to be priced carefully, in line with market values on similar houses in the neighborhood. There is also an ample amount of paper work to be done, including sales contracts, title searches and disclosures about defects.
The 6% commission has proved especially burdensome in California, where housing prices are more than 50% higher than in the rest of the country. Further, California home prices soared last year after several years of modest or no appreciation.
The median home price in Orange County jumped almost 9% to $147,743 at the end of 1986, while the median price in the San Francisco Bay Area rose nearly 15% to $161,150. The Los Angeles median price of $129,000 represented a 9% jump over 1985 prices.
Brokerage commissions are legally negotiable. But homeowners who barter for a lower rate run the risk that their property will sell more slowly because commission-conscious sales agents will steer potential buyers to more profitable sales.
But an increasing number of visible and successful entrepreneurs are determined to upend the status quo, predicting brashly that the days of the 6% commission are numbered.
"The 6% commission is on its way out, but you won't get brokers to admit that," said E.R. (Bob) Landy, a discount broker for Home Sellers Helper in San Diego.
It is these entrepreneurs who now offer a wide range of discount brokerage services and publish advertising magazines that cater directly to people who try to sell their homes. Do-it-yourself sellers are known in industry argot as FSBOs (pronounced Fizzboes), an abbreviation of "For Sale By Owner."
Help-U-Sell is a rapidly expanding franchised discount brokerage that has 200 offices in 20 states, including 100 in California. Help-U-Sell was bought last June for an undisclosed amount by Mutual Benefit Life Insurance in Newark, N.J.
Though local discount residential retail brokerages have been around for years, Help-U-Sell is the largest and the first to go nationwide. Its role model is Charles R. Schwab, one of the entrepreneurs who brought discount commissions to the retail stock brokerage industry in the 1970s.
"We don't think you should have to pay an $18,000 commission for selling a $300,000 house," said Rod Kershaw, a Help-U-Sell broker in Orange County.
The magazines for FSBOs are scattered along the West Coast, including one in Long Beach that advertises homes for sale by owner in parts of Los Angeles and Orange counties. Similar magazines are being published in San Diego and throughout the Pacific Northwest.
FSBO proponents received a boost in a recent issue of Trend Letter, a newsletter edited by John Naisbitt, author of the best-seller "Megatrends." The book, written several years ago, analyzed major trends accompanying America's shift to a service-oriented economy.
"A growing do-it-yourself attitude among homeowners is changing the way houses are sold across the U.S.," the Jan. 22 issue of Trend Letter said. "More sellers are bypassing real estate agents, to avoid paying the 6% commissions, and more businesses are popping up to help both buyer and seller go it alone. Industry leaders estimate 10% of homes on the market today are . . . for sale by owner . . . and could total 30% to 40% in 10 years."
Even Reader's Digest, that most middle-American of publications, recently ran an article giving tips on selling your own home. The National Assn. of Realtors estimates that 360,000 U.S. homeowners will sell their own houses this year--one-tenth of the expected home resales in 1987.
If FSBOs and discount brokers are seeking respect, they will not get it from traditional real estate agents, who view the cheeky challengers with a mixture of disdain and irritation.
"I've been in this business for 17 years, and I've seen them come and I've seen them go," said William D. North, executive vice president of the National Assn. of Realtors, referring to discount brokerages.
The National Assn. of Realtors is a powerful, well-organized lobbying group that is one of the nation's largest trade associations. It operates through hundreds of local affiliates across the country.
The lifeblood of the brokers' network is the multiple listing service that allows competing brokers to share computerized information about homes for sale. It also allows brokers to split commissions when one brokerage acts as the "listing" agent and another brokerage actually finds the buyer.
Those challenging the system say that the 6% commission is more like 15% to 75% when compared to the equity homeowners have in their property. A FSBO magazine in San Diego recently ran this example to illustrate the point:
A homeowner who has $65,000 of equity in a home sold for $185,000 actually pays an effective sales commission of 17%, not 6%. That's because 6% of $185,000 comes to $11,100, which equals more than 17% of the homeowner's equity.
Residential brokerage spokesmen insist that brokerage commissions are, in fact, negotiable. "There's no standard--5%, 6%, 10%," said Stephen A. Groome, managing senior counsel for the California Assn. of Realtors. "It's definitely negotiable."
The U.S. Supreme Court held in 1981 that local real estate boards that recommend a set commission may be charged with price-fixing under the Sherman Antitrust Act. Later that year, a state appeals court in California found a local board of realtors fixed prices by setting a flat 6% commission.
But 6% remains the norm in California, a state where there is one licensed real estate sales agent for every 90 people. And that is not about to change if the state's brokerage Establishment has its way.
What's going on in California in terms of lowering the standard 6% commission? "Not much," summed up Sands, the Los Angeles-area broker.
Indeed, real estate agents routinely tell sellers that if they do not agree to a 6% commission, other agents will have little interest in showing the home to possible buyers.
Anything less than 6%, and your property "may be the last one shown," as Sands put it. Groome added: "You get what you pay for, quite honestly."
It is not uncommon, however, for brokers to accept reduced commissions on very expensive homes--over $300,000, for example. It's also not unusual for sales agents to trim their commissions slightly to settle an impasse over price.
Discount brokers do not eliminate the commission. They merely reduce it by providing fewer services.
For a flat fee that averages less than $2,000 per sale nationwide, Help-U-Sell brokers provide all the traditional services, except that they do not show the home to would-be buyers. Homeowners do that. The fee is paid when the sale closes.
Marketing Vice President Fred Bohman says Help-U-Sell plans to have 6,000 offices nationwide in the next four years. "It's just like McDonald's," Bohman said. "Once people realize the service is there and it's uniform, they won't be able to keep their mouths shut."
One typical difference between full-service and limited-service real estate brokerages is their stance on direct negotiation between buyer and seller.
Act as Buffers
Traditionalists say buyers and sellers need brokers to buffer negotiations. "Buyers and sellers have a hard time talking to each other," said Richard Rosenthal, a real estate broker in Venice. "They don't know how to negotiate and they don't know how to back down. They end up banging heads."
Discount advocates feel just the opposite. "I feel the only way to nail down a sale is to deal one on one," said Brian Hammer, a real estate attorney near Seattle. "There are less problems and less time involved. Hey, what's wrong with people talking directly to one another?"
What sometimes happens is that a homeowner will try to sell his or her own home, only to receive an offer from a buyer who is represented by a broker. In that case, the sellers are often able to negotiate a lower commission--in the range of 2% to 3%.
That is what happened to the Ruans in Long Beach. After advertising in a local magazine and putting a FSBO sign in front of their home, they received an offer from a buyer represented by a sales agent. The Ruans agreed to pay the agent a 2.5% commission.
Those FSBOs who cut out the middlemen altogether sometimes find the experience jarring--buyer as well as seller.
"People are unaccustomed to 'for sale by owners'," Melville said. "They're more suspicious. They come in thinking you are trying to rip them off. Or they want to way undercut the price. I had one guy who came in and wrote up an offer that was $70,000 less than we were asking."
Phones Ring Often
Another irritation FSBOs say they encounter is a phone that rings continually once they put their homes on the market. Most calls, however, are not from would-be buyers but from persistent real estate agents who want a contract to put the home in the multiple listing service.
"The phone has been ringing off the hook," one harried FSBO said. "It has just been just awful. . . . I didn't realize the competition that existed (between real estate agents). Sometimes, three people from the same office would call me."
FSBOs often endure long weekend afternoons showing complete strangers through their homes. In all, people who sell their own homes should expect to put in at least 40 to 50 hours of work.
Experts generally recommend that FSBOs use an appraiser to determine market value, a mortgage broker to determine if the buyer qualifies financially, a lawyer to draw up a sales contract, and an escrow company to handle the paper work.