Real Estate Adventures
Buying and selling real estate is an intimidating and complicated process. In this article, I describe two experiences with realtors, one positive and one negative.
I purchased my first home in 1998 using the services of the same realtor who helped my parents purchase their first home nearly two decades earlier. The realtor became a trusted family friend and it made sense to call her when I was close to accumulating the savings needed for the down payment. In my mid-twenties at the time, I was not unsophisticated when it came to money but I was a real estate neophyte. The Silicon Valley real estate market of the late 1990s was not for the faint of heart.
My realtor provided good advice and I purchased a townhouse with plenty of room for the future. I intended to stay for a decade or longer. However, I ended up relocating for work a year later. The value of the home had increased but not enough to recover my cost basis after commissions. My realtor agreed to manage the property as a rental for a modest fee. The housing market was very hot in early 2000, just as the dot com bubble was bursting. I recovered my cost basis and earned a very nice profit.
The bottom line is that I was lucky.
I had no business purchasing a home at all in my mid-twenties. Few people have the personal and career stability at such a young age to make what normally needs to be a five to ten year commitment to stay in one location.
Fast forward two decades.
After several real estate transactions and much more life experience, I was again in the market to buy housing in the summer of 2020. In a pandemic stricken world with family members at high risk, I tried to avoid human contact as much as possible. The internet made it possible to independently research listings for sale. In addition, much data about real estate was available through county tax records. I did not need any help to find potential properties or to determine real estate values.
At the time, many realtors were avoiding direct contact with potential buyers and it was not uncommon to tour a home alone. The realtor would merely unlock the home and allow buyers to take a look. I decided to avoid using a buyer’s agent. I contacted listing agents directly, making sure to indicate that I was unrepresented by a buyer’s agent, and I toured many homes.
I found a home that looked appealing and decided to make an offer.
The home had been on the market for some time without attracting offers. The listing price was not unreasonable based on comparable sales. Mortgage rates were very low. The listing indicated that the buyer’s agent commission would be 3% which was the standard commission in the local market at the time.
I decided to write a letter to the seller with an offer that was 96.3% of the list price. I made it clear that I was not represented by a buyer’s agent and I naively assumed that the seller would negotiate with their agent to eliminate all or a large portion of the buyer’s commission. I offered a large deposit with few contingencies. My down payment was well over 20% and I had a firm mortgage pre-approval in hand.
Following what I thought was the proper protocol, I sent the letter to the seller’s agent rather than to the seller directly which proved to be a mistake. The agent was unenthusiastic and took a long time to reply. I am not certain if the letter was even delivered to the seller. Even if it was delivered, the seller might not have understood the terms or felt uncomfortable negotiating a reduction to their agent’s commission.
The end result was that the offer went nowhere.
The home later sold for 99.2% of the list price to a buyer represented by a realtor. My offer would have been very close, if not marginally better, to the eventual net proceeds for the seller. However, I attempted to negotiate a transaction in an unconventional manner that upended how things are normally done in real estate. I challenged the prevailing incentive model by attempting to bypass a buyer’s agent.
But it all turned out for the best anyway.
I rented for a year and then purchased a larger home for considerably less money.
I learned my lesson.
Rather than being “creative” by trying to bypass a realtor, I used Redfin. The realtors who showed the homes did not do much other than open doors. They did not provide advice on offer strategies or home values. I was capable of doing this research for myself. But once my decision was made, I had Redfin submit a conventional offer. In exchange for using Redfin, I received a rebate when the transaction closed.
Buying and selling real estate is fraught with peril and is the largest financial decision most people make, usually only a handful of times in their lives.
In 2018, I submitted a question about real estate to Becky Quick during a Squawk Box interview with Warren Buffett:
BECKY QUICK: Okay. Here’s another question that comes in. This one’s from The Rational Walk. It says, “Berkshire has become a large player in the real estate brokerage, a field that’s still plagued by high commissions. I recently sold a home using Redfin and saved at least two percent in commissions relative to traditional brokers. Is this a threat to HomeServices?”
WARREN BUFFETT: Yeah. I don’t think it’s much but, you know, I could misjudge that. But it’s obviously the Internet’s going to try and take away any business that existed in a more traditional form in the past. Buying a home is the biggest deal that most people make in their lives. Sometimes they’re moving from another city and they want somebody that explains the schools to them, and then, you know, just how the whole city – where they really want a helping hand in coming in. And it’s a very personal transaction. It’s a scary transaction sometimes to people. A lot of paperwork involved and all that. They really want somebody they trust, and I have a feeling that it will be very much a person to person operation ten or 20 years from now. But the people who are backing an Internet operation think otherwise, and certainly, Amazon has proved that a lot of businesses that you thought had to be done face-to-face can be done very well from thousands of miles away.
Warren Buffett’s comments are worth revisiting in light of the class action settlement that the National Association of Realtors agreed to last week. Berkshire Hathaway’s HomeServices of America did not participate in the settlement and Berkshire has stated that it plans to vigorously defend itself against lawsuits currently underway.
Mr. Buffett is certainly not wrong about the complexity of real estate transactions and the desire that buyers have to deal with trustworthy people. But I am less sure about his prediction that real estate will be a person-to-person operation in the long run. Great realtors, like the one I used to purchase my first home, are clearly worth the money, especially for an inexperienced buyer. But more sophisticated buyers might not need the help and many agents bring little very value to the table.
The NAR settlement has the potential to completely upend the longstanding industry model in which sellers set the commission offered to buy-side agents. Home buyers will likely be in a position to negotiate their own deals with their agents or possibly bypass agents entirely. Rather than the buyer’s commission being “baked into” the price of a home, it will now be a clear cost that buyers will have to consider.
I have purchased four homes and sold three over the past twenty-six years. Today, I am equipped to take advantage of the savings offered by avoiding the traditional buyer’s agent model assuming that I can operate on a level playing field with buyer’s agents. In 2020, my attempt to bypass a buyer’s agent did not work because it was unconventional and opposed to the incentive structure of the industry. In the future, a seller’s agent will be more motivated to treat offers like mine with the proper respect.
I am hopeful that industry reforms will be a net benefit to buyers. Unfortunately, reforms are likely to harm Berkshire’s HomeServices in the long run regardless of how current litigation turns out. The profitability of this industry in the United States has long been out of line with other countries and a competitive and transparent market will bring down costs. The net benefit for society should be considerable over time.
If you found this article interesting, please click on the ❤️️ button and consider sharing it with your friends and colleagues.
Thanks for reading!
Copyright, Disclosures, and Privacy Information
Nothing in this article constitutes investment advice and all content is subject to the copyright and disclaimer policy of The Rational Walk LLC.
Your privacy is taken very seriously. No email addresses or any other subscriber information is ever sold or provided to third parties. If you choose to unsubscribe at any time, you will no longer receive any further communications of any kind.
The Rational Walk is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.
Individuals associated with The Rational Walk own shares of Berkshire Hathaway.