Earlier we addressed how price, commission, and getting ready costs are the areas that home sellers can manage which affect net proceeds. Here, we outline some additional considerations associated with actual execution and strategy around getting the highest net proceeds into your bank account.
We know that the multiple listing service (MLS) is a monopoly and that no serious seller can afford to not be listed there. The only reason a seller would want to avoid the MLS is because of those pesky high commissions. Fortunately, the emergence of the Internet enables a new synthesis of this problem where sellers can list homes without buyers agent commissions and still benefit from the marketing power of the MLS without the cost.
Long before a home seller decides which broker to use, they need to make a critical decision about whether they agree up front to pay a 3% commission on any offer received through the MLS from buyers agents … or wait until the offer comes in to see how they want to handle the topic. Many homeowners do not realize that buyer’s agent commissions are optional in the MLS and that they also have no impact on their sale price. Brokers and agents will tell you differently, but that’s because their business is structured on perpetuating these very specific ideas.
The challenge for sellers is finding a broker who will get their home into the MLS without these commissions. Look around, but be sure to make calls since many traditional brokers or MLS-listed FSBO companies will not advertise that they list homes with non-conforming buyers agent commissions, even when they do. While many traditional agents will give a small discount on commissions on the sell side, they are often required by their broker to conform by only listing homes with a 3% commission for buyers agents. Even though the practice is illegal, finding a broker who will get their home into the MLS without these commissions is still quite common and you can expect some confusing conversations when you dive into the topic. You may have better luck with smaller, independent brokerages which have more flexibility with how they run their business. Total commissions will vary from as low as 1.5-2% inclusive of the buyer’s agent commission to 6%. Just keep in mind that there is no way to get highest possible net proceeds if you agree to pay full commissions up front, because those commissions don’t get you better prices.
Once you've got your commission strategy locked, an even more important topic is pricing. We've discussed how to price homes, how to think about pricing strategy, and how to avoid the misaligned incentives that lead to brokers talking you down on price so they benefit. And of course you want to avoid multiple offer situations like the plague. A home seller who is trying to get the highest net proceeds needs to do their own pricing work using the price per square foot (PPSF) method. But when data is ambiguous, how do sellers proceed on price and manage the necessary interactions with their broker?
Let's say you've got a comparable home that sold recently at $325 PSF. Your home is nicer than the $325 comparable so this is a price floor, meaning you can do better. You also have another comp at $370 but it is nicer than your home and represents a price ceiling, meaning you won't get this price. The problem is that the range represents more than 10% difference in value and there is no more data you can use. This is where a home seller needs to do some interpolation and figure out which of the two data points is more similar. It would be common for your broker to tell you to price on the lower end of the range so buyers can bid the price up, but you know a lot better by now.
Returning to our example, with two ambiguous PPSF results, if the seller thinks that the higher comp is more similar to the level of finish, then pricing may likely end up between the average of the two data points, and the higher number which will reduce the gap. Regardless, gaps between data points may be difficult to tell exactly what a buyer may pay and this introduces a bit of risk into the pricing strategy. In these cases, sellers are often better off running the risk of overpricing instead of underpricing, provided they are not in a hurry and the trade-offs are clear.
There is one last nuanced point that should be made about the buyer’s agent commissions and over pricing. While it is smartest when you choose to start your MLS listing with a non-conforming buyers agent commission such as with a low fixed dollar amount, you can’t stop MLS agents from putting in offers with a 3% buyer’s agent commission that gets written into the contract. If your listing is still within the average amount of time on market or less and you get one of these write-in offers, you’ve got some leverage to negotiate the price up to cover those commissions or split the difference with the buyer. On the other hand, if you overprice the listing and an above average number of days on the market accumulate, you’ll have to lower the price to attract a buyer. So if that buyer responds to the price drop with a full 3% commission offer, you won’t have as much luck negotiating a counter offer at higher prices since that ship already sailed.
The absolute highest net proceeds are only available to a seller when they pick a broker who will get their home into the MLS at a reasonable commission on the sell side and without an up front buyer's agent commissions. Also, sellers must design their pricing strategy so they avoid underpricing but recognize that the risk of overpricing is potentially getting stuck with a 3% buyers agent commission due to low leverage. The percentages, raw numbers, and various listing strategies should drive your approach to navigating the risks, as you close out your listing with the best financial result possible.