The boom is back.
Home sales in Orange County surged 25 percent in July and the average price was up 13 percent, adding to a joyride in sales and prices not seen since before the Great Recession. Busy brokers say they can’t supply the demand for houses in certain price ranges. Tales abound of houses selling the day they go on the market, of multiple buyers bidding for the same house, of houses selling above asking price.
Still, prices remain low compared to other parts of the country and to the pre-recession bubble. It’s a good time to sell and buy.
Which is what my wife and I did this year past. Our nest had emptied, so we entered the market in search of a smaller house and of buyers for our Chapel Hill home of 21 years. In one respect, it was a satisfactory experience. We did find a comfortable smaller home at a good price, and our old house sold in three months at a price we were satisfied with.
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But our experience with the real estate market was stressful and, for me, raised questions about the whole business of buying and selling residential real estate today. Some of these questions are so obvious that nobody bothers to raise them anymore. But here goes:
The biggest question: How is it that the real estate business still charges a fixed commission for home sales, especially in an open-market age where most home shopping is over the Internet? Yes, as defenders of the system will tell you, commissions are negotiable, and there are brokers who specialize in below-market rates.
But the norm in the Triangle still is a 6 percent commission, split between the seller’s agent and the buyer’s. (That’s high, by the way. The average commission in the United States last year was 5.6 percent, according to the New York Times.)
Even if 6 percent is justified, as brokers say, by the array of professional services provided by good agents – legal, financial, marketing – how is the same percentage OK regardless of sales price? On a $400,000 house, the 6 percent commission is $26,000. It’s $60,000 on a $1 million house for not much more work by the agent.
Here’s another head-scratcher. Why are commissions to the agents of both the seller and the buyer, paid by the seller? Doesn’t the buyer’s agent have a conflict of interest if she is supposedly working on behalf of the buyer but being paid by the seller? If nothing else, that agent is going to want the buyer to pay a higher price to yield her a higher percentage. (Yes, “her” is sexist but generally real, a separate question we’ll save for another time.)
I found myself gnashing my teeth during our negotiations as the buyer’s agent told us our house wasn’t worth the asking price and raised minor structural and repair issues. Who’s paying you?, I wanted to ask.
A wrinkle in the real estate deal that we hadn’t encountered in previous home sales is the concept of “due diligence.” The standard purchase contract today includes a clause giving buyers a due diligence period – perhaps 20 to 30 days – to have the house inspected and, if necessary, back out if problems are found. If they do, they forfeit a fee, but it’s nominal, maybe $500 to $1,000. Meanwhile, the seller’s home has been off the market for a month.
We had our house pre-inspected, to identify and fix problems before putting it on the market. But during due diligence, the inspection still identified 53 issues, ranging from wood decay to stuck windows. We had to fix most of these issues at our expense as a condition of closing on the house. And this was the same inspection firm that had done our pre-inspection.
During our negotiations, the due-diligence period was extended once and the closing date twice, causing us extra expense and aggravation.
The system also artificially inflates prices. If you’re lucky enough to sell your house without an agent– as we did our previous home in Raleigh – the sales price is lower, which can benefit both the buyer and the seller (by avoiding commission, the seller may get a better net price).
The U.S., by the way, is unusual if not unique in this respect, according to the New York Times. In the United Kingdom, for example, the average commission is 1.8 percent of the selling price. That’s because in the U.K. the only agent involved is the seller’s agent.
Randy Cox, president of the Greater Chapel Hill Association of Realtors, acknowledged that there is an “implied” standard commission of 6 percent, but he said Realtors can and do depart from the standard under certain circumstances, such as new construction sales. Cox, who is with Coldwell Banker Howard, Perry and Walston, said his firm adheres to standards set by its lawyers to ensure brokers follow ethical practices.
I should say that my rant isn’t directed at the agents who participated in the buying and selling of our house. They were professional and seemed to operate within the rules of the game. My issue is with the system they benefit from, disproportionately to the benefit realized by the buyer and seller.
Ted Vaden is a former editor and publisher of The Chapel Hill News. Readers may contact him in c/o email@example.com