Even though most of us know there’s no such thing as a free lunch, we still get tempted when we see it advertised. Lately, I’ve seen lawn signs in front of homes for sale put there by Realtors who promise to buy your house if they can’t sell it to someone else. At face value, this seems like a no-lose proposition. Whether the Realtor sells your house to clients or buys it themselves, you win, right? Well, not necessarily. Realtors aren’t offering to purchase the property for its list price. If they did, they’d be out of business in a hurry.
Realtors who buy your house with the intent to resell it must deduct the expenses of purchasing the house, owning it until it sells, and selling the house. These expenses add up.
First, they will discount the list (sale) price to reflect their opinion of value given its current condition and then by the amount of their brokerage fee. Then they’ll reduce the remaining amount by the cost of title insurance, inspection fees, escrow fees, and loan fees. To qualify for the loan, they may have to complete some repairs–those costs are deducted, too.
Even if they plan to resell the home, they’ll discount the sale price to account for their holding cost (the interest on the loan, property taxes, and homeowners insurance while they own the property). Depending on the housing market, they may plan for three to six months of holding costs.
Next comes the selling costs. As the Realtor representing the seller (themselves), they will deduct another brokerage fee, as well as title and escrow fees and the return on any equity they had tied up in the down payment. They may also calculate a fee for the risk of purchasing your house, just in case they misjudged the market, or the market takes a downturn between the time they commit to purchase your house and the time they sell it.
All of these deductions from the anticipated sale price are legitimate. It would be unreasonable to expect any Realtor to guarantee the sale of your property supported by a guaranteed purchase if they were to lose money each time someone accepted their offer.
So, next time you hear a guarantee like this, drill down until you find out what kind of discount they’ll apply to the fair market value of your property before relying on a guaranteed sale. If you have to leave town in a hurry and don’t want to be bothered with selling your property, maybe this arrangement is worthwhile. But for most of us, this would not be the free lunch we were hoping for.
If you have questions about getting into real estate, please contact me at email@example.com or call (707) 462-4000. If you have an idea for a future column, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s Bakery. Dick Selzer is a real estate broker who has been in the business for more than 40 years.