If you’ve ever taken a look at the APR on a closing statement, you have an idea of the true cost of buying real estate. But what about the true cost of selling? That’s a little trickier.
Let’s start with the basics of the APR, or annual percentage rate. In real estate terms, the APR represents the true cost of the loan – not just the interest rate, but fees and other charges all rolled into one. This is extremely helpful when shopping lenders. One lender may boast a lower APR in big print but the fine print may in fact be huge. For instance, if the rate depends on the buyer paying points – an up-front 1 percent charge at closing to reduce an interest rate – suddenly the cheap rate isn’t that cheap.
Buyers have the ability to shop rates based on APR thanks to the Truth in Lending Act, also known as Regulation Z. It’s the best way for a buyer to have an apple-to-apples comparison of different loan products and different lenders. That doesn’t mean people don’t look first and foremost at the rate, which isn’t necessarily the best route.
On the Sellers’ Side …
The situation is a little different for sellers. All the costs still need to be disclosed just as on the buying side. But just as buyers tend to focus on the rate, sellers tend to focus on the commission and not the full, true cost of selling. Which makes sense, since the commission tends to be the largest chunk taken out of a sellers’ proceeds. But it’s not the only one. There also are escrow fees, title fees, tax prorations (in most cases) and other closing costs.
On the sellers’ side of the ledger, all of those latter fees tend to run in the 1 to 1.5 percent range. Commissions, of course, are fully negotiable and there is no set rate in the industry – you can thank the Sherman Anti-Trust Act. And there remains the possibility of a buyer asking for closing cost assistance, usually up to 3 percent of the sales price.
The reason I mention this is there are companies who will say they are “saving” a seller money through their process of skipping the MLS and buying direct. In some instances this may be true, especially when assistance for buyer closing costs is factored in. But everything depends on one number: the percentage in closing costs the company will charge.
Finding the True Cost of Selling …
One client of mine recently discovered that the number easily can fall in the 12 percent range. So let’s do the math. Usual seller closing costs are around 1.5 percent. If there is assistance with buyer closing costs, that’s usually 3 percent. Commissions are what is negotiated … but to get to 12 percent, you’d need to be paying a 7.5 percent commission rate to get there.
Where are those savings?
This isn’t to say alternative models are bad. If someone is in a hurry to sell, doesn’t want to deal with foot traffic, doesn’t much want to worry about keeping the house showing ready and the like, the direct-sale method may be perfect for them. For most sellers, though, the true cost of selling may turn out to be much too high.