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On the surface, real estate transactions are quite mundane. You find a property you like, you get a lawyer to do a background check on the ownership documents and draft up the contract, after which you sign the papers and do the money transfer. There's some risk of fraud/land ownership problems for which a lawyer could be useful, but otherwise it's a straightforward business transaction.

However it seems that in the US there is a convention of using buyer and seller agents, which don't seem to do all that much but make each transaction 3 to 10 percent more expensive. What is the reason behind this? Why not shop for houses via something like FB marketplace and only pay a relatively small fee to a lawyer who ensures fraud won't take place?

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  • Most house sales involve two parties in addition to the buyer and seller; the mortgage holder of the house being sold, who wants to be sure that the mortgage is paid off in full from the proceeds of the sale right then and there before the seller pockets any of the money from the sale, and the buyer's putative mortgage holder whose money is actually paying most of the agreed-upon sale price to the seller. Aug 8, 2020 at 21:56

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I agree. In many cases, a realtor doesn't add much other than to the price. As a counter point, I'd offer that realtors put in a lot of time with buyers who don't buy or end up using another realtor. Be that as it may, buying or selling a home isn't rocket science and you don't need to become a realtor or use a realtor to do so. This is applicable to the states that I have lived in - it may vary in in other states. I've bought and sold a few and there were three considerations:

  • Work out the details of the contract with the counterparty and then have your lawyer review the agreed upon conditions and write a formal contract.

  • Hire a qualified licensed home inspector to detail the condition of the home.

  • Use a title company or your lawyer if he offers such service to execute the sale at a reasonable price.

In all cases, the counterparty and I split the cost of the title company and we paid our own lawyers. In most cases we split the cost of the home inspection but sometimes there was no inspection and in one situation, I bought a foreclosure directly from the bank and paid for the home inspection myself. I'd say that total closing costs were 1% or less.

Why do people use a realtor?

  • Unfamiliarity with the process
  • Fear of screwing up
  • Lack of time to chase down individual leads
  • Convenience
  • Availability of comps
  • More traffic with multiple listings

There may be a good reason to use a realtor if you are financing but having never done so, I can't say. I have held the loan on a property but again, my lawyer dotted the I-s and crossed the T-s on that one.

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There are several complex details and activity sequences that you need to know about, and most people buy real estate rather rarely, so they might not know them, or not remember them.
In addition, compared to other typical transactions, every error can bear significant losses; buying a rotted or moldy house can easily set you back five or ten annual salaries.

Therefore, most people are nervous about missing something, and prefer to pay an agent - who supposedly knows the hooks and traps - to watch out for them, and can be held responsible for gross negligence.

Of course, agents are not very interested in people avoiding them, and try to make it very hard to buy or sell without an agent - typically, the buyer and seller agent are willing to split the 6%, so each gets 3% only anyway, but if you try to buy or sell without an agent, the other party's agent wants the full 6%, so you didn't save a thing, and took on considerable risk.

One option is to take a real-estate agent class, without getting a license, which gives you the basic know how to try to transact on your own.

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  • The 3% each convention is losing ground in many places, especially where home prices are very high. There are more and more flat-fee options, but it is a slow going industry to change.
    – Hart CO
    Aug 8, 2020 at 23:09
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    Couldn't said complex details be posted on a wiki page? :) Aug 9, 2020 at 4:23
  • Follow up question: money.stackexchange.com/questions/131681/… Oct 7, 2020 at 19:44
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There are several reasons, and I'm perhaps missing some. First, and probably most important, is that it IS a convention. The system was set up, and fairly well perfected, long before there were such things as FB* marketplace, or Zillow, eBay, Craigslist, &c. If it ain't broke, why fix it?

Now there ARE plenty of "For Sale By Owner" and "Help You Sell" companies out there, which will help those so inclined to bypass the conventional real estate agencies. But selling a house is a lot of work. If you're the seller, you will need to be available to show the house to potential buyers, many of whom will be just looking. If you're a buyer, a good agent can narrow down the selection of houses that fit your needs, saving you a lot of time.

As for getting a lawyer to do background checks &c, that's just not what happens in most transactions. A title company does that sort of thing. If there are lawyers involved at all (and I've never known them to be) they are far removed from the buyer and seller. If nothing else, in America getting a lawyer involved in ANYTHING is not mundane. For most of us, it'd probably rank alongside serious accident or illness as a stress inducer.

*I assume FB = FaceBook? If so, you've just eliminated everyone who doesn't use FaceBook from your pool of potential buyers.

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  • "If you're the seller, you will need to be available to show the house to potential buyers, many of whom will be just looking" - if I can save 6% on a 500k house, it's 30k worth of savings. Not bad even for an entire month of work, I would say. And you're right, the right word is "title company". Aug 9, 2020 at 16:54
  • @JonathanReez: Perhaps it's a simple $30K savings if you are retired, or have flexible working hours. Otherwise it's taking time off from, and perhaps jeopardizing, a job that over the long run will pay a lot more. Then there's the aggravation...
    – jamesqf
    Aug 10, 2020 at 3:37

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