Ask the Broker: How do I figure out if this deal makes sense . . . ?

by Greg Swann

Suburban Phoenix Real Estate Broker

Author website

Here’s a question that encompasses all of my favorite real estate homilies: Every real estate problem is essentially financial. Definitive answers require calculation. Competent adults can agree to anything. And: When buying or selling real estate as a principal, it’s good to have a real estate license.

I am currently selling my house and have been talking to realtors.

We have seen the comps and our house should probably go for about $290,000. We have a friend that we asked if she wanted to buy our house. She looked at it and told her sister (who is a real estate agent) that it was for sale. Her sister called us and wants to buy our house as an investment. So we essentially found the buyer ourselves. She is offering us an immediate buy with a selling price of $280,000. The question is… She wants us to pay a 5% realtor commission and all the closing costs. She said it’s a good deal because we won’t have to worry about open houses and then maybe the house won’t sell for months. We could sell right now and rent back until we are ready to move in Jan. I would think that since we are theoretically selling the house ourselves (we found the buyer) then why should we pay her a fee? Any help would be greatly appreciated.

This is ultimately a net proceeds problem, but we’ll come back to that.

First, the fact that your buyer is a licensee matters. She can take compensation for the transfer of real property and then apply that to the costs of transferring that property, a very sweet advantage. When I buy an MLS listed property, I go in with a 3% advantage over an unlicensed buyer. Commission income is taxable whether taken in cash or in kind, but my entry (or exit) costs are essentially reduced by the amount of the commission.

Second, whether or not you pay commission in this circumstance is a matter of mutual agreement. Your buyer wants to structure the deal with a commission for her in order to have that money available in the escrow process to reduce her costs. She could just as easily offer you 5% less, but she chooses to finance that 5% to reduce her out-of-pocket costs. At this point, the issue is not who procured the buyer by what the parties agree to by contract. Competent adults can contract to any lawful purpose.

None of this matters to you, in the end. What matters is your net proceeds. So now we need to do some math.

Assuming you sell as you had originally planned to, is $290,000 a high, low or medium price for your home? Is it in A+ condition, repaired, cleaned and staged to perfection? If it is priced right and presented right, you can estimate a time on market of about 120 days — 4 months. Swallow hard — and then accept that it could be double that or longer, and you might have to reduce the asking price one or more times to get it sold.

Assume a real estate commission of 5% — 3% of which will go to the buyer’s agent. In Arizona, your share of the closing costs will come in at around 1%. So if you sold for $290,000, you would net $272,600. If it take four months for you to make the sale, subtract four months’ mortgage payments — call it $6,000 — to bring you down to $266,600. You have four months of opportunity costs to consider, too, but we’ll get back to that.

Looking at the other scenario, closing costs on the buyer’s side will probably run to around 2%, possibly more, so your gross closing costs will be plus or minus 3%. So starting with a purchase price of $280,000 and allowing for 5% sales commission and 3% closing costs, your net would be $257,600. I’m assuming the money will land in your account in 14 days or fewer, so I’m not bothering with the mortgage payment.

There is an opportunity cost associated with getting your money four (or more) months from now, as opposed to now, and you will have to decide what that is. Right now, the second deal nets out $9,000 less than the first. It seems unlikely to me that waiting four months would occasion a $9,000 cost to you. But the other thing to consider is that the home may take much longer to sell, and it may sell at a much lower price. In this market, I entreat my sellers to carefully consider the cash value of a bird in the hand.

But you’re not done yet. If you were to counter the second offer at $290,000, your net might come to $266,800 — a net profit over the first scenario! Even if you end up splitting the difference, the difference between your net proceeds now and your net proceeds later may be an acceptable risk premium. Your goal, especially in this market, should be to take advantage of the bird you have in the hand, if your doing so is not too much to your disadvantage.

I do not represent you, and my advice is more general than specific: Reducing the problem to the raw numbers will usually provide sound guidance. But there are two points I want to add:

1. Do not under any circumstances let a real estate licensee who is acting as a principal in a transaction also represent your interests. Hire a Realtor by the hour or pay an attorney to make sure your interests are protected.
2. Have the property appraised. Generally speaking, real estate professionals, licensed or not, like to buy properties at 90% or less of their Fair Market Value. You should find out what the property is truly likely to sell for before you make any deal, and a spot appraisal (about $350) is your best guide to pricing.

I’d be interested in hearing how this turns out.

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