More Homes For Sale by Owner Listed in Michigan than California Due to Emotional or Financial Reasons?

Homethinking, a great realtor rating site, posted an interesting article on why some states have higher concentration of FSBO's than others. According to the informal study, there were 3,031 people per FSBO in Michigan while California was 32,177.

The article continues on to ask why some states have such a high concentration while others are significantly lower?

Our thoughts are that it has to do with the fact that clients perception of amount of equity sacrificed for the convenience and comfort of using a REALTOR is much greater if you have had little price appreciation and little equity vs. alot of appreciation and equity. Also it may be due to need vs. desire and if the market softens up dramatically, there may be a much large percentage in "need" of selling FSBO.

We used our cost of home sale comparison calculator and ran a few scenario's to support this theory.

We will start off with someone who purchased the median priced home in Los Angeles and Detroit for 2004 and resold it currently. Assuming all things equal that both buyers put 10% down payment at 5.5%, fully amortized for 30 years. We will take 24-month amortization to show new loan balances. Will also assume that both properties where sold with a 6% total real estate commission and 1.5% for all other fee's including title, escrow, termite, etc. Here are the results of the test sample.

Detroit Median Price in 2004: $161,000
10% Down, Final Loan Amount: $144,900

Current Median Price, Q2: $155,700
24-month amortization, loan balance: $140,885

Total Gross Equity: $14,815

Minus 6% Real Estate Commissions: $9,342
Other Costs of Sale estimated at: $2,336

Selling with an Agent: 78.82% of the owners gross equity is spent in total cost of sale and owner nets: $3,137

Selling FSBO: 15.76% of the owners gross equity is spent and owner nets: $12,479

Now compare this to California, same assumptions:

Los Angeles Median Price in 2004: $446,400
10% Down, Final Loan Amount: $401,760

Current Median Price, Q2: $576,300
24-month amortization, loan balance: $390,630

Total Gross Equity: $174,540

Minus 6% Real Estate Commissions: $34,578
Other Costs of Sale estimated at: $8,645

Selling with an Agent: 24.76% of the owners gross equity is spent in total cost of sale and owner nets: $131,317.

Selling FSBO: 4.953% of the owners gross equity is spent and owner nets: $165,895

Again, we just selected random numbers to create a side by side comparison but it makes that financial and psychological /emotional aspects of the transaction come to light.

In Detroit, the seller probably “feels” that the real estate agents are making too much money because they are making more than the owner “netted” for his two year sacrifice of owning the home, making the payments and repairs. While the agent came in, worked for 60 days and “made” more money than they did.

While in Los Angeles, California, the seller probably “feels” great because he looks at the $131,317 net which is a significant amount. The fact agent made $34,578 does not seem that much compared to his substantial gains.

Does difference of $3,137 vs. $12,479 seems much more than difference between $131,317 vs. $165,895? Maybe it's the same emotion of .99 cents vs. $1.00 that advertisers use everywhere?

If you were selling your home, how would you “feel” if the agents make more money selling your home in 60-90 than you are netting from the sale of your home with 2-3 year sacrifice as indicated above?

Am I way off base on this?


Source of Median Prices, NAR Existing Home Sales Q2, Homethinking.com and Costs of Real Estate Sale Comparison Calculator