In 2004, the United States real estate market was booming. With the growth of technology that paved the way for do-it-yourselfers, it looked like real estate agents were doomed to the same fate as travel agents. Fueled by a hot market and a flood of real estate Web sites, buyers and sellers were going straight to the Internet to find homes, make offers and close deals. The idea of paying a real estate agent a 5 or 6 percent commission seemed ridiculous when it was so easy to find buyers.
But between April 2007 and April 2008, the housing bubble burst, and new home sales dropped 42 percent. Existing home sales sank 17.5 percent [source: Luhby]. Across the United States, homes sat on the market for months while their values slowly seeped away. Sellers offered creative incentives like free utilities for a year or flat-screen TVs to lure buyers who were waiting for the market to bottom out.
With such stiff competition, the for sale by owner (FSBO) option didn't look attractive anymore to some sellers. People turned to real estate professionals for help with effectively marketing their properties to the largest possible segment of buyers. Some sellers turned to a group of agents called Realtors.
There are more than 2 million licensed real estate agents in the United States, but only half of them are Realtors [source: National Association of Realtors]. The title "Realtor" stands for a member of the National Association of Realtors (NAR), a real estate trade organization that holds its members to high ethical standards and trains them in the most effective professional practices.
Realtors vs. Real Estate Agents
The word Realtor is a trademark referring to someone who's an active member of the National Association of Realtors (NAR). In the United States, a real estate agent is licensed to help consumers buy and sell commercial or residential property. But not all Realtors are real estate agents. Home appraisers, property managers, real estate counselors and real estate brokers can also be members of the NAR, earning them the title of Realtors.
In the U.S., each state has its own requirements for becoming a licensed real estate agent. Most states require a minimum of 30 to 90 hours of classroom instruction in real estate fundamentals from an accredited college, university or technical school [source: Bureau of Labor Statistics]. After he or she has completed real estate school, the applicant needs to pass an official exam that covers real estate standards and practices, national real estate law and laws that affect that particular state. A real estate agent pays an annual fee for his or her license, which must be renewed every one or two years [source: Bureau of Labor Statistics]. Some states require a certain amount of continuing education to renew a license.
Only about half of all licensed real estate agents in the U.S. are Realtors or members of the NAR. To become a member of the NAR, you need to join your local real estate board or association. Real estate associations are often organized by county or region. You can look up your local board in the phone book or by searching the NAR Web site. Once you're a member of your local board, you're automatically extended membership into the national organization.
New NAR members must take an online course on the ethics code and pass an exam. Current members are required to take an online ethics refresher course every four years. Membership in a local real estate board or association requires an annual fee that covers membership dues for the NAR and any state-level real estate associations.
To qualify for membership, you must agree to adhere to NAR's strict code of ethics and standards of practice. The official ethics code is revised yearly to reflect the latest issues in real estate law and practice, and its core message is to "treat all parties honestly" [source: National Association of Realtors]. Although the primary responsibility of a buying or selling agent is to his or her client, Realtors promise never to mislead or withhold information from anyone involved in the real estate transaction -- including the other real estate agent and his or her clients.
The NAR ethics code is what separates Realtors from non-member real estate agents. Although the study of ethical principles is included in many state education and licensing programs, the NAR code obligates Realtors to follow the code of ethics and standards of practice that we discussed earlier. Part of the incentive for becoming a Realtor is to capitalize on the good reputation of NAR members. The idea is that consumers will opt to work with a real estate agent who has sworn to treat all parties fairly and honestly.
Like other trade organizations, the NAR offers members the benefit of a collective voice to lobby state and federal governments for improved legal protections. Through local associations, NAR members can network and learn best practices for their communities. And through annual conferences and continuing education courses, Realtors can polish their skills and improve their chances of success in this highly competitive industry.
Now let's look at exactly what a Realtor can do for someone who wants to sell his or her house.
What Realtors Do for Home Sellers
One of the first things a Realtor will do for a home seller is evaluate the property. This price won't necessarily be the same as the listing price. An experienced Realtor will know the local real estate market very well. If similar houses in the area are selling for more than their appraisal values, then the Realtor knows how much higher the seller can reasonably go. But if the market is really slumping, then the Realtor may suggest listing the home at its appraisal value or even slightly lower.
Many Realtors will also recommend that the seller conduct a full inspection of the home. The advantage of inspecting a home before putting it on the market is to avoid being surprised by unseen defects in the property. Most buyers will request an inspection before making an offer, and hidden problems like cracked foundations and rusty plumbing could break the deal. It's better to fix those problems before trying to sell the house.
A Realtor, as with other real estate agents, is an expert on the details that buyers look for in a home. Most sellers grow accustomed to the eccentricities of their homes without realizing that a few simple improvements could drastically increase the marketability of their property. Sometimes it's as simple as a fresh paint job, removing excess furniture and clutter, or tearing up carpet to reveal hardwood floors. Or a Realtor might suggest larger improvements -- like renovating a kitchen or bathroom -- that will considerably raise the value of the home.
Realtors -- like other real estate agents -- know the most effective ways to advertise and market a home. Because a Realtor is a member of the local real estate association, he or she has access to an extensive network of buyer's agents. More than 50 percent of home sales are cooperative sales, where a seller's agent works with a buyer's agent [source: National Association of Realtors]. Your Realtor might include your home in a caravan, where groups of buyer's agents tour multiple properties.
Because they're licensed real estate agents, Realtors are able to post listings for free to the Multiple Listing Service (MLS), a national database of homes for sale. This database is searchable by other real estate agents and by the public at Realtor.com. Savvy Realtors know what to include in these listings to make them most attractive to potential buyers. Clear, attractive photos are key, and the description should focus on all of the best qualities of the home without sounding too much like a used car salesman.
More and more homebuyers are searching the Web for properties. A good Realtor knows which Web sites are the most popular with homebuyers and what search engine optimization strategies will get your listing to the top of Google. Community Web sites, like Craigslist, require a different marketing strategy than the typical MLS listing. A smart Realtor will tailor each listing to its potential audience.
Once there are prospective buyers, the Realtor will to arrange showings and open houses. As the primary contact for the home, the Realtor is responsible for making individual appointments for showings. He or she is also responsible for making sure that the house is ready for each showing, which includes getting the current occupants to leave for an hour or so. For open houses, Realtors might even recommend hiring a professional home stager to add interior decorating and design touches that present the home in its best light.
Once there's an interested buyer, the Realtor will be the chief negotiator and point of contact for all of the paperwork. The Realtor will guide the seller through the closing process.
Now let's look at what Realtors can do for homebuyers.
What Realtors Do for Homebuyers
A Realtor who works with a homebuyer is also called a buyer's agent. In one of their first conversations, the buyer's agent will ask the homebuyer to secure a pre-approval letter from a bank or qualified mortgage lender. The pre-approval letter states that the homebuyer has been approved for a mortgage loan from that particular lender. To qualify for pre-approval, the lender needs to see proof of income, bank account statements, savings account information and credit reports to determine the homebuyer's buying power. Pre-approval letters are more reliable than pre-qualification letters, which can easily be printed from a Web site or secured over the phone [source: Geffner].
Although pre-approval letters require time and effort to acquire, they carry several advantages for the homebuyer. Both the buyer's agent and the seller's agent know that a homebuyer with a pre-approval letter is serious about the investment. The letter gives the buyer's agent more incentive to work hard, because there's a better chance of a future commission. The seller's agent is also willing to put in more time with a pre-approved homebuyer because there's less of a chance that the deal will fall through.
Although everyone has access to MLS listings, experienced Realtors know how to search the database to find the best homes within the buyer's price range. Realtors also know how to read the subtle language in listing descriptions. A "newer roof" was probably replaced 10 years ago. A "charming" home is a code word for a fixer-upper. A buyer's agent can narrow the listings down to a dozen good fits for the client. Then the Realtor can call the sellers' agents to arrange for showings.
When it's time to look at the homes, the buyer's agent provides a crucial, objective opinion. Homebuyers have the habit of falling in love with a property because it has a great view or a huge kitchen, but they tend to overlook less favorable characteristics like lousy plumbing or a leaky roof. The buyer's agent can help the homebuyer see the whole picture like repair costs, the neighborhood, the local school system, taxes and so on, and they're not be blinded by one or two superficial features.
Once the buyer has found a home that he or she likes, the buyer's agent is the point of contact for all price negotiations. The buyer's agent knows how much other homes are selling for in the neighborhood and will fight for the fairest price. The Realtor may also arrange a title search to make sure that the seller has a legitimate right to sell the home.
Once the buyer and seller enter into an agreement of sale, the buyer's agent will arrange for a professional home inspection to make sure there aren't any hidden problems with the foundation, plumbing, heating, cooling and electrical systems. He or she may also schedule termite, radon and mold inspections. When the inspection reports come back, the Realtor will help the homebuyer prepare an official written offer or withdraw the offer based on the inspections. If the offer is accepted by the seller, then the Realtor will walk the homebuyer through the closing process, preparing all of the documents to complete the transaction.
Now that you know what a Realtor does, how do you find one? We'll explore this on the next page.
Finding and Choosing a Realtor
Before you begin a search for a Realtor, as with any real estate agent, it's important to understand the concept of representation. If you're looking to sell your home, you may want to work exclusively with a seller's agent. If you're buying a home, you'll want a buyer's agent. When you sign a contract with either of these agents, they are legally bound to look out for your best interests.
If you're a homebuyer, try to avoid working directly with the seller's Realtor. If you mention to the seller's agent that you can go as high as $200,000, then the Realtor is obligated to pass that information on to the seller, which could hurt you in negotiations. If you're the seller, it's not a good idea to work directly with a buyer's agent because anything you mention about the price and condition of the home will be shared with the homebuyer. You need to hire someone who represents you -- and only you -- in this transaction.
When looking for a Realtor, the best place to start is by asking your friends and neighbors for referrals. Another place to go is the Find a Realtor search engine on the National Association of Realtors (NAR) Web site. By working with a Realtor rather than a non-member agent, you have an extra layer of assurance that your agent will be ethical and professional throughout the process.
Meet with several Realtors before choosing one to work with. If you're a buyer, tell them what you're looking for in a home and ask for some suggestions. This will help you determine how well the agent knows different neighborhoods and different home prices. If you're a seller, ask the Realtor how many homes he or she has sold in the past year, and the typical ratio of list-price-to-sales-price. In other words, does the Realtor regularly sell homes for prices above or below the initial asking price? Get an idea how much time the agent is going to be able to devote to selling your home or finding you a new one.
When you're selling a home, it's customary to sign an exclusive agreement with a seller's agent. If you're not happy with the way the Realtor is representing you, you can terminate the contract at any time and find another agent. If you're a homebuyer, it's not necessary to sign an exclusive agreement with a buyer's agent, but some agents will ask you to do so.
The last thing to understand about Realtors is how they make money. We'll tackle that one in the next section.
How Realtors Make Money
Realtors make money on commission: They only get paid when they sell a house or help someone buy a house. The standard Realtor commission in the United States is between 5 and 6 percent, which is evenly split between the seller's agent and the buyer's agent [source: Linden]. The person who sells the home is responsible for paying the entire commission.
How much of that commission the Realtor actually takes home depends on a few factors. Many Realtors work for small or large real estate firms. It's common for a Realtor to pay 30 to 50 percent of his or her commission to the firm, leaving as little as 1.5 percent in the Realtor's pocket [source: Lending Tree]. Even if a Realtor doesn't work directly for a firm, he or she might work with a real estate broker who provides the Realtor with referrals. That broker will also want a cut. Self-employed Realtors can keep all the commission, but they run the risk of losing business to larger competitors.
Commissions are negotiable, although NAR members are strongly encouraged not to budge under five percent. The idea is that the level of service offered by a certified Realtor is worth the full commission. In fact, the NAR claims that in 2005, homes represented by a certified Realtor sold for 16 percent more than homes that didn't use a Realtor [source: National Association of Realtors]. That said, when the real estate market gets really slow, even certified Realtors are tempted to lower their commissions to sell more homes.
Real estate is an incredibly competitive business where very few Realtors are likely to get rich. In 2006, the middle 50 percent of real estate agents earned between $26,790 and $65,270 a year in the United States [source: Bureau of Labor Statistics].
The average salary of Realtors doesn't change that much between hot and cold markets [source: Goolsby]. That's because in hot markets, the profession is flooded with real estate agents who think they can make a quick buck. With so many agents in the field, it limits how many homes any individual agent can sell. In a colder market, fewer total homes are sold, but fewer agents are selling them, so the earning potential evens out.
For even more information on real estate and personal finance, follow the links on the next page.
More Great Links
- Luhby, Tami. CNNMoney.com. "For this broker, foreclosures spell boom." June 11, 2008.http://money.cnn.com/2008/06/11/news/economy/mcilvaine/index.htm
- National Association of Realtors. Realtor.org. "Why Use a Realtor"http://www.realtor.org/home_buyers_and_sellers/why_use
- Bureau of Labor Statistics. Occupational Outlook Handbook, 2008-09 Edition. "Real Estate Brokers and Sales Agents"http://www.bls.gov/oco/ocos120.htm
- National Association of Realtors. "2008 Code of Ethics and Standards of Practice"http://www.realtor.org/mempolweb.nsf/pages/code
- National Association of Realtors. Realtor.com. "Real Estate 101: Why Use a Realtor?"http://www.realtor.com/basics/allabout/realtors/why.asp
- McLinden, Steve. Bankrate.com. "Real Estate Adviser: Is Agent Commission Negotiable?" August 10, 2008.http://www.bankrate.com/brm/news/realestateadviser/20080810-agent-commissions-a1.asp?prodtype=mtg
- RealEstate.com. "Real estate commissions: What you need to know"http://www.realestate.com/TipsAndTools/Agent-Commissions/Real-estate-commissions-What-you-need-to-know.aspx
- Goolsbee, Austan. Slate.com. "Bubble-lusions: Why Most Real Estate Agents Aren't Getting Rich." August 26, 2005http://www.slate.com/id/2124506