I am a Realtor. Here’s How The Real Estate Industry Works

>>Find the Best Real Estate Agent<<

There are many professions where the professionals make the work look easy, fun, and exciting, and anyone and everyone believes they can do it themselves. With the abundance of DIY projects and advice available, many people are wondering if they have the skills to act as their own real estate agent. While TV shows make it look easy, how the real estate industry works is actually quite complicated, and one missed document could invalidate the contract.

While it is true that a property owner is allowed to sell their own property without a real estate license, that does not mean they should.

Home sales often encounter issues that licensed professionals are trained to handle. Despite this reality, in 2023, 7% of property owners chose the for sale by owner (FSBO) route and completed a sale.

However, the data shows that the majority of them did so, leaving money on the table after the sale.

A typical FSBO sale sold for $310,000 compared to a typical agent-assisted sale, which sold for $405,000. This equates to $95,000 less, or approximately 30.6% less. Even the best agents don’t secure a 30% commission on real estate sales. 

While paying the commission may seem like an area to save money, in actuality, most people lose money on the sale. It’s essential to rely on your real estate agent because they really know how the real estate industry works.

To get a comprehensive understanding of how the real estate industry works, let’s look through the lens of who, what, when, where, how, and why.

Who: The Players in Real Estate

There are many players in a real estate transaction. I will cover the primary players: sellers, buyers, agents, lenders, title companies, home inspection companies, and appraisers. There are other secondary, or behind-the-scenes, players supporting the primary players as well.

Sellers

The process of a real estate transaction begins with the seller. Sellers are individuals or entities who are property owners, or non-owners with legal authority to convey (transfer) an owner’s property to another person or party entity through a real estate sale.

Buyers

Buyers are individuals or entities seeking to acquire real estate from property sellers. This acquisition can be directly from the sellers or with the help of a third party, aka a real estate agent.

Real Estate Agents

Real estate agents are individuals licensed by their respective state agency to assist with the sale and purchase of real estate.

These licensees are hired to represent the interests of sellers and buyers. Licensees may be real estate salesperson, associate brokers, or brokers.

Some licensees are also Realtors, who members of national, state, and local realtor associations. Not every real estate agent is a Realtor, but most are.

Realtors abide by a code of ethics and have additional training beyond the minimum licensing requirements, which serves to enhance their professionalism and client representation. All licensees are agents, but not all agents are Realtors.

>>MORE: What’s the difference between real estate agent, realtor and broker?

Lenders

Lenders are the entities, public or private, that provide the funds to buyers (referred to as borrowers) for the real estate purchase.

These primarily consist of banks, credit unions, hard money lenders, and, on rare occasions, family members or friends. In some instances, the buyer may enter into an agreement to pay the seller directly without obtaining a loan from a lending institution. This is referred to as seller financing.

Title Companies

Title companies facilitate the settlement.

They work with the sellers, buyers, and lenders to ensure all required documents are collected for the property to be conveyed from the current owner to the new owner with a free and clear title.

This means there are no liens, judgments, or other encumbrances against the property allowing someone to claim ownership or bring a suit against the new owner. They also receive and disburse the funds for the transaction to the respective parties.

Home Inspection Companies

Home inspection companies conduct many of the due diligence inspections buyers elect on the agreement sale.

Cousin Ray-Ray may have done a good job remodeling your kitchen and bathroom, and he can attend the home inspection to share his knowledge regarding the property; however, he can’t be your official home inspector.

According to home inspection law, the home inspection must be performed by a full member in good standing of a national home inspection association, or a person supervised by a full member of a national home inspection association.

The home inspection determines the condition of the property through a non-intrusive inspection. This inspection helps the buyer determine if they can afford the property in its current condition.

Appraisers

The appraiser is the person who sets the actual value for the property.

While they do consider certain conditions, their inspection is not as intense as the home inspection. The appraisal type is based upon the client, purpose, and loan type. In a real estate transaction the appraiser works for the lender. They are letting the lender know whether or not the property value supports the loan amount.

>>DISCOVER: How to get a home appraisal for free.

Now that we have covered the major players, let’s look at how a typical real estate transaction flows.

How: The Process

The seller starts the process by listing a property for sale. When putting a property up for sale, there are many factors to consider, such as the listing price, marketing, and eventual sale of the property. The seller’s motivation will determine a large part of what is done to prep and market the property. 

There are three levels or conditions in which a seller can list their property.

The property can be listed in the best condition possible, as-is, or somewhere in between the two.

If a seller desires to obtain the highest price possible, it would behoove them to present their property in such a way as to attract buyers willing to pay top dollar. This could mean investing a substantial amount of money into renovations and upgrades. 

When considering any investments into a property, sellers must understand that there is a difference between renovations/upgrades and routine maintenance repairs. Sellers need to consider what items increase the property value before they begin any work on the property.

>>Agent Advice: What should I renovate before selling my home?

When: Is there a Best Time in Real Estate?

Real estate markets differ from state to state. Certain times of the year are typically better times to sell or buy than others. However, people always need a place to live, and regardless of what month or season a seller decides to sell, they will find a buyer if they are realistic regarding market conditions in their location.

There are other factors, such as the economy, interest rates, and available inventory, that may favor sellers (seller’s market), buyers (buyer’s market), or neither above the other (balanced market).

While a seller’s or buyer’s market will, in general, have unbalanced favor, this does not mean buyers or sellers cannot secure their desired outcomes in an opposite market.

Where: Marketing the Home

There are only two places a property can be marketed for sale.

They will either be marketed online or offline. Although 95% of today’s buyers begin their property search online, there are valid reasons why a seller may elect offline marketing only. 

The biggest reason for offline marketing is privacy. Many celebrities and high profile people may elect offline marketing. They may opt for their broker to market the property internally only.

Why: Motivation for Moving

This speaks to the seller’s motivation for selling. There are many reasons why a seller sells, but they fall into one of two categories: a need to sell or a want to sell. Let’s look at a few of these motivating factors.

Needs encompass downsizing, upgrading, relocation, death, or divorce to name a few. When a seller needs to sell they may be more restricted in what they can or cannot do to secure a sale.

When a seller needs to sell, they may have time restraints, such as relocating for employment or upgrading to a new home.

Oftentimes if the sale is based on wants, it is usually free from time constraints. When there is less urgency, the seller can wait longer for their desired price and conditions. Price rather than time may be their primary focus here.

What: The Product

Now it’s time to bring it all together.

The seller has made the decision to sell, interviewed multiple agents, and selected their real estate agent.

The Contract

Once the seller decides on their agent, they hire that agent’s brokerage through a listing or marketing agreement.

This agreement will have the terms agreed upon, including the length of the contract, the services provided, and the fees the broker will earn for securing a buyer, and taking the offer from contract to closing.

The Connection

After the listing agreement is signed, the agent enters the property into the multiple listing service (MLS).

Here, the property is shared with all the members of that MLS and other third-party websites to secure a buyer.

The Cooperation

Once a buyer becomes aware of the property, a request to tour the property is submitted to the listing agent.

If the buyer does not like the property, they will continue searching until they find a property they like. If they like the property, their agent will write an offer to purchase the property. The offer will be submitted on an agreement of sale.

The offer will consist of a purchase price and other terms such as deposits, inspections, appraisal, negotiations, financing, and a settlement date.

The Consummation

Once the seller receives the buyer’s offer they may accept it, reject it, or provide a counteroffer to the buyer.

Once the seller and buyer agree to the price and terms, each will indicate such by signing and dating the agreement of sale.

The property will then be considered pending or under contract. Both statuses indicate that the seller has a buyer for the property. The pending status means that the property is no longer allowing showings. Under contract allows the property to continue to be marketed and the seller may accept a back-up offer.

The Conduct

Unless the buyer elects to waive inspections, there is a default 10-day time period for the buyer to conduct their due diligence inspections. This time frame can be lessened or increased if necessary.

During this time, due diligence inspections are performed, including home, radon, wood destroying insects, insurance, and property boundaries.

After completion of the elected inspections, the buyer will receive all inspection reports within the due diligence period. Based on the reports, the buyer can accept, reject, or provide a written corrective proposal to the seller.

Following the due diligence period, there is a 5-day negotiation period. Unless the buyer accepts or rejects the property, a written corrective proposal will be prepared and submitted to the seller through their agent. During the negotiation period, the buyer and seller discuss and negotiate the price and/or terms of the original offer based on the results of the inspections.

The transaction will be terminated if the seller and buyer cannot agree to new terms based on the due diligence inspections and negotiations.

If there is a meeting of the minds during negotiations, a change in terms addendum will be prepared to memorialize the new terms of the agreement and the transaction will continue being processed for settlement.

The Crossover

Once the property passes the due diligence period, the buyer must decide if they will pursue the contract or terminate it. If they continue with the contract, the buyer crosses over into a locked contract.

However, before the sale is finalized, there are a few more processes that must be completed.

The title search, appraisal, and clearing of conditions for final loan approval are next. The title company makes sure the seller provides a title to the buyer that is free and clear of any mortgages, judgements, liens, or other encumbrances.

The appraiser provides their assessment of the property value based upon similar recent sales. The value will be as-is or subject to repairs. If the value is subject to repairs, the value assumes completion of the repairs. However, the repairs must be completed, and then the appraiser will do a reinspection to confirm completion. 

The Commitment

During this final time period, the financing contingency requires the lender’s written approval or mortgage commitment.

The commitment may be outright, or conditions may need to be met before or at closing. The conditions vary and may be few or many and can include verbal verification of employment, sourcing deposits, and the buyer receiving a copy of the appraisal.

The Cleared to Close

The final stage before settlement is the issuance of the clear to close from the lender.

This means that all pre-settlement terms and conditions have been satisfied, including the borrower receiving the closing disclosure at least three days prior to the settlement date. A clear to close will be issued if the lender has received the appraisal and all required documents from the buyer. The closing date will then be scheduled

The Closing

The closing, also called the settlement, typically occurs at the title company or broker’s office.

The buyer signs a large stack of documents agreeing to repay the money they are borrowing for the purchase. Checks are issued, keys exchanged, and property ownership is transferred (conveyed) from the seller to the buyer.

The Conclusion

This is the homebuying process. It can be daunting for buyers and sellers without the services of a real estate professional. Be sure to do your search and hire a proven professional to represent your interest in the sale or purchase of your home.