The lagging housing market makes competition for house listings intense.  Many realtors offer incentives to entice prospective sellers to choose them.  One of the most common marketing techniques is a guarantee to sell your home in 90 days, or less.  There are certainly many reputable realtors out there, but analyzing the home sale guarantee often leaves you questioning the realtor’s motives.  There are a number of ways these guarantees are structured, so let’s examine two common ones:

Sold in 90 Days or I Will Buy Your House

This one sounds great.  If the realtor is unable to sell your home, they will buy it from you.  You probably figure the realtor is motivated to sell your home since they’ll get “stuck” buying it otherwise.  The reality is that most of these guarantees stipulate a purchase price of below market value for your house.  20% is fairly common.  So if the realtor can’t sell, they get to buy at a 20% discount.   But it gets even better for them because of their commission.

Assume your house is listed at $300,000.  When it doesn’t sell and the guarantee kicks in, the realtor would buy it for a purchase price of $240,000 (20% below market).  You would owe them a commission on the sale, typically 6%, or $14,400.  So you get $225,600 instead of $282,000 ($300K minus 6% commission).  They get the whole commission, instead of the half they would have gotten if someone else bought your home.  They also have 20% equity in the home, since they bought it at a discount.  They can then turn around and resell your house.  Assume they split the value of the house and what they paid and list it for $270,000.  They would pay the buyer’s agent a commission, probably 3% or $8,100, but still make a profit of $21,900 on the sale.  So their guarantee cost you an extra $56,400 and earned them an extra $29,100.  Looks like it really guaranteed your realtor a larger profit.

Commission Reduced Until Your Home is Sold

A second variant of the guarantee is for the realtor to reduce their commission every day until the home is sold.  This too sounds great, but does it really help you to sell?  I was pitched this guarantee after my listing with my first agent expired.  Since the realtor would only be earning a 3% commission, that was the total bargaining power they could offer a prospective buyer.  Since I hadn’t sold my home despite an 8% reduction in asking price, this really wasn’t much incentive at all.  Also, towards the end of your contract, which do you think your realtor would prefer: selling the home for virtually no commission or allowing the contract to expire with the hope that you would resign with them, and a fresh guarantee?

Both of these variants also favor a low listing price to help the home sell quickly.  One realtor in our area was famous for using this type of guarantee.  Sellers flocked to him because his listings typically only spent a few days on the market.  The reason was that he priced the listings so low.  Other realtors knew this, so they would bring in prospective buyers to grab these great deals quickly.  This is a good thing if you need to unload your house quickly, but trading a quick sell for a bad price is often not the best way to go.

As is often the case with guarantees, they may be useful if needed but shouldn’t be used as a reason for choosing a particular agent.  When choosing an agent, don’t fall for another common trick: marketing information that show’s they are the #1 realtor in the area.  Reading the fine print typically defines #1 very narrowly.  (The fact that your agent sold more homes priced between $230,000-$231,000 on Tuesdays in March of 1993 doesn’t necessaily make them really #1)  Find an agent who makes you feel comfortable and seems capable of selling your home.  If a guarantee, or #1 agent criteria,  comes along with the listing, that’s merely a bonus that may give you an option if your home fails to sell.