Whether it's pumping their own gas, buying bulk at a warehouse store or ordering airline tickets over the Internet, more and more people today prefer doing it themselves to save money. Unlike these commonplace activities, however, selling or buying a home is a complicated matter. Without professional assistance, thousands, or even tens of thousands, of dollars could be lost through ignorance.

The real estate industry has been slow to offer the public an acceptable alternative to traditional agency relationships and sizable fees. Fortunately, there is another option — consulting — a misunderstood term, even among licensed real estate practitioners. Before understanding consulting, nevertheless, it is important to be clear on what agency means.

Commission-for-service

As I discussed in an earlier article, an agent is someone who represents another, called a principal, in dealings with third parties. Because of the many responsibilities and risks involved, including the risk of spending substantial time without getting remunerated, agents receive a commission, usually based on the selling price of the property.

Despite the fact that agents typically get paid this way, being considered an agent is related to the actions of the individual, not on compensation. This system has worked well for generations and is still suitable in most residential real estate transactions. 

Fee-for-service

This simple concept, fee-for-service, is used by doctors, dentists, attorneys and other professionals, but rarely real estate brokers. The consultant charges by the hour only for the time actually expended on your behalf. Alternatively, a flat fee might be negotiated.

Bear in mind that standardized forms for real estate consulting do not exist. Also remember that anyone can call himself a consultant if he has a real estate license. One way to identify a professional is that he will insist on you signing a comprehensive consulting agreement that covers the limitations of consulting and enumerates the specific services you require. This document should spell out both the broker's and client's duties, and it should clearly state the hourly rate or total fee for the service, whichever applies.

Consulting scenarios

Why choose a consultant over an agent? The following are examples of some of my experiences with consulting arrangements: 

For Sale By Owner (FSBO). The seller called me after he had an interested buyer with whom he was negotiating. The buyer had an agent, and the seller wisely wanted a professional on his side. I explained the purchase contract and required paperwork and met with him a number of times as issues arose. At close of escrow, he had saved more than $10,000 in commissions. 

Warning: Selling by yourself can be very time consuming and may save or cost you thousands. Even if you plan to hire a real estate consultant, do not underestimate the process.

Ex-tenant buying from landlord. The buyer was thoroughly familiar with the property, as he had recently lived there. Prior to hiring me, he had agreed upon a price with the owner, but they did not have a written contract. 

My job was to look out for his interests. I was able to put him in touch with an excellent home inspector and pest control operator. The inspections uncovered some problems unknown to the buyer and helped him factor these into his negotiations. The buyer was able to successfully purchase the home for significantly less than if the seller had had to pay a standard commission.

Renter buying from landlord. One of my readers called to ask for help in buying directly from the owner, who lived out-of-town. I gave the renters the choice of hiring me as their agent or as a consultant. They asked me to be their agent because, if the sale had not closed, they would not have had to pay me anything. It did close, and, for the additional risk of acting as an agent, I was paid quite a bit more than if I had consulted hourly.

Add on, or sell and buy another. I am currently consulting with a couple who is weighing the pros and cons of adding on to their existing home vs. selling it and buying a larger one. There are many variables to consider. We have discussed prices if they sell and buy. I have also helped them get contractor bids for the expansion.

Advice on selling.The sellers had lived in the home for 20 years and had never sold real property before. The house was a "fixer" with extensive deferred maintenance. They hired me to consult about how they should sell (spend to fix or sell "As Is"). I gave them names of various inspectors. After gathering all the information, they decided to sell "As Is." After their home sold and they bought another, they felt consulting had resulted in greater net dollars to them.

Choosing a consultant

Because there are no requirements or certifications necessary to be a residential real estate consultant, you need to probe for information before committing. The following questions might be helpful:

What is your real estate experience? Competence is a function of the number and different types of transactions. Someone who has closed 80 to100 sales in five years would be preferable to another who has closed 50 sales in ten years. This is why just asking how long someone has been in the business is not enough.

What is the main difference between you being my agent and my consultant? You should receive a succinct explanation of agency and that consultants do not have dealings with third parties on your behalf. If you do not get this, or if it is given short shrift, keep looking.

How long have you been consulting? Describe how you have helped buyers and sellers as a consultant. Where? When?  May I call some of these clients for a reference? Real estate is complex and nothing can make up for experience and good references.

Lawyers vs. real estate consultants

When does it make sense to hire a lawyer as your consultant? Obviously, if you need legal advice, an attorney is best. Ask how much of the practice is devoted to real estate. You want someone who knows the business.

Lawyers charge more and most cannot help with many aspects of buying or selling, e.g., neighborhood pricing trends, ordering and analyzing inspection reports, staging and marketing the property, helping arrange broker's tours, completing the myriad of necessary paperwork, financing and qualifying buyers, coordinating escrow and closing. A real estate consultant can do these things and more. 

Final thoughts

When appropriate, real estate consulting can be a win-win solution for all parties. Nonetheless, for the buyer or seller who hires a consultant, the benefit of saving money is tempered by the risk of having to pay even if the transaction does not close. Although many are not used to thinking this way, it is no different from hiring any professional on an hourly basis.

Consulting in real estate is not the wave of the future. It is here now.

Related Articles: Understanding Agency, How to Interview Agents, Part 1 and Part 2; Selling By Yourself, Part 1,  Part 2, and Part 3; and FSBO Redux