Real Estate

Real estate has long been a preferred choice for investors. However, when we think of real estate transactions, one of the first things that might come to mind is the substantial commissions and fees associated with buying or selling properties.

Stocks have been getting progressively cheaper to trade since May Day 1975 when fixed stock commissions where abolished and the so-called discount brokerage model got going. More recently, commission-free trading took off, and now free ETFs and mutual funds. The real estate market remains mostly unchanged in this regard. The daunting commissions, often ranging from 5% to 6%, can eat into potential profits significantly. So, for those looking to invest in real estate without the burdensome commissions, what options are there?

Real estate remains one of the highest fee investments - so much so that the investing merit can be questionable, especially in the short run. Even if you buy a home from your neighbor with no commissioned realtors on either side, you are looking at legal fees, as well as local taxes. You'll be lucky to get out for a few thousand dollars. Then there are the ongoing taxes of ownership - a fee of sorts. There are some tax benefits compared to stocks on long-term sales, notably if you reside in the property, but for the most part, the costs of dealing in real estate far exceed stock and bond funds. Note that companies have fees in the form of salaries, and pay taxes, so there are also indirect costs of stock ownership, but homes also have maintenance costs.

You can buy a low fee real estate index fund that typically owns REITs, or Real Estate Investment Trusts, but those underlying investments have many layers of fees and salaries.

The closest thing you can get to a zero-cost real estate deal is to ignore the ongoing taxes and other costs and focus on the commissions. You may be able to buy property from a developer that doesn't use a sales agent on commission. There are also FSBO or "for sale by owner" sites where a seller can find a buyer and if neither party has a realtor, just focus on the other costs of transactions - taxes, legal, inspections, etc.

Avoiding the commission may not work out as well as just getting the commission reduced, at least for the seller. According to one WSJ article, some research has shown seller-sold homes sell for less than realtor-sold homes, which may be a benefit as a buyer, but not as a seller. The reason is brokers know better how to sell your house than you do (if a good broker). This is also a job, unlike say selling your stock which should be fee minimized.

You also don't have to take photos of your stocks to sell them or sit around on a Sunday while potential buyers look over your stock and then decide they don't like the flooring. Or stand in your bathtub with their shoes on saying they would prefer a bed-adjacent tub.

Bottom line, residential real estate is not 100% an investment - it is maybe 50% investment and 50% pure discretionary purchase of a collectible. As such, it may never truly be free to buy and sell. As a semi-irrational purchase (not that stocks can't be irrational), there are factors that could make commissions needed. For all the fee reductions in stocks, companies still typically pay high commissions to sell stock to the public, stock that eventually winds up in your zero-fee fund.

Commercial real estate is more of a straight investment. This market is often best tapped in real estate trusts and funds, though again there are tax benefits to direct ownership as well as tax pitfalls. Most need the diversification of a fund as well as the low entry price. As of now, there are no zero-fee options. I'll keep you posted.

One word of warning: there have been many real estate funds launched in recent years touting high yields. Many of these are flat-out frauds where the proprietor just uses your money to lease a Lambo. More exaggerate the yield with a mini Ponzi element. Real estate is NOT regulated heavily like securities. Many hide the fees. There are essentially NO rules in private real estate partnerships.

Someone can buy a $100,000 property in bad condition, spruce it up with paint, find a tenant who won't be paying the rent very long and won't leave, and sell it to you as a turnkey investment opportunity for $200,000 with an 8% yield (and about to go to a negative yield).

There are no markup or commission rules in real estate (or precious metals and other collectibles), you might as well be buying a classic car.