Buying a Home? Buzz Words to Look Out For

June 21, 2007— -- This story originally aired on October 7, 2005

Owning your home is often described as the "American Dream," but whether you want to buy a home or sell one, it's scary. With so much money involved, it's hard to know if you're getting the best offer for your home, or paying too much when you buy one.

There are a lot of tricks of the trade that can cost you time and money, starting with the language in ads. Real estate listings -- with words like cozy, charming and fantastic -- make everything sound great.

Phil Loriana -- who is not a real estate agent but used to work for them -- was candid with "20/20" about the apartments he shows and the descriptions used in listings. "You really have to have very little conscience, because you know that you need the sale," he said.

Reading Between the Lines

Loriana said certain words, like charming, don't mean what you think they do. "It means it's old, it's dark, it's dank and it's small," he said.

The ABC consultants who wrote the best-seller "Freakonomics" say Loriana is on to something. In their book, they explain that conventional wisdom is often wrong.

"Fantastic, charming, spacious, those are terms that are correlated with lower sales prices," said co-author Stephen Dubner.

Dubner's co-author, economist Steven Levitt, compared Chicago real estate listings to home sales, and found that you should expect problems when you see exclamation points and certain words like "charming," "spacious," "great neighborhood" and "fantastic" in real estate ads.

"The dead giveaway for a house that's in trouble is the exclamation point. When you've got exclamation points littered through the listing, that's probably a sign the house has problems," he said.

Many real estate agents told "20/20" Levitt is right that the meanings of certain words are stretched in real estate ads.

"Cozy most likely does mean small," said David Oppenheim of Halstead Properties.

"'Fantastic' is a lazy broker term. If you can't think of anything else, you tend to throw it in," Felicia De Shabris, a broker for Halstead.

By contrast, Levitt found that five descriptors were associated with higher prices: "state of the art," "gourmet," "maple," "granite" and "Corian" (that's a material for countertops).

Is a Broker Worth It?

We watched a real estate agent who was careful to mention some of these things when she was showing a property.

That's one reason to hire an agent, even though you'll have to pay three percent to six percent commission -- they know more. And in a softer real estate market, that can be reassuring.

Michael and Danielle D'anna hired broker Kelly Collins to sell their house in September 2005, and they agreed to pay her a full six percent commission.

"You get what you pay for. And we look at it more as an investment with somebody that we trust and want to do business with. And for us, we sleep easier at night knowing that we have somebody really looking after every aspect of the sale of our home," Michael D'anna said.

Collins did sell their house for more than the asking price of $600,000. But six percent of that comes to $36,000. Is it worth paying that large commission for one sale?

Collins said she's worth it.

She may be. Brokers work hard to make the sale. They will negotiate for you. They'll help you write the ad for your house, and refer you to an engineer who can inspect your home.

Are Real Estate Agents' Incentives In Sync With Your Own?

But the "Freakonomics" authors point out that real estate agents' incentives may be different from yours. Real estate agents' main goal is just to make the sale, even if they don't get the absolutely best price.

"We're not saying real estate agents are corrupt or crooked, we're saying they're human," said Dubner.

"You have to take a look at how the commission breaks down. She has to split her six percent commission with the buyer's agent and then typically she has to kick back half of it to her own company, the agency. So instead of getting fully six percent, you're getting one-and-a-half percent," Dubner explained.

This means that while selling your house for an additional $10,000 is a big deal for you, it doesn't amount to much for a real estate agent.

"To her that extra $10,000 is $150. So you have to say $150 for doing a week or two or three of work…It's probably not really worth their time," Dubner said.

It made Levitt wonder whether real estate agents get higher prices when they sell their own homes. So he researched that. "What we found is that real estate agents sell their own home for three [percent] to four percent more than they sell the homes of their clients. And also, they leave their homes on the market for 10 percent longer. The real estate agents are taking their time, holding out for the good offer, whereas with the clients, every once in awhile, they kinda nudge you in the direction of taking an offer they wouldn't have wanted to have on their own home," he said.

And a study released this month on Madison, Wis., real estate found that people who sold without a real estate agent came out ahead. The National Association of Realtors says that since the Madison study was done, the market has cooled and more people in Madison have decided to use an agent to help them sell. The NAR also says that study and Levitt's do not take into account the added services you get when using a Realtor.

But if those studies mean you could save money, maybe you'll want to do what the Novara family did.

Do-It-Yourself House Selling

Terri Novara took a do-it-yourself approach to sell her home in New York. She's happy she did.

Instead of paying a $15,000 commission to a real estate agent, she paid just $350 to list her house on ForSaleByOwner.com. It's one of many Internet sites that claim to help you save money by eliminating the middleman -- the real estate agent.

"How could I pass that up? I thought: $350, versus $15,000. You know, why not?" Novara said.

She posted an ad with pictures of her house and 16 people called. She showed the house herself.

"No real estate agent can walk into the house and show it with the zeal that I can show it," she said.

Within days, Novara had four serious offers. And each offer was better than the previous bid, she said.

An agent had told her she'd be lucky to get $470,000 for her house, but she sold it for $495,000.

"Think about it. That's $25,000 more than the real estate agents were telling us that we could sell our house at," Novara said.

So, who needs a real estate agent?

Dave Lereah, former chief economist for the National Association of Realtors, says you do. Lereah said, "You need someone to take you, to guide you" through the process of selling your home.

Realty companies run frightening television ads describing home sales as a daunting, complicated process.

Is it that much work?

Novara didn't think so. "Anybody out there can do it. If I can do it, anybody can do it," she said.

I asked Lereah whether the Internet has made a lot of what his members do obsolete.

He said no, because most people still use real estate agents. "Eighty-five percent of all households that purchased homes do use real estate agents, in one shape or form," he said.

The bottom line is, should you pay six percent to a real estate agent to sell your house?

You should know you don't have to. You can negotiate, and today the average commission is 5.1 percent.

I asked Lereah whether people should start negotiating for even lower commissions -- say, four percent or three percent.

He wasn't enthusiastic about my suggestion. "Let's be real careful there," he said. "You could negotiate, but you get what you pay for as well. A mistake may cost you tens of thousands of dollars, for this very large transaction," he said.

It's possible. But paying six percent can be a mistake too. Levitt says the high six percent commission is going to become history. "I think what's more surprising is that the six percent has lasted as long as it has…I think in the future, you'll pay $500 instead of paying six percent."