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Posted about 5 years ago

Are Realtors Really On Your Side?

Are you having trouble differentiating yourself from realtors? I did when I started! So I wrote the post below to help homeowners understand how real estate agents are incentivized. 

Hopefully you can glean some value from it as well!

“I’m going to list my house with a realtor since they are supposed to have my best interest in mind,” says the homeowner. 

Of course realtors should be acting in their client’s best interest, but do they always do what’s best for the home seller? Unfortunately, the truth is realtors act according to how they are incentivized. The most thorough explanation of realtors acting in their best interest is perfectly captured in the highly-publicized Freakonomics, where the authors Levitt and Dubner highlight studies and statistics to prove things aren’t always the way they seem. One of their examples in the book was that of realtors selling their own properties for more than their clients. Below is the article directly from the book. If you disagree with the study you have to argue with the authors Levitt and Dubner.

A recent set of data covering the sale of nearly 100,000 houses in suburban Chicago shows that more than 3,000 of those houses were owned by the agents themselves. Before plunging into the data, it helps to ask a question: what is the real-estate agent's incentive when she is selling her own home? Simple: to make the best deal possible. Presumably this is also your incentive when you are selling your home. And so your incentive and the real-estate agent's incentive would seem to be nicely aligned. Her commission, after all, is based on the sale price. But as incentives go, commissions are tricky. First of all, a 6 percent real-estate commission is typically split between the seller's agent and the buyer's. Each agent then kicks back roughly half of her take to the agency. Which means that only 1.5 percent of the purchase price goes directly into your agent's pocket. So on the sale of your $300,000 house, her personal take of $18,000 of commission is $4,500. Still not bad, you say. But what if the house was actually worth more than $300,000? What if, with a little more effort and patience and a few more newspaper ads, she could have sold it for $310,000? After the commission, that puts an additional $9,400 while she earns only $150, maybe your incentives aren't aligned after all. (Especially when she's the one paying for the ads and doing all the work.) Is the agent willing to put out all the extra time, money, and energy for just $150? There's only one way to find out: measure the difference between the sales data for houses that belong to real-estate agents themselves and the houses they sold on behalf of clients. Using the data from the sales of those 100,000 Chicago homes, and controlling for any number of variables---location, age and quality of the house, aesthetics, whether or not the property was an investment, and so on---it turns out that a real-estate agent keeps her own home on the market an average of ten days longer and sells it for an extra 3-plus percent, or $10,000 on a $300,000 house. When she sells her own house, an agent holds out for the best offer; when she sells yours, she encourages you to take the first decent offer that comes along. Like a stockbroker churning commissions, she wants to make deals and make them fast. Why not? Her share of a better offer---$150---is too puny an incentive to encourage her to do otherwise.

Please note the bold sections; realtors waited longer and sold their homes for more than their clients due to the extra effort resulting in a marginal benefit (of $150 in the example above).

What if I told you there are other aspects where realtors are failing home sellers?

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When a home seller is in a distressed situation, and needs to sell quickly, should a realtor take the listing? Absolutely not! Why you ask? Because, unless the realtor is the one buying the house, he/she has no idea who the buyer will be or when that buyer will close. If a realtor takes the listing knowing you have a deadline, he/she should be clear that they can’t promise the house will be sold by your deadline or at the price you're asking. They are lying if they tell you any different!

Another way I have seen realtors provide a disservice to home sellers is with outrageous sales price promises. For example, a realtor may tell you he/she can sell your house for 250k, when it’s really worth 220k. If it sells at the higher price then more commission for the realtor, comparables for the neighborhood increase for future commissions and more cash in your pocket, everybody’s a winner! However, often this leads to a stagnant month or so where the property sits on the market with little interest from buyers. Then the realtor says, “the markets softening. We may need to drop the price just a little bit.” You agree to drop the price 10k to 240k. This brings interest from some buyers and an offer comes in at 220k. Your realtor says, “it’s not a full price offer but it’s the only one we’ve had. Maybe you should accept?” You’re so happy to have your first offer that you accept! Notice this is the true value that the house should have been listed at to start with. This would have saved you a month or more waiting for a buyer, the stress of having numerous showings and having to reduce the asking price.

Now, I can see the realtors out there losing their minds. “This is NOT what happens! Who does this guy think he is!?!?!” As with all professions there are ethical and unethical practitioners, and the situations I’ve described above have and do happen.

Think about it. Do you know someone who had to reduce the price of their home once, twice or three times? Get on Zillow or HAR and look at the current houses for sale in your neighborhood. I bet you’ll see houses that have been reduced. The truth is if your house sits or is reduced, you’ll never know if it was a softening market or the poor judgement of your realtor.

The question then becomes; how can you, as a home seller, protect yourself from unethical realtors with ulterior motives? Here are several ways;

  • Determine if the realtor is buying your property or listing it.
  • Is the realtor trying to make promises of a certain sales price or closing date?
  • Ask the realtor to see all the sold properties in your neighborhood in the last 6 months of similar square footage, age and with similar number of bedrooms and bathrooms.
  • Have a short listing-agreement with the realtor that meets your timeline.
  • Find a buyer yourself or a backup buyer if your realtor cannot perform.
  • Remember: everything is negotiable, even the realtors commission!

Armed with the questions above you (the home seller) can make an informed, intelligent decision when selecting a realtor to determine if they are a good fit for your situation. Use this to put the power back into your hands as the homeowner and take control of your home. Don’t leave it up to the realtor to take care of you and do what’s best for you and your property. The ethical realtors won’t mind you asking the above list of questions and the realtors that do mind should raise a red flag.



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