I believe it was in one of the Freakanomics books where they studied the how real estate agents sold their own houses as compared to their clients’ houses. They found that real estate agents kept their own houses on the market much longer and generally got a better price, by a significant amount.
A naive analysis is that the agent always wants to best price for her client, because she gets a percentage. But in reality the incentive is more complicated. A seller’s agent typically gets 6%, of which she has to share half with her company. So 3% of $250,000 today is more valuable to her than 3% of $260,000 a month from now. That’s a $10,000 difference for the seller, but only a $300 difference for the agent, and three Benjamins is not worth an extra month of showings and negotiations. So the agent will advise the seller to take the $250,000 deal now instead of wait.
How might agents be better incentivized so their interests align properly with the seller? One thing I thought about was a kind of progressive commission scale. The agent would establish a price band based on the appraisal and comps, and get the standard 6% if sold within that band, but a higher percentage on any price above the band, and a lower percentage below the band.
But I still think the progression would have to be rather large, and thus unappealing to the seller, to make a significant difference in agent behavior.
Nothing stops home owners from leaving their house on the market longer. Agents don’t approve sales. There’s no problem with the agent’s incentive system.
Personally, I found the Freakonomics argument flawed. If you are paying upkeep and a mortgage on a house you no longer need, you are eating quickly into your “significant gains.” You may be taking a pass on a house you want because the one you own isn’t moving quickly. To me, that was one of the disappointing pieces in Freakonomics - it assumed more money for your home was good, and ignored opportunity and maintenance costs.
When I sell homes, I want to be done with them. I don’t care if I sell a little below market - I make that up in not having mortgage/utility/tax payments - or the stress of not having money tied up in a house
The problem with the agent’s incentive system is in their advice to the seller. They will advise sellers to take an offer now when they know they can probably get a better offer if the house remains on the market. Obviously, it’s ultimately up to the seller, but the agent’s advice carries a lot of weight.
You’re off by a factor of two. A typical commission is 6%, but half goes to the seller’s agent and half to the buyer’s agent, and both agents split their commission with their brokerage. Seller’s agents usually get 1.5% of the deal.
As far as incentives, you have to account for the time-value of money - which makes it seem like it would be better to have the percentage decrease as time goes on, promoting a small price, instead of a large price over a longer time period. Or you could go with a flat-fee to the realtor, promoting that they will take their skin out of the game and be more realistic, but people don’t like that idea either, thinking that “skin in the game” equates to a higher price.
However, the biggest complaint most seller’s agents will have is unrealistic homeowners, who think their shack in the boonies is clearly worth as much as their buddy’s McMansion downtown, and refuse to list at a reasonable price or sell at a reasonable offer. There is no incentive system that will fix that problem.
I have always found selling agents to be relatively useless to me. The only value they have is getting your listing in the Multiple Listing Service (MLS) database. After that, some assistant at their office coordinates showings, which they have to clear through me anyway.
Or the stress of having a home on the market - putting aspects of your life on hold until it sells, trying to keep it in tip showing condition, worrying if you will get showings/offers…
I’m often surprised when I hear people discuss figures less than $10k on a several hundred K house. For me - especially if I’m financing over 30 years - relatively large amounts of money become less important to me than ease/speed of the transaction. But I acknowledge that my overall financial position may differ from others’.
One thing that COULD be made more clear IMO, is whose interests the agent is representing at what point in the transaction.
Salespeople operate on the ‘bird in the hand’ principle. They do this because if they go after the two in the bush they may end up with nothing. Homeowners won’t end up with nothing, and if they want to use a sales agent they have to understand the agent’s motivation. The agents don’t act the same way when they sell their own homes because then they are owners, and understand the process.
That’s not even the same argument. The Freakonomics section was about the agent’s incentives, not the seller’s. Every seller will have a different set of incentives, of course, but they were discussing agents, and their point is remarkably consistent with the way realtors actually behave.
You may not want to haggle over the price, but some people do need to sell for a particular price point. The question asked by the OP is how to incentivize the AGENT in a way that maximizes the seller’s return.
Mine was really good. He specialized in the area I used to live in. He and his people took care of the staging, and identified which repairs which we could make would be cost effective. He had his own people who did this kind of thing, and he coordinated everything. Our house sold before we really hit the market.
Right now the agent gets 1.5% of the sale price, so on your $250,000 home they’re getting $3750, a decent chunk of change for sure. Now let’s say they really go nuts on the listing, spruce it up, let it sit on the market, and it sells for $265,000 - a pretty massive jump. The agent now gets $3975, or an extra $225 for a lot of extra showings. Clearly the incentive here is to move a lot of houses as quickly as possible, because selling any house is worth a lot of money, but selling any particular house for slightly more money is chump change.
The solution is to have a tiered commission. Say, up to 90% of the assessed value of the house, the agent gets .5%, or $1125 in our example. Anything over that value, the agent gets a whopping 10%. If they sell the $250k (assessed value) house at that price, they get $3625, slightly less than before. But if they hold out for $265k, they’ll net $5125. That’s a pretty massive incentive if you ask me. The homeowner gets an extra $13.5k and everyone is happy.
(Yes, this also incentivizes agents to fine assessors who will lowball the value, and vice versa. Someone will need to sort out that detail).
Agents don’t hire appraisers - that’s what the lender does. And plenty of agents have gotten pissed at an appraiser that appraises a house below the contract price (but then, that’s the whole point of the appraiser), which means the deal either has to be renegotiated or it falls through.
As I recall the Freakonomics article - the point was that the homeowner doesn’t get as good a price, because the realtor will recommend a lowball price for a fast sale, where when the realtor puts his own home on the market, they’ll pick a higher price and wait.
I think incentivizing the agent for a higher price is not wise, because for many people, the longer the home stays on the market, the more money is put into an asset that they don’t want to own, and quite possibly are not even using. I’m sorry I wasn’t clear, my point was I don’t even think its a problem, I think its a feature for most people that agents are interested in moving the home quickly due to cost and effort of upkeep and the stress of a home on the market.
Yes, but in my proposal here, an appraisal would need to happen prior to the seller hiring an agent, and it’d have to be an appraisal both parties agreed to. This would necessarily be different from the lender’s appraisal that the buyer needs.
Once a home is listed any realtor can sell the home I believe. The incentive is to sell the home before someone else does. The listing agent is pretty well guaranteed his commission either way. It is up the buyer as it should be to decide if he wants to accept an offer or not. The selling agent represents the buyers, if an agent both lists and sells the property I am not so sure who he or she would be primarily representing.
Again, while that may be true in some cases, and may in particular be true of your personal experience, it is not true of all, or even most, homeowners.
You can always negotiate commission terms with an agent. If you’re concerned about getting a higher price set the commission for the asking price at X%, more than the asking price at X+Y%, and X-Y% for less than the asking price. That’s part of the existing system, there’s no need to invent something new.
It’s a balance, for sure. If selling a house ASAP was everyone’s top priority, agents could just list it at whatever rock bottom price would guarantee it would sell within 24 hours, and then there’d be a race to the bottom of this hypothetical buyer’s market. And on the other end of the spectrum, you could sit on a house for 2 years waiting for that perfect moneyed buyer to come along. But right now, agents are incentivized to sell a house quickly, possibly quicker than is in the seller’s best interest. A different incentive scheme might only result in houses staying on the market for a week or two longer, but still net the homeowners a significant chunk of money.
And I think that most agents will be receptive to their client’s needs in that regard.
“I am looking for the highest possible price” “OK, we can list at $X, but it will take Y months to sell”
“I need to sell fast” “OK, we can sell it in X days/weeks, but we probably need to list at $Y to do that”
“I don’t want to be on the market forever, but I would like a good price” “Sure, normal days on market is X and the comps indicate we could list for $Y in that time”
A good agent will take into account if the owner is trying to sell fast, or high, or neither.
All that said, I did not use a buyer’s agent when I bought my last house, and I’m not planning on a seller’s agent when I sell my current house. Agents have their place, and there are good ones and bad ones, and clients that need them and clients that don’t.
I’m sure there are good agents and bad agents. I’ve only bought one house, but my wife and I were young and naive, and our agent managed to talk us out of some of the things we wanted, and talk us into others. In other words, “OK, we can list it at $X, but it will take Y months to sell” might be solid advice that allows the sellers to get what they want, or it could be an exaggerated number intended to scare the seller into listing it below $X. How’s a seller supposed to know the difference?
At the end of of the process, a day or two before we closed when it looked like my wife might get cold feet and walk away from the deal, it became apparent to me that our agent wasn’t really working for us. He was working for the deal. Same with the buyer’s agent. Neither of them had as much of an interest in making us happy as they did in making the deal go through. They were there to grease the works so that they could both get paid and go home. Which for the seller’s agent it makes sense, she was trying to make a deal happen. But our agent was clearly also trying to sell us on this house, because if we walked he’d have to work for another several weeks for the same paycheck. I don’t begrudge him for that, but the motivation there was clear.