Its been years since I’ve read Freakonomics, but as I recall the time value of money and opportunity costs of why it might be in your best interest to sell for less quickly was not brought up at all. It made it seem like the realtor was the bad guy out to make a buck by selling your house cheap - and they are out to make a buck - but their are disadvantages to asking top dollar for your home to you - its likely to sit on the market for a while, which will eat up into the additional margin.
Did the Freakonomics guys predict the housing bubble and it’s actual causes? If they didn’t then they don’t have a lot of credibility on this subject. Out of control appraisals and no money down mortgages were a much bigger concern than real estate agents selling too quickly.
How is that going to work? How do I even know a house is for sale, if it hasn’t been listed through an agent? How does the seller get the word out if there’s no agent? Who hires the appraiser? And, if the buyer and seller have already come to the point of agreeing on a price, why not just dispense with the agent entirely and hire a lawyer (who works on an hourly or set fee) to draw up the papers?
I’m a commercial real esate agent not residential, but one flaw in your argument is that you are kinda-sorta treating houses like commodities that are going to sell in x time at Y price range. From the 20,000 foot view this might be the case on a broad statistical basis but in the real world for many properties not in hot markets viable, ready and able, good credit buying prospects are NOT a dime a dozen and sellers often fail to recognize this.
Often the first offer you get in many cases may be the best and only offer you get for a long time and beating on agents for pushing you to take a deal is contrasted with the reality that if you don’t take that deal you may be standing around with your hands in your pockets for a long time waiting for the next buyer. This is why agents always want to be the seond to third agents to take a listing. By the time it gets to them the seller’s arrogance has worn off.
Also re putting a metric on incentivization “getting an appraisal” was mentioned as if it’s just a checkoff. As an FYI a formal arm’s length residential appraisal (not just an agent’s market analysis) by a licensed appraiser often runs $ 400 or more (much more if the property has extensive land or complexities). Is the average homeowner going to pony that cash up upfront just to set a perfromance baseline?
Not to mention that the buyer’s agent has every incentive to try to get his or her own clients to offer as much as possible. Agent gets more money on the commission, and the offer has a better chance of being accepted.
I’ve ended up trusting my two different buyer’s agents after they managed to talk me out of buying a specific house. Made me think that their reputation was more important than the quick sale.
You’ve misunderstood. The buyer is not involved in this at all yet. The agreement on the appraised value is between the seller and a prospective seller’s agent, in order to set up the incentivized commission structure.
See, I feel like my proposal solves this problem rather than exacerbating it. It essentially puts the ball in the agent’s court. The agent will have to decide whether this first offer is really good enough, or if he/she would rather try showing the property for a few months. The agent’s time is on the line, same as before, except now instead of being at the whim of the seller they can weigh the prospect of more profit against the value of their own time.
Well that’s a good point, I hadn’t thought of that up front cost. If we try this incentivization plan a few thousand times, just on a hunch, and discover that on average the seller nets substantially more than $400 in additional sale price, it may very well be worth it to pony up that cash upfront. But if, on average, 3 or 4 or 8 appraisals need to be done prior to the seller finding an agent who agrees on the price, then that would obviously suck.
IMO as someone who has sold real estate for 29 years you are attributing far, far more power to the agent re making a seller “take” a specific price than exists in the real world of agents, buyers and sellers. You’re also kind of assuming that if you wait long enough a better deal for the seller will always come by. In many cases in slower markets this will not happen and there may in fact be only a very few interested or able local buyers who pop up when the property is fresh on the market, and once they pass the property by and go onto another opportunity they are not coming back.
In the end any property is only going to sell for what the market will bear and most competent agents have a pretty good feel for what to recommend taking and not taking re price (in their market) unless they are incompetent or unethical. In some hot housing markets like areas of Richmond VA and elsewhere they have multiple contracts being submitted on desirable properties and houses going for over listed price. In tertiary markets like mine on the Eastern Shore this is generally not (currently) the case.
You can set pricing targets, parameters and guidelines all day long but in the end hitting a strike price target range is a real time dynamic supply and demand exercise and there are lot of parameters involved beyond what an appraisal says a price should be in ideal circumstances.
Also, how accurate (really) is an appraisal? It’s basically an educated guess. In a market like the aforesaid hot Richmond market any appraisal you get is going to be months behind and well under the current price curve.
On the flip side many of the commercial properties I sell go for way below replacement cost for a number of reasons mainly because they are special purpose and only a few regional industrial buyers can use or afford them. How long do you wait for your perfect buyer or do you take the deal being offered today? In those circumstances I have vastly more real time knowledge about what commercial properties are actually selling for in my market than any appraiser. Appraisers usually call me for the latest deals going down and to check on their pricing not the other way around.
The first paragraph is true, but comes with a caveat: If I have my house on the market for an extra 3 months, is that worth an extra $5,000? Or might I rather have my house sold in week 2 for $5,000 less? I remember when selling my first house, I thought to myself “hmm, average DOM is 60 days, I can pay two mortgages for six months if I need to, I’ll be fine”, but by week 2 of being on the market I was in “WHY THE HELL HAVEN’T I GOTTEN AN OFFER YET?!?!” mode. I ended up getting an offer for half a percent lower than I had wanted, but it was a great relief and and it was only a couple thousand off what the agent had suggested as our “final” price. (We listed about 3 percent above what we expected to get, and we ended up with three offers to choose from).
The second paragraph is also true with a caveat. When I listed that house, I thought in my head that a good price would be $275,000. My seller’s agent convinced me to list at $289,000, expecting to make a deal at $280,000. We ended up doing $285,000 with a $6,000 seller’s credit, for a net of $279,000. Great, the agent got me an extra $4,000, right? WRONG WRONG WRONG. I had to pay 6% commission for the privilege of a buyer’s and seller’s agent making the deal happen. That was almost $18,000 in my case. Had I gone it alone and just ponied up $500 to put it on MLS myself, and given a 3% buyer’s agent commission, I would have saved $4500. And probably sold sooner, if I had stuck to my original price estimate. That’s the reason I’m not going with a seller’s agent next time. They have their place, but if you can look at comps and not make a ridiculous price yourself, you can save a hell of a lot of money going it alone.
Not at all. Under the current system, if you’re relaying to me a $400k offer for my house and you tell me that as an agent with 29 years experience, I should really take the offer, I could listen or I could be the sort of problem seller you’re talking about who thinks that my house is worth gold. After all, if you hold out for a $405k offer you only get an extra $75, so there’s no skin off your back. That doesn’t even pay for an extra open house. I have the perception that your only motivation is to get this deal done so you can collect your 1.5% of a really big number and go on to the next house.
But under my incentivized system, you’d stand to make an extra $500 if you held out for $405k. Not king’s money, but still enough that I might think, “Well, he’s got 29 years of experience and is willing to turn down a chance for an extra $500, so I’d better listen.” I think it gives weight to your encouragement to accept the offer. Likewise, it also motivates you to think a little bit harder about when an offer might actually just be too low, and maybe a couple more weeks of open houses might be worth finding out.
Yeah, I’m not liking the appraisal idea anymore, and without it the whole idea just falls apart. I don’t know if it’s necessary, but since seller and agent need to come up with this baseline together, a neutral 3rd party seemed like a good idea. Oh well. I’m not terribly vested in this idea, I was just playing along with the OP.
I’m not sure we’re on the same page with respect to the risk/reward efficacy of holding up a deal for what amounts to 1% of the sales price. You’re thinking that a properly incentivized agent will be more inclined to tell you to push for just a little more. I have had multi million dollar deals fall apart because someone was holding out just a few thousand dollars more and the buyer got pissed at being moved around over such small change and went elsewhere. If you have an agent telling you to stand unyielding over a 5,000 differential on a 400,000 deal you have a fool for an agent. No agent with any sense is going to tell you to hold out for 1% more unless the market is hot enough that there is another deal literally around the corner. In that case go for it, but most markets are not like that. In most markets an able, ready to go buyer is like gold and squandering a deal over 1% is insane.
A professional agent with common sense is there to keep the buyer and seller from getting into a dick measuring contest re price and to make the best makeable deal. Gaining $ 500 more with the risk of losing the entire deal on the flip side is not going to be a real world incentive for any agent doing their job.
Fair enough. In that case, the agent can comfortably tell the buyer to take the $400k deal and absolutely nothing has changed. The agent gets the exact same commission as under the status quo, the seller unloads his property, everyone’s happy.
But right now, let’s say it is a hot market, and there is another deal literally around the corner. Even in this steamy hot market, agents have no incentive to push for an extra 1%. It may be a surefire way to put an extra $5k into a homeowners pocket, but it’s not worth it. It’s not even about risking blowing the deal at that point (although that’s certainly a concern for a busy agent), it’s about the agent only getting $75 or whatever, which isn’t worth a phone call to the buyer to make a counter offer.
Furthermore, bringing us back to the OP, if no agent worth his salt would risk blowing a deal for an extra 1 or 2 percent, why did the Freakonomics analysis find that agents do exactly that on a regular basis, but only when they stood to benefit personally?
I think the real solution, at least in major cities and areas with hot property markets, is to change how home sales are done. Companies like Redfin provide a nicer model for how such transactions should be handled IMO. The ways to fix the problem in the OP, and other are lower transaction costs, increased specialization, higher volume, and better data.
First, transaction fees should be much lower. There is no reason in an area like Washington DC (for example) where houses sell quickly (less than 2 weeks) for high prices (median price: 545k) that a person who performs largely perfunctory duties cost 6%. Same goes for cities like NY, San Francisco, LA, Chicago, etc. That’s just madness and it’s even worse on the higher end. By and large, many of these people are not actually bringing buyers to the table, they are just advertising and letting stranger walk around a house. Redfin manages to lower these costs considerably: 2.5% for sellers and buyers get half the commission received by their agent).
The best way to lower these costs is specialization. There is no good reason realtors should do all the things they do. Some things like setting up an open house require little skills whereas actually negotiating can be a valuable, complex skill. A large enough company can greatly benefit from splitting those job duties. There is no reason why you can’t have low cost, salaried employees show a dozen houses by appointment all day while leaving complex negotiations to one more experienced, salaried person.
Better data can also empower both buyers and sellers. Sites like Zillow and MLS allow sellers to get a better idea of comps in their areas, and buyers can do their own legwork in identifying houses without having their hand held. Nowadays, you can see pictures, sales histories, aerial maps, school ratings, etc. for almost any property. You can also sort and get alerts when something comes on the market. This helps to minimize the time spend getting a deal done on both sides. The data explosion is one main reason we are starting to see information asymmetries diminish. Just like when buying a car, there is more price transparency which means perverse incentives factor in much less. Housing is harder because they are unique products, but the point obtains.
But even if such a system doesn’t come to predominate, I think this problem is overstated, and that the freakonomics argument is largely nonsense. When you continually lowball, pressure, and screw your own clients, you tend to find you’ll get a bad reputation. In the most clear cut example of this, if you list a property at $500k for example, then ask the seller to accept $480k after a few weeks on the market, they might eventually acquiesce, but they are probably not going to use you again. Even if you have to foresight to just list low, you are banking on the dubious fact that some other realtor isn’t going to suggest a higher selling price.
Further, realtors should sell their houses for more money they have more experience, have a better client (themselves), a better house (they know where to buy), and better timing (they know the market). I don’t think the supposed discrepancy is evidence of something nefarious.
I think most realtors have integrity, and are in it for the long haul. In many places, buyer’s and seller’s agents aren’t required to split commissions evenly, but the vast majority do because professionalism and reputation matter in the long run. Like with selling price, the incentives are misaligned, but there seems to be other factors that generally ensure fair outcomes.
Buyers (normally) don’t want to be handled by a host of different people and handed from person to person. It’s off putting and unprofessional. To be effective the experienced agent needs to be in place while properties are being reviewed to answer questions about the property, the market, seller motivation etc. An hourly tour guide can’t do that.
Also, to maintain a staff of salaried people to be property tour guides is actually a very expensive proposition for a broker. Having the agent (essentially) work for free pending a successful sale is a more attractive model. Beyond this, in my experience the discount brokerage models only work effectively in hot markets and dense urban markets and they tend to wither in slack markets when people are scrambling for buyers and the part time discount agents leave the market because they cannot make a living. We have very little discount brokerage activity in my market and no one is stopping them from coming.
6% is my low end and I charge up to 10% for more difficult commercial properties and I get it. Why? Because the properties I sell are not commodities. Each property requires pricing research, professional package assembly, rolling it out to a host of portals nationally and regionally and being able to interface and negotiate with large corporations and smaller buyers alike. You are not going to get that package of skills from someone willing to work for peanuts and (here is the key) potentially not be paid at all for many months at time in slack times. I roll those dice.
I think everyone in this thread is tilting at the wrong problem. The problem is not to incentivise the agent to sell higher, or at any particular price. There are many reasons why the owner may want to sell at a particular price, or by a particular time. The real problem is information asymmetry.
If the owner knew what price was reasonable for his house, independent from the agent, then the agent would not be able to pressure the owner to sell - or at least if they did, the owner would be making an informed decision.
The agent does know what the reasonable price is, which explains why they generally hold out for the better price. The agent is not incentivised to let the owner know what this reasonable price is, for various reasons (commission %, chance that another agent gets the deal). There is very little we can do to make the agent disclose the reasonable price. So we need an independent person who does not have the incentive to fudge the reasonable price to give the owner this full information.
Whether such an independent person exists is another matter.
See, I know that is the conventional wisdom, but I don’t think that’s actually true. Especially if the choice is between better customer service and $15k or so. People already have no issue attending open houses by themselves, so I don’t think the process is that unfamiliar to them. I don’t know anyone who has recently bought a home that hasn’t essentially “found” the house themselves or at least done the ancillary research themselves. Why is the intermediary so important in this case as to deserve 2-3%? Given people are moving more often these days, these transaction costs add up quickly.
Why not? Actual tour guides do this all the time. Realtors aren’t generally providing special knowledge. It’s just what the records say coupled with accumulated wisdom; none of which is due to them being an agent vs. someone who shows a lot of houses. In fact, someone who could afford to specialize in just one aspect (eg. load origination, advertising, staging) would get more expertise.
Again, this model is already in place essentially. I agree charging more is a more attractive model to the guy getting the checks, but it sucks for society as those transaction costs are terrible, and realtors are spending far too much time looking for clients and advertising rather than selling houses (their primary job). Additionally, if you had more specialization, you would get more experts and (likely) better results.
I literally said the exact same thing. Did you even read my post?
Why do you think the agent knows what the maximum price is? I think my post largely addresses this asymmetry, but putting that aside, I think you are ignoring how this process usually works. Agents are often competing with other agents who want their listing, buyer’s agents who have any opposing incentives, and seller’s expectations. The whole over-promise and under-deliver model has many real world consequences that usually prevent too much collusion.
Empirically, we know that the agent knows what the maximum price is because when the agent is selling their own house, they get a higher price than if they were selling someone else’s house.
Now, while I agree that agents are also incentivised to sell early (and low) because of competition with other agents, in the end it is the owner who decides whether to sell or not. If the owner knows what the maximum price is, they would more often decide to hold out for a higher price (assuming some owners want to sell quicker rather than holding out), similar to how an agent would hold out for the agent’s own house.
In the real world now, we see that owners are settling for less than the agents would if the agent were in the owners shoes. It’s a common issue, and known as the principal-agent problem. It’s less of an issue here because the owner is still the one making the final decision to sell, and the main difference between an owner selling through an agent, and the same agent selling his own house, comes down to knowledge.
Wow. In the UK we think estate agents are sharks for charging 1 to 2 % for selling.
And: Buying Agents? WTF do they do for their money?
A friend just sold his house after having it on the market for four years. He was in absolutely no hurry, got the price he wanted, and his only fees were to a lawyer who looked over the documents and gave some advise.
Four years ago he stuck a “For Sale By Owner” sign in his yard.
His situation was perfect for this approach, but it shows another option. The difference in price between what he was offered several times and his asking price (which he eventually got) more than paid for his additional expenses.
This is true in some cases and places, not all.
I can only speak from personal knowledge and experience in my state, and only in a small (2 county) corner of that. To avoid anti-trust accusations, I cannot say what other brokerages’ policies are, only mine.
Our standard commission for residential properties is 6% plus $165 “extra” commission; vacant land, 10% plus extra; commercial property, 8% plus extra. These “standard” rates can be modified within a narrow range by the individual agent. It’s typical to charge less for properties worth more than $500,000, such as 6% for the first $500K and 4% for any amounts above that. I never charge the “extra” commission for my listings, but the company forces me to make up for that out of my own pocket. 
In case you’re wondering what the “extra” commission is, it’s a sneaky and devious way to get more money for the brokerage that does not have to be split with a co-broke. In my state, it’s legal to charge a percentage or a fixed amount commission, or a combination. And there is no law that mandates any fee amount, nor can brokerages collaborate in fee setting due to anti-trust law.
The split between buying and selling brokerages in my county is not 50/50, but 60/40 or 63/37, with the lion’s share going to the listing company. Nobody seems to know the real reason for this, but some of us think it’s due to the territory – heavy with out of town, tourist-type buyers – and some think that it’s to compensate the listing agent for the greater amount of work needed to complete the transaction.
And after the brokerages have split the commission (which is publicly acknowledged on the listing contract), the splits between the company and agent are an internal, private matter. 50% is common, but agents with more experience and/or greater production often get a higher percentage – whatever they can negotiate with their principal broker.
Don’t forget – it’s possible for one agent to have both “sides” of a transaction, and there will be no co-broke split with another company. Our company pays its agents a higher split internally when this happens, too.
Not true in our office, but even more true in larger companies. I used to work for a large brokerage with maybe a hundred offices in the state, and they wanted all agents to use their “Showing Desk”, and only online communication. That policy was one reason I left that company, and I now handle showings personally for all my clients.
As far as “the only value” – if your property is on a major highway, highly visible, and the only likely buyers are ones who will drive by and see your sign, perhaps an agent is not all that useful, advertising-wise. But if you have a hideaway off the main road, and your buyers are typically out-of-town ones, don’t underestimate the value of an MLS listing. MLS listings are copied and distributed to dozens of websites like Realtor.com, Trulia, and Zillow, and most buyers now use the Internet to search. Your measly yard sign can’t possibly be as good as this kind of exposure, and exposure is the name of the game.