"Freakonomics" and real estate agents

One of the sections of “Freakonomics” that damn near every review seems to mention is that real estate agents keep their houses on the market longer and sell them for higher prices. Levitt suggests that it’s because it’s not really worth the agent’s time to list for longer just for their 6% of the price differential.

I just put a house under agreement, and, based on that experience, I think there’s a much simpler reason–agents can get in trouble if they get a compelling offer and don’t take it for their clients. In my case, I went to see a house before the open house, and we put in an offer at the asking price. My agent then said to the seller’s agent, “This offer is only good till one hour before the open house; after that it’s off the table. You’d better tell your clients that you got an offer.”

The sellers accepted the offer, and I asked my agent why the other agent hadn’t just waited till after the open house–after all, a bidding war might have erupted, and, in any case, it was no less work for the seller’s agent (she still had the open house). My agent said that it’s b/c, having received an offer at the asking price, her job is to tell the sellers that, since if it turns out there’s no bid after the open house, we could use that info to drive down the price.

Essentially, if that had happened, the seller’s agent would have violated her fiduciary duty to the buyer, and there could have been some sort of repercussions. Since an agent can’t violate her fiduciary duty if she’s selling on her own behalf, she can afford to take more risks to get a higher price for herself than she can take for a client.

The list price and the advice given to the seller when an offer is received are both under the agent’s discretion. The agent has financial incentives to reduce the former and to be more likely to accept any given offer. There is nothing complex about that observation.

the flip side is that the buyer’s agent isn’t terribly interested in getting their client a good deal either. when i bought my house, i offered list price, according my agent’s advice – “you don’t want to offend the seller, they might not be willing to deal with you after that”. i found out later that the house had been on the market for over a year, so i could have most certainly gotten a discount off the asking price.

Oh wow, a year? I was chortling with joy when I found out the house I was about to offer on (and I currently own) had been on the market just over three months. I had a seller desperate to move the property and oh boy did I take advantage.

Me too.

Gav, I think the disconnect with your scenario is this: the agent has to tell the owners about the offer, but doesn’t have to advise them to take it. But if the owners always (or ususally) take those offers, while the agents always (or usually) don’t take them and hope for a bidding war, I think the fair conclusion is that the agents probably advise owners to take the offers despite the fact that they wouldn’t take the offer if it were their own house.

Of course it’s possible that owners are all just more risk-averse than agents (because they can take the offer against the agent’s advice, just like they could refuse it against the agent’s advice). But given the wide range of home sellers, that seems less likely. My own personal experience with real estate agents pretty much matched the Freakonomics version, and I had come to the exact same conclusion (when you get to the short strokes, this guy doesn’t have my interests at heart) before I read the book. I think it’s absolutely true.

Well, of course my experience is just anecdotal. But, in this case at least, it wasn’t more work for the sellers’ agent to hold off on the sale–she still had the open house, and still went through the whole listing process (b/c the offer could still fall through). So the rationale that it’s easier to just take the offer than hold out for what amounts to a paltry sum doesn’t really hold–if there’d been a bidding war, she would have gotten extra money for nothing.

And she was going to hold off on passing through the offer (the sellers were out of town) until my agent said that the offer was good only till before the open house, and came pretty close to saying that the other agent had to pass through the offer before-hand, or risk the fiduciary duty thing (I think the actual words were “I’m not trying to tell you your business, but remember what’ll happen if the clients hear there was an offer that you held off on”).

This, btw, isn’t saying that agents don’t have their own interests at heart. In my scenario, they’re accepting a lower price than they might get b/c they’re afraid of the repercussions if they don’t recommend a customer take an offer and it turns out the later offers are lower. When acting on her own behalf, the agent might just say “them’s the breaks,” but she has to be way more conservative with clients.

My mother has been a realtor for like 20 years. From the stories she has told me, both as a buyer’s agent and a seller’s agent, the most common reason people get screwed is because they do not listen to her.

There have been many really bad deals for buyer’s that have gone through. Its not always about price either. Sometimes she will tell them the house is built poorly or that there are other houses that are much better for the same price. Somtimes people do not want to pay for inspections and later find out something is horrably wrong with it. Finally the biggest factor is the fact that she says in 3 years this house’s value will not improve much, if at all. Then sure enough 3 or 4 years later when the person decides to moves, she will get an angry phone call about how someone’s house should be worth X but is only appraised at Y.

For sellers, they will overprice thier house frequently and have a tuff time selling it, other times they will get desperate and sing the first deal to come along even if its way underpriced.

There defintly are bad agents out there, but most of them are pretty good. Personally Id take shopping around for an agent as seriously as I would shopping around for a house. If you just walk into a random realtor’s office and ask for someone, its a total crap shoot. If you are moving to a new area, and do not know any realtors there, if you know realtors locally where your moving from, maybe some of them can reccomend agents to wherever your moving too.

The thing to remember is:

The agent has maybe $2,000 at stake on a typical deal (once the commission has been split, and the agent’s franchisor takes their cut).

The home buyer and seller each have about $200K+ at stake.

Your incentives (as buyer/seller) to make sure you get the best possible house/buyer at the best possible price are MUCH MUCH higher than the agent’s. If the price is 5-10% suboptimal, the agent only loses about $100-200 - that’s almost meaningless. But you’re out $10-20K off of what you could have had.

In other words, don’t depend on the agent. Do your own homework. If you’re selling, check out the comps in your neighborhood yourself and figure out what you can really get (the agent is incentivized to underprice). If you’re buying, know your neighborhoods, know the comps, and if the house is more than 10 years old, get a good home inspector, and most certainly, get an idea of how long the home has been on the market and if the price has already been reduced or not. (If it’s been on the market for > 30 days without a price reduction, your initial offer should be low-ish. If it just went on the market or just had a price reduction, you’ll likely need to pay closer to list)

Really, fee structures are wrong.

Instead of a flat 6%, it should be a flat fee, plus a higher percentage off the excess over a base price.

So, for a $200K house, instead of flat 6%, how about $3K, plus 15% of the price over $170K. That would motivate the agent to really push to maximize price…

Wow… some of you must really be dealling with crappy realtors out there. I’ve dealt only with exclusive buyer side agents only. They present a list of details comps to me, had an extensive home inspection done, and fought for me to get the lowest price possible (following that home inpection).

If you’re having a hard time getting information from your agent; perhaps it’s time to find another agent. They are working for you, to help you and provide you with information and answers to your questions. If they aren’t doing that; I can understand why people don’t trust realtors… because a lot of them are in fact simply looking for a quick transaction.

Dealing with smaller outfits you tend to find agents that deal more with the quality of their customer service. I’m not saying that franchises have only poor realtors, that’s not the case at all. They are found there more often then not though. . .

Yes, in theory the agent should be doing all that research for you and presenting it to you to back up their suggestions. But obviously that’s not always the case (i.e. the poster who offered full price on a house without knowing it had been on the market for a year).

Really, the only time you should offer full price is if the house has been on the market for < one week.

Eh? I thought inspections by a licensed inspector was required by law. Does it vary by area?

Also, I’m just getting ready to list my house, but it’s going to be a lot smoother process this time around. The relocation package from my new employer (halfway across the counry) pays for all closing costs AND all realtor commisions, among other perks. Plus if we line up buyer and it falls through, the company will actually step in and buy our house so that our life doesn’t become a train wreck.

We and the realtor are still motivated to get as good a price as we can, but it’ll be less stressful. Well, until we move across the country without a new house ready to move in and we have to live out of hotels and suitcases like nomads. But the only real drawback is that if I quit my job within 3 years I have to pay it ALL back.

In a hot market, with money to burn. otherwise what’s the rush! especially now that it’s a buyer’s market. Everything has cooled off, and it doesn’t seem to be turning around quickly for spring at all.

In a Buster Poindextrous Hot Hot Hot market, you can go 15-30% above for the first few days, because you’ll get offers within 48 hours. Vegas was like that for awhile.

Tell me how buyers agents work and what you pay them - we have no such thing over here (well, I guess if one was rich enough you could pay some realtor to find you a house, but I’ve never heard anybody do it).

Over here, at least close to the capitol, it’s really a sellers market, so the above theory is very true. More people are realising, that selling a house is so easy, that they only need a realtor to set a price and an attorney to do the paperwork - the one showing they’ll need before a bidding war starts doesn’t need to cost them a percentage of the price. But most trades are done with realtors quick to move on to the next commission.

We managed to get their realtor more or less on our side. Bought our house at the full price, based on the sellers realtors suggestion. It had been on the market for 6 months and the seller was in no hurry, but hadn’t raised the price in that period either. We agreed on paying full price, but not before october but the deal was sealed in march - basically we got close to a year worth of value increase before we paid our first mortage.
We just took out new loans and in the 4 months we’d been paying for the house, the value increased $100.000.
I’d say that seller had some bad advice and that at least half of that increase should have been his. I’m not complaining, but I’ll definately be selling the house myself if the market hasn’t changed radically by then.

Edit: and yeah, most houses here goes for above the quoted price, usually with a bidding war.

Well, we’re that rich, motherfucker! Just kidding, the percentile cut a realtor makes off your house-buying ass is counted towards closing cost (which sometimes the seller of the house will pony up, just to get his pad sold off), so there’s no actual extra OOP (out of pocket) expense for the buyer. Our country likes to get houses bought and sold. That’s for re-sales; if you go new, it’s similar in that the builder pays a finder’s fee to the realtor (in a much smaller amount) which is completely independent of what the buyer has to cough up (which, if you throw down for upgrades, can be a lot - 5 figures without blinking, really).

Phil, it sounds like you’re grabbing any agent and then doing their job for them. Shouldn’t you spend time researching a really good agent and then leverage their knowledge into a superior purchase decision?

You have to do the agents job yourself if you want to protect yourself. Trusting the agent is silly, and going without an agent isn’t a good idea because it cuts off access to MLS.

I just bought a home and we had the seller pay the closing costs, which included the agent. So there are ways to work it. Bottom line is that you have to get the house you want at a price you want. It’s not rocket science.

Yep, you can have the other party pay the agent, but the agents must be paid. I find it amusing that listing a house (at least around here) requires signing a contract that not only guarantees the seller’s agent cut of the deal, but the buyer’s agent cut as well. It gives me a special warm feeling as a homebuyer to know the market is fixed to the degree that my fees with my agent are set in stone before I even get an agent or make an offer.

Real estate is a racket, and someone with the clout and brand name recognition (yahoo, ebay) to pull it off ought to go into competition with MLS.