Freakonomics: Are Real Estate Agents Selling You Short?

Although I’ve heard great things about it for years, I’m finally getting to go through Freakonomics. It unpacks so many interesting topics at the intersection of economics, culture, crime, and behavioral science. The chapter on “What do school teachers and sumo wrestlers have in common?” deals with how prevalent cheating is and the pervasive motivations to do so. “Why do drug dealers still live with their moms?” talks about how the crime world works as a business and what incentives motivate its participants. “Where have all the criminals gone?” unpacks how the legalization of abortion in the 60’s lead to the plummeting crime rates and societal trends of the 1990’s. “What makes a perfect parent” deals counter-intuitive findings on what really even affects our children, and “Would A Roshanda By Any Other Name Smell As Sweet” talks about how names are chosen and how they affect our lives.

Perhaps the most pertinent topic to this blog though is the chapter titled “Are Real Estate Agents Selling You Short?” Wow… I feel like I have a sense of what many people think of realtors, but that title really paints the picture. ? I like to talk about these things frankly instead of sweeping them under the rug though. Some colleagues might say, “why even suggest this book to people that might want to work with you? It’s better to just avoid it entirely and hope they never read it…” Again, though, that’s just not my style. Check out Freakonomics if you have the time. It’s a great read. In a nutshell, this chapter about realtors can be boiled down to two points I think. 1) The incentives for helping a client to earn just a few thousand dollars more does not properly align with the realtors own incentives, and 2) realtors usually do a better job at selling their own homes than they do for their clients.

Unpacking the first point they make, they lay out stats that suggest that realtors often cajole their clients to go ahead to accept an offer for say, $5000 less than what the seller could have accepted otherwise because this price difference would end up making only $100 or less difference to the realtor’s pocket. They argue that the sellers’ and the realtors’ incentives are not properly aligned in these situations. While I’d love to see wider data than just those of the local areas they analyzed, I think I should start from the point of acknowledging that some of this is probably true. I HOPE I’ve never done this, but I should acknowledge that it’s possible. If you have any good ideas about how to get over this hurdle, I’d LOVE to hear your ideas. For my part, there are a few things I do to try to avoid this scenario. First, I try to constantly keep in mind that the next referral is how I profit from any extra small price gains I can get. Only a completely happy client will recommend me to someone else, therefore the continued monetary provision my family DEPENDS upon me making my clients absolutely happy. I’m thinking about my son, my daughter, and my wife. This transcends the extra $100 incentive they talk most about in the book. My perspective is that I’m in this for the long term, not the short sighted perspective of extra commission on this individual transaction.

One big problem in the real estate industry is that there’s so much turn-over. A huge percentage of realtors are in and out of the profession within one year. They have perhaps heard from someone that it’s easy money, and very quickly learn that it’s not. Only a very small portion of talented, hardworking professionals are able to do well at it. Those “in-and-out” realtors do, however, end up getting a few transactions under their belt before they leave, and I would imagine their behavior in those transactions do indeed skew the macro level stats, as well as realtors reputation in general.

Pertaining to the second point, that realtors do a better job at selling their own house… I’ll start by acknowledging that this is perhaps true as well, and for many of the reasons the book mentions. There are, however, probably some reasons that also make this trend a natural outcome. 1) Clients don’t always listen to realtor’s advice. No matter how much counsel we might give, in the end, much of the sale performance comes down to how well certain vision is executed. When a realtor sells their own house, there is little gap between “best practices” that are recommended and the “best practices” that are executed. 2) Non-realtors are more prone to want to over-price their home. An experienced realtor knows that a home priced AT or even slightly below market value is the home that will sell for the highest price in the end. Homes that are overpriced don’t provoke the same reactions, and don’t incite bidding wars as often. A realtor know that they’ve achieved the greatest success when buyers are tripping over each other to win the bid. I’d argue that non-realtors are more prone to price their home incorrectly. 3) Realtors are a little more emotionally detached during the process. I’ve seen many times where sellers are influenced by sentimental aspects of a buyer or their offer, whereas a realtor might not be if they were selling their own home. I’m not saying that this personal side to dealing with people is bad necessarily. I’m just saying that it doesn’t always get you the absolute best terms on your home. Since Freakonomics is comparing the sale price numbers realtors get on their own homes vs clients homes, I just think that this difference in emotionality is worth paying attention to. 4) Clients are often resistant to “depersonalizing” their home to the degree that “best practices” suggest. Lots of research shows that making colors and decorations neutral help. It also suggests taking out religious items, personalized clutter, etc are all things that help attract buyers to your home over others. When a home is overly personalized, it makes it difficult for the buyer to envision their own life in that place. Many seller’s knee jerk at this suggestion to depersonalize and think “why should I have to change who I am for these people?” While that’s valid, it’s just a difference of goals sometimes. Realtors are trying to influence a supply and demand graph, while a client is sometimes concerned with protecting their internal personal identity. Different goals lead to different outcomes, and I think the aggregate stats will bear out this effect.

Also, it’s worth noting that not all markets are the same. Most people who move to Austin, I’ve found, have sort of an HGTV idea of how real estate works. Outside of Austin, that’s often true. That paradigm suggests that everybody prices their house at higher than they expect to get, and have a built in margin to negotiate the price down. Austin, however, has been a strong seller’s market for almost a decade. For quite some time the ratio of buyers to seller’s has been about 3X what a market in equilibrium would be. This means that seller’s are in the driver seat more often, and have a lot more ability to call the shots in the process. A very large percentage of homes sell for over list price (if priced right initially), and those that don’t usually sell  for only 1-2% under list price. The idea that a buyer can come in and offer 10% or more off list price and get their offer accepted is just usually not realistic at all here. In Freakonomics they mention the Chicago market, among others. In many of those places I’m sure that “letting the home sit on the market longer” or “holding out for a better price later” might be a very valid strategy, but in Austin it’s often a bad one. What we see is that the homes that sell for the most, are homes that sell within the first week or two. The longer it sits, the more the potential final price drops. A good realtor here will usually try to sell quickly, not merely because they’re trying to get a quick paycheck, but rather because THEY KNOW from past experience that this is the way to get you (the seller) the best deal. Sitting and waiting longer usually does not result in a higher price, rather it more often results in getting stigmatized, followed by the downward spiral of price reductions. These differing market conditions from city to city make me wonder if some of the discoveries pointed out in Freakonomics are really equally valid everywhere, across the whole nation, in every city.

Finally, I can’t end this without emphasizing that all realtors are not created equal. There are some bad realtors, and a ton of mediocre ones. Naturally the those agents all influence the macro stats we observe and analyze. Does the performance of the very best professionals share the same statistics? I’m inclined to say no, but I’ll keep myself open to new studies that may come along. In the very least, there is one easy practice which I’ve tried to integrate that I think perhaps sets me apart a little bit. I try to more often say “in this situation, I don’t absolutely know what will happen. I don’t have a crystal ball. Based on my experience, my colleagues’ experience, and the things I read, XYZ is what more often happens… but not always. In light of the whole game board laid out, as it is right now, I think if it were my own house, this is what I would do… but you are not me. ? You are totally the boss here, and I just view my job as a provider of information, an adviser to the best of my ability.” I’d say usually when my suggestions are followed things turn out pretty well, but if I’m being honest I’d have to say that there are indeed past times when a client has acted contrary to my advice and things actually still worked out! ? With so much uncertainty of human behavior, inherent to every home transaction, this is almost unavoidable. Game outcomes don’t follow deterministic rules, rather they follow probabilistic trends. While doing my job, I just have to be faithful and honest, and do the very best I can. If we ever get the chance to work together, I hope this is what’s needed to make you completely happy and satisfied with the whole process. If there are ways that we realtors can do our job better, I’d love to hear your thoughts!