Realtors and Incentives

https://www.youtube.com/watch?v=17jO_w6f8Ck

In the video above the authors of Freakonomics talk about Realtors and how they are not incentivized to get the best price for your home.  A $10,000 reduction in sales price is only a few hundred dollars reduction in commission.

First, are there agents like this?  Absolutely.  I also know of agents who won’t show a home if their cut of the commission isn’t big enough.  I don’t think they tell their clients though. Are there economists that make erroneous claims or write harsh, misleading chapter titles to sell their books? Yes.

Second, I know a lot of agents, and I don’t believe this to be the norm.  In my own experience I told a man going through a divorce not to buy a home.  I had just gone through one and knew where he was at.  He kind of stuttered and said, “Wait, you’re a Realtor. Shouldn’t you be selling me house?” I have advised people not to buy or sell at times.  But I it is their decision.

In regards to the final price, it is completely up to the client. It’s their money and their decision, we are just advisers. Their assumption that if they wait another week that they will get a better offer is absurd.  It is akin to looking at the Days on the Market statistic and thinking it will sell on that day regardless of the list price.

They mention that agents sell their homes for more money.  I have seen agent’s homes on the market for long periods of time at a price higher than I would put it.  But my friend who is an agent sold his for $10,000 less than I thought it was worth in 2006 when the market was still hot.  He knew it was good enough for him and he didn’t want to risk that another offer wasn’t coming.

In their book they talk about Appraisers.  One author was selling a piece of property to another. They figured the most fair way to come up with the price was to hire an appraiser to determine the value.  If I recall correctly they had to call nine appraisers before one, very ruluctantly, agreed to do it.  They all said they needed to start with an agreed upon price.  If the first eight appraisers where incentivized by just money they all would have jumped on it.  Their own example pokes holes in their incentives theory.

Interestingly, or ironically, Freakonomics is about turning data on it’s head and seeing what people didn’t see before.  They are making easy assumptions about the inner workings of a Realtor’s mind.  One line in the video is that, “If you can figure out what people’s incentives are then you have a good idea on how they will behave.”  They assume money is the inecentive and nothing else, not doing what’s right by the client or the desire to get the best price.

A sidenote: Some builders and forward thinking agents have raised the commission to the buyer’s agent. I have yet to see any proof that this affected the sale of the home. We don’t control the client like some people imagine.

I can give more examples but honestly I would be surprised if you read this far.  It is easy to make blanket assumptions about an industry though I am sure I am guilty of it as well.  I am tired of economists saying that “in the next three quarters the economy will be turned around.”  So far they have been wrong.