Freakonomics & Real Estate Agents
I’m reading Freakonomics
The gist of the real estate section is that the incentives of real estate agents are not perfectly aligned with the incentives for home sellers. Sellers naturally want top dollar for their property, although they will not wait forever to get it. And of course agents also want high sales prices. So what’s not aligned?
Well, let’s say that your home is listed at $300,000 and after a week on the market, you get an offer for $290,000. That’s $10,000 less than what you wanted, a very big number to you. However, it’s not so much for your agent. If the seller’s agent is getting 3%, and has to pay half of that to his broker and the IRS, then a reduction of $10,000 in the sale price equates to a $150 reduction in the agent’s commission. Not really a big deal for the agent, money-wise.
The homeowner has a very strong incentive for wanting a higher price, while the agent only has a small incentive. The homeowner might be willing to wait three more weeks or three more months to get a higher price, while three months for $150 just isn’t worth it for the agent. The homeowner makes the final decision, but the agent has influence on the homeowner’s decision.
Now I believe that good real estate agents will recognize this situation, ignore it, and act in their client’s best interest. In fact, Dubner’s analysis doesn’t take into account another incentive that agents have–the fact that getting a higher price for their client will make for a happier client and ultimately more referrals.
I suspect that the misaligned incentives have a greater effect on agents who are more shortsighted and aren’t thinking about the longer run incentives of providing the best service possible. Any ideas on how to determine whether or not a prospective agent would be affected by the incentive to sell quickly?
Perhaps legalizing net listings would further incentivize agents to sell at higher prices, but that can get stick with negotiating brokerage fees…This is just all the more reason that it’s important to hire an agent that you know is working for YOU. Look at the flip side of this discussion. A buyer’s agent may try to influence you to pay a higher price or purchase a more expensive house because his/her commission comes off of the sales price.