Why do realtors’ houses take so much longer to sell?

It’s an untold dirty little secret that realtors won’t tell you and that I first heard of in the book Freakonomics.  I then took some time to look up the stats on this little secret and low and behold – it was true.

Here is the excerpt that really opened my eyes and the one that should completely open yours as well.

Freakonomics and realtors

When she sells her own house, an agent holds out for the best offer; when she sells yours, she encourages you to take the first decent offer that comes along. Like a stockbroker churning commissions, she wants to make deals and make them fast. Why not? Her share of a better offer—$150—is too puny an incentive to encourage her to do otherwise.

Let’s dive into what is meant here so that you, as a consumer understands the incentives (i.e. how realtors get paid) when #selling your house versus when they are selling their own.

GTA (or Toronto) average home sale

Prior to the end of 2017, the average home price in #Toronto was hovering around $900,000, so we will use that number as our benchmark. The average commission that a #real estate professional (salesperson or broker) will charge in Toronto is 5%.

Based on this information on the #sale of a $900,000 house, a typical 5% (full) commission yields $45,000 (that’s before HST, but for argument’s sake, let’s pretend you don’t pay that for some reason; and there are reasons that you might not, but those are beyond the scope of this article).

Prior to iListMLS, Lizty and Valery along with all our other tools, you as a consumer would have been hard pressed to sell the home yourself, so you may think – “well, this is the cost of having an expert sell my home”. The agent knew how to —what’s the phrase she used?—“maximize the house’s value.”

She got you top dollar, right? Right?

A real-estate agent is a different breed of expert than a criminologist, but she is every bit the expert. That is, she knows her field far better than the layman on whose behalf she is acting. She is better informed about the house’s value, the state of the housing #market, even the buyer’s frame of mind. You depend on her for this information. That, in fact, is why you hired an expert. As the world has grown more specialized, countless such experts have made themselves similarly indispensable. Doctors, lawyers, contractors, stockbrokers, auto mechanics, mortgage brokers, financial planners: they all enjoy a gigantic informational advantage. And they use that advantage to help you, the person who hired them, get exactly what you want for the best price.

Right?

It would be lovely to think so. But experts are human, and humans respond to incentives.

The lowdown on real estate sales incentives

How any given expert treats you, therefore, will depend on how that expert’s incentives are set up. Sometimes his incentives may work in your favor. For instance: a study of California auto mechanics found they often passed up a small repair bill by letting failing cars pass emissions inspections—the reason being that lenient mechanics are rewarded with repeat business.

But in a different case, an expert’s incentives may work against you. In a medical study, it turned out that obstetricians in areas with declining birth rates are much more likely to perform cesarean-section deliveries than obstetricians in growing areas—suggesting that, when business is tough, doctors try to ring up more expensive procedures.

It is one thing to muse about experts abusing their position and another to prove it.The best way to do so would be to measure how an expert treats you versus how he performs the same service for himself.

Unlike other professionals who would not share this information, real estate sales are a matter of public record and real estate agents often do sell their own homes. We replicated the experiment they ran in Freakonomics (theirs being: a data set covering the sale of nearly 100,000 houses in suburban Chicago showing that more than 3,000 of those houses were owned by the agents themselves) using TREB #MLS data and found very similar findings – our data set was for 2016-2017 and found approximately 100,000 per year in the system, with about 4,000 of them being realtors’ properties.

Before plunging into the data, it helps to ask a question: what is the real-estate agent’s incentive when she is selling her own home?

Simple: to make the best deal possible.

Presumably this is also your incentive when you are selling your home. And so your incentive and the real-estate agent’s incentive would seem to be nicely aligned. Her commission, after all, is based on the sale price.

How their commission is broken down

But as incentives go, commissions are tricky. First of all, a 5% real estate commission is typically split between the seller’s agent and the buyer’s. Each agent then kicks back roughly 30% (on average) of her take to the agency. Which means that only 1.75 percent of the purchase price goes directly into your agent’s pocket.

So on the sale of your $900,000 house, her personal take of $45,000 of commission is $15,750.

Still not bad, you say. But what if the house was actually worth more than $900,000? What if, with a little more effort and patience and a few more newspaper ads, she could have sold it for $920,000?

After the commission, that nets you an additional $19,000 while she earns only $350, maybe your incentives aren’t aligned after all. (Especially when she’s the one paying for the ads and doing all the work.)

Is the agent willing to put out all the extra time, money, and energy for just $350? There’s only one way to find out: measure the difference between the sales data for houses that belong to real-estate agents themselves and the houses they sold on behalf of clients.

How long do realtors’ houses stay on the market then?

Using the data from the recent sales in the #GTA, and controlling for any number of variables—location, age and quality of the house, aesthetics, whether or not the property was an investment, and so on—it turns out that a real estate agent keeps their own home on the market an average of ten days longer and sells it for an extra 3+ percent, or $30,000 on a $900,000 house.

When they sells their own house, an agent holds out for the best offer; when they sells yours, they encourages you to take the first decent offer that comes along.

Like a stockbroker churning commissions, she wants to make deals and make them fast. Why not? Her share of a better offer—$350—is too puny an incentive to encourage her to do otherwise.