Tuesday, April 26, 2005


This isn't strictly real-estate related, but it does touch on real estate. I am in the process of reading a fascinating book called Freakonomics by Steven D. Levitt and Stephen J. Dubner. Levitt is an award-winning economist who looks at things slightly differently than most. The book is basically a collection of illustrations showing that what really drives people's behavior, and hence our society, laws, jobs, and almost every aspect of our lives, are financial incentives. His conclusions go against common beliefs, are not politically-correct, and are sure to offend some people (like his conclusion that the drop in the crime rate in the 1980s was due to the legalization of abortion decades earlier). However, he presents solid evidence for his positions and I find it hard to dismiss his conclusions.

Anyway, one bit of this book talks about real estate agents and whether or not they really work to get you the most money when you sell your house. His conclusion is they do not. The agent's interests lie in getting you to sell your home quickly, so they can collect their commission. For example, you get an offer of $300,000 for your house, but you want to sell it for $310,000. Commissions on this sale are 6%, but only half that goes to the selling agent - the other half goes to the buyer's agent. And of the 3% your agent gets, about half of it goes to his or her agency. So your agent is only getting 1.5%, or $4,500 of the $300,000 offer. If you hold out for that extra $10,000, the agent's commission only rises by $150. So your agent has a choice of getting $4,500 now or maybe getting $4,650 sometime in the future after some negotiations that may or may not be successful. The extra $150 is too small of an incentive for him and he will recommend accepting the $300,000 offer.*

Levitt and Dubner also look at how agents behave when they are selling their own houses. Now in these cases, they are directly motivated to get a higher sales price, as all the extra money goes into their pocket. Sure enough, they found that agent's houses are on the market an average of 10 days longer than non-agent houses, which allows time for better offers to come in.

They also discovered large disparities in the language used in the listings of agent versus non-agent homes. The agent's listings used words that evoke specific, luxurious images, while listings for non-agent houses used vague, nebulous language. The more evocative language resulted in an average of 3+% higher sales prices.

Correlated To Higher Sales Price

Correlated To Lower Sales Price










Great neighborhood

Words also correlated to a higher sales price are new and move-in condition.

Use this information for your next listing and hopefully, you'll get a higher sales price!

* I directly experienced this. When I made my offer for House 11, it was $25,000 below the listing price (and fair market value). Nevertheless, the buyer's agent recommended they accept my offer. Now, this was partly because my offer was all cash, no contingencies and the sellers were facing foreclosure in a month, but, had this agent really known his market, he would have known that the Phoenix area is on fire right now and a better offer would be sure to come along, within days, if not hours. Luckily for the seller (and unluckily for me), a higher offer did come in before mine was officially accepted and I had to pay an additional $8,000 to get the place. But still, this agent went for the sure money and only got more money for his clients out of sheer luck.

1 comment:

Trisha#1 said...

Very interesting, Shaun. I will definitely have to keep your tips in mind. In fact, I might just go out and get that book. That author sounds like he's right up my alley!

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