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September 22, 2005
Brokers' Misalignment of Interest
The most noteworthy point in last weekend's article on foregoing real estate agents was a parenthetical one about the disincentive that brokers have to hold out for top dollar on a sale:
Note, however, that agents don't always push for the best price. Steven D. Levitt, co-author of "Freakonomics," and Chad Syverson, both University of Chicago economists, found that real estate agents have an incentive to persuade their clients to sell their houses too cheaply and too quickly because a few thousand dollars more in price won't yield them a significantly higher commission.
We completely agree. One way to diminish that tendency would be to have several brokers who want your listing to submit their "bids" for what price they think they can sell it for. Then create a sliding commission scale (with quite a steep rate slope) based on how close they come to achieving that price. This would encourage brokers not to throw out inflated numbers in hopes of winning a listing--and would align their interests better with the seller. Do you think that could work?
The 6 Percent Solution [NY Times]
Comments
if anyone else has used the sliding scale, i'd be really interested to know if they will even accept this type of offer..
Posted by: ltjbukem at September 22, 2005 8:59 AM
Excellent idea. I love it. And if your house goes for $100,000 less than they lured you in with, you get to hang them from their toe nails. I'm serious.
Posted by: Anonymous at September 22, 2005 9:00 AM
Great minds think alike.
My experience has been that there really is no further incentive once the asking price has been reached. The broker wants to make the sale - period.
If I were selling, that is EXACTLY how I would structure the broker contract. In this market, where decent properties sell themselves, there is not reason anyone should accept a standard flat percentage contract.
Posted by: BB at September 22, 2005 9:49 AM
The sliding scale is a standard practice in many other sales fields. For instance, in my industry (software) a rep may get 5% on the first 40% of quota, 6% on the next 20%, etc. on up to 10-15% of anything sold over quota. The real money is made when you overacheive, an extra $100k can yeild $15k in their pocket.
It's surprising that RE firms haven't come up with this already and pitched it to their clients. It offers everyone the opportunity to make more money.
Posted by: anon at September 22, 2005 10:02 AM
The broker's conflict only comes into play if you agree to accept a lower offer than you want. You can always say no to a low offer and hold out for more. Most people don't have the guts to that, which is why the brokers get away with it.
When I sold my place recently I pushed the broker to list it at a higher price than I knew I could get. I didn't tell her the minimum I would accept. This way when I got the amount I wanted, the purchaser was happy to get a discount, and there was less conflict of interest for the broker.
Posted by: eco at September 22, 2005 10:06 AM
A certain well known broker specializing in CH and FG sold our place to us and made it very clear what the seller would settle for. Good for us, but I'd never sell through him after that.
Posted by: Anonymous at September 22, 2005 10:06 AM
I've bought two places through a well-known PS broker who tends to get their clients to settle for less than ideal prices. But, likewise, I would never sell through them, at least not on an exclusive basis.
Posted by: BB at September 22, 2005 10:33 AM
This is why I think - in a warm to hot market at least - selling yourself makes the most sense. All you should need is a website, a craigslist link and a Times ad. Why would you pay 2 or 3% to those FSBO websites mentioned in the article
I also think Barbara Corcoan was right when she said pricing 10% below market gets you a bidding war and nets the highest sale price.
Posted by: Anonymous at September 22, 2005 10:50 AM
how much does a nyt print ad cost? the online site is too jumbled to read through...print/online has different rates. online is cheaper.
Posted by: ltjbukem at September 22, 2005 10:56 AM
In what is often an unusually closely correlated field to real estate, a sliding scale commission is often used in sales of high-end (say, 6 figure plus) fine art. However, it can work as a positive incentive, as well, with bonuses for getting over market value, or whatever an agreed-upon level is.
Posted by: Anonymous at September 22, 2005 10:56 AM
Eco,
It's certainly the seller's option to say no to an offer. Problem is, sellers rely on their brokers' expertise to tell them what they can realistically hold out for. If you can't trust them to apply their expertise in your best interests, why use a broker?
Also, very smart not to tell the broker what you'll settle for.
Posted by: linusvanpelt at September 22, 2005 11:09 AM
I think an ad runs around $250, if you have a banner (OPEN HOUSE) and if it's a few lines long. That's for a Sunday. Online is about half that for 14 days. I've done both and found the vast majority of people still rely on the standard printed page.
Posted by: Anonymous at September 22, 2005 1:20 PM
Interesting that no brokers have chimed in!
Posted by: Brownstoner at September 22, 2005 4:25 PM
A few things to consider.....many brokers get better prices because they are more dispassionate about the process, and more willing to risk losing a deal. What is missing from the Freakanomics data is the lots of broker-owned property was not primary residence, so they could hold out without say, needing to sell to move to another city or to afford the next house.
Re: sliding scale. If your agent does not co-broke, which is common in Brooklyn but rare in Manhattan, you might be ok (maybe). But you are unwise if you do not consider human nature. Brokers want to make money, and they could unexpectedly make less when representing a buyer that has bargained their way down to a deal that pays the broker 4%. So to avoid this possibility they only show their clients property that pays 6%. If you exclude these motivated, successful brokers, you are excluding their qualified, motivated buyers....the cream of the buying crop. This is why 7% commissions are now being offered, or 4% to a buyers broker....it works.
The readership here is astute and informed and a little obssesed. Many buyers are not, which is why they rely on their brokers. Have you ever noticed that almost all brokers hire 'themselves' and their firms when selling their own places? They're paying commissions to attract buyers, in addition to the marketing. They do it because they want to get the best price and they've only got one chance to do so. Even after paying a commission you will usually make more money....not always, but usually.
As sellers insist that your broker co-brokes with everyone, and don't discount human nature
Posted by: Anonymous at September 22, 2005 4:30 PM
I've never used a broker to buy a place. Just lined up for open houses like everyone else. 7%?
Posted by: Anonymous at September 22, 2005 4:34 PM
Because of the lack of cobroking in Brooklyn lining up for open houses like everyone else is unavoidable. What you should also do is befriend a broker at each of the large, active firms in your area of desire. Tell them what you want and what you can afford. Full disclosure, especially if you want to buy a coop. Then stay in touch with them regularly and you'll have a friend in the business that can help you, esp new construction when inventory is limited. Do not work with more than one person per firm if you want to be taken seriously.
Posted by: Anonymous at September 22, 2005 4:45 PM
Or buy directly from the owner. I've done that twice and we all saved a bunch of money
Posted by: Anonymous at September 22, 2005 5:22 PM
7%!! I love it! LOL!
Posted by: Anonymous at September 22, 2005 6:15 PM
I'm a Broker here on the West Coast, and here is some food for thought...
You're moving forward with a transaction that represents you're single biggest investment, you're emotionally charged, no matter what you say, you are. You run the possibility of dealing with the legalities of a transaction of this magnitude, yet you would consider puting it in the hands of the "best deal in town". ( the discount broker). Or better yet, you try and do it yourself... a person that represents themself, has a fool for a client.
Something to think about...
Broker in Oregon
Posted by: Broker in Oregon at October 1, 2005 7:50 PM
Some more food...
80% of all for sale by owners list with a broker,
Why is that?
Simply put, most fail, if you've succeeded, Congrats, most don't.
More... fsbos loose 16% trying to save 6%-7%
(National statistic)
There is a reason why we're licensed, reason... you can get raked over the coals in a transaction, should something go sideways. Should you take that risk? Is that wise, putting you're family in jeapordy, with you're money on the table?
Think about it...
Would you get lasik surgery from the cheapest doctor in town, or the best? What's it worth to you?HHMMM....
Makes sense, doesn't it.
Broker in Oregon
Posted by: Anonymous at October 1, 2005 7:58 PM
All that you say is true! As a listing agent I always have to fight for the selling agents commission to be at least 2.5% no matter how high the unrealistic selling price is. Once that is set I have to stand up for my self after all I am the one that pays up front for the advertising. My advertising is already in place and I it's hard to show the seller every cost that is involved in advertising and being a successfull Realtor. I say how would you like it if I went around telling buyers that you will discount your price. So I price it to sell or we all lose.
Posted by: Sandy, Santa Cruz CA at May 8, 2007 3:23 PM
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