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Does your real estate agent have your best interest?

by Eric Rothman
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This clip from the movie “Freakonomics” does a great job explaining why your agent isn’t incentivized to get you the best price for your home.

The book, which preceded the movie, was written by Steven D. Levitt & Stephen J. Dubner.

The Incentivized Behavior of Agents

It’s a really interesting perspective on how economics influences behavior and sociology. It clearly shows their passion and quirkiness through the examples of cheating teachers, bizarre baby names, self-dealing Realtors, and crack-selling mama’s boys.

It hit and stayed on the Times best-seller list, and went on to sell more than 5 million copies in 40 languages.

Below are some excerpts :

“But experts are human, and humans respond to incentives. How any given expert treats you, therefore, will depend on how that expert’s incentives are set up…. A recent set of data covering the sale of nearly 100,000 houses in suburban Chicago shows that more than 3,000 of those houses were owned by the agents themselves.

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. But as incentives go, commissions are tricky. First of all, a 6 percent real-estate commission is typically split between the seller’s agent and the buyer’s.

Each agent then kicks back roughly half of her take to the agency. Which means that only 1.5 percent of the purchase price goes directly into your agent’s pocket. So on the sale of your $300,000 house, her personal take of $18,000 of commission is $4,500. Still not bad, you say. But what if the house was actually worth more than $300,000?

What if, with a little more effort and patience and a few more newspaper ads, she could have sold it for $310,000? After the commission, that puts an additional $9,400 while she earns only $150, 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 $150? 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.

Using the data from the sales of those 100,000 Chicago homes, 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 her own home on the market an average of ten days longer and sells it for an extra 3-plus percent, or $10,000 on a $300,000 house.

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.”

Freakonomics: A Rogue Economist Explores the Hidden Side of Everything

Paperback – August 25, 2009 by Steven D. Levitt (Author), Stephen J. Dubner (Author)

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