Freakonomics, or Freakojournalism

Finding clueless people writing inane garbage is easy when you read the NY Times. I shake my head when a reporter submits dim copy on a subject they know nothing about. One of today's "most emailed articles" is entitled Why a Real Estate Agent May Skip the Extra Mile, and the crux, is as you might imagine, why real estate agents won't work as hard for you as they do for themselves. The story is based on a study done by economist Steven D. Levitt, who tried his hand at rehabbing some houses outside Chicago and decided that agents didn't work hard enough for their clients. Daniel Gross of the Times, who has probably never brokered a transaction on behalf of a home seller himself, has to get in the obligatory remark about that "hefty 6 percent commission" before he pens the following gem (my emphasis added):

Real estate agents have a better sense than others of the best price a home can command. But when they work for others, they don't have the financial incentive to pursue it. Most home sales generate a 6 percent commission, split between the brokerage firms representing the buyer and seller. The agent generally receives half of the firm's draw, or 1.5 percent of the sale. So if a home sells for $500,000, the agent personally receives $7,500. Not bad for what may be just a few days of work. If the agent works for an additional week and urges the seller to hold out for $515,000, that's an extra $15,000 for the seller, but only an extra $225 for the agent. Because every additional dollar throws only a penny and a half into the pocket of the agent, the economists reason, the agent may push clients to accept low ball offers.

This seems like reasonable math on face value, but it is quite erroneous. The data Gross uses doesn't take into account many other factors that make this anything but a one dimensional, zero sum game. 

The shallow analysis that the agent hangs his client out to dry  because he's not inspired to get that $225 example is brazenly misleading. Here is why. These poor sellers who are forced to take these low ball offers because their greedy agent doesn't advocate for them  have to live somewhere after they sell their home. Guess who will most likely sell them that new home? Their real estate agent, that's who. If that guy doesn't get them top dollar, guess what? He has to sell them a less expensive home on the buying end. Let's take that example where $15,000 less costs the agent $225. Suppose the clients are putting 20% down on their next home. That is $75,000 in buying power lost, and by Mr. Gross' math $1125 in lost commission to the agent. If you add that to the $225, you have $1350 in evaporated income. I don't know anyone who would walk away from that kind of money.

Now suppose the sellers are not going to buy another home or for some reason don't need their agent. Maybe they are flying south, or maybe they are inheriting their parent's home. Perhaps they are divorcing (I have played this right and sold two houses-one to her and one to him, but that is rare) and must rent for the time being. The agent still has plenty of reasons to act in his clients best interest in the negotiations. Happy clients refer people. Curious neighbors will list with an agent who has shown he can "ring the bell" in their neighborhood. More often than not, after months of prospecting, getting the listing, marketing, buying ads, showing,  and fielding offers, that agent wants to wring every possible cent from his effort. Every thin dime. And in the not uncommon occurrence when we have to cut our commission to make a deal close, that hurts. It hurts a great deal.

I have listed and sold more than a few homes in my day. I spent 5 years in an utterly brutal buyers market and still hold a license now.  Even in my current hot market I know the percentage of  listings that sell  in a few days work as Mr. Gross says: Less than 1%. Even a slam dunk deal that sells within a week most likely will not close for at least 30 days, and that is really pushing it. Most deals take 6 months from listing to closing, assuming the client was picked off the client tree that grows in all agent's back yards. That is a tremendous amount of hand holding and 9pm calls on the cell phone to explain to the buyer agent exactly why that heirloom dining room chandelier will not be included in the sale. It also involves the ingestion of copious amounts of excrement served by attorneys for both buyer and seller, appraiser, home inspector, retarded newspaper ad staff, title company, lender and others involved. If Mr. Gross ever worked a day in his life on his subject matter he'd know that.

Here is more wisdom from a professor at Columbia University, who probably never brokered a transaction in his life either:

Armed with this knowledge, what should home sellers do? "You cannot completely trust the advice your broker gives you," said Christopher J. Mayer, a professor of real estate at Columbia Business School. "You have to become more educated as a buyer."

Well DUH. Imagine that, doing a little research on a half million dollar transaction.

More dopiness:

When the economists constructed an analysis that controlled for amenities, location and the adjectives used to describe the houses, they found that agent-owned homes, on average, stayed on the market 9.5 days longer and commanded median prices that were 3.7 percent higher than comparable homes owned by clients.

Of course, agents may just know how to position homes for sale better than other people do. It's their job, after all. And, being human, they may work harder selling their own homes, the way a dentist may take extra care cleaning her own child's teeth. But these explanations don't square with the data. "If that were the case, you'd expect the clients' homes to stay on the market longer than the brokers' homes," Professor Levitt said.

When you compare the extra 9.5 days and 3.7 % higher sales price, Levitt (whose book is aptly titled Freakonomics) makes the mistake of thinking that correlation means causation. Anyone who has sold real estate will tell you that the longer a house is listed for sale, the more likely it is that the price needs to be dropped. As a matter of fact, the industry term for a house on sale a long time is a "stale listing." The longer a house is on the market unsold the more buyers will wonder why it isn't selling. Simply put, in no way shape or form does time on the market mean more money for the seller. It is quite the opposite. 9.5 days is statistically insignificant  when one considers that these houses typically spend 180 days (and sometimes far longer) on the market. Time on the market is the time from listing to closing escrow, and does not account for time until an offer is made. The study said nothing about normalizing the statistics for divorces, bankruptcy, loss of jobs, job relocation, foreclosure, vacant estate sales, and other instances where the seller will be too motivated by distress to hold out for maximizing their price.

But the question remains as to why agents do better than their clients in that study, and it is obvious. They take their own advice. Consider the seller who hasn't updated the yellow hammered glass kitchen cabinets, paneled walls or shag carpets. Or the seller who insists on an unrealistic price out of ego, and then force the agent to try and sell a stale listing when (and if) they finally get realistic. Some people are slobs and never clean their house. Others are so used to their pet odors they get a quizzical look when an otherwise interested buyer covers their nose and leaves before even looking at the 2nd floor. Many tidy people have too much stuff and the rooms end up looking small.  I had people who refused to leave for showings and sabotaged my efforts because they wouldn't stop breathing down the buyers' necks. I sat in amazement as this man talked about his prostate with the young couple. His prostate. Couples who are divorcing seldom get top dollar, not because it is disclosed -it seldom is, with good reason. However, nothing says distress like three vacant rooms and a half empty walk in closet. Vacant houses have a relatively uphill climb. That is especially the case in the event of an estate sale where the house is often old and outdated-and the heirs are more motivated by fast liquidation than holding out for top dollar. The examples go on and on. I am certain that Mr. Gross' study did not normalize the numbers for these factors.

No, real estate agents with rare exception, are the antithesis of the proverbial doctor who won't take his own advice and quit smoking. They know exactly when to list their house and at what price. The joint is an absolute museum. The kitchen counter is clean. The dust is wiped off the TV. The landscaping is impeccable. Everything is updated from the decorating to the roof to the furnace ( Are these things withheld from the seller? Never. As a matter of fact, sellers seldom have the objectivity to really follow through. But I digress). The basement is dry. If having a pet were a crime there wouldn't be enough evidence to arrest them. Lastly (perhaps firstly) they bought the house right to begin with so they either had the equity to improve sensibly or the flexibility to price enticingly, or both. They chose the right location. All of these factors yield more showings and a higher likelihood of multiple offers.

And if their clients would take their advice to begin with, they would have to acknowledge that agents do not  just go the extra mile, they paved it. Are there clueless agents? Yes, just like there are clueless attorneys, electricians, accountants and even clueless newspaper reporters. The New York Times should know a thing or two about them.