Hey Home Seller, Nobody is on Your Side

You might think that in the $160 billion dollar industry that is residential real estate brokerage, somebody would be on the side of the home sellers. You know, the ones that contribute most of those $160 billion dollars. You would be wrong.

insaneAppearances aside, there is really nobody on the side of the home seller. That $160 billion is a mighty big trough, and a lot of people’s livelihoods depend on their continuing to feed at it. For starters, there are the real estate agents themselves. They may claim they act in the home seller’s best interest, and some may even believe it. Unfortunately, whether they acknowledge it or not, they suffer decidedly from the Principle-Agent Problem. For proof, look no further than the research of two noted Stanford professors. What did they discover about these well-intentioned servants? “All of the empirical findings are consistent with agents distorting information to mislead clients.”

If that were the limit to the problem, it would be understandable. Everybody in a more-or-less free market tries to do the best for themselves. I am okay with that. But those not in the real estate industry probably do not know there is an entire industry that does nothing but sell things to real estate agents (to make their jobs more palatable). This “agent support” industry is also not on the side of the home seller. They want agents to make as much as possible, regardless of how unfair it is to home sellers. For the greater the agent’s take, the greater their market.

Perhaps you think these new third-party sites (Realtor, Trulia, Zillow) are on the side of the home seller. After all, the information and marketing they make available can be very beneficial to home sellers. And that is true, to a point. But you have to understand who the customer of these sites is—where their revenue comes from. If you guessed real estate agents, you are correct. To the extent that these third party sites help home sellers, it is just a means to an end. The more home buyers and sellers use these sites, the more they can charge the agents to advertise on them. And more importantly, the more the agents make, the more they can charge them. These sites, while they will never admit it, do not want anything to jeopardize the lucrative commissions the agents garner.

And finally, perhaps you think the ancillary real estate services industry (title, escrow, mortgage, etc.) is on the side of the home seller. Definitely not. Unlike home buyers and sellers, who have at best a fleeting business relationship with these service provides, real estate agents have an on-going relationship with them. These service providers depend heavily on agent recommendations for their on-going business. Hell, some even pay for them with kickbacks, which is illegal. They certainly do not want anything to endanger “their” agent’s livelihood.

So there you have it. An entire industry purporting to serve home sellers when in fact they would like nothing better than to have home sellers pay as large a commission as possible to sell their homes. The bigger the trough…

To see how ReaListing takes the side of the home seller, click here.

To learn how to keep more or your hard-earned equity when you sell your home, check out The Intelligent Home Seller eBook and The Intelligent Home Seller eCourse.

The Simple Way to be as Smart as Your Real Estate Agent When Pricing Your Home

Without question, the biggest mistake you can make when selling your home is to price it wrong—especially too high. You can have the nicest home in the neighborhood and if you price it above the market, it can sit there and sit there. And then it gets the stink of a stale listing, where buyers become afraid to make an offer. And thus begins the downward spiral of price reductions and capitulation.

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Most home sellers who work with a real estate agent tend to defer the pricing decision to their agent. The agent starts by assembling a Competitive Market Analysis (CMA), which is a combination of recently sold homes and currently for-sale homes in your neighborhood. Then they sit down with you, go through the list, and the two of you decide on an asking price for your home. But relying too heavily on the agent for the asking price can be a real mistake.

First of all, agents are generally not certified appraisers, which means their choice of asking price is just a guess—an educated guess—but a guess none the less. Second, agents are subject to the Principal-Agent Problem, which means their choice of asking price is not without bias. The faster the home sells, the sooner they get paid. This incentivizes them to choose a lower asking price, which benefits them at your expense. Finally, it is unlikely your agent knows more about your neighborhood then you do. You may have even been inside one or two of the recently sold or for-sale homes in the CMA. It is doubtful your agent has. And the insides of those homes has a dramatic impact on the price of yours.

So, how do become as smart at pricing your home as your agent? Simple, become a buyer who is looking to buy your home. First, you set up a simple spreadsheet that tracks the asking price and sold price of homes in your neighborhood that match the specifics of you residence. Entries on the spreadsheet include the following:

  • Listing date
  • Address
  • Bedrooms
  • Bathrooms
  • Square feet
  • Asking price
  • Sold date
  • Sold price

Next, about 90 days before you are ready to sell, go to any (or all) of the online real estate sites (Trulia, Zillow, Homes.com, Redfin) and sign up for e-mail alerts that notify you whenever a home goes up for sale or gets sold in your neighborhood that matches your home’s specs. Then, whenever you receive an e-mail alert, enter the information into your spreadsheet. You can even add comments to an entry if you know something about the condition of the home.

With this approach, not only can you see what homes similar to yours sell for, but you can also see how long they took to sell and what percentage of the asking price they got. What is more, by doing this for 90 days, you will also get a feel for price momentum in your neighborhood: what direction and how fast are the prices moving.

I promise you, if you do this for three months, you will now as much, if not more, about the pricing of your home than the agent you work with. Then, when you sit down with them to determine the asking price, there will be two informed people making the decision instead of just one.

To see how ReaListing helps home sellers make better decisions, click here.

To learn how to keep more or your hard-earned equity when you sell your home, check out The Intelligent Home Seller eBook and The Intelligent Home Seller eCourse.

How to Reduce the Conflicts of Interest in the Real Estate Industry

Whether you are a home buyer or a home seller, when you work with a residential real estate agent, you are subjected to two conflicts of interest. One of these is inherent in the relationship itself, while the other is borne out of the customs and traditions in the real estate industry. And if you are not aware of them, and you do not know how to deal with them, it could cost you thousands of dollars.

Conflict

The first of these conflicts of interest, which is inherent in any relationship where you rely on a professional for advice, is called the Principal-Agent Problem. This problem is just as prevalent with medical doctors and plumbers as it is with real estate agents. The conflict basically comes down to this: when an expert (i.e., the agent) gives you advice, is it in your best interest or their best interest? When a doctor tells you to take a prescription, is it the best course of action for you or is it helping them meet their quota for that drug? When a plumber tells you that you need to have you main line cleaned, is that really true, or does it just pad their bill? And when a real estate agent tells you to lower your home price or take the first offer, is it sage advice, or are they just looking to get a quick commission?

How do you combat the Principal-Agent Problem? There is only one way: education. You have to be (almost) as smart as the agent giving you the advice. And while becoming an expert in any field is unfeasible, the wealth of information available today certainly makes it easier to close the gap. For some issues, like medical and plumbing, you can also seek a second opinion. But this is not really feasible with real estate. That is why, when it comes to buying or selling a home, you must get your own education—especially with regards to home prices—and not rely completely on your agent. It is not that your agent is bad and will intentionally mislead you, it is that they are human and very susceptible to the Principal-Agent Problem.

The other conflict of interest, which is the real estate industry’s own doing, is the all-or-nothing lottery structure of real estate compensation. If your home does not sell as a seller (or you fail to buy a home as a buyer), the agent makes nothing, regardless of how much money they have spent and how much work they have done. But if your home does sell (or you do buy), then they get compensated with a lottery-size payout, which is disproportionately large for the work they have actually done on that particular deal. Of course the agents do need these lottery-size payouts to compensate them for all the work they have done for free with buyers that didn’t buy and sellers that didn’t sell. It does seem unfair that serious, motivated home buyers and sellers end up subsidizing those buyers and sellers that were not really committed.

How do you combat the all-or-nothing conflict of interest? Make it all-or-something. When an agent does work for you as a buyer or seller, they should get paid something whether you go through with the deal or not. Not only does it reduce the conflict of interest, but it is also fair. Nobody should have to work for free.

How would this all-or-something compensation work? Home sellers could offer to pay a non-refundable portion of the commission (perhaps 25%) after the home has been on the market for one week. This would be money the agent keeps whether the home sells or not. If the home ultimately sells, this approach costs the home seller nothing, as it was just a portion of the commission they agreed to pay anyway. But if the home does not sell, then at least the agent made something for their time and money (most of which is spent in the first week).

Home buyers could offer to pay a nominal, refundable payment (perhaps $1000) to buyers agents to show them homes. If they ultimately buy a home through the agent, it costs them nothing as they will get this money back at closing. But if they fail to buy a home, the agent keeps the money (and the buyer is out the money), and in so doing avoids working for free.

The all-or-something approach to agent compensation is not only fair, but it actually reduces the Principal-Agent Problem by getting the agent’s goals more in line with the those of the buyer or seller that has already paid them some money.

Will this all-or-something technique ever take hold? Not if it is left up to the real estate industry. The industry makes too much money the way things are. The only ones who can make this happen are the buyers and the sellers. And that will not happen until they see the benefit in doing it.

To see how ReaListing saves home sellers thousands using the all-or-something technique, click here.

To learn how to keep more or your hard-earned equity when you sell your home, check out The Intelligent Home Seller eBook and The Intelligent Home Seller eCourse.