My Personal Finance Journey

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Why a Real Estate Agent May Skip the Extra Mile

Contributed by mm | February 21, 2005 1:26 PM PST

A study by two University of Chicago economists, discussed in depth in this New York Times article, questions whether real estate agents are well motivated to negotiate the best price for their clients.

The study, which are based on 98,000 home sales in suburban Chicago between 1992 and 2002, concludes 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." 3,300 of the 98,000 homes were owned by real estate agents.

It is actually easy to understand. Take my house as an example: based on recent sales in my neighborhood, my house can probably fetch anywhere between $360,000 to $380,000. If I use an agent to sell my house, in the typical 6% commission structure (3% to buyer's agent and 3% to seller's agent), my agent will receive $10,800 if the house is sold at $360,000, or he will make $11,400 if the deal is closed at $380,000. In other words, it only benefits the agent's pocket by $600 even if he has to negotiate $20,000 more, which is almost a mission impossible, which, if ever accomplished, may take couple of weeks' time.

The same math applies to buyer's agent too. So, both agents are motivated to close the deal fast instead of close at the fair price.

So what's the answer? Either you can negotiate a different commission structure for your house (like a flat $6,000 plus 40% of anything above $360,000), or you can try to sell the house by yourself using resources like ForSaleByOwner.com or FSBO.com. I'm actually leaning toward the FSBO solutions -- unless I can get a relocation package that covers the commissions once I move out of the area, I will try to sell by myself. It will be an interesting excursion in my journey (not to mention lots of posts to write).

This Post Has Received 5 Comments. Share Your Opinions Too.


mark Commented on February 22, 2005

I found the opposite. My agent encouraged me to wait for all offers before making a decision. In the end, the house sold for 50k over the asking price.


peter Commented on February 22, 2005

I would avoid the FSBO route. In San Diego, my neighbor's condo lingered on the market for two months until she switched to using an agent, after which it sold after two weeks. A friend of mine in Los Angeles had a similar experience when he sold his house. The FSBO "service" caused all sorts of headaches when he attempted to switch to a real estate agent but in the end it turned out ok.


Laura Commented on March 4, 2005

I had just the opposite experience. I had a realtor who insisted that I needed to drop my price to make the sale even though the price I was asking would have only allowed me to "break even" on the condo. To compound the issue my condo association wouldn't allow signage in the windows including "For Sale" signs which really aggravated my realtor when someone complained to the condo association about the sign she insisted had to be displayed. This digressed until she had her husband handle most of the sale because I wasn't worth her time. Once my listing contract expired I was able to list the house FSBO and had okay results. Granted FSBO is not for the faint of heart. I learned a lot about seller closing and associated costs the hard way since this was my first property sale in addition to be a FSBO. I still wound up losing money but not nearly as much as I would have if I had listened to my realtor's advice.


peter Commented on May 12, 2005

Interesting. I guess we can't make generalizations either way...

On a similar note, my condo is on the market now (http://sdhomies.com/?p=303). And I do have a selling agent. I'll try to remember to come back and comment on my experience.


peter Commented on May 12, 2005

From the Thu May 12 Mortgage Matters, Holden Lewis has an interesting story on Realtors vs FSBO:
http://www.bankrate.com/brm/news/mortgages/mortgage_update.asp


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