Beware: Realtors Do Better for Themselves than Their Clients

by Darwin on August 22, 2010

A few years back, the esteemed author of Freakonomics reviewed and provided commentary on a study showing that when realtors are selling their own homes (correcting for several factors so as to not influence the study), they leave their home on the market longer and get more money for their homes, all other things being equal.  As would be expected, the National Association of Realtors felt it was necessary to defend their minions and they made themselves look even more foolish when Freakonomics owned them in their retort.  But everything the study said, as well as common sense – makes sense.

What is this saying?  It doesn’t necessarily mean that realtors are bad people or they’re committing fraud.  It does however demonstrate a lesson in incentives.  Because they have much more at stake in the sale of their own home, as opposed to the modest commission they get from selling yours (maybe 2-3% after paying their agency fees and personal expenses, etc.), they will tend to go that extra mile in negotiating a better deal.  Doesn’t sound right?  Think about this very representative example:

  • Your house is listed for $300,000
  • They will ultimately keep 2.5% of the final sale price
  • We’re in a horrid economy
  • The realtor hasn’t made a sale in 4 months
  • 2.5% of $300,000 is $7500
  • 2.5% of $285,000 is $7125

Do you really think your realtor’s going to hang around haggling and fighting with the opposing realtor for a prospective buyer over $375 when they can collect $7125 immediately?

$15,000 LOST to you is only $375 lost by your realtor.

Think about it.

With this information in hand, you’ll at least know when this is happening to you and if you so choose, just say no to the low offer your realtor is pushing you to accept.  You don’t have to call them out or point them to this article, but at least you’ll know why they’re telling you, “This might be the best offer you’ll get; this is a great offer, etc.”

Now in case our realtor’s reading this, who’s a friend, this is not directed at you Vince!  We’re in a situation where we don’t have an urgent “need to move”, we’ve just put our house up because we’d like to move to a different area.  So, we’re under no pressure to accept an offer we’re not comfortable with and our realtor hasn’t pressured us to lower our asking price or anything like that.  However, in general, the phenomena described above is more prominent than you may have ever contemplated.

Thoughts from Sellers? Realtors?

{ 8 comments… read them below or add one }

Sharon Molnar August 24, 2010 at 2:34 pm

If this is the case, IMHO, they don’t need to be Realtors.


Darwin August 24, 2010 at 9:11 pm

The data is the data. When you say “they”, this isn’t referring to specific people, this is the whole lot. When looking at large data sets of realtors vs. a control group, the realtors do better. Based on the study design/sample size, it is reasonable to assume this is a broad issue for the whole profession.

I don’t know, would it be a surprise to see that financial advisors have better returns and pay lower fees than their clients? Don’t cops have a lower incidence of DUI convictions than the general population? I think you’d see similar trends in many professions – this was just highlighting what to watch for with real estate specifically.


Valarie Beadle August 25, 2010 at 2:56 am

I would find it insulting to be considered part of that group – and I’m a Realtor. In this current economic climate, when I’m dealing with clients who are in danger of losing their homes due to poor mortgage loans, or being underwater, or dealing with unethical banks who’d rather I shortsale a clients’ home and force them to move rather than doing a simple principal reduction to keep them in it (a current situation with one of the banks who took the bailout), pricing a property correctly is EVERYTHING. Unfortunately, it’s a buyer’s market and I can’t get top dollar for every client’s home – there are just too many foreclosures and short sales out there right now.

As a Realtor, I make it a point to get to know my client’s situation, price the property using all of the available data and help my client make their property as saleable as possible – staging, financing, marketing – every tool. At no point does it enter into my mind to discount their property to take the commission and run – and any Realtor who would consider this shouldn’t be in the business. We have a fiduciary obligation to treat our clients’ most major investment with our highest and best efforts and represent them to the best of our abilities in this market. In selling my own properties, I’m more able to discount and work with someone.

If a client insists on a price that is well above the current market conditions; they can expect that I’ll encourage them to be more realistic; or as in many cases; I just won’t take the listing – it makes no sense to spend the time and money on marketing a property that is overpriced and just won’t sell in this market.


Greg Cook August 25, 2010 at 9:17 am

Charles, far be it from me to disagree with someone who thought up the theory of natural selection (way above my pay grade). BUT
I’m not a Realtor but am in the business, but your example is just a microscopic view that doesn’t take into consideration market dynamics.
Perhaps the market value is only $285,000 not the $300,000 the owner decided to list at.
Perhaps the seller was in a financial bind and had to sell quickly.
Perhaps it was a cash buyer who could close in two weeks and there was little to no danger of the deal falling apart.
In SoCal a great many homes sell for more than list, so the seller nets an additional $15,000 and the Realtor only gets $375. Does that make the Realtor altruistic?
Yes, some agents will push for a lower price just to get their commission but it’s hardly a reflection on every real estate transaction.
Interesting theory though


Darwin August 25, 2010 at 8:58 pm

Hi Greg,
It was only an example to demonstrate how several thousand such transactions could explain the statistically significant outcome. Surely, there’s something going on, and it’s probably not too much different than what I postulated in the example. There are logical explanations for individual situations such as what you stated, but not for aggregate sample set. There are clearly two outcomes on a home sale – one by an individual being represented by a realtor, and then a better outcome by realtors selling their own homes.


James August 25, 2010 at 4:23 pm

Realtors are all out for themselves…they don’t care about their clients, all they care about is their commission. The words ethical and realtor should not be used in the same sentence! I agree with the assessment that a realtor will push a sale through at a lower price just to get paid and move on to the next deal, to the detriment of the client. I’ve experienced it firsthand, several times…I’ve had to fight my realtors by showing them comps data and then they finally agree…Besides, the 6% they charge is a joke- especially in a good market (granted they have to work for it more these days). The MLS and Realtor lobbies are all corrupt too!


Darwin August 25, 2010 at 9:00 pm

I think the same could be said for many industries, from cops letting each other off the hook while targeting civilians, to bankers to politicians, etc. The key here is to understand that people respond to incentives and what those incentives are. Since the incentive to optimize a sale price for a client is quite marginal, the client should be aware of the likely outcome. Sounds like you’ve had some bad experiences. I did on my first home as well until I found a new realtor that I know and trust more.


David Cherry August 26, 2010 at 9:20 am

I think the best thing to get out of this is that as the owner of the house you need to be aware of the market and what your house is worth. Yes, Darwin is correct to point out this situation and everyone should take RESPONSIBILITY in knowing what they should be getting and turn down any unfair deals.

As he has mentioned, I don’t think this is a reflection on all Realtors, I work with many in my line of work and they are very caring, friendly, trusting people with high integrity! But there will always be situations in every industry where someone will try to take advantage. It is always good to know what the current scams and situations are so you can watch out for them.


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