Freakonomics and The Commission Conundrum: Why You Should Never Forget That Your Realtors' Incentives Are Different Than Your Own

SELL THAT HOUSE

Good real estate agents are difficult to find, but they can be extremely helpful and can make the process of selling your current house and finding your dream home a lot less laborious. 

Here at NewHomeAssociation.ca we even offer some links on our Resources page to help you find a realtor you can trust in Ontario because we know how important that step is in any housing transition. (Similar sites exist for regions across North America, and look out for a post here soon rounding up many of these resources.)

But there's more to the story.

You see, we also know that real estate agents are human like everyone else and are driven by the same types of incentives as the rest of us, and we think these are facts that every homeowner should be well aware of when buying or selling a home. 

So What is Freakonomics and What Does It 

Have To Do With Selling My Home?

The "Commission Conundrum" referenced in the title refers to a dilemma outlined in the excellent book Freakonomics: a rogue economist explores the hidden side of everything, by economist Steven Levitt and author Stephen J. Dubner (they also have a great NYTimes blog by the same name here.) 

This book is a really great read, full of off-the-wall social and economic analyses of things like the correlations between race, child names and success and the statistical propensity of drug dealers to live with their moms. 

And among these nuggets is a full chapter on real estate agents and their motivations that I think should be required reading for every homeowner thinking of selling.

Of course, being the busy people you are, you might not all have the time to go out and read their book right away, so this post will describe the Steves' theories briefly and explain how they relate to you and your home sale.  

Different Paychecks, Different Pages

The main point to remember when you are selling your home is that you are selling your largest asset. Your realtor, regardless of their competency or integrity, is not. 

They may be guiding you and helping you along the way, but ultimately they are conducting a business transaction for an asset that has no bearing on their own net worth, and it is best not to forget that.  

So what does this mean?

Well, quite frankly, it means that in order to make sure you get the best possible 'buck for your bang' when you sell your home, it helps to understand your agent's own motivations so that you can guard against any rash decisions that may not be in your own best interest. 

'But my realtor is so nice... how could their motivations in selling my home be any different than mine?', you might ask. 

Good question. 

Well consider this example given by Levitt and Dubner in their book: If an agent holds out for an additional $10,000 on your $300,000 home, that's a big deal for you, right? There's a lot you could do with 10 grand, I'm sure. 

But when you consider that the realtor's 1.5% commission take (half of the 3% average commission, with the other half going to the real estate co) on that large sum is only $150, you begin to see how your motivations might be a ittle bit different than theirs. 

Just think- If you were a realtor and could seal the deal right now and forfeit just $150 out of over $4500 in commissions so you can move on to the next deal, or hold out an additional week to make sure your client gets full pop, what would you be inclined to do?

Steve and Stephen even take their observation one step further, pointing to a study that shows agents on average keep their own homes on the market 10 days longer than their clients' and sell them for 3% more as well. 

Interesting thought, isn't it?

So Now What?

Ok, so what does all this mean anyway? Does this mean all agents are selfish and untrustworthy? Hardly.

Should you swear off realtors and their poorly incentivized commission structure for good and go the for-sale-by-owner route? Well no, we don't think that either. 

Because as with hiring lawyers to navigate the law and accountants to do your taxes, competent, trustworthy professionals are usually worth their weight in gold. But it never hurts to understand the motivations of your business partners, and that's exactly how you should view your realtor.

You can minimize your exposure to this type of risk by a) finding a realtor with integrity (as money-hungry agents may be more likely to try and churn volume sales), b) stowing in the back of your mind your understanding of your agent's motivations throughout the process and c) holding your ground when you don't feel like you're getting the cash you expected for your most prized asset. 

By doing these three things, you are more likely to have a smooth home-selling experience thanks to your realtor's expert guidance, and one that doesn't leave you $10,000 poorer than you ought to be thanks to your understanding of the incentives involved in the sale. 

How about yourself - have you ever sold a home? If so, how did you find your experience working with a realtor? Have you ever encountered this disconnect of incentives first hand? Let us know in the comments!