Don’t get Ripped Off By Real Estate Agents
I’m selling a house, and I’m very well aware of the research that demonstrate the many forces at play to ensure a real estate agent will try and sell my house for a low price not a high one. However, I’m also lazy and / or don’t have the confidence to sell it myself. So what do you do?
Real Estate Agents Will Try and Sell Your House For a Low Price
Real Estate agents in Australia work on a commission of between 1.6% and 2.2% – whatever they can get away with. It’s a flat fee and one that only gets paid if the house is sold. If the commission is 1.8% and you sell the house for $1,000,000 that means the agent will make $18,000. If the house doesn’t sell – the agent gets nothing.
However, if you sell the same house for a terrible price say $850,000 (compared to the $100,000 expected) the agent will still make $15,300, that’s only $2,700 less. Conversely if they sell it for $1,200,000 then they only make $21,640 The figures between a low amount for a property, and a high amount for a property mean a lot to you -but not that much to the agent – especially when you consider how much they make if the house does not sell at all $0.00. Hence, your real estate agent will want to sell your house AT ANY COST. it matters much more to them that the house sells, rather than what they sell it for. You can see this below:
- No Sale = $0.00
- Sell at bad price = $15,300
- Sell at ok price = $18,000
- Sell at great price = $21,640
The Freakonomics authors refer to this study that also shows real estate agents reduce the value of a property sale. They also show evidence here and here why and how real estate agents try and sell houses for a lower price. Anyway, if you believe the Freakonomics guys (and associated research) or not, the logic I put upfront is – I think, compelling.
The Solution
Create your own incentive scheme for the real estate agent, one that will change their behaviour, and have them motivated to sell the house, at a high price, not be motivated to sell the house at any price. I personally have just negotiated with an agent and have put the following incentive scheme in place*:
- 1.0% commission for every dollar they get for selling the house up to $1,000,000, plus
- 10% commission for every dollar they gets between $1,000,000 and $1,150,000, plus
- 20% commission for every dollar they gets over $1,150,000
So if the real estate agent does there brilliant best and we sell the house for $1,200,000 they would make $35,000 (that’s $10,000 (1.0% of 1,000,00) + $15,000 (10% of $150,000) + $10,000 (20% of $50,000), compared to the $21,640 he would have made if we had a flat rate of 1.8%. And believe me, if I sell this house for $1,200,000 I would be more than happy to part with $35,000:
- No Sale = $0.00
- Sell at bad price = $8,500
- Sell at ok price = $10,000
- Sell at great price = $35,000
What do you think?
So what do you think? If the house sells for an great price I owe $35,000 in fees rather than $21,640 in fees. However, everyone wins as the real estate agent is on my side. There is, from I can gather very little written about this confusing world. I would like to know from real estate agents, economists, and the general public if I am on the right track or not. In short we need to incentivise people to work in our interests, not against them. In the current paradigm real estate agents are incentivised to work against the person paying the bills (the seller) and in the interests of the buyer. It’s a silly system and needs to be rethought.
Note the photo is courtesy of Mumbrella – spot the IT guy.
* Please note all prices are indicative – to make the point. Not actual prices.
Fritz Bachen is a Consumer Psychologist and Founding Partner at Naked Communications. Fritz can be seen, read or heard at; The Gruen Transfer, ABC Radio (Sunday nights), Adnews columnist, as well as The Australian, Cleo, Mumbrella, Shop Till You Drop and so on. He speaks at numerous conferences on marketing, ideas, contemporary culture, and consumer behaviour. Fritz has degress in clinical psychology and commerce (marketing). A registered psychologist and has worked in private practice, forensic settings, advertising (Saatchi & Saatchi) and marketing consultancy (Added Value). He was also state under 12 chess champion on WA, and has a board game called The Analyst selling well in the Benelux countries.
Comments
Anonymous
Oct 9th, 2011This makes great sense. I've often had a similar feeling but think I'd just do it myself. Why give them 30k for nothing.
Ben Shepherd
Oct 9th, 2011interesting approach. i guess any incentive depends on the agents confidence that they can achieve the best case scenario. here you are rewarding them for great work and in some ways, punishing them for a mediocre result.
one agent may look at it as a chance to earn significantly more (if they back their own ability), another may look at it as a significant risk (if they are skeptical of their own ability to generate a strong result.)
BTW a similar model to what you propose Fritz would have helped me when renting our property in Melbourne. Our agent recommended we take a $20 pw rental decrease which I found a bit odd. Then I did the math and worked out the net loss for the agent was less than $50 annually, whereas for me the loss over the year was $1000+. Our interests were not aligned.
Andrew
Oct 9th, 2011If it helps. I used this approach for selling my previous house and it worked well.
Only differences were commission gradings of 2%, 5% & 10%. The key trick is understanding the value of your property. Easier said than done in the current market.
Also as part of the deal, I got them to invest in some of the advertising campaign up front (brochures, photography, etc)…so they had some skin in the game. I figure they probably get it at a discount anyway…so it is a good negotiation point.
Andrew
Oct 10th, 2011yes yes all very good. Just so long as somewhere in there you consider the fact that such actions will further reduce the prospects of young 'uns like myself from ever owning a house, where perhaps my absolute upper limit is $50-100K under your 'bad' price. I guess in terms of buyer/seller motivations it would be nice if instead of 'ripping us off' sellers and agent would consider maximising social utility instead of individual utility.
Andrew #4 (different)
Oct 10th, 2011sorry didn't realise an anon "Andrew" has already posted!
Fritz Bachen
Oct 11th, 2011@ben thanks for sharing and yes a good example of another way of restructuring the relationship with estate agents.
@Andrew 1 2 and 3 thanks for commenting. Its right to ensure the incentives align with the seller, not the buyer and on the whole you agree. Andrew 1 I think the incentives need to be geared towards the buyers interests in a stronger way than you propose to make the effect work?
Andrew # 1
Oct 12th, 2011Fritz, It would be difficult to judge this tactic's effect in such a sale. It poses a number of questions around actual sale price, seller's knowledge, agent's skills and sales process.
However, is this really about the need to further motivate the agent? (Perhaps it is less important these days due to internet advertising). A bigger issue here seems to be at what price/terms the seller is prepared to complete deal.
Matt Hickey
Nov 1st, 2011@Fritz, I'm interested to hear how this panned out.
Did you end up implementing this commission strategy and did it lead to the outcome you expected?
Fritz Bachen
Nov 5th, 2011Hi Matt Hickey
I'm sorry to say I didn't. At the last second with the contracts in front of me I changed my mind and sold it in the traditional way 1.8% commission. Not sure why. The house sold last night for a price I was happy with.
Matt Hickey
Nov 18th, 2011Fair enough. I know someone else who bailed on their approach at the same point. Must be something about contracts…
I'm not sure if you're familiar with Bruce Bueno de Mesquita, but he has a pretty interesting approach to buying a car. If I ever end up purchasing a car (again), I'd link to think that I'd give this a go (but who knows what will happen once the contracts are in front of me).
http://www.scribd.com/doc/20079939/The-Predictioneer-s-Game-by-Bruce-Bueno-de-Mesquita-excerpt
Trackbacks and Pingbacks
Leave a Comment