Wednesday, December 23, 2009

Guest Post: Does Your Realtor Care About the House Price?

The following guest post is Part II in a two part superb article by Edwin Ivanauskas. Part I of the article was published yesterday. This week and next I am mostly publishing guest posts, as I am traveling with my family in the jungles, volcanoes and towns of Costa Rica. Hooray!

In part I of this post, I’ve been assuming that houses just cost a flat $200,000. Let’s take this a step further and see if it’s worthwhile for an agent to spend a lot of time getting you the best price. For this I will assume you are selling your house and you are dealing with a listing agent.

Let’s assume if the agent worked hard enough they could sell the house for 10% above its price. On a $200,000 house that would $220,000. That’s a huge difference you might say, and well… it is. But the commission for your agent on that goes from $6,000 to $6,600, still nothing to scoff at.

The trouble we run into is how much effort it would take to sell that house for $220,000. If we are going off the assumption that this agent can sell the house in 320 total hours to make $18.75 per hour, we can use that to see how many hours it is worth working to raise the price to $220,000.

With some simple math we find that if the agent worked 32 more hours to get the price up to $220,000, they will continue making $18.75 an hour. Let’s think about this for a moment, the agent already has to spend 320 hours to sell the house at $200,000; is it really realistic to spend only 32 more hours and increase the price by $20,000, netting himself $600 more in commission? I don’t think so.

In this example, there is no reason for an agent to bid up the house for the seller because it will take far more time than selling the house quickly and moving on to a new one.

Edwin, This Is Just Too Simple and Unrealistic

Wow hold on there, let me explain. I used this modeling to help illustrate how agent’s compensation can affect their incentives when it comes to selling a house. The model is extremely simplified to give a basic representation of the idea.

Some things I didn’t discuss are that an agent working like this would likely have issues growing his client base in the long term because he just uses them and discards them. Good, established agents often work closely with their clients to deal with their needs rather than to make a quick buck. These good agents also tend to become real estate brokers and have other agents working under them to expand their business and their earnings.

My Take

Given how easy it is to become a licensed agent (40-90 hours of coursework plus a certification test) you are likely to be dealing with an entry level agent, particularly if you aren’t in the market for an expensive house. You could easily have to deal with poor performance because they are incentivized to sell houses quickly rather than negotiate the price or help you spend a long time searching.

My view is that the ease of becoming an agent tends to bring in newcomers who are looking for a quick buck. These people will find that they barely get any more money by spending a lot of time helping their clients so find ways to cut corners so they can get houses sold ASAP. When buying something as big and expensive as a house, you should be forewarned that your agent may not have your interests at heart. Don’t be fooled into complacency when dealing with a real estate agent.

Do you have any stories of terrible or wonderful agents? What do you think of the simple model I’ve constructed here, is it accurate or total B.S?

[In the coming days, I will offer my own ideas based on Edwin's excellent 2-part guest post. Stay tuned. - Shadox]

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Money Beagle said...

When I bought my condo, then later sold it and bought a house, I used the same agent for all of the transactions. I chose an agent that was referred to me as a family friend, and who had over twenty years in the industry, specifically because I didn't want a newbie handling things. On the first purchase, which was in 1999, he took me around to a variety of places and when I decided the condo was the way to go, advised me and helped me on the offer and all the steps up to closing. Eight years later, when I went to sell the condo, it was right when the housing market was starting to tank. He advised me on the best price to get traffic, advised to lower it immediately when competition opened up at a lower price, and assisted me with the negotiations when an offer came in. On buying the house, he took us to probably 50 places, assisted in writing the offer that we made on our house, and when I was prepared to accept their 'final price' counter offer, he recommended we go $5k lower, which we did and was accepted. Right there, we basically 'made back' the money we paid on the condo sale commission (which he'd discounted from 6% to 5% since I was a 'repeat' customer). Without his experience and eye on the market, I probably would have been caught holding onto my condo for a lot longer and gotten a lot lower price, because things really went south pretty quickly afterward.

Doreen Starks said...

Money is one of the least critical sides of human life... Why everybody is making money

Edwin said...

Money Beagle, thanks for posting that. I think it really highlights what a great agent can do for you. Rather than trying to make a quick buck, they represent you and do their best to make it painless, easy, and even profitable for you.