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.
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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