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Freakonomics looks like a very interesting book; I will have to buy it. I won’t be surprised if it has a lot in there that I agree with.

The authors of Freakonomics, Steven Levitt and Stephen Dubner, were on the NBC Today Show the other morning. The only focus in that interview, however, was on real estate agents. They draw some interesting but very faulty conclusions.

As I say, I will probably find this book a very interesting read. However, while watching the interview with the authors this morning I could not help but compare them in my mind to a couple of unmarried marriage counselors.

Here are a few of their conclusions from this news article:

Your home has been for sale only a short time, and your Realtor is urging you to accept an offer.
   University of Chicago economist Steven Levitt says think twice. It’s possible you could get an extra ten-thousand dollars for the house by keeping it on the market an extra week or two, but your agent probably doesn’t want you to hold out.

In the Today Show interview, Steven Levitt makes several statements that I will address. Here they are (paraphrased of course).

  1. Keeping your home on the market longer will possibly get you more money, and your Realtor doesn’t want that because they would rather the home sell quickly so they can collect their commission.
  2. You need to be aware of which advertising words work, and which don’t, so that you can arm yourself with information to use against your Realtor (that’s almost a direct quote).
  3. Realtors only do a couple of things: Advertise your home and find a buyer.
  4. A flat-fee real estate agency is the best way to go.

Let’s take those one at a time:

1. Keeping your home on the market longer will possibly get you more money, and your Realtor doesn’t want that because they would rather the home sell quickly so they can collect their commission.

It’s not that keeping your home on the market gets you more money, it’s the fact that with anything that is sold, time affects the price. Remember the old saying, “There’s a 5 minute price, and a 5 month price.”

In other words, if a home is priced below market, it will sell faster. If it is priced above market, it may sell at that price, but it will take longer to sell.

When I list a home, one of the things that I ask my client is this: Which is more important to you? Selling fast, or making the most money possible? Or, as with many things in life, somewhere in between?

After giving good, sound advice to my client, and showing them the high price and the low price, my client makes that decision&#8212not me.

Levitt implies that this decision is made at the time of the offer. Not so. In addition, my place as a real estate agent is not to give orders to my clients. My place is to give advice. Frequently, I am in the position where I am representing a seller, and we receive an offer. The seller will often ask me, “If we counter them, do you think we can get more?”

It’s a fair question. The problem is, I’m not a mind reader. It is very common for the buyer to have their own agent representing them, for example. The best advice I can give is to professionally point out what is likely to happen in any given scenario. I can give that advice based on 10 years of experience, but that doesn’t make me a mind reader. I don’t really know what the buyer will do if we counter them.

Another old saying: “A bird in the hand is worth two in the bush.” As I am fond of pointing out to people, it’s a gamble. You can take this offer, or you can see if you can get more money. But be prepared that your buyer may walk away if you gamble. What you do depends on the particular situation and how much of a risk-taker you are. Do you need to get this home sold right away, or can you afford to take the risk of possibly losing this buyer and waiting for another one? Neither way is wrong, it just depends on the situation.

But to imply that real estate agents are really in control of this is ludicrous. Our job is to give good advice to our clients, so that they can make their own decision.

2. You need to be aware of which advertising words work, and which don’t, so that you can arm yourself with information to use against your Realtor. (That’s almost a direct quote.)

I can’t help but think but that at some point in their lives, these two authors have had dealings with an unethical Realtor and want to assume that all Realtors are this way.

There are two things you need in a real estate agent. One, you need an agent that really knows what they are doing. Two, you need an agent who is trustworthy.

I recently hired a handyman service to take care of some things around the house that I live in, as well as my rental homes. To be sure, I shopped around to find someone who knew their stuff and also seemed honest. But once I made the decision to go with that handyman service, it was time to place my trust in them. I’m not very handy at all. I don’t want to hire someone to do something for me and then waste my time micro-managing. I’d rather hire someone I have confidence in&#8212whether it is a handyman service, an accountant, an attorney, or a Realtor&#8212and then let them do what they do best.

To say that a person needs to be armed with information to use against the Realtor is to imply that your Realtor is probably dishonest. Does Levitt go around saying that you need to arm yourself with information to use against your accountant? Or your doctor?

There are good and bad real estate agents, the same as there are good and bad plumbers, mechanics, accountants, attorneys, and every other field. Find someone that you trust&#8212preferably us! &#8212but then let them do their job.

3. Realtors only do a couple of things: Advertise your home and find a buyer.

Again, very inaccurate. Realtors have two MAIN jobs, but that’s not the two. If a Realtor is representing a seller, their first job is to get the home sold. That means advertising, networking, etc. The Realtor’s second job is to make sure the home closes, which can be VERY complicated. Levitt didn’t even mention this part.

I have seen plenty of folks that were lucky enough to find a buyer on their own, but then could not get it closed, because closing real estate transactions is not what they do for a living.

4. A flat-fee real estate agency is the best way to go.

In my area, flat fee real estate companies do not advertise on the MLS, the database that most Realtors use. That is a serious drawback. They also do not hold your house open, do showings, etc. Mostly, they provide a sign for your front yard and an ad in the paper. So in my opinion, you essentially have your home for-sale-by-owner in this situation. If you are lucky enough to find a buyer, they will do the paperwork for you. In addition, you are in a dual agency situation, which is about the same as having an attorney in a courtroom be both the prosecutor and the defense. Levitt conveniently leaves this out when recommending a flat-fee company.

So if you are going to be in a for-sale-by-owner situation, why pay thousands of dollars for something you could try for yourself for a lot less?

Finally, Levitt only did research in the Chicago area on this, yet he is making blanket statements on how Realtors operate everywhere. Levitt must not be aware that real estate is done very differently depending on where you are in the country — sometimes very differently in areas in the same state!

The bottom line is that yes, there are some Realtors out there who care only about their commission. But there are also a lot of very good people who make a living in real estate who not only want to get paid, but also care deeply about their clients and want to do what is best for them&#8212not for themselves.

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About Mike Davis

  • The Duke

    In a target rich environment… like the current real estate market… in most areas with good employment….WHY ARE YOU USING A REAL ESTATE AGENT????

    Sell your own house, yourself. It’s easy, it’s fun. I did it, and made a pile of capital gains… I had people out bidding each other… but that was Northern Virginia last year….

    It wasn’t the Ozarks. Anybody here livin’ in the Ozarks?

    Great place… outstanding place… no work to speak of.

    Tennessee has some large pockets of cheapo land too.

    If you want to get away from it all, go to the midwest. Kansas, Nebraska, Wyoming maybe… but be prepared to not work, or cater to the yuppie amongst us.

  • http://w6daily.winn.com/ Phillip Winn

    Does Levitt go around saying that you need to arm yourself with information to use against your accountant? Or your doctor?

    Gosh, I hope so! It takes time to build up trust with someone — time I don’t expect to have with a typical real estate agent. An accountant, sure. But a doctor? When it’s life and death, I trust but verify everything.

    Nobody, and I mean nobody, will ever take your business (or your health) as seriously as you will. Ever. The real estate agent, accountant, or doctor I trust the most is the one who isn’t afraid of me having all the possible information.

  • http://www.mikedavishomes.com Mike Davis

    Absolutely true, and I agree with that — I give people all the possible information. My beef is not with giving people information. My beef is with Levitt saying this is information to ‘use against’ your Realtor. Antagonistic, to say the least.

  • http://w6daily.winn.com/ Phillip Winn

    I didn’t see the interview on which you’re commenting, but having read this transcript, I would say that your arguments don’t seem very effective in countering the author’s actual claims.

  • http://w6daily.winn.com/ Phillip Winn

    I was emailed with: “Would you? If you’d care to elaborate on why, I’m curious. Just making a statement without backing it up isn’t good debate,” so I’ll respond at more length.

    I didn’t follow the links the first time I read this story, responding only to the text of the article itself. So my first comment was directed solely at the suggestion that people should not have an antagonistic relationship with doctors, etc, a notion I dispute.

    Having read the interview with the author to which I linked in my last comment, I see now the basis for the author’s statements, and more than ever I agree with the author’s statements.

    Mike Davis paraphrased four points from a different interview, and I have no way of knowing whether the four points are an accurate characterization or not. I know that Mike Davis’ responses to the four points were generally off-target, which suggests that either he didn’t carefully construct the four points to be self-refuting, or they are accurate.

    Behind all of this, remember that the authors did an extensive survey of 100,000 home sales in Chicago (not just “dealings with an unethical Realtor”) in order to determine what the numbers say about home sales. That’s the point of the book, to demonstrate how the numbers reveal large-scale truth that individual people might easily miss either because of exceptions or simply poor perception.

    After all, I could have a warm fuzzy feeling about a realtor who screwed me out of $10k, or bitter feelings about a realtor who bent over backwards to get me more than I should have gotten. The numbers would tell the real story.

    The interview to which I linked stated it this way:

    ROBERTSON: Now, you are selling your house, and you have a realtor trading for your house. What are his incentives?

    LEVITT: Well, a realtor gets a commission of six percent on your house. If you sell it for $10,000 more, six percent of that goes to the realtor. Then the realtor has to share that with the buyer’s realtor, they split it, and they split it with their company. In the end, your own real estate agent is only getting 1.5 percent of any increase in value.

    Let’s say you are a homeowner. You have a house that you could sell either today for $300,000, but maybe if you held out for another week or two, you can get an extra $10,000 for your house. Well, every homeowner in the country would say, I’d rather wait that week for an extra $10,000.

    The real estate agent? Well, the agent is only going to only get another $150. So is the real estate agent really going to want to spend that extra money marketing and showing the house, and holding out for the best deal? Incentives are set up that the realtor may not want to – so we went to data – 100,000 home sales around Chicago. And it turns out in the data, when a realtor is selling their own home, as opposed to a client’s home, they get three percent more for an identical house, but they also keep that house on the market an extra 10 percent longer. It looks like they hang on longer to get the best deal for themselves, but they are not always doing that for their clients.

    I added the emphasis.

  • http://w6daily.winn.com/ Phillip Winn

    So getting back to the four paraphrased points, the first one is clearly supported by the facts:

    1. “Keeping your home on the market longer will possibly get you more money” — true, given the qualifier; “and your Realtor doesn’t want that because they would rather the home sell quickly so they can collect their commission.” — this is certainly the explanation that most easily fits the facts.

    An alternative explanation? Realtors are, as a class, more patient than most home-sellers. Does this make sense? Not as much sense as the idea that realtors — who have bills to pay — tend to downplay the benefits of waiting. A further claim made by Mike Davis is “to imply that real estate agents are really in control of this is ludicrous.” That argument is itself ludicrous! Most of us sell very few houses in our lives; I’ve sold only one. Realtors, on the other hand, sell many — we hope. Realtors obviously possess enough information to generally hold onto their own houses for 10% longer than average in order to get 3% more money, and that is clearly more than most people know. Do realtors tell their client that? Or is it wrapped up in extremes like “five minutes” vs “five months” when it is mentioned at all? Five months is not just 10% longer than five minutes!

  • http://w6daily.winn.com/ Phillip Winn

    The second point is listed as “almost a direct quote,” and is “2 You need to be aware of which advertising words work, and which don’t, so that you can arm yourself with information to use against your Realtor.”

    This is clearly the bug under Davis’ bonnett, the statement that inspired this article. The use of “against your realtor” implies an adversarial relationship with your realtor, which Mike Davis, as a realtor, probably wouldn’t appreciate.

    But frankly, I’m not asking you to be my best friend, I’m asking you to sell this house for me. And when I learn that realtors make different decisions for their own houses than most people make for theirs with the realtors’ help, I think to myself — who made this relationship adversarial?

    See, I don’t know the market. I don’t watch the prices in the area week after week. I don’t go out on caravan every Tuesday (or whatever). I don’t know what’s going on in my area when it comes to home prices and such. I’m counting on my realtor to know all of that. But then I find out that my realtor is apparently likely to provide me with information that on average leads people to accept nearly 3% less than he would accept himself. I think to myself — I may not be able to go back in time and learn all about my market, but I can educate myself enough to know whether I have a good realtor or a bad one. I can educate myself enough to make sure he keeps my interests at the top of the list. I can learn enough to make sure that I don’t get screwed out of that 3%!

  • http://w6daily.winn.com/ Phillip Winn

    At this point, things start to venture into silliness. “3. Realtors only do a couple of things: Advertise your home and find a buyer.” Essentially true. Of course, finding a buyer can be easy or hard, so I don’t know that I’d say “only,” but beyond that, the rest is minor paperwork. While things vary from state to state, the title company handles most of the paperwork, and a lawyer can provide the rest for a couple of hundred bucks — usually far less than 6%.

    Frankly, most people could handle closing a real estate deal easily, but for lack of confidence. Which I suspect, is something Mike Davis is trying to reinforce. And yeah, I’m sure that accusation is offensive, but I’m not sure I can pull any other reasonable explanation for the treatment in the article above.

  • http://w6daily.winn.com/ Phillip Winn

    Finally, “4. A flat-fee real estate agency is the best way to go.” Having not heard the rest of the interview, I don’t know the context for this.

    Certainly in a market where houses are selling well and buyers are eagerly snapping them up, it seems slightly silly to pay 6% to someone for something easily done far more cheaply. In a market where there are more sellers than buyers, obviously things would be different.

    Oddly, Mr. Davis first suggests that flat-rate agencies are little different than selling the house yourself, and then seems to respond to that situation, which is in fact not the same. However, in doing so he provides another answer to point #3 that I forgot to mention, so that’s helpful. Worried about paperwork? Unless the buyer comes to you on his own, so that no realtors whatsoever are involved, the buyer’s agent can arrange for the paperwork. And the commission at that point should theoretically be only 3%, or half what it would be if you had a listing agent.

    But a flat-fee agency isn’t quite the same as selling a house yourself. One big difference? Paperwork! That’s right, if you really want to sell the house yourself but are afraid of the paperwork stuff, a flat-rate agency can handle that for you, at a much lower cost than a realtor would.

  • http://w6daily.winn.com/ Phillip Winn

    In my case, I’ve bought two homes and sold one. I honestly can’t remember buying the first one, but when I sold it, the realtor was unethical, in my opinion. Nevertheless, I had a time crunch, so I was quite happy for her to take her percentage and move the house quickly. The fact that she ended up selling it to people that had already talked to us while we had a “by owner” sign in the yard, well, that’s just shady.

    But my most recent purchase involved a buyer’s agent, and he helped us a great deal. My wife actually found the house we live in now, and not via MLS, but she had previously found another house that we liked but that the agent talked us out of getting. The passage of time has definitely reinforced that his advice was good and we’re better off where we ended up.

    So I’ve had mixed experience with realtors, but I generally like them. I think that they can be useful, or they can be shady, like anyone else. And I would no sooner trust them without thinking than I would anyone else when serious amounts of money are on the line.

    Especially after having seen these nots about the behavior of realtors contrasted with the general population.

  • http://www.filteringcraig.com Craig Lyndall

    I know I am late to this party, but it is tought to counter an economist with stats.

    The point that Leavitt was making was that Real Estate agents keep THEIR OWN HOUSES on the market longer than they do a client’s house. If you are to define perfect representation by a realtor as the kind of action they take when they sell their own house, then in some way, by some small margin, real estate agents aren’t doing the maximum statistically speaking.

  • http://www.mikedavishomes.com Mike Davis

    Craig, thanks for your comments. And Phillip, in the early days of the internet, I learned something important: Don’t spend too much time online arguing with someone who has a lot of time on their hands. So this will be my final comment on this blog entry.

    Craig said:
    The point that Levitt was making was that Real Estate agents keep THEIR OWN HOUSES on the market longer than they do a client’s house.

    No, the point that Levitt was making was that CHICAGO real estate agents keep their own houses on the market longer than they do a client’s house.

    Levitt should know better. The real estate market is different in each area of the country. The rules are different, and the way the game is played is different. Levitt got his numbers from Chicago agents, and is naive enough to think that his information applies everywhere in the country.

    Someone who hasn’t sold hundreds, if not thousands, of homes would be fooled by this.

    Here’s an example. In the Des Moines area, I might list a home for $175,000. That’s not an uncommon price range; in fact, in Des Moines that gets you a pretty nice home. In fact, $125,000 can get you a pretty nice home.

    I will assume for the sake of a friendly debate that in Chicage, what Leavitt claims IS actually the case. But it is NOT the case in other areas of the country. I can only speak for the Des Moines Iowa area market, but here, it is common for properties to sell fairly close to the list price. It is one of the healthiest markets in the country.

    For example: I list a home at $125,000 in Des Moines northwest, a highly desired area of town. Let us say that 1 month later my sellers and I receive an offer from another agent and their buyer for $122,000. This is a VERY common scenario.

    What Levitt says, with his blanket statements, is that if it were my personal home, I would then tell the buyers to go away, in essence, keep my home on the market longer, and get $10,000 more on average. Simply ridiculous.

    Now: Phillip’s posts were rather haphazard and incoherent, but I’ll attempt to address some of his points:

    Let’s say you are a homeowner. You have a house that you could sell either today for $300,000, but maybe if you held out for another week or two, you can get an extra $10,000 for your house. Well, every homeowner in the country would say, I’d rather wait that week for an extra $10,000.

    The key word in the above sentence is MAYBE.

    And it turns out in the data, when a realtor is selling their own home, as opposed to a client’s home, they get three percent more for an identical house, but they also keep that house on the market an extra 10 percent longer. It looks like they hang on longer to get the best deal for themselves, but they are not always doing that for their clients.

    Instead of just stating the facts, Levitt here makes an assumption as to WHY Chicago realtors do this.

    Again, true professionals give advice, not orders. If you go to an investment planner, for example, it is NOT his job to tell you where to put your money. But gosh, Phillip would say, yes it is. No, not really. It is his job to FIRST ask you what your GOALS are. Are you interested in early retirement? Are you a risk taker? Do you want agressive investments, or safe ones, or both?

    THEN — and ONLY then — the investment planner has the right to give you ADVICE about where to put your money.

    Same with a good real estate agent. What is the home-owner’s goal? Why, to sell the house, of course. But there’s more to it than that. Do they want to sell quickly? Or do they have all the time in the world? If they want to sell quickly, then I’m going to ADVISE a different price than if they have all the time in the world.

    There are some crooked realtors out there, to be sure, and I’m sure that is true of Chicago as well. But the more likely reason that most Chicago realtors keep the own properties on the market is that most realtors that own property, when given that choice — between selling quickly and getting less, or selling later and getting more — choose the latter. That’s always the seller’s choice, hopefully based on good advice from his agent.

    Regardless of the reason, I find it simply ridiculous that Levitt pretends that the same real estate rules apply in Texas, Iowa, or any other state the same as they do in Chicago. I’ve been a realtor in 2 different areas in the same state, and I can tell you that things are VERY different even in those two areas in Iowa! Levitt took a shortcut here, and he deserves to be called on it. If he really wanted to do things right, he should have made it a nation-wide survey of home sales.

    The problem is, most people want to have their cake, and eat it too. They want to sell quickly, for the highest possible price. That’s only human, but it’s not logical. Anyone that has experience with the market knows that price is a function of TIME (as well as other things, of course).

    Realtors obviously possess enough information to generally hold onto their own houses for 10% longer than average in order to get 3% more money, and that is clearly more than most people know. Do realtors tell their client that?

    You bet I do. Some people actually listen. A lot don’t.

    At this point, things start to venture into silliness. “3. Realtors only do a couple of things: Advertise your home and find a buyer.” Essentially true. Of course, finding a buyer can be easy or hard, so I don’t know that I’d say “only,” but beyond that, the rest is minor paperwork. While things vary from state to state, the title company handles most of the paperwork, and a lawyer can provide the rest for a couple of hundred bucks — usually far less than 6%.

    This is where Phillip truly shows his lack of understanding of the typical real estate transaction, and is mis-quoting me, to boot. What I SAID was:

    Again, very inaccurate. Realtors have two MAIN jobs, but that’s not the two. If a Realtor is representing a seller, their first job is to get the home sold. That means advertising, networking, etc. The Realtor’s second job is to make sure the home closes, which can be VERY complicated. Levitt didn’t even mention this part.

    Phillip says he’s been involved with two real estate transactions in his life. I’ve been involved in literally hundreds. And I can tell you, again, that in my area, it’s not MINOR paperwork at all.

    First of all, Phillip is right, finding a buyer can be quite hard. And once you do, here’s a just a FEW things you have to do as a realtor that the title company does NOT do:

    * Make sure the buyer really is pre-approved, so that your seller doesn’t take the home off the market for no good reason. Sounds simple, right? Well, it’s not. In Des Moines, we have some lenders that when they say (even in writing) that someone is approved, in many cases that’s not true. A good realtor, that knows who to trust and who not to trust, can usually tell. A for-sale-by-owner has no clue. Neither do most real estate lawyers.

    * Clear title. Title company, right? Wrong. In Iowa, we have to update the abstract. We are the only abstract State left. Liens actually HAVE TO BE CLEARED prior to closing. If an affidavit needs to be signed, guess who handles it? The realtor, that’s who. What if you have 10 liens on a house? I’ve seen it, many times. You have no concept, Phillip, of the time it takes to track down the proper way to clear these liens. I would not even know how to begin to explain it to you, it is so complicated. And each one is different. And no, real estate attorneys don’t do it. Title companies don’t do it. The realtor does.

    * We order the termite inspections, the home inspections, negotiate the home inspections, etc. There are so many things that have to be done it would be impossible to list them all.

    Again, that’s just a few things. There are so many more that I won’t bore you with right now. But it certainly isn’t “minor paperwork”. A lot of my friends think that my job is showing and listing houses. In reality, that’s about 10% of what I do. Most of the rest is making sure transactions close.

    But a flat-fee agency isn’t quite the same as selling a house yourself. One big difference? Paperwork!

    The first thing that has to happen is that you actually find a buyer — guess what — on your own. Then, and only then, will they have any “paperwork” to do. Of course, the buyer needs to beware, because they’re in a dual agency situation, but that’s just on top of everything else. My point always is, if a for-sale-by-owner actually DOES find a buyer on their own, I’ll do the (Phillip’s words) “minor paperwork” for usually quite a bit less than the local flat-fee agency.

    This is clearly the bug under Davis’ bonnett, the statement that inspired this article.

    What inspired the article, Phillip, was that I’m a really nice guy, and I do care about my clients, as hokey as that may sound to you. No, it’s not fun reading someone’s statistics from another STATE, where the same rules don’t even apply, and having those folks imply directly that realtors are dis-honest. When you care about people, and are a very honest person, you don’t like other people making generalizations and assumptions about you without even knowing you. Especially not based on data that has nothing to do with you.

    Yeah, yeah. Realtors are bad people. So are lawyers, cops, meter maids, and waiters. The lazy mind makes generalizations like that.

    A lazy mind would also assume that Chicago data actually applies everywhere.

  • http://w6daily.winn.com/ Phillip Winn

    Nobody but you seems to be assuming that all realtors are evil or that what happens in Chicago happens everywhere else. On the other hand, it would be rather foolish to assume that all realtors have only your best interests at heart, or that the Chicago data is completely anomalous, right?

    Characterizations involving “lazy minds” and “too much time on his hands” and “haphazard and incoherent” accomplish nothing, since each could be turned around easily. Respond to the data, please.

  • qween_bee

    Excellent book I thought. Race is big in this book. Still sorting out what I think I should do now that I am thinking that HeadStart does not work. This could be used in the wrong way to justify some racist plot…. I thought about the Bell Curve while reading this book;however, I did not find Freakonomics to be vicious as I found Bell Curve to be