Unethical Practice
#2: Sellers’ agents who underprice homes for quick sales.
As I
noted earlier, economists Levitt and Syverson found that real
estate agents
got an average of 3.7% more when they were selling their own homes.
Patience was the key--the agent-owned properties stayed on the
market almost 10 days longer than the client-owned properties.
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Unless they're
selling their own homes, though, agents have a strong incentive to price homes low
for quick sales. A quick sale means less work, a faster payday, and the
advertising benefits of a “SALE PENDING” rider on a newly
planted yard sign. Low asking prices also elicit more
inquiries from prospective buyers, allowing agents to recruit new
clients.
It's true that
listing agents get higher commissions if sales prices are high.
But getting an extra $10,000 for a home may only net the agent $125
(assuming the listing agent gets a 2.5% commission and splits it
with the broker). It's simply not a good business decision for
an agent to delay a sale in order to try for a higher price.
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Here's
how agents
sometimes talk their clients into lower prices for quick, easy sales:
The prospect of selling
quickly without having to endure numerous showings is tempting to
many sellers, but restricted exposure will likely result in a lower
price.
Soon
after the ink is dry on their listing contracts, listing agents
will sometimes bring in offers from their own buyers.
Sellers are often tempted to accept these offers in order to get
the ordeal over with. But unless a property
has been aggressively marketed,
it's impossible for sellers to know if they could have gotten
higher offers from other buyers.
Low asking
prices often do lead to multiple offers, but not necessarily to
higher sales prices.
I once worked with a buyer
who had been patiently waiting for a gorgeous foreclosed property to
come on the market. I'd told him that I thought the property
was worth about $375,000, and he said that he'd gladly pay that.
When the property came on the market, though, the asking price was
just $285,000.
When he saw the low asking
price, my client decided to offer just $315,000, despite my warning
that the low
asking price would likely elicit many offers. My client
believed his offer would be enough to win the
house, and that he was intoxicated with the idea that he would not
only be getting a fantastic house, but also a fantastic deal.
The winning offer was
$325,000, and my buyer was heartbroken that he'd bid too low.
We both felt that the winning bidder had gotten the deal of a
lifetime.
In some areas,
it's customary for buyers to sign off on all disclosures and/or
complete all their inspections prior to submitting their offers.
Making buyers sign off on inspections and
disclosures, of course, makes it harder for them to wiggle out of
contracts or ask for price adjustments after the offer is accepted.
But the downside is that it discourages offers, and likely leads to
lower sales prices. It's costly for buyers to read through
dozens of pages of disclosures and hire
inspectors or contractors. Insisting that they do is like asking each
buyer to pay a steep fee as the price of admission to bid on a
house.
In
addition to discouraging offers, this practice also weakens the bargaining position of
sellers. For example, one strategy for teasing out higher
offers in hot markets is to let prospective buyers know that there's
a lot of interest in the property. But the disclosure
sign-off requirement instead forces agents to downplay interest
in the property, since
buyers often won't put up with the hassle of preparing an offer if the
odds are small that they'll win the property.
The
disclosure requirement hurts sellers in slow markets, too.
When an offer comes in, a good agent will normally "shop" it, or
use it to try to elicit other offers so as to improve the
seller's bargaining position. But it's much harder to shop
offers before the original offer expires if potential buyers have to plow through dozens of pages
of disclosures and/or complete inspections in order to submit their
own offer.
The only time it would make sense to impose a
disclosure sign-off policy is if the seller is in a hurry to sell.
For example, a seller that has to sell by a certain date to
avoid paying a capital gains tax will want to be very sure that the
buyer isn't going to bail. Otherwise, I'm at a loss to
see why any seller would agree to this.
The disclosure sign-off requirement may hurt
buyers and most sellers, but there is one beneficiary--the listing
agent. If the buyer backs out, it's the listing agent who will
have to host more open houses and pay for more flyers and newspaper
ads. By ensuring that any buyer is unlikely to do so, the
agent minimizes marketing costs and boosts profits.
Many years ago, my mother
hired an agent to put her home on the market. The home sold
within hours to a buyer represented by the agent's own brokerage.
My mother accepted the offer, since the sales comps provided by the
agent suggested that it wasn't worth much more.
The quick in-house sale made me suspicious that
something wasn't right, so I went to another brokerage and asked for
sales comps. When I compared the two sets of comps, it was
clear that my mother's agent had picked through them, showing my
mother just those that had gone for the lowest prices. This
had led my mother to believe her house was worth less than it really
was.
My mother ended
up going ahead with the deal, since she didn't want to risk getting
sued for breaching the sales contract. I complained to the
agent's broker, but he did not fire the agent. I also
complained to the State Board of Real Estate, but the woman I spoke
with scoffed at my complaint, saying that it was nothing compared to
the stuff she usually investigates.
My mother's sleazy agent not only got a commission from
the deal, but at least one new client. A neighbor of ours
decided to list with him as well, thinking that he must be a
fantastic agent to have sold a house so quickly.
How to protect yourself
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Don’t agree to a
pocket listing.
You’ll likely get more and better offers if you can get as much exposure for your property
as possible by going on the Multiple Listing Service (MLS).
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Look at active comps when pricing your home.
Unless you're in a big hurry to sell, your goal in pricing your
home should simply be to get people in the door. Look at
other active listings that are similar to yours, and price your
home so that it's one of the better values in your area--but not
necessarily the best value. Note that active comps often
mislead sellers into believe that their homes are worth more
than they really are.
After you get an offer, you'll want to study "sold" comps, since
they're a much better guide as to what your home is really
worth.
-
Ask your agent for a large number
of comps.
Ask your provide you with a
large list of comparable properties (“comps”) that have sold.
Check prices online to make sure your agent is giving you unbiased
data.
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Don't try to elicit a
bidding war. You're more likely to get a better price if
you're one of the best values, not the best value, in your area
and price range. A low asking price can also backfire by
causing other sellers to lower their prices.
-
Insist on
waiting at least 5 days after the home is listed on the MLS before accepting an offer.
Unless you're in a desperate hurry to sell, it pays to allow
others a chance to make offers.
-
Play your cards close
to your chest. Don't ever tell your agent how
much you're willing to accept for your home. He doesn't need
to know this in order to help you price your property
competitively.
-
Don't always insist
that buyers sign off on disclosures prior to submitting offers.
Only do this if you are in a hurry to sell, or if you're willing
to accept a lower price in exchange for greater certainty that
the deal will go through.
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(Note:
This isn't commonly done.) Change the commission
structure so as to align your agent's interest more closely to your
own. Suppose your home is worth
about $350,000. Instead of offering your listing agent a
commission of, say, 3% of the total sales price, offer her, say, 20%
of the part of the sales price in excess of $300,000. If your
home sells for $350,000, then the two commission payments would be
roughly the same: about $10,000. But the agent will have
a much stronger incentive to market the property effectively and to
negotiate well on your behalf.
Though setting up the
buyers' agent's commission this way would also be advantageous to
you, the seller, it would create an incentive for buyers' agents to
work against their clients' interests. I would feel
uncomfortable with the idea of encouraging rival agents to betray
their clients.
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Do agents really help sellers get more for their homes?
Agents sometimes tout their negotiating skills by
citing an old
National Association of Realtors ad claiming that “[s]ellers who
use a real estate professional make 16 percent more on the sale of
their home than do sellers who go it alone.” This statistic is based
on data in the NAR's 2005 Profile, which found that the median 2005
sales price for a home that was sold by an agent was $230,000, about
16 percent more than the $198,200 median price for a FSBO (For Sale
By Owner) home.
It’s hardly fair,
though,
to compare agent-assisted and FSBO sales prices. About 40%
of those FSBO transactions were to buyers that the sellers
knew, and the sales prices in many of those transactions may
have been set artificially low. The FSBO properties in the
2005 study also included a disproportionate share of
manufactured and mobile homes, which surely dragged down the
median price.
So just because agent-assisted properties sold for 16% more doesn't
mean that hiring an agent will bring you a higher price.
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