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Unethical practices that affect buyers:   1  ●  3  ●  4   ●  5   ●  6   ●   7  ●  8   ●  9  ●  10 
Unethical practices that affect sellers:   1  ●  2  ●  3   ●  5   ●  6   ●   7  ●  8   ●  9 

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.    

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.

Here's how agents sometimes talk their clients into lower prices for quick, easy sales:

  • Offering to find a buyer without putting the property on the MLS.

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.

  • Bringing in their own buyer quickly.

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.

  • Suggesting that a low asking price will lead to a bidding war.

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.

  • Requiring that buyers sign off on disclosures when they submit their offers.

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.

  • Picking through comps so as to give the impression that a house is worth less than it is.

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

  • 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).

  • 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.

  • 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.

  • (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.



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. 

©Lori Alden, 2010.  All rights reserved.