Real Estate Agent Incentives

February 10, 2010


In his book Freakonomics: A Rogue Economist Explores the Hidden Side of Everything, economists Steven Levitt and Stephen Dubner point out that a real estate agent has the incentive to sell a home quickly, not get the best price for the seller. Consider a home that is listed at $400,000. Assuming that a selling agent nets a 1.25% commission on the house after splitting the commission with the buyer’s agent and his agency and the home sells for the listed price, the agent will earn a commission of $5,000. The seller is left with $380,000 after paying his agent’s commission.

Now, assume that the seller holds out for a higher price of $410,000 or $389,500 net of commissions. The seller has an extra $9,500 on the sale of his home but the agent has just $125 more in commissions. Clearly, the agent’s incentive is to sell the home quickly, not hold out for a higher price. Mr. Levitt and Mr. Dubner found that sales data for homes in the Chicago area reflected the way realtor incentives are structured: when an agent sells his own house, they keep in on the market an average of 10 days longer and sell it for 3% more compared to homes sold for clients.

You might want to check this excerpt from Freakonomics on the subject of real estate agents. It includes terms you should put in a for sale ad (and terms to avoid) and this funny story related by a professor who was looking to purchase a home:

I was just about to buy a house on the Stanford campus, and the seller’s agent kept telling me what a good deal I was getting because the market was about to zoom. As soon as I signed the purchase contract, he asked me if I would need an agent to sell my previous Stanford house. I told him that I would probably try to sell without an agent, and he replied, ‘John, that might work under normal conditions, but with the market tanking now, you really need the help of a broker.’

Real estate rules termed “anti-competitive”

February 9, 2010


The Canadian Real Estate Association (CREA), which owns the Multiple Listing Service (MLS), has rules preventing realtors from listing a home in the database for a flat fee. A homeowner simply wanting to list her home in the MLS and is willing to do the legwork to sell her home on her own cannot do so. Instead, she is forced to hire a registered realtor, who in turn is prohibited to simply list the home in the database for a flat fee. The realtor is bound to represent the seller throughout the sale process under the “minimum service” standards required by the CREA.

The Competition Bureau, a federal watchdog mandated with protecting and promoting competitive markets, is saying that it will challenge CREA’s rules because the “rules restrict the ability of consumers to choose the real estate services they want, forcing them to pay for services they do not need”. You can read the Bureau’s press release here.

It is not clear how long it will take for discount brokers to start offering services to simply list a home in the MLS. What is noteworthy though it that it has taken close to three years for the Competition Bureau to rule on CREA’s “minimum service” standards. If CREA creates additional road blocks, could this dispute drag on forever?

What are these home owners thinking?

November 18, 2009


We are just recovering from a punishing recession in which millions of jobs were lost and portfolios were decimated by a market downturn. Across the border, home owners are defaulting on their mortgages in record numbers because they loaded up on mortgage debt at teaser rates and are unable to make mortgage payments when the rates reset at a much higher level. Therefore, it is surprising to read that many Canadians refuse to learn from recent experience and are loading up on long amortization, variable-rate mortgages at record low interest rates. The Globe and Mail reported today that mortgage brokers are doing brisk business as many first-time home owners rush in to take advantage of today’s (probably temporary) low rates:

It’s these buyers who have raised fears of a bubble, negotiating mortgages at historic lows, opting for 35-year terms and making small 5-per-cent down payments to keep monthly outlays down and put previously unaffordable homes within their reach.

“They are taking advantage of things that are a lot more attractive initially but they could find themselves in a position where they couldn’t afford their mortgage if rates start to go up,” Mr. Averbach says.

This report comes in the wake of a recent interview The Toronto Star conducted with Peter Aceto, CEO of ING Direct Canada:

Aceto said he is so concerned about the market that he has instructed staff to advise customers not to go with longer-term amortizations if they can help it. More than 50 per cent of all mortgages in Canada this year were amortizations longer than the standard 25 years, says Aceto.

As a result, the lender said he is worried that some consumers are biting off more than they can chew.

Those who fail to study history are condemned to repeat it. Those who ignore very recent experience are just being stupid.