If the house would not sell at $900000, would sell in 15 months at $800000, or would sell in 3 months at $700000, or would sell in 2 weeks at $600000, what do you do?
You try to sell it for $600000. You tell the owner that that is what the home is worth, even if the owner is not in a hurry. Getting your share of the 6% (likely 1.5%) of $600000 in 2 weeks is better than any of the other alternatives FOR YOU.
A better way to align the incentives would be to give the seller's agent a percentage of the amount by which the sale price exceeds the price determined by an independent appraiser. The buyer's agent gets the opposite, getting paid only if the price is lower than the appraisal, and you don't get to be both agents at the same time.
I used to think that real estate agents were a waste of time until I lived through several difficult transactions. Each real estate transaction involves negotiations for loans, inspection objections, and various legal details. For example, a good real estate agent will make sure the title commitment documents are in hand early enough that you have time to review them, because they often have a lot of mistakes. This can kill a closing and/or require post-transaction work to correct.
I bought a house in the middle of a flood (Boulder 2013). The inspection objection had already been negotiated before the flood occurred. Getting the deal done was a huge task, because the seller was lying about the house being affected by the flood. I still wanted the house, but I needed proper compensation for the remediation. My real estate agent did an amazing job of bringing the deal together by tossing in some money and getting the other broker and seller to contribute a bit.
I'm now living with the above real estate agent, and she's on the phone right now at 7:45p working on a deal. I have watched her pull together deals, and the important thing is that all her clients are happy. I have met many of them, and they are very grateful for her work. I know there are many other agents out there like her (maybe not quite as good :-).
The market clearing price is not set in stone. It is determined partly by the actions of the agents.
The appraiser's estimate of the market clearing price would set a measuring point from which the agent's performance can be measured. Agents are then paid according to how their performance exceeds the expectation.
Without the appraiser's estimate, the performance of the agents can not be measured. There is no way to reward good performance or punish bad performance. The agents are simply collecting their cut of the transaction.
1) If everyone else in the market is priced to move, and you aren't doing it, there is always going to be new housing stock that undercuts you. 2) A seller has to maintain insurance and the property, and typically maintains utilities (a house without water/electricity doesn't show as well). They sometimes have to pay a mortgage. And often people who are selling a house are also buying a house, and intend to use the proceeds from the sale to finance the down payment on their next house. Most people cannot treat the extra money from waiting on a better offer as 100% profit. 3) The primary purpose of an appraisal is to ensure that the underlying asset is sufficient collateral for the loan. If you manage to sell a house for significantly over the appraise value... guess what, the loan falls through.
The current situation exist due to a slow long-term evolution of events but seems like won't change any time soon. Sort of like how wage controls during WWII encouraged businesses to pay for your health care and it is not taxed, but you don't get that tax break when you pay for it yourself. An insane situation, but next to impossible to change.
In some markets, like the Bay area, rents are much less than the cost of owning the property, and in others, like Kent, Ohio, they are higher.
Plus: If there is a willing buyer for something you own at price X and then someone takes 6% of that when the seller pays, true the sell pays it all, but the buyer also pays it in getting less money.
I'm from the UK, but in Finland these days, and the way that both of these countries work is very similar.
In America a lot of things are very odd with regard for property, even common things like tenants paying rent by posting/delivering cheques!
Freakonomics talks about this all of the time.
http://freakonomics.com/2008/02/26/real-estate-agents-revisi...
Or it may be that buyer's agents actively steer their clients away from FSBO properties which one person revealed to me during a showing even though the listing states I'll pay 2.5% to the buyer. I requested and now have that in writing from this buyer in case I feel like filing a complaint. You should have seen the agent's face when I said my email was in the listing and she could ask me any questions directly if she liked. An agent mortified by the thought of direct communication between buyer and the person who knows the property best.
Actual potential buyers send emails. Agents seem to only communicate via phone, probably because they believe they can charm you.
It's like saying if I trained hard enough I could be in the NFL. Well - "training hard enough" is actually hard to do.
I purchased a home recently and my buddy tried to sell his FSBO. I told him to use the same title company, because we had a painless closing. The title company told him that they do not do title work for FSBO's because "not enough of them actually disperse funds, so we don't get end up getting paid on the title searches and work we do before the closings. We prefer working with clients that have a much higher probability of closing".
That's a title companies perspective. They are getting paid either way and don't get paid more if it's with a real estate agent or FSBO. That's about as unbiased as you can get in that market, one would think.
I am using numbers for the Bay Area that I have heard of. Maybe other markets are different.
If you think about what an efficient use of realtor labor would look like it would be ~2 houses a month or more with agents spending all their time on showings and contracts. In a market with $1M houses this would yield roughly 24M * 0.025 = $600K/yr and up.
Hence the market becomes flooded with people that would like to make $600K/yr on a educational investment period of 6 months or less (plus an apprenticeship-like paying job for a few years).
The industry is weird because the price of agent service is resistant to supply&demand forces for various reasons but the main reason is that it's impossible to know what the selling agent's contribution to the house price is, since you can't sell the same house twice under the same conditions.
In principle, a good agent can easily recoup their commission by adding a few percent to the house price, but in practice agents have a counter-incentive to this because the homeowner will never know what the added amount was and raising the house price a small amount adds less to the agent's bottom line than moving on to the next house more quickly. In most cases the agent is simply setting the price that will sell the house quickly for the local market. As a seller, you'd probably prefer to make an extra 20K on that 1M house by showing for a month instead of a week, but this makes the agent do 4x the showings to make 2% more commission.
Ironically, the buyers' mortgage lender will have an impartial professional estimate done after they've already agreed on a price with you. In a perfect world, the seller would get this estimate done up front and then the seller's agent would be be paid on a structure that incentivizes beating that estimate. But wait - if the mortgaged portion of the price is greater than the estimate then the buyer's lender will back out ($collateral < $loan). So if your market is mostly buyers doing 20% down then the price is soft-capped at no more than 125% of the estimate even for the best agents.
Quite the free market, eh?
They do end up not being too rich on an annual pay basis where I live because the number of realtors actively working adjusts to the volume and pricing.
https://www.zillow.com/agent-resources/blog/commission-refer...
A new agent might not get a listing in an entire first year. In places like SF, its all about how good you are about generating leads, the house sells itself.
When I sell my house, it'll be 100% with a realtor. Is it expensive? Yes. But my home is quite sentimental to me. I don't know enough to break down that barrier. I'd rather pay someone else to do it for me. I look at comparable homes in my area and I think, "my house is $50k better than that." But I honestly don't know. :)
- selling your house, at the end of the day, is quite the undertaking. A lot goes into it, it can get emotional, messy, and sometimes quite complicated. Having someone that does it on a daily basis can be nice and really smooth things out.
- people are too attached to their homes emotionally. More often than not, when trying to sell on their home without a realtor they will not have it in a saleable condition and price it too high for the marketplace. It will sit and not sell, or they will get an offer that is appropriate and be offended and not sell it. A GOOD broker will bring facts, data, and logic to the table so that a person that is actually committed to selling their home will get the job done.
If people saw their homes for what they were when they decided to sell them, a product or a piece of property and nothing more, the real estate industry would die in no time at all.
Then again, there are a lot of swindlers out there too, so it's nice to have someone as back-up to watch out for those types of things as well.