? Why Do Agents' Homes Sell For More?

By Bob Hunt

January 8, 2007

Suppose that homes owned by real estate agents tended to sell for more than homes owned by non-agents. What would explain that fact?

One controversial answer is set forth in the book, Freakonomics, by Steven Levitt and Stephen Dubner (HarperCollins, 2005). There, in Chapter 2, "How is the Ku Klux Klan Like a Group of Real-Estate Agents?", they propose an answer based on an earlier paper by Levitt and Chad Syverson (Market Distortions When Agents are Better Informed: The Value of Information in Real Estate, National Bureau of Economic Research Working Paper 11053).

The data underlying the Market Distortions paper was drawn from records of the Multiple Listing Service of Northern Illinois. The sample involves sales of single-family homes reported in the MLS during 1992 - 2002. After eliminating a variety of categories (e.g. extremely high and low sales prices) the data set covered approximately 98,000 homes. About 3.4 percent of those were homes owned by the real estate agent.

The authors found that "homes owned by real estate agents sell for about 3.7 percent more than other houses and stay on the market about 9.5 days longer, even after controlling for a wide range of housing characteristics." So, the difference in selling price couldn't simply be attributed to the fact, if it were a fact, that agents owned larger homes, or newer, or in better neighborhoods. The authors controlled for those sorts of characteristics, doing their best to be sure that apples were compared to apples.

So there you have it, agents' homes sold for more, although it took a few days longer. Why? In a nutshell, the author's answer is this: "Homeowners are induced by their agents to sell too quickly and at a price that is too low ... . Sellers sell too quickly not only because of impatience, but also because agents 'trick' them into doing so."

Why would agents do this? "The agent," say the authors, "has strong incentives to sell a house quickly, even at a substantially lower price, and thus may encourage clients to accept sub-optimally low offers too quickly." The scenario is elaborated in Freakonomics: The study [i.e. the Market Distortion paper] found that an agent keeps her own house on the market an average ten extra days, waiting for a better offer, and sells it for over 3 percent more than your house -- or $10,000 on the sale of a $300,000 house ... . The problem is that the agent only stands to personally gain an additional $150 by selling your house for $10,000 more, which isn't much reward for a lot of extra work. So her job is to convince you that a $300,000 offer is in fact a good offer, even a generous one, and that only a fool would refuse it."

Why those scoundrels! I'd be almost ashamed to acknowledge that I have a real estate license, if, IF, the analysis were a plausible one.

As the full title of the Market Distortion paper implies, Levitt and his co-authors believe that real estate agents have more information about the marketplace than do home sellers. This is, in general, undoubtedly true. But they make some serious misassumptions about the content of that knowledge. For one thing, they assume that agents know, within better than 4 percent, what a house will sell for. (If they didn't have that knowledge, they couldn't be "tricking" their sellers into selling too low.) Most agents would love to have the crystal-ball knowledge that is attributed to them by these writers. But they don't.

Levitt and his co-authors also hold the implied, but not specifically acknowledged, belief that later offers are higher than earlier ones -- hence the knowledgeable agent-seller "waits for a better offer." But this thesis is nowhere proved in their work, or any other that I know of, and it flatly contradicts, albeit anecdotal, experience.

Finally, although the authors indeed controlled for "a wide range of housing characteristics," their study reveals that they did not, and well may not have been able to, control for a comparably wide range of characteristics that (a) are key determinants of value, and (b) that one would expect to be found true of home owned by superiorly knowledgeable real estate agents. They were unable, for example, to take location into account. Nor could they account for style and d?cor features that are very important, but do not appear in MLS data fields.

Freakonomics is a fun book to read, and not just because of its discussion of real estate. But one would be well-advised to keep some salt handy.

Copyright © 2007 Realty Times. All Rights Reserved.

Alan's Comments:  My personal observation on why realtors get more is based on three aspects that are all born from superior knowledge in doing something every day:  The primary reason is that a realtor understands there is a difference between value and market value - the former being higher and achieved through more thorough marketing.  A realtor also understands that while they can't control the market, they can control the condition of the property and will make great efforts to maximize presentation of the property.  The last component has to do with negotiation.  Often it's not what you deserve that you end up with, but what you negotiate in the ends.  Longer negotiations also tend to result in a longer sales cycle. 

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