With house prices dropping and the real estate market in disarray, real estate agents aren't the most popular professionals these days. As home prices continue to slump, many homeowners are loath to pay a real estate agent on a home sale that isn't likely to be profitable for them no matter what they do. Not to mention the fact that there's a lot of contention about how much value a real estate agent actually brings. (For background reading, see Do You Need A Real Estate Agent?)
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Most people have heard of the well-publicized statistic that finds that when real estate agents sell their own homes, they tend to keep them on the market longer (about 10 days) and get a higher sale price (by about 3%) than when they sell homes for their clients. This statistic comes from the wildly popular 2005 book "Freakonomics" by Steven D. Levitt & Stephen J. Dubner. The authors assume that this is because getting a few extra dollars for a seller doesn't have a sizable impact on the agent's commission.
Unfortunately, this well-promoted statistic offers no details about why this may be, and the authors appear to assume the worst. However, there are some less nefarious reasons why a real estate agent might be able to get a higher price for his or her own home. Here we'll take a look at the other side of the coin and what you can learn from it, whether you decide to hire an agent or sell your home yourself.
Making an Impression
If a stranger were to walk into your home, what would their first impression be? This is one thing that many people get wrong - even when they use a real estate agent. For example, in the popular A&E television show "Sell This House", potential buyers are videotaped as they tour a house the homeowner is desperate to sell. As a general rule, the homeowners are shocked by strangers' first impressions of their home. A home is a reflection of its owner, so it's understandably hard for an owner to accept that other people find the décor, cleanliness or even the smell of the home distasteful. A real estate agent is often the sounding board for buyers and their complaints about the homes they visit and is therefore likely to address important details in her own home.
According to the National Association of Realtors, the second-biggest reason a home won't sell is because the homeowner hasn't taken care of details like ensuring the house is clean and uncluttered, the décor is neutral and the house has been "staged" to play up its best features. The biggest reason a home won't sell is, of course, the price. We'll get to that next. (Discover some other mistakes that can keep your home from selling in Selling Your House? Avoid These Mistakes.)
Evaluating Your Property
So do real estate agents really command higher prices when they sell their own homes? In 2005, the National Association of Realtors responded to this question, but because there is very little data beyond what was collected for "Freakonomics," they weren't able to deny that the data may well be true.
However, one of the top reasons for this, according to real estate news provider Realty Times, is that real estate agents know how to evaluate a property in terms of what is likely to garner the highest resale. Therefore, they are likely to analyze the resale values of the properties they buy for themselves in an attempt to ensure a higher resale value. (Find out more about how to choose a property with high resale value in The 5 Factors Of A "Good" Location.)
Setting a Price
According to the National Association of Realtors, home sellers often choose a selling price for their homes based on three factors: need, ego or greed. Particularly in a tough real estate market like the one we're seeing in the United States now, sellers often want to price their homes according to how much they need to get out of the sale in order to purchase a new property.
Unfortunately, what a seller needs to make on a property has nothing to do with market conditions, which are generally governed by supply and demand, along with other economic factors. The same goes for sale prices that are dictated by ego or greed; just because a neighbor's house sold for a higher price doesn't mean yours should as well unless your home truly is more valuable or market conditions have changed.
Accepting an Offer
The final piece of the puzzle in terms of selling a house is deciding which offer to take. Levitt and Dubner state that their data suggests that a real estate agent "holds out" for a higher price on his own home. Assuming this is true, it is important to remember that when it comes to selling his own home, the real estate agent is the decision-maker. When an agent is selling a client's home, that seller is in the driver's seat and the agent must balance his desire to get a price the seller will be happy with and the need to ensure that the home actually sells in a timely manner - or at all.
When selling his own house, an agent can afford to gamble on the fact that a better offer might come along - even though this plan will often fall through, particularly if the house stays on the market too long. This is much the same is if your stock broker makes more money trading in her own account because she takes more risk than she feels is appropriate to take in a client's account.
In addition, a common practice for real estate agents is to relist a home that isn't selling. This is because a listing's "days on market" can affect the price the seller can attain for the property. When a home sits for too long, buyers assume the price is too high, the sellers must be desperate to sell or that there is something wrong with the property. This can kill a seller's chance of getting a fair price, and real estate agents must balance this risk with the seller's desire to hold out for a higher price. (For more insight, see 7 Ways To Improve Your Home's Sell-ability.)
The Bottom Line
Type "real estate agents are" into a Google search bar and the first options to appear are "scum," "crooks" and "liars." This may be why this one little statistic from "Freakonomics" by Steven D. Levitt & Stephen J. Dubner has had so much staying power - even though the book was published more than five years ago. Perhaps real estate agents really do sell their own homes for more. But just as with any simple statistic, the data can only tell us that a correlation exists while the reasons why this may be the case are left to speculation.