The triangle arrangement I would like to talk about involves a real estate agent, a buyer and a seller. Back in 2010, My parents were looking to purchase a house and went through a real estate agent for the process. I wasn't directly involved in the offering process but I had been brought along on a few house tours. The real estate agent has the job of bringing a buyer and seller together and negotiating an acceptable price to both parties.
The seller would like to get top dollar for their home. They do not want to accept a lower price than what they think their home is worth and they will not accept a lower price, at least at first. They also want their homes sold quickly. Someone who's selling their home has probably found another place to live and wants their old home to sell so they can pay off their mortgage on their new house. This can be time sensitive if they cannot afford the mortgage payments on their new home. Therefore, the seller has incentives to sell their house quickly. If their house if on the market for awhile, the seller is more like to accept a lower and lower price for their home.
The buyer would like to find a home that fulfills their expectations for a new home. My parents, for instance, had very high expectations for their new home and were in a position that allowed them to be patient and review all of their options. On top of finding the "perfect" home, a buyer has a budget that they have to keep within a reasonable range. The buyer would like to get the best deal on a home as they can.
The buyer and seller have different expectations for the real estate agent. The seller wants their home sold at top dollar and sold relatively quickly. The buyer wants the best deal they can possibly get on a home. A resolution to the differing expectations of the buyer and the seller comes in the form of a compromise on price. This can be an even compromise, where the buyer and seller meet in the middle or it can fall mostly on either the buyer or seller. If the house has been on the market for a long time, a compromise on price would fall more on the seller because they just want their house sold at a certain point. If a house is new on the market, the seller would be less likely to take a hit on the price. A buyer is willing to come closer to the asking price when the house in question satisfies more of their wants.
Failure for the real estate agent is different for the buyer and seller. If the agent cannot find an acceptable home for the buyer that meets their needs then the agent has failed. If the agent cannot find a buyer for the seller's home then the agent has failed. If the agent cannot broker a deal between the buyer and seller then the agent will fail both parties. The agent fails the seller if they take a long time to sell their home and get a price well below the asking price. The agent selling a home for a low price is in the interest of the buyer, and interestingly enough, in the interest of the agent as well.
I've gone over what the buyer and seller want, but what about the agent themselves? The agent receives a certain percentage of a deal they set up as commission for setting up the deal. So the agent would want the price of the home to be as high as possible so they get the biggest possible commission, right? Not necessarily. I can't remember the percentages off the top of my head but the commission for selling a home is a small percentage. So if the agent was able to get the seller of a home $10,000 more for their home, the agent would only receive $100. The seller would really enjoy that extra $9,900 for their home and would be willing to wait a few extra days or weeks to sell their house if it means a better offer from a buyer. However, the agent would rather lose the $100 and sell the house now then wait a few days or weeks to make that $100. These few extra days or weeks could be time spent on a new house by the agent. This represents a situation of opportunism, which was talked about in this blogpost. The agent benefits from taking a lower price for a home so they can spend time on selling another house rather than get the most money they can for the seller of the home. Based on a commission system, the agent's interests do not actually line up with the interests of the seller.
There is research on the issues that you write about, to the effect that the moral hazard on the part of the agent is manifest mainly in trying to come to closure early - before the buyer has seen all the possibilities. The quicker the closure, the sooner the agent can get to work for another client.
ReplyDeleteAlso, at least around here but I think this is true for most places nationally, there is typically a 6% wedge between the seller price and the buyer price. If each of them have an agent, then that different is split evenly by the two agents. If only one has the agent, the agent gets the entire 6%. Sometimes you see a sign in front of a property that says - for sale by owner. That is done to avoid the agent's fee. It makes the seller a little more flexible on price.
I did not consider that the buyer and seller could have different agents, but that makes sense because it would provide a large pool of buyers and sellers for both parties.
DeleteYeah, it seems like many people are trying to sell their own home now. The internet should make it easier for someone to sell their home without the help of an agent because of craigslist and other sites that provide a marketplace for private sellers. I think selling your home yourself is the way to go if you have time to work with, presumably it would take longer to sell a home without the help of an agent. Considering the value of homes, a few weeks of hard work in marketing your home could save you the agent's fee that would amount to thousands of dollars. I suppose it all depends on the opportunity cost of the time you use to sell your home. If you make decent money at work, it's probably in your interest to just let a real estate agent handle it.