Raising the Sale Price of Your Home the Freakonomics Way/Are Real Estate Agents Replacable?

Posted by admin on July 13, 2007 in Real Estate

I finally got around to reading Freakonomics: A Rogue Economists Explores the Hidden Side of Everything by Steven Levitt and Stephen J. Dubner. It is certainly the most interesting book I have ever read flying home from a business trip (I highly recommend it just for the curious observations they make about human nature). The premise of the book is that economics can explain basically everything in life. In a chapter where the authors compare the Ku Klux Klan and Real-Estate Agents, the authors correlated the following commonly used terms in real estate ads with sales prices. Here are ten terms found in real estate ads. Can you guess which ones lead to higher real estate prices (no cheating if you have read the book)?

Fantastic, Granite, Spacious, State of the Art, !, Corian, Charming, Maple, Great Neighborhood, Gourmet

The terms that correlated to higher real estate prices are: granite, state-of-the-art, corian, maple and gourmet. They are all descriptive of the homes (as the authors point out, even if you don’t like granite, a house with granite in it is most likely quite nice) rather than “dangerously ambiguous adjective[s].” I suspect “charming” in real estate ads is the dating equivalent of “my cousin has got a nice personality.” It certainly makes sense- the more positively specific you are, the better your chances of selling at a higher price. I am selling my car and, thanks to this book, I am using the same approach in my ad (“new brakes”, “snow tires included”). To continue the dating analogy, it would be the equivalent of saying “my cousin is 6 feet tall, reads to orphaned kids on the weekend and use to do modeling work.”

One of the author’s larger point though was that certain real estate agents use this “secret” knowledge for their own good and not yours (citing a study where real estate agent sold their own homes for more than they sold their clients). This always leads me to the question of: do we really need real estate agents? Prices can be negotiated by lawyers and, with internet tools like www.zillow.com, price histories and neighborhood comparisons can be quite easy. Certainly, great real estate lawyers can give you insider’s information on the state of the building, surrounding schools etc. etc. but even that information is being found on internet chat boards. Of course, there’s always the issue of large commissions for what could be a quick sale…

Of all the professions that are most likely to be thinned out by the Internet, real estate agents are probably the most vulnerable. Accounting and law are simply too specialized to be phased out. But zillow and the like could wipe out a lot of the value-added that real estate agents use to provide pre-Internet. The only thing standing in its way is the monopoly MSL holds over listings (fortunately, this monopoly is being investigated).

The larger question remains: should this industry be phased out or is it an absolutely critical function to have a real estate agent when buying/selling home? Your thoughts are always appreciated.

This was, indirectly, my first book review on this blog. I just borrowed from the library “Stocking Up on Sin: How to Crush the Market with Vice-Based Investing” by Caroline Waxler. I hope to read it over a beer and pack of smokes and report back on it soon. Have a great weekend.

3 Comments on Raising the Sale Price of Your Home the Freakonomics Way/Are Real Estate Agents Replacable?

By FourPillars on July 13, 2007 at 9:30 am

Two things – I think RE agents can help with the buy & sale of your house but the fact that they charge 5% is highway robbery. My last house had 14 bidders and sold right away. Did I need to pay $13k in real estate fees for that? I certainly don’t mind paying for a service but there is a huge disconnect there.

The other point – I think it’s extremely unlikely that the wording in the ad is more than a small variable in the eventual sale price. For example the word “gourmet” implies a nice kitchen which if true, will fetch a higher sale price. But I think the higher sale price is because of the nicer kitchen, not the fact that it was mentioned in the ad.

Mike

By Mr. Cheap on July 13, 2007 at 10:17 am

I agree with Mike. If I recall, the bigger issue that lead to the higher price was that RE agents had their houses on the market *LONGER* (e.g. they held out for a higher price for their own property, but went for a quick sale for a client’s property).

If you’re going to smoke anyway, please consider the smooth flavour of Rothmans brand cigarettes!

By Louis Trahan on July 16, 2007 at 5:03 pm

Earlier in that same chapter in Freakonomics, Levitt also points out that it is not necessarily in the agents best interest to get you to hold out for the best price when selling your home. With the selling agents 2.5% – 3% share of the total commission (5%-6%), a $10,000 difference in the selling price only equates to a $250 – $300 difference in commission for them. It’s much better for them to do a quick sale at $350K than to wait for a $360K offer.