Freakonomics – an unbiased review from a real estate agent

As most readers are probably aware, economist Steven D. Levitt and author Stephen J. Dubner have written the bestselling book, “Freakonomics: A Rogue Economist Explores the Hidden Side of Everything”.

I read the book because I recently became a member of a book club.  I found the book very entertaining, although a bit weak.  Each of the chapters is short, and the whole book runs under 200 pages, of which at least 15 are simply names of children.

The writers don’t seem to want to delve into the chosen subjects, too much.  Not sure why, although it could simply be because they didn’t want to bore their readers.  Of course, the cynic in me would suggest that it could also be because they didn’t want to open themselves up to objections.  They come up with some interesting and funny conclusions, throughout the book, but, although there is a set of end notes, they don’t really give lots of space to backing up their accusations with data and facts.

Of course, being a real estate agent, the number one criticism I have is to their chapter entitled, “How is the Ku Klux Klan Like a Group of Real Estate Agents?” ZING!  That one is sure to get a response!  In fact, the authors have followed up on the book by appearing all over the media, including in published interviews and on television, and have often been discussing this chapter, specifically.

Recently, they appeared on NBC-TV’s “Today Show” where they proceeded to make the same accusation that they made in their book.  Namely, that real estate agents have an incentive to sell clients’ homes as quickly as possible, for less than they should.  The idea is, basically, that the real estate agent gets paid on commission, so, they need a seller’s home to sell, right away, in order to get paid.

Therefore, the agent tries to convince the seller to take the first reasonable offer.  To the sales agent, it doesn’t matter whether a home sells for $300,000 or $310,000; they only care that the house sells, period.  If they sell the home, they will make around (5% commission, split between agencies, split between agent and company) $2,500.  The theoretical difference of $10,000 in proceeds means only $150 in additional commission to the seller’s agent.  Meanwhile, the seller loses out on $10,000 in their pocket.

In their words:

A recent set of data covering the sale of nearly 100,000 houses in suburban Chicago shows that more than 3,000 of those houses were owned by the agents themselves…

…Using the data from the sales of those 100,000 Chicago homes, and controlling for any number of variables – location, age and quality of the house, aesthetics, and so on, it turns out that a real-estate agent keeps her (sic) own home on the market an average of ten days longer and sells it for an extra 3-plus percent, or $10,000 on a $300,000 house.  When she (sic) sells her (sic) own house, and agent holds out for the best offer; when she (sic) sells yours, she (sic) pushes you to take the first decent offer that comes along.  Like a stockbroker churning commissions, she (sic) wants to make deals and make them fast.  Why not?  Her (sic) share of a better offer – $150 – is too puny an incentive to encourage her (sic) to do otherwise.

Or, at least, that’s the authors’ theory.

Here’s two reasons why this might be incorrect.  As the authors state, over and over again, and as all economists learn in Econ 101, there’s a big difference between causality and correlation.  To wit, (?!), although there may be a correlation between sales prices and who’s home is being sold, that doesn’t necessarily imply a causality, meaning one doesn’t necessarily cause the other.

The authors don’t think very hard about other reasons why the prices may be higher.  The authors do a disservice to their readers, because they fall prey to the very thing they accuse others of – being too selective in the data they use.

Here are some other reasons why real estate agents may sell their own homes for more money:

1) The agents simply have a better idea of what their own homes are worth.  This seems logical to me.  I know how much my own home is worth because I am an agent, and because I live in my home.  I spend more than eight hours a day here.  I know the home’s location relative to other homes, to recreation and shops and businesses.  I know very well what other homes in the neighborhood have sold for, because I keep an eye on it, to make sure my investment is secure.  I know the good things about my own home, and I also know the bad things.  This means I can accurately price my own home to sell.  Therefore, I would price it at the right price, and won’t need to negotiate down when I put it on the market.

Compare this to a situation that many sales agents find themselves in.  They get a call from someone from another part of town (or city) asking for the agent to list their home.  The sales agent has never sold a home in that part of town, but quickly pulls up what they think are comparable sales.  Basically, the agent has to make their best guess at what the home is worth.

Then, when they go by the house to check it out, the seller gives them their own spin on what the good things and bad things are about the home.  “That carpet isn’t worn out, I just put it down ten years ago,” and, “I don’t remember when we did the roof, it might have been last year, or it might have been when George Bush Sr. was in office.”  The agent may not have much to work with, so their description of the property might be less than complete.

The agent, when listing their own property, obviously has more at stake.  Not just a commission, but the profit on any sale.  They will work harder to make the sale.  That’s just logical.  They also know their own property better than their client’s, so they can be much more descriptive and comprehensive when showing the home and advertising it.

2) Some sellers demand that their homes be priced at what they want, regardless of what is realistic and regardless of the empirical data.  “I know my house is worth that much because the people down the street sold theirs for that much, and mine is MUCH better.”  The agent may list the property, knowing full well that the real price is somewhat less.  When the seller gets their first offer, and it’s for a lot less, they may realize the error of their way, and come down.  Remember, the final sales price may be lower than what the home was listed for, but it could be much higher than the buyer’s initial offer price.

3) Agents may suggest that sellers price their homes at a higher than expected price, with the assumption that any prospective buyer will want to negotiate, so that the buyer feels they “got something” and didn’t pay top dollar.

I might add, in this day and age, and at least for the past couple of years, properties have sold for full-asking price, if not above.  There has been little, if any, price negotiation, at all.

The authors may be right, but I’m doubtful.  I think they need to do more research.  I think they need to break down the data more.

They looked at data on all home sales, and compared that to the sales of real estate agents’ own homes.

They need to look at data on home sales just by agents who also sold their own homes.  Perhaps these sales agents were more educated on the market, were more experienced, or were more involved than the average sales agent.  Did the sales agent sell all of their listings for more, on average?

Many sales agents work part-time, so they don’t know their markets very well.  This means they might price properties too high, which means the sellers end up having to take what appear to be low offers.

Here is an excerpt from the book, which you can also read on the authors’ website.

A big part of a real-estate agent’s job, it would seem, is to persuade the homeowner to sell for less than he would like while at the same time letting potential buyers know that a house can be bought for less than its listing price. To be sure, there are more subtle means of doing so than coming right out and telling the buyer to bid low. The study of real-estate agents cited earlier also includes data that reveals how agents convey information through the for-sale ads they write. A phrase like “well maintained,” for instance, is as full of meaning to an agent as the code phrase “Mr. Ayak” was to a member of the Ku Klux Klan; it means that a house is old but not quite falling down. A savvy buyer will know this (or find out for himself once he sees the house), but to the sixty-five-year-old retiree who is selling his house, “well maintained” might sound like a compliment, which is just what the agent intends.

An analysis of the language used in real-estate ads shows that certain words are powerfully correlated with the final sale price of a house. This doesn’t necessarily mean that labeling a house “well maintained” causes it to sell for less than an equivalent house. It does, however, indicate that when a real-estate agent labels a house “well maintained,” she is subtly encouraging a buyer to bid low.

Listed below are ten terms commonly used in real-estate ads. Five of them have a strong positive correlation to the ultimate sales price, and five have a strong negative correlation. Guess which are which.

Ten Common Real-Estate Ad Terms

* Fantastic
* Granite
* Spacious
* State-of-the-Art
* Corian
* Charming
* Maple
* Great Neighborhood
* Gourmet

A “fantastic” house is surely fantastic enough to warrant a high price, isn’t? What about a “charming” and “spacious” house in a “great neighborhood!”? No, no, no, and no. Here’s the breakdown:

Five Terms Correlated to a Higher Sales Price

* Granite
* State-of-the-Art
* Corian
* Maple
* Gourmet

Five Terms Correlated to a Lower Sales Price

* Fantastic
* Spacious
* Charming
* Great Neighborhood

Three of the five terms correlated with a higher sales price are physical descriptions of the house itself: granite, Corian, and maple. As information goes, such terms are specific and straightforward-and therefore pretty useful. If you like granite, you might like the house; but even if you don’t, “granite” certainly doesn’t connote a fixer-upper. Nor does “gourmet” or “state-of-the-art,” both of which seem to tell a buyer that a house is, on some level, truly fantastic.

“Fantastic,” meanwhile, is a dangerously ambiguous adjective, as is “charming.” Both these words seem to be real-estate agent code for a house that doesn’t have many specific attributes worth describing. “Spacious” homes, meanwhile, are often decrepit or impractical. “Great neighborhood” signals a buyer that, well, this house isn’t very nice but others nearby may be. And an exclamation point in a real estate ad is bad news for sure, a bid to paper over real shortcomings with false enthusiasm.

If you study the words in the ad for a real-estate agent’s own home, meanwhile, you see that she indeed emphasizes descriptive terms (especially “new,” “granite,” “maple,” and “move-in condition”) and avoids empty adjectives (including “wonderful,” “immaculate,” and the telltale “!”). Then she patiently waits for the best buyer to come along. She might tell this buyer about a house nearby that just sold for $25,000 above the asking price, or another house that is currently the subject of a bidding war. She is careful to exercise every advantage of the information asymmetry she enjoys

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Updated: 2018

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