What Is The Incentive For A Real Estate Agent?
April 18th, 2006 by Grant in: Real Estate
As I mentioned in a previous post, the book I’m currently reading, Freakonomics, talks a lot about how we are driven by incentive.
One discussion on incentive really struck home for me: What incentive does a real estate agent have to sell your house for top dollar?
A real estate agents job is to sell your house, hands down. He has financial incentive to do so due to the fact that he doesn’t get paid unless he sells your house. But what is his incentive to get the most out of your house? You might be surprised.
A typical commission on a sale is 6%. Half (3%) goes to the sellers agent, and half goes to the buyers agent. Of that 3% that each agent receives (based on the sales price), half of that goes to the company the agent works for, and the agent keeps the other half (1.5% of the sale price).
So let’s say you are trying to sell your house, and the appraised value is $200,000, and the agent says you could easily sell the house for that amount in a short amount of time. But you want to get the most for your house, and you think you can get $210,000 for it, or $10,000 more than the agent says you could easily sell it for.
Contrary to popular belief (and what your agent will tell you), selling your house for $10,000 more doesn’t appeal to the agent. Here’s why.
You’d like to sell your house for $10,000 more, because to you, that’s a lot of extra money in your pocket. However, selling your house for an extra ten grand only puts an extra $150 (1.5%) in your agents pocket. However, the agent will have to work harder to sell your house, spending even more money on marketing your house, and he knows that the house will sit on the market longer at $210,000 than it would at $200,000, and naturally, being human, he wants his money as fast as possible.
So he’s already making $3,000 off the sale of your house (1.5% of $200k) and you tell him that you’d pay him an extra $150 to put an extra $10,000 in your pocket. You have to admit, that’s not much incentive for him to squeeze and extra ten grand out of your house, especially since it will take longer to sell, and your agent will have to work even harder to sell your house.
So with that knowledge, whose best interest does your agent really have at heart?
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April 20th, 2006 at 11:00 pm
Interesting take. I have to agree with your ideas on agent motivation for the more experienced agents. Logically, everything you say makes sense.
On the other hand, in my personal experience, agents often will buy listings by claiming they can get you more then others, appealing too your greed, and getting the listing. Typically, they just see dollar signs, and usually only see the dollar signs lying ahead.
April 20th, 2006 at 11:16 pm
I can see your point, Joshua. But that’s where you have to understand the agents incentive to sell your house after claiming he/she can get the most for it.
If I were an agent, I’d tell you I could get you 10% over current market value just to get the listing. Knowing that each day your house is on the market hurts YOU more than it hurst ME (although I’m wanting to get paid) it’s actually the home owner that has the motivation to actually lower the price, not the agent. But of course, this is music to the agents ears, as lowering the price means a quicker sale (theoretically, of course).
It’s a really interesting theory when you really sit and look at all the different incentives for each of the different players in the game.
Thanks for reading and contributing!
-Grant