Freakonomics: How are real estate agents like the KKK?

How are real estate agents like the KKK?

Todd Miller: Hello and welcome to Todd Miller TV. I read a book recently. It was actually a very good book. It was called Freakonomics and it was written by a couple of PhD types in economics. And one of the things they did was they talked about real estate agents and how real estate agents’ goals aren’t aligned with a seller’s goals.
They said some things in here I just want to point out as potentially not being true and this is why.

So the chapter about real estate agents starts out by saying “How is the Ku Klux Klan like a group of real estate agents?” or “How are real estate agents like the KKK. ┬áSo at first you’re probably thinking “Wait a minute, how – what are they like bigots or something?” And basically what they determined was there was these code words that real estate agents use and these code words are signals that we pass to each other, to other agents to let them know about a house we have. So some of the words that they picked out were words like well-maintained or fantastic or charming and words like this and apparently they did their analysis and found that houses were none of those things, some of the houses that were charming weren’t really charming. So I first wanted to address that – being on the listing side of a couple hundred properties every year with successfully selling properties for sellers and those are not key words. If I say your house is fantastic that is not a key phrase to other real estate agents to tell them that the seller’s willing to accept $10,000 less than the list price. That is called puffing. Some houses are just not very nice, unfortunately. The sellers haven’t taken good care of them and we have to use some words to describe them in good light. So fixer upper is not necessarily the best term. Something charming or well maintained or fantastic, something like that are terms that are used commonly in real estate and they are called puffing. It’s very common in the industry, it’s not misrepresentation, it’s just called puffing. So when we’re saying that we’re just puffing and we’re not doing anything else. There’s no secret code words, I just want to make that clear.
The second thing I wanted to do is just deal with the number that they quoted. And the number was that real estate agents don’t care about how much you get, they just want their commission and they’ve got statistical proof, statistical proof – and this is the statistical proof – it was the average home sells for $300,000, the average real estate agent gets $310,000. So we’ve got the average and then agent – so the agent’s getting more and also – and the reason why the agent’s getting more is because the agent is pushing that seller to sell at any price and then of course the agent’s holding out for a better offer and staying on the market longer. So I want to point out two huge fallacies with that and these are basic reasons for this. Now first of all, I’d like to disclose I do not have a PhD in economics, I do have an MBA though, and I have been in real estate for quite some time. And I can tell you this – the difference between $300,000 and $310,000 is statistically not meaningful, it’s 3%. You can’t tell me that when this data was taken which is right when the market was taking off and prices were changing rapidly, that you can take a slice and time and take meaningful data, enough of it to give yourself a reasonable thing. All houses are not equal, all real estate is not equal, the fact that a real estate agent gets more for their house than the average person is not statistically meaningful even if you can show that because real estate agents tend to buy houses that they know are going to appreciate more or that they’ve upgraded in a certain way that they know and by the time we get to the seller they’ve already made those upgrades, they’ve already bought the house. And sometimes we’re scratching our head going “Why did you put Corian countertops in a house this nice? It’s just going to detract from the value. Maybe you should have done some better upgrades. Maybe you should have thought a little bit about the upgrades you did.” So real estate agents in general are going to know those things and they may get a little more for their house but this $10,000 number I don’t believe that it’s statistically significant especially since the numbers quoted were exactly $300,000, exactly $310,000. I think that they found a small difference and rounded and they came up with this $10,000 difference, I don’t believe the numbers, not during that market, and not during that time, it doesn’t make sense.

Here’s the other thing – the other thing they pointed out very interesting was that the real estate agents’ time on the market that a regular person’s on the market this day but the real estate agent is on the market longer. So you’ve got the agent here, right, and then we have the average person here, okay? Now why this is statistically deceiving – and this is why. I don’t think the real estate agent has her house on the market longer. I think the real estate agent actually has their house on the market shorter than the average person and this is why. We draw this baseline here so an agent kicks a listing and sells it, okay, of a client. Here the agent lists their own home, they keep the listing with them as long until it sells so it takes longer – this is why. Because this is not the first agent to list this house, they had one or maybe two agents previously list the house, they were overpriced here so by the time agent number 2 or 3 takes this listing they’re only looking at when they took that listing so days on the market is really, really, really a moving target. I believe that real estate agents actually have their house on the market a shorter amount of time and that enabled it to exploit some of this difference because the longer you are in the market, if you start off overpriced, people tend to disregard the property and agents tend to disregard the property, and then by the time you get to a reasonable price you’re having to discount it to sell it.
That is the truth – you’ll have to discount the house to sell it if you mess up that price. Sellers tend to do that when they list with the agent because they think if they list too low that they won’t get as much money. They’re always pushing for more money than the house is worth. The agent’s not going to do that. The agent’s going to price their own home where they think it’s going to sell. That’s what we do when we meet with a seller — we want them to price their home where it’s going to sell. The homeowner always thinks it’s worth more, always wants more, and that’s why we go through agent number 1, agent number 2, agent number 3 finally gets it right and sells the house. So the two statistics they show – I don’t believe them. I think they’re statistically misrepresented and I don’t believe there’s anything in there that tells me the real estate agent is not acting in the best interest. The anecdotal reasons they gave in the books, a couple of examples the people who just didn’t like real estate agents, it was very clear, they wanted to get their point across. I don’t think you could take a couple of anecdotes and come up with this belief of this conclusion. I just think it’s wrong.

Anyway, that’s my take – for what it’s worth the book is called “Freakonomics.” Steven Levitt and Stephen Dubner. It’s actually a good read. Read the book and, like I said, the specific area of real estate I think they just missed it a little bit and that’s fine. Anyway that’s my update for today and I hope to see you on the next video. Thank you.