Realtors tend to keep their own homes on the market 10 days longer than they do for their clients. Now why is that? Could it be that they want and get a higher price for their own real estate?
What Realtors should be doing, at a minimum, is providing the same level of service for their clients as they do for themselves, if not treating their clients better than they would themselves. What is the right outcome that they should be trying to achieve for their clients?
Should they be trying to maximize prices or optimize them?
I would argue that they should be looking for an optimal outcome. If a property stays on the market too long, the listing can become stale. If it is on the market for too short a period, it may not attract wide enough interest and the sale price may be too low.
I would tend to err on the side of the property being exposed to the market for less time rather than a longer period because of fears of the listing becoming stale. But this does not relieve the Realtor of the fidicuary obligation to his or her client to achieve the optimal price for their property.
Now if a Realtor’s $300,000 home is on the market for an extra ten days and, say, three more showings are required to get a 3% increase in price, that means that the Realtor has received an extra $9,000 for about three hours of additional work on his or her own home. That works out to about $3,000 per hour, not bad work if you can get it.
By comparison, if the Realtor does that for your home and he or she receives half (the listing end) of, say, a 5% commission on the extra $9,000 and their commission split with their Broker is 80/20, then the Realtor will receive:
$9,000 x 5% x .5 x .8 or $180.00 for the extra effort which works out to $60 per hour.
Now there is a big difference between $60 per hour and $3,000 and Realtors are human beings which means they are highly motivated by the same things that affect everyone– greed and fear. Fearful that if their clients don’t take the first offer, there may not be another one and they will get nothing. Greedy to receive $3,000 per hour instead of 60 bucks.
Nevertheless, Realtors have a code of ethics that require them to place their clients’ interests above their own and they need to redress this difference in exposure time between their own properties and their clients’.
There are other reasons for Realtors to want higher prices, not only in residential markets but in commercial markets as well. Higher prices for existing homes or existing commercial property encourages new supply. In Ottawa where I work, there is a shortage of commercial office and industrial and showroom condos. More and more small and medium sized enterprises, NGOs, Not-for-profits, charities, etc. want to own their own real estate. I have written extensively about this. See: Why Invest in Real Estate.
But developers in our area are gun shy about building new office or industrial condos because selling prices are too low. When we sell these condos at our real estate company, we want to get higher prices for our clients and, in a way, it isn’t the worst thing for buyers either.
Think about it for a minute. You can go to practically any small town in rural Ontario and buy industrial space for very very little. But wait a minute. One day you may want to sell it and what if there aren’t any buyers, that would be bad, right? So if a buyer pays a higher price in a major (for Canada) market like Ottawa than he or she would want to, and that encourages more supply, and the overall market gets bigger and the market provides more liquidity not only in terms of eventually being able to sell the property for more than you paid for it but also making it easier for you to find and get financing and refinancing, then higher prices are a good thing for buyers too.
Residential Realtors should stop shaving house prices to get quick sales not only to serve their clients better but also to fight off the FSBO (For Sale By Owner) market which is growing by leaps and bounds. Trust is everything in life. If your clients can’t trust you or your industry, pretty soon you won’t have any.
Realtors have a lot to contribute and should be able to fend off FSBOs. They know the markets; they know the comparables; they know the forms; they are expert negotiators; they have access to mls.ca and mls.com, powerful real estate portals. The average FSBO seller might do one or two or at most three transactions in a lifetime. A decent Realtor should do five a month so, by golly, they had better be better at it…
In a way FSBOs are paying a commission even when they don’t use a Realtor. The Buyer knows that there is no commission payable so they usually start with a top line price that is 5% below the asking price anyway. So FSBOs are doing all the work and paying a “commission” and not getting any of the benefits of the industry. (They may pay a few points in any event since Buyers often aren’t comfortable representing themselves and get a Realtor involved to represent them. The Buyer Rep then asks for and usually receives something from the FSBO.)
I have seen sophisticated business people represent themselves in commercial real estate transactions and make a hash of things. In one transaction, a Seller declined to pay a commission to the Realtor and specifically asked that the Realtor not represent him, only the Buyer. The Buyer was happy with this arrangement and agreed to pay the Realtor’s commission. The Realtor, upon presenting the Offer of Purchase and Sale, asked the Seller three times if he wanted to have his own representation– either a Realtor or lawyer. Each time he declined.
The Seller signed back the Offer which required vacant possession of his building despite the fact that the Seller wanted to remain in the building for another three years. The Buyer obvioulsy wanted vacant possession. This cost the Seller $180,000 later on to renegotiate the deal.
A very successful real estate lawyer I know critized this industry– he said that Realtors have an avocation not a career; the industry, in his mind, was not professional. “What professional would drive a ‘client’ around for days, using his gas and his time and then, if no transaction resulted, get nothing for it?” This kind of stung and will stick with me forever. But maybe he is right? Why should Realtors do market analyses and provide comparables for free? Why should they tour clients around for nothing? There is nothing that says Realtors can’t charge for their expertise and time, if they want to. They can always give clients a credit for this work if a transaction does result in a commission but, as my wife has told me, “If you want people to respect you, first you have to respect yourself.”
I realize I am biased now that I am a licensed Realtor (having had my license for a little over a year to date) but the industry does have a lot to offer its clients. What it needs to do is to explain its value proposition better (a lot better), earn and receive respect for the work they do and make sure that it is serving its clients needs above all else.