The real estate market needs transparency and competition now


“It’s a great offer; I think you should take it.

“How about we make a little price adjustment?” “

“The market is not as hot as it was last spring” …

Sounds familiar? Recently sold a condo? My wife and I did it too.

Fortunately, during our recent real estate transaction we were able to work with a smart, polite, responsive, knowledgeable and professional man, whom I will call Eric Swift (not our agent’s real name). Having years of experience and working under an international and prestigious brand, Swift is the kind of agent you want to represent.

But despite all of Swift’s qualities and the friendly interactions we had, one major issue stood between us: Our incentives were completely misaligned.

Swift wanted a quick transaction. We wanted the highest price possible.

This misalignment stems from the fact that the most common type of contract between sellers of real estate and their agents is a fixed percentage of the sale price. The rate varies from province to province, but is generally between three and seven percent. If the buyer in the transaction also has an agent, the commission is split between the two agents.

To illustrate the seriousness of the misalignment problem, let’s say for simplicity that our agent asked for a four percent commission and the asking price for our condo was $ 1 million.

Now let’s do some math. If our house sells for the asking price ($ 1 million), we can keep $ 960,000.

Our agent, Swift, charges four percent, or $ 40,000 in commission, which he will have to share with the buyer’s agents. Therefore, he collects two percent, or $ 20,000.

But since Swift works under an international agency and will share part of its commission with the agency. Based on a typical 70/30 split ratio, Swift’s private share of the deal is $ 14,000.

Basically, if we sell $ 1 million, we get $ 960,000 and our agent gets $ 14,000.

Now, let’s analyze how much each side would get if the sell price was $ 10,000 less than $ 990,000.

For our agent, the compensation would now be $ 13,860, only $ 140 less, but for us, almost $ 10,000 less! This is the heart of the matter: our agent is insensitive to the sale price. He wants to sell at all costs.

Given these incentives, it is clear what agents need to do. First, secure the list. This is usually done by providing an optimistic analysis of the market. Swift, our agent, was no different. After initially appraising the condo at around $ 875,000, he “looked at the potential market value of the condo” and came up with a rosier projection between $ 975,000 and $ 1,075,000.

But once the contract is signed (exclusively, for at least three months), agents can start to manipulate sellers with statements like the ones cited above, and push to reduce the price in order to close a deal as soon as possible.

In our case, after signing and accepting an asking price of $ 998,000, two days before registration, Swift offered to reduce the asking price to $ 945,000!

“We’re more likely to get strong action early on. I’m afraid starting at $ 998,000 won’t help you get the best price, ”he wrote.

Then, eight days after first listing the condo, Swift wrote, “How about we drop the price a bit ($ 10,000 to $ 20,000)… We haven’t had as many visits as we did. would have hoped … “

Beyond the misalignment of incentives, there are two additional considerations that compound this problem.

The first is asymmetric information. Real estate agents are more informed than sellers and also have a monopoly on data. Sellers do not have easy direct access to historical transactions and rely on reports generated by their agents. For example, to have access to previous sales in the Quebec land register, you must first register, enter the lot numbers (instead of the addresses) and pay $ 1 per request. Information is provided in French only.

For her part, Swift says that claiming that data access is “asymmetric or restricted” could be misleading. He says agents invest in memberships and tools that give them quick access to data, much like other professionals or experts invest in specialized equipment.

“In the end, like many other specialists we call on, trust is essential,” he adds.

Swift was honest, but theoretically agents could provide partial and misleading market information to their clients.

The second problem is the fact that the agents do not have recurring business with the seller. Most people would have one or two real estate transactions in their lifetime, if they are lucky enough to own a property.

On the other hand, the seller’s agent regularly interacts with the buyers’ agents, especially if they are working in the same field. The two agents’ incentives are also 100% aligned – they both want a quick deal – and customers don’t have access to their private conversations. Therefore, a seller’s agent may be more loyal to the buyer’s agent than to his client. It is possible that he is a double agent.

The ultimate proof that agents are actually leveraging their informational advantage comes from examining agent-owned home sales. Research in the United States shows that agent-owned homes stay on the market almost 10 days longer and sell for about 3.7% more than comparable non-agent-owned homes.

In Canada, the Toronto Real Estate Board (TREB) fought for seven years the Competition Bureau Tribunal ruling that it had abused its dominant position to restrict competition and innovation in real estate services. The board ultimately lost.

The real estate market cries out for transparency and competition. To achieve this, it is up to municipalities, provinces and real estate boards to learn from TREB’s lost case against the Competition Bureau and to make historical transaction data readily available to sellers and buyers across the country. country. The monopolization of data in the hands of agents gives them an unfair advantage.

Second, the market needs innovation. We need brokers who offer alternatives to the fixed commission contract by offering a commission scale that aligns the incentives of agents with those of their clients.

Real estate agents are not bad people. They are simply motivated by economic incentives. Without real competition and innovation, they will continue to use their expertise for themselves and their fellow agents rather than the people who hire them.

Amir Barnea is an associate professor of finance at HEC Montréal and a freelance columnist at Star. Follow him on Twitter: @ abarnea1


Comments are closed.