Hornung: Freakonomics got it wrong on Realtors

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Lane Hornung

It’s been almost seven years since Freakonomics: A Rogue Economist Explores the Hidden Side of Everything, became a run-away non-fiction best-seller, but Lane Hornung still periodically gets questions about the passages involving real estate agents.

To refresh your memory, the book by economist Steven Levitt and writer Stephen Dubner, said that Realtors on average sold their homes for 3 percent more than an average price for a home and kept their own homes on the market 10 days longer.

In their sequel, Super Freakonomics, published in 2009, they were even harsher on Realtors, comparing and contrasting them to pimps.

“A Realtor and a pimp perform the same primary service: marketing your product to potential customers, Just as you can sell your body with or without the aid of a pimp, you can sell your house with or without a Realtor,” they wrote. “While Realtors charge a much lower commission than the pimps — about 5 percent versus 25 percent — the Realtor’s cut is usually in the tens of thousands of dollars for a single sale.”

Ouch!

Hornung, President, CEO and co-founder of 8z Real Estate and COhomefinder.com, found the first book to be a good and entertaining read, but he thinks they missed the mark when it came to their analysis of real estate agents.

“Great book by the way,” Horunung said, in a recent monthly conversation InsideRealEstateNews.com. “I really enjoyed it. People often ask me about my thoughts on the part of the book about Realtors. As a person, I like to base my arguments and conclusions on data, just as the authors of Freakonomics do. But I thought their section  was fairly amateurish.”

IREN: In Freakonomics, the authors contend that Realtors have an incentive to low-ball listing prices to sell them quickly. While a $10,000 increase is a big deal for most sellers, for a Realtor, it might only mean another $500 or so in their pocket, so they would rather sell it quickly at a lower price – something they don’t do when selling their own homes. What do you think, Lane?

Lane: I’ll start by saying, “Have there ever been cases where that has happened? Yes. I’m not going to say, “Gee, a Realtor has never done that.” Is it as pervasive in our industry as the authors contend? I don’t think so.”

IREN: Why not? It seems to make sense on a purely economic level?

Lane: I think their logic and analysis is pretty laughable. It ignores variables and dynamics of this business.

IREN: Can you elaborate?

Lane: No. 1, time and price are extremely correlated in real estate. Sellers have to make trade offs between time and price. The dynamics are very different for someone who has to sell a home in a month compared with one who can sell it any time in the next six months or longer. If you’re not in a hurry to sell your home, you can probably price it a little higher.

IREN: What about the danger of over-pricing?

Lane: There is a huge risk in over-pricing a house. Most Realtors will tell you that in this age of the Internet, people will look at two things – price and photos. If both of those aren’t attractive, they seldom return to it, even with successive price reductions. It has already has passed over their transom and has become a stale listing. So you take a huge risk in over-pricing a home.

IREN: Getting back to Realtors selling their own homes, if they are correct that they command premiums, why do you think that is the case?

Lane: First, as I recall it was a very limited data set. But for the sake of argument, let’s say they are correct. There are actually very good reasons they sell them for more, and they have nothing to do with the notion that they are somehow ripping off consumers and clients.

The first is the question of time that I mentioned before. Realtors often put their homes on the market not because they have to sell. It is usually a move of convenience, so they have plenty of time to wait it out for a higher price.

IREN: Other reasons?

Lane: The authors completely overlook the presentation or staging of a home. Realtors are in the business. They know what needs to done to receive the maximum price. They know that merchandising a property correctly can mean a plus or minus 5 percent swing in the final selling price. You can’t really do a proper analysis without accounting for that.

IREN: Even though it has been a number of years since Freakonomics was first published, do you think its impact still lingers?

Lane: It just adds to the perception that you can’t trust Realtors. It’s part of the long history of trashing Realtors. But a good Realtor who sells 20 or more homes each year – not someone who sells one or two homes a year to friends and family – is a true professional. They take classes, they truly study the neighborhood they work in and they get to know their clients. They want repeat business. They want their buyers and sellers to be happy.

And like I said, I really enjoyed Freakonomics. They just should have dug a little deeper into their analysis of Realtors selling their own homes.

IREN: Thanks, Lane.

8z Real Estate is a sponsor of InsideRealEstateNews. A monthly conversation with Lane Hornung is a feature of IREN. If you wish to contact 8z, please visit this link.

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John Rebchook

John Rebchook has more than 30 years of experience in writing and communications. As the Real Estate Editor for the Rocky Mountain News, he wrote about residential and commercial real estate for 26 years. He has won numerous awards for business stories and columns that he wrote, both as an individual and part of teams. In addition to real estate, he also covered economic development, banking and financing, the airlines, and cable TV for the Rocky. In addition, he was one of the original freelance writers for GlobeSt.com, covering commercial real estate for the Internet publication.

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