SuperFreakonomics on Realtors

Still Casting Stones . . . But Now With (Lots of) Caveats

An economist is an expert who will know tomorrow why the things he predicted yesterday didn't happen today.

—Laurence J. Peter

[Editor's note: to see my rebuttal to Freakonomics, the predecessor to SuperFreakonomics, click here]

So, I finally finished off the (surprisingly short) section on Realtors in SuperFreakonomics.

Two things jumped out at me: 1) the authors, both economists, clearly have bored with attacking Realtors, and have moved on to other, fatter targets; and 2) they still think people who hire Realtors (as opposed to selling their homes themselves) are idiots, but this time they offer a lot of caveats.

Five, to be specific.

Here they are (my commentary follows in italics):

One. Even though Realtors don't do anything you couldn't do -- this seems to be the authors' mantra, by the way -- you still may want to hire one, anyway, if you don't have the time.

I spend anywhere from 40 to 100(!) hours per listing professionally staging my clients' homes, advising on disclosures, putting together professional marketing materials, doing pre-list networking -- and literally 37 other things.

And that's before their homes ever come on the market!

The professionals (and non-professionals) I work for would literally have to take a leave of absence from their day jobs to do what I do. Assuming they knew how.

Which leads to Caveat #2 . . .

Two. "Realtors don't do anything you couldn't do for yourself."

Oh, really? I've been selling real estate for almost 9 years. Before that, I was a corporate attorney and CPA, and have a Stanford economics degree. I have been successfully buying and selling stocks since I was 12 years old, and have started 3 companies.

I say none of that to brag (OK, a little), but to make the point that I'm not a dummy.

And yet every deal I do -- and I've now done about 70 -- I invariably learn something new.

It can be a contractual fine point; a negotiating insight; some arcane feature of a home that comes up on inspection; or even something as simple as "upgrading" to an especially talented, new photographer I heard about through the grapevine (in real estate like other fields, "who you know" can matter as much as "what you know").

The bigger point?

Suggesting that a novice could handle all the phases of a real estate transaction as expertly as a seasoned Realtor can is: a) uninformed; and b) insulting.

How much better?

It depends on the deal, the market, and who the ultimate Buyer is (assuming that I'm the selling, or listing agent).

But industry statistics (and common sense) suggest that the swing between having superior counsel and none at all (or poor counsel) easily exceeds 10%.

Which makes my commission -- substantially less than that -- a bargain.

Three. Madison, Wisconsin -- the market the authors cite as evidence that FSBO ("For Sale by Owner") Sellers do as well as Realtor-assisted ones -- may not be representative (call it the "your mileage may vary" caveat).

Yuh think!?!

Madison is a highly educated, college town with a metro population just over 200,000. It is about as representative of broader America as Manhattan is -- or Hollywood.

Notwithstanding Madison's experience with FSBO's, no other metro area has followed suit.

And even in Madison, FSBO's only account for 26% of home sales. That means almost three-quarters(!) of all homeowners there still list with traditional brokers.

In my experience, if something truly is a "better mousetrap," sooner or later people tend to discover it . . . and switch (assuming they have a choice, i.e., there's no monopoly provider).

Instead, FSBO's are now declining as a percentage of the market place nationally (about 12%).

Four. Self-selection. Or, as the authors put it, "the kind of people who choose to sell their own houses without a Realtor may have a better business head to start with."

At least in my experience, that statement is categorically wrong -- which, ironically, actually supports the authors' argument that FSBO's can do better, net of commission, selling themselves.

From what I've observed, what invariably characterizes FSBO Sellers isn't a "better head for business" -- it's a simple (if uninformed) desire to net more on the sale of their home, coupled with having some "extra time" on their hands (in economic-speak, their perceived "opportunity cost" is low).

Unfortunately, the vast majority of FSBO's don't have a clue as to how to go about doing it.

So, something like 9 out of 10 FSBO's egregiously overprice, while the 10th literally gives their home away (then brags that they "sold without a Realtor").

Which gets to caveat #5 . . .

Five. The authors' data and conclusions may be flawed.

To recap, the authors allege that Realtors selling their own homes (vs. clients') are more patient waiting for a deal, and (therefore) sell for more. They base that conclusion on a study of 100,000 homes sales in suburban Chicago -- 3,000 of which were sold by owner-agents.

Charge #2 is that FSBO Sellers fetch the same price that Realtor-listed homes do -- they just take a little longer (20 days on average) to sell. That's based on the aforementioned study of FSBO Sellers in Madison.

I couldn't find the Chicago study the authors refer to (anyone who knows, please feel free to point me in the right direction).

However, the study of FSBO Sellers in Madison was conducted between 1998 and 2004 -- a Seller's market there (and most of the rest of the country, too).

I doubt that FSBO sellers in Madison today would fare nearly as well.

Meanwhile, the authors' contention that more market time equals higher price contradicts what I've observed over thousands of deals covering the better part of a decade -- namely, the longer a given home is on the market, the lower the selling price. Period.

And that relationship holds whether the Seller is an owner-agent, a FSBO . . . or the man from Mars.

But the most significant weakness in the authors' argument is their assumption that it's possible to isolate differences between Realtor and non-Realtor sold homes by "carefully controlling along several dimensions -- price; house and neighborhood characteristics; time on market; and so on."

Unfortunately, that's notoriously difficult to do in practice.

Precisely to avoid such an "apples-to-oranges" problem, the housing market's leading price index, Case-Shiller, opts in favor of tracking "sale pairs" -- the same home across multiple transactions.

Echoes of Peter Lynch

The arguments in Freakonomics and now SuperFreakonomics ultimately recall Peter Lynch's best-selling book, "One Up on Wall Street," in which Lynch disingenuously tells retail investors -- "Mom & Pop" types -- that they can outsmart the pro's.

How?

By following their spouses and kids to the mall, being the first to notice the hot new, retail trends, then buying the companies positioned to profit.

Unfortunately, for every Apple Computer discovered that way, there are 10 -- or 100 -- "Krispy Kremes" (busts, flame outs, and one-hit wonders).

What Lynch omits is that, in his hey day, he traveled 300-plus days a year, personally talking to senior managers at thousands of companies; checking out their facilities; quizzing their employees and competitors; and relying on a battery of Fidelity analysts to analyze thousands of companies' financial statements.

Level playing field, indeed.

"If You Don't Know Who the Patsy Is . . " *

The authors of Freakonomics (and now SuperFreakonomics) perpetuate the same myth about real estate -- namely, that amateurs who do their homework can outsmart the pro's.

Who ultimately profits from that misconception?

Just as in the stock market, in the housing market the beneficiaries are the pro's on the other side of the transaction.

So, on behalf of Realtors everywhere, I suppose I should say: 'Thank you, Freakonomics!'

*It was Warren Buffet who said, "if you've been playing poker for 30 minutes, and you don't know who the pasty is . . . it's you."

"59' Lakeshore" vs. "Waterfront"

"Full Service" vs. "Discount" Realtors

Much attention is paid to what Realtors get paid.

A lot less to what services they perform for that money.

The reality is that there is no such thing as a "discount Realtor" offering full service. Rather, what they offer is more properly called "limited service."

What do I mean by that?

To pick just one detail -- and real estate involves hundreds of them -- a discount Realtor will put up a "For Sale" sign in your front yard.

A full service Realtor will add a sign "rider" that reads "waterfront" to draw attention to the otherwise invisible lake in back.

A great full service Realtor will have a custom rider made up that says "59' Lakeshore."

"An Inconvenient [Housing Market) Truth"

Framing the Choices

In politics, it's often said that "whoever defines the terms of debate, wins."

The equivalent in real estate appraising would be, "whoever decides the geographic area for choosing the comp's, defines home values."

What does that mean?

One of the challenges choosing and analyzing "comparable sold properties" (comp's) is coming up with three, similar properties nearby that have sold recently. Traditionally, Realtors and bank appraisers look back no more than six months; lately, there is a preference for three months or even less.

Unfortunately, that requirement bumps up against what might be called an "inconvenient housing market truth": there are many, many small neighborhoods in the Twin Cities -- some with as few as 100 homes -- that have their own distinct character and identity -- and not a lot of turnover.

If you want to intelligently price a home in one of these smaller neighborhoods, you have to consult previous neighborhood sales. However, because the neighborhoods are so small, there may not be 3 good comp's. In fact, it's not unusual to have to go back a year or even longer to find a similar, nearby sale.

But then, by definition, the previous sale is no longer a comp.

Comparing (Honey Crisp) Apples to (Cortland) Apples

What then?

You have to go farther afield.

Just to illustrate the challenges, consider the Lion's Park neighborhood in Golden Valley.

Lion's Park is located between 169 on the west, 394 on the south, Hiway 100 on the east, and Hiway 55 on the north. Built mainly in the '50's and '60's (with a sprinkling of recent tear-down's), the neighborhood includes perhaps 100 homes that encompass a surprising range of styles and sizes.

So, if you're trying to price a Lion's Park home, the odds are good you'll have to go outside of Lion's Park to find one or more comp's.

But which direction?

Northern Golden Valley, just to the north across Highway 55, borders Crystal and New Hope and is perhaps 20% less expensive than Lion's Park.

Meanwhile, North Tyrol Hills, just to the east of Lion's Park (across Highway 100) is perhaps 20% more expensive.

My guess is that a majority of the time, when a home doesn't appraise, it's because the appraiser is doing the equivalent of pulling comp's from the equivalent of Northern Golden Valley rather than the counterpart to Tyrol Hills.

"Full Service," Defined

Attention to Detail + Hands On Role

What exactly do Realtors mean when they say they're "full service?"

It's certainly a fair question, because a full service commission in the Twin Cities these days typically ranges from 6% - 7%. By contrast, "discount" Realtors charge 5% or even less ("limited service" is actually a better label).

My full explanation takes about 90 minutes, which I cover as part of a formal listing presentation that I make to prospective clients.

Suffice to say, I play a "hands on" role -- starting weeks (and even months) before my listings ever hit the market, to well beyond closing.

That includes knowing all there is to know about both recently sold properties (the "comp's") and competing "Active" listings, so I can give expert guidance on pricing; suggesting cost-effective improvements to maximize the home's value; and building market awareness -- well before the home formally debuts on MLS -- both with other agents and the general public.

"Full Service" . . . in Practice

In fact, my input goes well beyond simply recommending value-adding improvements.

As an example from just this week, my client was in the process of painting their home -- at my recommendation -- to get it ready for sale. However, the paint colors they selected just didn't seem right.

I knew, because I was in daily contact with both the client and the painters.

As part of "full service," I asked two stagers I regularly work with to interrupt their schedules and come to the house, ASAP, to make suggestions from their color palettes.

Which they did. They both recommended near-identical colors, which my client OK'd, and the (waiting) painters immediately substituted.

Example #2

The second illustration of what "full service" involves was . . . today.

The key to my client's just-listed home is the Kitchen, and the Kitchen has a prominent light fixture with 3 halogen bulbs. Unfortunately, 2 of them didn't work.

Normally, my client would attend to that, but they timed their vacation to be out of the way the first week their home is on the market.

So, I went to the hardware store to find replacements. "Not so fast," the salesperson I talked to said. The bulbs were specialty bulbs, and I needed to go to a specialty store for replacements.

Which I did.

After I finished, I had just enough time to join my family on an apple-picking outing.

P.S.: And no, "full service" does not include getting my clients' dry cleaning, babysitting their kids, etc.

A Tale of Two Professions

Are Realtors Underpaid??

Consider the following parallels between these two groups of professionals:

--Both groups include highly skilled, highly trained individuals;

--Both are known to tackle cases with long odds and a high risk of failure;

--Notwithstanding the aforementioned risks, both get paid only if their client gets paid. If their client walks away empty-handed . . . so do they.

--Both can toil for months -- if not years -- on behalf of their clients, investing hundreds of hours of their time, and incurring thousands in out-of-pocket expenses, before they see a dime of compensation.

So who are these two groups?

Plaintiff's attorneys bringing class action suits -- and Realtors! (specifically, listing agents representing Sellers).

Unlike the former, whose contingency fees typically range from 25% to 33%, full-service Realtors typically charge a 6% - 7% commission. Which they proceed to split four ways (with their broker, the Selling agent (representing the Buyer), and the Selling agent's broker).

Realtors . . . one of the great bargains left!

Vanishing FSBO's

The Mysteriously Disappearing FSBO

One of the less-remarked developments in today's housing market is the relative absence of FSBO's ("for sale by owner" homes).

As recently as two years ago, more than 10% of all listings were; now, I'd guess that number is less than 5%. (Note: there are actually two kinds of FSBO's: the "pure," sign-in-the-yard, no commission-to-anyone kind; and the FSBO offering a "payout," i.e., a commission to the Buyer's Realtor, but bypassing the listing agent, and typically paying a flat fee to list on MLS).

What accounts for the shrinking number of FSBO's?

Maybe it's because if the pro's (professional Realtors) are having a hard time selling homes, the odds of an amateur succeeding are pretty low.

The fact is, selling a home involves dozens of judgement calls concerning marketing, pricing, negotiating, etc. A FSBO seller just needs to make one mistake to more than offset any money they may have saved on commission.

Realtor Tips

So what's an example of something that a Realtor knows that a "layman" wouldn't?

Yesterday, a client just about to put his house on the market wanted me to take photos while (the previous night's) fresh snow framed his home. His logic was that the snow made the home look more aesthetic -- especially compared to the brown grass underneath.

While he's undoubtedly right, the problem is that the Multiple Listing Service ("MLS") is cluttered with literally thousands of "stale" listings now -- homes that have been on for months (in some cases, years) without attracting a Buyer.

How can you tell? Amongst other things, they have out-of-season photos (many quite flattering, by the way).

I told my client to use the less flattering -- but seasonal -- photos to avoid the negative association, and not risk losing prospective Buyers.

Blog Housekeeping Notes

Discount Realtors and Mushroom Clouds

Under the category of, "everything you (maybe) wanted to know about blog 'plumbing,' but were afraid to ask," two quick items:

1. All the ads around the periphery of this blog are "served" by Google's search engine, based on key words. So, the reason this blog has links to so many discount brokers is, apparently, because they're paying for such words as "foreclosure, "realtor," "Twin Cities housing market," etc.

In fact, one discount broker whose ads regularly appear on this blog, themlsonline.com, has previously been charged with deceptive advertising practices for giving consumers the impression that it's the Multiple Listing Service, not a for-profit broker (the MLS is actually a consortium of all local brokers, and the database it maintains is co-owned).

If you need a Twin Cities Realtor, don't call them . . . call me!

2. Everyone has their own way of telling when they have veered, shall we say, a little off the deep end. Significant Other, trusted friend, even a boss.

If you blog (yes, it's now a verb), all you have to do is look at the ads that are being served.

Judging by all the mushroom clouds lately, the subject matter on this blog has gotten a bit . . . dark. Sorry for that. But to be fair, so has the news . . .