The Probability That a Real-Estate Agent Is Cheating You (and Other Riddles of Modern Life) profiles an interesting character:
Steven Levitt tends to see things differently than the average person. Differently, too, than the average economist. This is either a wonderful trait or a troubling one, depending on how you feel about economists. The average economist is known to wax oracularly about any and all monetary issues. But if you were to ask Levitt his opinion of some standard economic matter, he would probably swipe the hair from his eyes and plead ignorance. ”I gave up a long time ago pretending that I knew stuff I didn’t know,” he says. ”I mean, I just — I just don’t know very much about the field of economics. I’m not good at math, I don’t know a lot of econometrics, and I also don’t know how to do theory. If you ask me about whether the stock market’s going to go up or down, if you ask me whether the economy’s going to grow or shrink, if you ask me whether deflation’s good or bad, if you ask me about taxes — I mean, it would be total fakery if I said I knew anything about any of those things.”
In Levitt’s view, economics is a science with excellent tools for gaining answers but a serious shortage of interesting questions. His particular gift is the ability to ask such questions. For instance: If drug dealers make so much money, why do they still live with their mothers? Which is more dangerous, a gun or a swimming pool? What really caused crime rates to plunge during the past decade? Do real-estate agents have their clients’ best interests at heart? Why do black parents give their children names that may hurt their career prospects? Do schoolteachers cheat to meet high-stakes testing standards? Is sumo wrestling corrupt?
As the title suggests, one topic that interests Levitt is the real estate business:
While negotiating to buy old houses, he found that the seller’s agent often encouraged him, albeit cagily, to underbid. This seemed odd: didn’t the agent represent the seller’s best interest? Then he thought more about the agent’s role. Like many other ”experts” (auto mechanics and stockbrokers come to mind), a real-estate agent is thought to know his field far better than a lay person. A homeowner is encouraged to trust the agent’s information. So if the agent brings in a low offer and says it might just be the best the homeowner can expect, the homeowner tends to believe him. But the key, Levitt determined, lay in the fact that agents ”receive only a small share of the incremental profit when a house sells for a higher value.” Like a stockbroker churning commissions or a bookie grabbing his vig, an agent was simply looking to make a deal, any deal. So he would push homeowners to sell too fast and too cheap.
This occured to me when I sold my last house The incentive structure certainly encourages the realtors to move the house quickly. Realtors get a percentage of the sale, usually 6% of the sale price. Whether a house sells for $100,000 or $110,000 is almost trivial to the realtor, even though it can be the difference between breaking even or losing money for the seller.
Really, their incentive is to sign as many sellers to contracts as possible in order to maximize their number of commissions. Taking people around to show them houses is a lot of work, an added expense, and, more importantly, time that’s not spent signing new clients who are going to give you the 6%.
(Hat tip: Brad DeLong)