realtors don't want to overvalue a house, that extra couple hundred bucks is nothing to them compared to pricing it well and getting it sold with fewer open houses. I don't know for sure but I bet over 90% of houses that are overpriced are due to the seller, not the realtor.

fan_from_texas;484001 wrote:I think we agree here--realtors make money by (1) increasing the price of the homes they sell; and (2) selling them quickly. From the perspective of a seller, (2) is the major concern, while from the perspective of the buyer, (1) is the bigger issue. It's quite clear that, similar to lawyers billing by the hour, the incentives between the realtor and the buyer are not directly aligned. That's not to say that realtors are dishonest as much as it is to let buyers know that the realtor has incentives that are not necessarily aligned with their own.

All else being equal, a realtor earning X% of the sales price would prefer you to pay $Y + $10,000 instead of just $Y, as that will yield an additional X%*$10,000 in commission.

Yes, but that's different than saying they have an incentive to intentionally overprice a home; because they don't. It's all irrelevant to buyer who has done their homework. Realtors don't price their listings based on uninformed market participants.

Dave knows.

Steel Valley Football;484022 wrote:Yes, but that's different than saying they have an incentive to intentionally overprice a home; because they don't. It's all irrelevant to buyer who has done their homework. Realtors don't price their listings based on uninformed market participants.

I didn't say that they have an incentive to intentionally overprice a home. I have noted--and stand by--that there is a misalignment between the agent's interests and the buyer's interests, and that realtors have an incentive to (1) encourage high prices, and (2) encourage quick sales. I'm not sure where you draw from that any suggestion that realtors intentionally overprice homes and keep them on the market. There is clear tension between (1) and (2), but that doesn't mean they're not incentives; presumably, rational realtors would price homes in such a way as to maximize commissions (which requires increasing sales velocity). My noting this isn't incorrect, nor is it particularly controversial--this is fairly straight-forward economics.

If a client comes to me and says that he'll pay me $300/hr to review a contract, I have an incentive to take a long time on it. That doesn't mean that I will--because it's unethical and this isn't a one-shot transaction. Home-buying is much more of a one-shot transaction from the buyer's perspective. In a one-shot deal with misaligned incentives, it's important for a buyer to beware of what's going on.

fan_from_texas;484033 wrote:I didn't say that they have an incentive to intentionally overprice a home. I have noted--and stand by--that there is a misalignment between the agent's interests and the buyer's interests, and that realtors have an incentive to (1) encourage high prices, and (2) encourage quick sales. I'm not sure where you draw from that any suggestion that realtors intentionally overprice homes and keep them on the market. There is clear tension between (1) and (2), but that doesn't mean they're not incentives; presumably, rational realtors would price homes in such a way as to maximize commissions (which requires increasing sales velocity). My noting this isn't incorrect, nor is it particularly controversial--this is fairly straight-forward economics.

If a client comes to me and says that he'll pay me $300/hr to review a contract, I have an incentive to take a long time on it. That doesn't mean that I will--because it's unethical and this isn't a one-shot transaction. Home-buying is much more of a one-shot transaction from the buyer's perspective. In a one-shot deal with misaligned incentives, it's important for a buyer to beware of what's going on.

Except realtors don't encourage high prices.

fft, if it was up to almost all realtors, they would undervalue every single house they list. They would sell a ton, gain awards and referrals, make a crapload of cash. realtors do not encourage high prices. when people sell houses, they have a price in mind. the realtor isn't going to say it should be higher, but they more often than not will say it should be lower.

fan_from_texas;483726 wrote:Exactly. What is a typical commission for a realtor today? 3%? On a $300K house, they'll make $9,000. If you only look at 5 houses (like most people typically do), you may be paying $1-2,000 per house you view, and you get some help filling out a very standard, straight-forward form contract for your offer.

Get your money's worth. This is likely the biggest single expenditure of your life, as well as a place that you have to live in for awhile. Make sure you do your homework first.



I'm not suggesting that you have to be there 30 years, but banking on 4-6 yrs isn't necessarily super safe. E.g., there are plenty of people who bought in 2005-2006 who lost 30% or more of their value. Unless they plan to take a massive hit, they'll be forced to wait it out much more than 4-6 years.

It's a question of risk. Generally, you can buy a place and get out in 5 years without taking a big hit. But preparing yourself for the bad scenarios (home loses 30%, can't afford to sell it; stuck with the mortgage for the foreseeable future) can help cushion the blow in bad times.

The seller should be paying for the buyer's agent, so you shouldn't be paying anything to look at a house

fan_from_texas;484033 wrote:I didn't say that they have an incentive to intentionally overprice a home. I have noted--and stand by--that there is a misalignment between the agent's interests and the buyer's interests, and that realtors have an incentive to (1) encourage high prices, and (2) encourage quick sales. I'm not sure where you draw from that any suggestion that realtors intentionally overprice homes and keep them on the market. There is clear tension between (1) and (2), but that doesn't mean they're not incentives; presumably, rational realtors would price homes in such a way as to maximize commissions (which requires increasing sales velocity). My noting this isn't incorrect, nor is it particularly controversial--this is fairly straight-forward economics.

If a client comes to me and says that he'll pay me $300/hr to review a contract, I have an incentive to take a long time on it. That doesn't mean that I will--because it's unethical and this isn't a one-shot transaction. Home-buying is much more of a one-shot transaction from the buyer's perspective. In a one-shot deal with misaligned incentives, it's important for a buyer to beware of what's going on.

This conversation reminds me of this book.

http://freakonomicsbook.com/freakonomics/chapter-excerpts/chapter-2/

Sonofanump;484147 wrote:This conversation reminds me of this book.

http://freakonomicsbook.com/freakonomics/chapter-excerpts/chapter-2/

I haven't read freakonomics, but my quick scan of that chapter is that I agree with it.

SV, my recollection is that you're the guy who went back-and-forth with Con_Alma for about 100 posts on fair market value, and I'm not interested in repeating that experiment. I think you guys keep looking at this from the perspective of the seller, and not from the buyer, which was the point of this thread. It's easy to think of a situation where a house can be undervalued and yet the realtor's interest is in pushing the price as high as the buyer is willing to pay. It's very clear that the incentives are not aligned between the two parties--this isn't rocket science. A quick example:

A wants to buy a house. The house is listed at $300,000. A is willing to pay $280,000, but would like to offer $270,000. B is A's realtor. B believes that the owners would sell for $270,000. Yet B knows that A would pay $280,000. B's incentive is to encourage A to make an offer of $280,000. The $280,000 may undervalue the house inasmuch as the house could sell for $300,000 at some point over the next few months. But in this instance, B is better off making the quick buck and convincing A to pay on the high end of his range.

That's not say that realtors are dishonest or shady; just that their incentives are not aligned with the buyers they represent. This is the exact reason the WSJ's Lifetime Guide to Money recommends working with a for-fee financial advisor rather than one paid on commission. It's not a matter of integrity/trust so much as it is a question of incentives.

LJ;484086 wrote:The seller should be paying for the buyer's agent, so you shouldn't be paying anything to look at a house

Agreed--I didn't mean to suggest that the buyer would be paying it so much as that certain transaction costs are incurred that indirectly affect the ultimate price, and that the existence of those costs free the buyer to shop around as much as they want.

fan_from_texas;484224 wrote:SV, my recollection is that you're the guy who went back-and-forth with Con_Alma for about 100 posts on fair market value, and I'm not interested in repeating that experiment. I think you guys keep looking at this from the perspective of the seller, and not from the buyer, which was the point of this thread. It's easy to think of a situation where a house can be undervalued and yet the realtor's interest is in pushing the price as high as the buyer is willing to pay. It's very clear that the incentives are not aligned between the two parties--this isn't rocket science. A quick example:

A wants to buy a house. The house is listed at $300,000. A is willing to pay $280,000, but would like to offer $270,000. B is A's realtor. B believes that the owners would sell for $270,000. Yet B knows that A would pay $280,000. B's incentive is to encourage A to make an offer of $280,000. The $280,000 may undervalue the house inasmuch as the house could sell for $300,000 at some point over the next few months. But in this instance, B is better off making the quick buck and convincing A to pay on the high end of his range.

That's not say that realtors are dishonest or shady; just that their incentives are not aligned with the buyers they represent. This is the exact reason the WSJ's Lifetime Guide to Money recommends working with a for-fee financial advisor rather than one paid on commission. It's not a matter of integrity/trust so much as it is a question of incentives.

That's exactly what you are saying in your example - your situation has an unethical realtor. If he acts as you described, then he has violated the ethics portion of his license as well as the purchase contract and would be subject to punishment and contract breech. Realtors are no different than any other sales person who works on commission...selling windows, furnaces, cars, etc and in each their ethics dictate future business. As an appraiser, I can charge a higher fee for a more expensive property as there is likely more work involved...so why wouldn't I appraise everything higher and make more money? It's called ethics and community reputation.

Regardless, your example makes many assumptions and is not likely a real-world situation. It assumes that buyer A has no intelligence and would not offer $270,000 and then wait for a counteroffer (which he likely would). It also assumes that realtor A is correct about the what the seller would sell for (which he wouldn't be as he would never have met the seller nor can he read minds). It assumes there is no other market interest in the property and that the seller has no other offers. Would the seller accept 90% of list and lose $30,000 after the first offer? Not likely.

fan_from_texas;484224 wrote:This is the exact reason the WSJ's Lifetime Guide to Money recommends working with a for-fee financial advisor rather than one paid on commission. It's not a matter of integrity/trust so much as it is a question of incentives.

Lastly, if you didn't have a realtor and instead used a financial planner to represent and assist you in buying a house; you would likely pay his fee and in addition end up without a house. Here's why: who will let you into the properties you want to make offers on? Your financial advisor? Nope. He's not allowed. The seller's realtor? Nope. Because, if they do they are legally entitled to a commission. Wait, isn't that what you are trying to avoid by going with a financial planner? Have you kept up on the recent changes in realtor commission laws? It doesn't sound like you have.

Steel Valley Football;482511 wrote:Do you realize a house can have curb appeal without having a curb...or even if you can't see it from the curb? Curb appeal is simply another way of saying to keep the outside of a house neat and tidy so potential buyers will want to see the inside.

With that said, I'm not sure what the hell Belly meant by "location, location, location...curb appeal" as advice for buying a house. That makes no sense.

Yes I realize that.

My previous comments suggests that a home should not be bought as an investment and that the curb appeal to others is of no importance to me. I will concede that "curb appeal" to my family is important for we expect and like things a certain way and should work to make them so.

I can understand that curb appeal would be important to someone trying to appeal to another...maybe a buyer. In my case, I don't choose a home nor care for its outward appearance with the intention of trying to appeal to someone else....just our own desires.

Steel Valley Football;484821 wrote:Lastly, if you didn't have a realtor and instead used a financial planner to represent and assist you in buying a house; you would likely pay his fee and in addition end up without a house. Here's why: who will let you into the properties you want to make offers on? Your financial advisor? Nope. He's not allowed. The seller's realtor? Nope. Because, if they do they are legally entitled to a commission. Wait, isn't that what you are trying to avoid by going with a financial planner? Have you kept up on the recent changes in realtor commission laws? It doesn't sound like you have.

I don't think FFT was saying you should use a financial planner instead of a realtor. He was trying to demonstrate how someone's motivation can be changed depending on what their incentives are.

Con_Alma;484838 wrote:Yes I realize that.

My previous comments suggests that a home should not be bought as an investment and that the curb appeal to others is of no importance to me. I will concede that "curb appeal" to my family is important for we expect and like things a certain way and should work to make them so.

I can understand that curb appeal would be important to someone trying to appeal to another...maybe a buyer. In my case, I don't choose a home nor care for its outward appearance with the intention of trying to appeal to someone else....just our own desires.

Trying to appeal to another??? How about just buying a house with better resale potential? That's exactly what we are giving advice on. People buying their first house don't go into it planning to lose money. The best advice is to buy conventionally.

I realize you fancy yourself as unique and that you may not follow the norms of society and that you have "special needs" and don't care what they may cost, but it get's annoying hearing how special you are and how you don't conform to what the majority does.

Do this guy a favor and help him out instead of making everything about how you do things because you have this great insight that the rest of us couldn't possibly possess. We get it already.

FatHobbit;484871 wrote:I don't think FFT was saying you should use a financial planner instead of a realtor. He was trying to demonstrate how someone's motivation can be changed depending on what their incentives are.

Thanks--I thought it was pretty clear, but SVF really seems to struggle with the concept of misaligned incentives and using hypotheticals to analyze a situation. Why on earth would anyone use a financial planner to buy a house? The point about fee-based vs. commission and aligning incentives was clearly missed.

I think it's likely that I could go back and forth with SVF another 50 times and not reach resolution (similar to Con_Alma's experience awhile back), so I'll just let it go and not respond to this latest round, giving him the last word.

At any rate, to the original poster: because the realtor's interests are not aligned with yours, be heads-up and don't accept their advice unquestioningly. You have to make sure that you do your own homework and don't rely on them to tell you how much you should offer for a house.

FatHobbit;484871 wrote:I don't think FFT was saying you should use a financial planner instead of a realtor. He was trying to demonstrate how someone's motivation can be changed depending on what their incentives are.

Got it. I misunderstood as he linked those two sentences together as if they supported one another.

fan_from_texas;484949 wrote:Thanks--I thought it was pretty clear, but SVF really seems to struggle with the concept of misaligned incentives and using hypotheticals to analyze a situation. Why on earth would anyone use a financial planner to buy a house? The point about fee-based vs. commission and aligning incentives was clearly missed.

I think it's likely that I could go back and forth with SVF another 50 times and not reach resolution (similar to Con_Alma's experience awhile back), so I'll just let it go and not respond to this latest round, giving him the last word.

At any rate, to the original poster: because the realtor's interests are not aligned with yours, be heads-up and don't accept their advice unquestioningly. You have to make sure that you do your own homework and don't rely on them to tell you how much you should offer for a house.

I assumed the bolded portion was obvious to even a 10th grader.

Regarding Con Alma, it's clear to anyone with an oz of real estate knowledge that market value was not his definition. Can I assume that to not be you? Con proves he's off the mark again by arguing against buying a house with curb appeal above. He's right in his own head, though.

fan_from_texas;484949 wrote:Thanks--I thought it was pretty clear, but SVF really seems to struggle with the concept of misaligned incentives and using hypotheticals to analyze a situation. Why on earth would anyone use a financial planner to buy a house? The point about fee-based vs. commission and aligning incentives was clearly missed.

I think it's likely that I could go back and forth with SVF another 50 times and not reach resolution (similar to Con_Alma's experience awhile back), so I'll just let it go and not respond to this latest round, giving him the last word.

At any rate, to the original poster: because the realtor's interests are not aligned with yours, be heads-up and don't accept their advice unquestioningly. You have to make sure that you do your own homework and don't rely on them to tell you how much you should offer for a house.

I assumed the bolded portion was obvious to even a 10th grader. What you posted earlier though wasn't true...that realtors encourage high prices.

Regarding Con Alma, it's clear to anyone with an oz of real estate knowledge that market value was not his definition. Can I assume that to not be you? Con proves he's off the mark again by arguing against buying a house with curb appeal above. He's right in his own head, though.

Steel Valley Football;485030 wrote:I assumed the bolded portion was obvious to even a 10th grader. What you posted earlier though wasn't true...that realtors encourage high prices.

We can let the rest of the OC read it and determine for itself whether that's what I stated originally (reprinted below for convenience):

Fan_from_Texas wrote: Another factor to consider is that an agent's interests aren't necessarily aligned with yours. They're paid based on the price, so they have an incentive to (1) encourage high prices, and (2) encourage you to make an offer quickly and close, so they can move on to the next sale. Don't be pushed into something you're not comfortable with. If possible, get a realtor referral from a friend or someone you trust.

That doesn't say that realtors encourage high prices. What it does say--and what I've repeated about 30 times so far--is that realtors' interests are not aligned with the buyers, and realtors have an incentive to encourage higher prices and quicker sales.

If it's something that is abundantly clear to a 10th grader, why do you keep disputing it?

fan_from_texas;485071 wrote:We can let the rest of the OC read it and determine for itself whether that's what I stated originally (reprinted below for convenience):



That doesn't say that realtors encourage high prices. What it does say--and what I've repeated about 30 times so far--is that realtors' interests are not aligned with the buyers, and realtors have an incentive to encourage higher prices and quicker sales.

If it's something that is abundantly clear to a 10th grader, why do you keep disputing it?

But you just contradicted yourself - incentive for quicker sales would mean a realtor would encourage LOW prices. The two incentives you stated that realtors have don't mesh - encouraging higher prices would not cause quicker sales.

So which is it?

fan_from_texas;485071 wrote:If it's something that is abundantly clear to a 10th grader, why do you keep disputing it?

This part is what I meant should be clear:

"be heads-up and don't accept their advice unquestioningly. You have to make sure that you do your own homework and don't rely on them to tell you how much you should offer"

I don't necessarily agree that realtors' interests don't align with the buyer just because they are on commission. Realtors need referrals and repeat customers to stay in business. Any shady dealings could ruin their career.

Steel Valley Football;485085 wrote:But you just contradicted yourself - incentive for quicker sales would mean a realtor would encourage LOW prices. The two incentives you stated that realtors have don't mesh - encouraging higher prices would not cause quicker sales.

So which is it?

Realtors make $100 per $3,333 of additional price, so their incentive is quick sales rather than holding out for the best price with is not always in the best interest of the property owner.

Steel Valley Football;485085 wrote:But you just contradicted yourself - incentive for quicker sales would mean a realtor would encourage LOW prices. The two incentives you stated that realtors have don't mesh - encouraging higher prices would not cause quicker sales.

So which is it?

Serious Q? I already mentioned the tension in an earlier post. Scroll up a few pages and re-read it.

fan_from_texas;485125 wrote:Serious Q? I already mentioned the tension in an earlier post. Scroll up a few pages and re-read it.

Yes, serious question. Which is their greater incentive? Everything else you've posted leans toward higher prices and trying to dupe buyers into paying too much. I think you are off base.

Sonofanump;485119 wrote:Realtors make $100 per $3,333 of additional price, so their incentive is quick sales rather than holding out for the best price with is not always in the best interest of the property owner.

I agree.

But FFT says the realtors are trying to get the prices higher to make higher commission.