Looking Out From the Garage

This one has been kicking around in my head for a few days.  I read this around the same time that I read the info for the previous installments of The Real Estate Alchemist. (I & II).  As I read it, it was troubling me.  I know that from what I have seen, the limited service brokerages haven't done well for consumers, but here was evidence to the contrary... I had to think a bit...

Here is what started occurring to me...

First, let me toss out a couple of quotes and some links.  These are in chronological order as the data has been revisited several times.  Also, please note that the market was cruising pretty well during the study period. 

The results were striking; Redfin customers paid on average under asking price, whereas customers of all other brokerages paid on average over asking price. The difference in negotiations was .9% of the home price, equivalent in King County to over $4,000, on top of a commission refund of nearly $10,000.

What makes this noteworthy is that the data did not come from Redfin, but from the MLS, from the brokers themselves who contribute to the MLS. Any brokerage can validate the data by following the instructions available in the appendix of our report.

Already, the Seattles Times reviewed the report and picked up the story in yesterday’s big Sunday spread.

Perhaps there is another way to evaluate whether traditional agents negotiate better than Redfin agents; until there is, the most likely conclusion is that Redfin agents negotiate better than their more expensive counterparts.      Redfin Blog entry.  A year's worth of data...

 

Publishing MLS data that shows that Redfin got a better deal for buyers than agents at other brokerages sparked a riot yesterday: here, here, here, here, here, here, here, here, here, here and here. We also showed up in Freakonomics (holy cow!).       Redfin Blog entry.  Here we stand...

 

We originally reported that our King County buyers got a final price of 99.329% below list, whereas King County customers of other brokerages paid 100.233% above list. This is factually correct. But one transaction should have been adjusted to account for a commission refund applied to the purchase price, so as to isolate the negotiating capabilities of Redfin and its customers. Making this adjustment leads to an average final price 99.340% below list.

With this adjustment, the negotiating advantage we claimed to be .904% is .893%. This reduces Redfin’s negotiating advantage by $54, from 4,474 to $4,420. This advantage is still financially meaningful and statistically significant, but we are nonetheless unhappy with ourselves for the error.   Redfin Blog Entry.  OK, we can be moved...

Doesn't look good, does it?  I didn't think so.  But, then I started thinking.  When the smoke cleared, I came up with a list.

• How were unrepresented buyers handled in the statistics? 
• How were other discount broker clients handled?
• How were closing costs and other non-price concessions dealt with?

I'm going to handle these one at a time.  There are some significant problems here.  

 How were unrepresented buyers handled in the statistics?

The whole study is about the negotiating ability of Redfin agents v. traditional agents.  However, in the methodology, Redfin didn't appear to strip out transactions where the listing agent and selling agent were the same.  So, where there was NO agent negotiating on behalf of the buyer, if the price was higher the penalty went to the traditional agent.  This could be significant.  

How were other discount broker clients handled?

This one is probably a wash, because there could have been discount brokers handling the seller side as well, but Redfin isn't the only discounter in the market, and there are plenty of cases (including within Redfin) where their agent does nothing but present the offer.  They don't study the comps, they don't consult on the price... the consumer does all of that.  It is an unknowable.  It might not have a significant effect... but should be acknowledged.   

How were closing costs and other non-price concessions dealt with?

This is the biggest one of these objections to their data.  Purchase price doesn't always reflect the cost of the property.  In fact, in about 70% of transactions, it doesn't reflect the net price.  The most common alteration would come from "seller paids" and the most common of these is closing costs.  Of course, it is the first thing that buyers (and even sellers) forget after the sale.  Redfin doesn't address how they dealt with it.  Almost as a matter of course, I ask for 3% in closing costs for my buyer client.  This money will cover things like loan origination fees and other costs.  Generally, we try to get any balance over what is needed as a decoration allowance.  So, Redfin quotes their advantage as just under 1%.  What percentage of costs did they get covered for their buyer?  And, what percentage did the other agents get?  Did they pay 101% of list but get 3% in costs netted back to the buyer?  

The other side of the coin, related but more difficult to track is improvements.  For me it has normally come from new home sales, but it has also happened with resales.  One of my new home sales was 115% of list price.  Looking at that, I must be terrible.  But, my clients loaded the house with upgrades.  LOADED.  In fact, we negotiated the builder down to half price on the upgrade package.  We are talking about a savings of $45,000.  And the builder kicked in 3% for closing costs and a further 5% for a decorator's allowance.  So, the list price was $300,000.  The sales price was $345,000.  The total without the discounts and allowances was $417,000.  But, according to Redfin's methodology, my client didn't get a discount from $417k, but rather an overpayment from $300k.  That can be a pretty significant change.

So, I think Redfin needs to go back and look at the data more closely.  I would love to have the raw data set to look through.  Although, there are the unknowables (in the previously example, the $45,000 in discounts on upgrades would not show up unless one had the contract and the builder's price list), it would give a much better picture.   The bottom line is that stats can be manipulated pretty easily to show what the presenter wants to show.

But, I don't know that Redfin really wants to run those numbers... 

Continuing the series...

In this episode, we are going to look at seller offered commission to the buyer's agent.  At the Redfin Corporate Blog, there was a recent post titled Typical is Boring, but When Selling a Home, Effective.  

In the post, they compared days on market and list price/selling price ratios for properties that were shown with buyer's agent commissions above, at and below 3%.  The findings were this:

Homes offering a commission higher than 3% actually had a lower sale-to-list price than homes offering a 3% commission, by about 0.82%, or the equivalent of $4,095 on a $500,000 home. We had hypothesized that a higher commission would correlate to a better result for the seller. In contrast, homes offering a commission below 3% did get a better result for the seller: they had a higher sale-to-list price, by 0.54% or the equivalent of $2,719 on a $500,000 home.

The real difference between these groups was in days on market: homes that offered a 3% commission took 68 days to sell, while homes that offered a lower commission took about 30% longer, and homes that offered a higher commission took almost twice as long.

According to our data, setting a higher commission to get better results doesn’t work. It’s best to be typical, with respect to commissions.

I commented on their blog...  

There is one major problem with their data.  They only looked at closed sales, and not at expired or withdrawn listings.  The reason this is a problem is this...  We don't know how effective the commission levels were at selling the property.  We know that properties sold, but we don't know what percentage of properties sold with each type of arrangement.  

Now, let me clue you in from the perspective of a real estate agent.  I have worked primarily with buyers, and so this is right in my expertise.  When I see a higher commission level for a property, I immediately wonder what the problem is.  That's right.  It is a red flag.  Is the price too high?  Are there issues with the property?  Bad location?  Inspection problems?  Ugly?  When I see a lower commission, I wonder who I will be working with.  Now, keep in mind I have no problem selling a property with a lower commission rate... I talk it over with the buyer.  But, my experience has been that both the sellers and the agent are more difficult to work with.  Flat out, they want to fight over every penny.  If there is a big problem with inspection... they don't want to do anything about it.  They often want all issues resolved in their favor.  Simply put, if there is an opportunity to screw a buyer, they seem more likely to take it.  (**please keep in mind that I KNOW this is not always true, but it is what I often see**).  So, I don't look forward to working with those agents.  

But, let's put all of that aside.  From my observational research, I see more expired properties with lower commissions offered to buyer's agents.  I can't give research data, because I don't have time to spend doing research like that.  And, I see more properties expire that offer a higher commission.  

Apparently I'm not the only agent out there that sees a red flag with a high commission... 

Instead of offering that money to a buyer's agent, spend it to make the property look better through staging or minor renovation (paint and landscape would be my suggestions).