Enlightened Capitalism

Essays about how to harness people's natural desire to create wealth and improve their quality of life to solve global problems such as war and poverty.

Monday, August 29, 2005

Competing Buyers Protect Sellers

In any financial transaction, the party with more information has an advantage.

Say I am selling you my house, and I know about the midnight airport noise but you don't.

Sellers often have this advantage regarding problems with the property, since they have had more time to discover them. Disclosure laws, which force the seller to answer certain questions about the property, attempt to remedy this inequity, protecting the buyer.

But who protects the seller from getting ripped off? The answer is competing buyers.

Some real estate agents do protect their sellers. But unless you know real estate better than your agent, you will never know whether your agent is cheating you. It is too easy for them, and, under the current laws and industry practices, totally commonplace and acceptable (read "Freakonomics" by Stephen Levitt, in which he proves that real estate agents pervasively and systematically cheat sellers). What's worse, the agent listing your house often doesn't even know he is cheating you. It takes a fair understanding of economics and/or game theory to make sense of the situation, and few agents ever studied any of that.

The bottom line is that unless you are a savvy investor and can figure out for yourself what your house is really worth (in which case you are on a level the playing field with your listing agent), your only hope is to advertise your house to as many potential buyers as possible and have them bid against each other. This is relatively easy to do in active markets. Here's how.

1) List your property on the MLS with a discount service like "Help-U-Sell" Realty, which charges a flat rate of something like $200-500. Or call dozens of "full-service" agents until you find one that will sell your property for the lesser of 2% or $5000 (with the same amount for the buyer's agent). In my experience, about one in eight agents will do this, though the other seven will swear that the eighth doesn't exist. You can save several thousand dollars by calling around for an hour, so unless you are a rock star, it is totally worth your time.

2) If you sign a listing agreement, make sure it expires in less days than the Average Time On Market (ATOM) for your property type in your area. Friendly real estate agents will tell you the ATOM over the phone for free. If they refuse, call someone else. You don't want to work with someone who keeps information from you, or makes it difficult to get all the facts. It's already difficult enough. If the market is hot, agents tend to be flexible, but still half of them will say "no" to any modifications of their listing agreement. You must be firm. Call someone else, who says "yes". Do NOT sign a listing agreement for longer than the ATOM, and do make it clear that if the agent doesn't sell the house in that time, you are going to take it off the market and not relist it with them.

Do NOT list your property with anyone you already know. The moment you think of your sister-in-law the agent and feel a little guilty or generous, go online to your ftd florist and send her flowers, the huge deluxe $200 ones with a vase and a "thinking of you" note. Or send your agent college buddy or neighbor a check for $200 with the note, "Thanks for not listing my house." You will be glad you did.

[The only exception to this is if your neighbor the agent completely owns your neighborhood and continually lists and sells dozens of houses there. In that case they might be the best choice, but still, only if they agree to your terms.]

2) At the same time as listing on the MLS, advertise your property in craigslist.org, other online sites that allow you to post for free, and in the local newspaper or a circular that carries dozens of homes-for-sale-by-owner ads in your city. Pay the $70 or whatever it is, for a descriptive ad. You stand to gain many thousands by attracting the right eyeballs.

3) Price your property high. If your listing agent says it's priced too high, call around to other agents and ask them what they would list it for. Pick the highest one and add some on top of that.

4) If you get more than 1 offer in the first week, you probably priced it too low. If you like the offers anyway and just want to get it over with, counter back to all of them saying there are multiple offers and they have one more chance to give their highest and best offer.

5) If you get lots of interest but no offers in the first week, then wait another couple weeks, up to about half the ATOM.

6) If there are no offers by half the ATOM, and you advertised it aggressively as advised above, congratulations, you really did price it high! Note that you can never know what the market will bear unless you price it too high and they say no. This gives you valuable information. If you still want to sell, drop the price, but not below what you think it is really worth, based on what similar properties are listed for in your area. Put "REDUCED--Priced to Sell!!!" in the ads.

Note that Appraisers like to use only "sold" properties as the basis for comparison -- they don't trust "available" listings. Buyers, however, who are the ultimate decision makers, care much more about other available properties than already sold ones.

7) If it doesn't sell by the ATOM, take it off the market, cancel the listing, and relist it with another agent, which you find in the same way as you found this one. Repeat this process.

Patience tends to pay off handsomely, especially when the market is rising. If you are desperate to sell, or the market is falling, follow the same procedure, except cut all the timeframes in half and lower the prices a little.


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