For Realtors who don’t look past the end of their noses, the Freakonomists just might be right

October 17, 2006

As I continue to dissect Mark Nadel’s tome, he reiterates a favorite point of the Freakonomists: the current commission-based fee structure makes Realtors do things that might not be in their clients’ best interest.big-nose-dude.jpg

An example of this mis-alignment of interests is that while a homeowner would certainly love his Realtor to spend an extra 20 hours to get an extra $10,000 for his home, a Realtor’s not likely to do so because the extra income from those 20 hours is paltry — $10.50/hr by Nadel’s calculations. (Nadel may need to check his math on this one; using his same assumptions, I get $4.50 an hour. Either way, the Realtor might as well be flipping burgers.)

For those Realtors who don’t look past the end of their noses and regard each transaction as simply a one-off deal, this is indeed a pretty damning indictment.

Successful agents, however, know that a solid business is built on long-term relationships with satisfied clients. If a past client indeed thought his Realtor had left $10,000 on the table, that would be the end of that relationship. No more future deals, and no more future referrals.

For agents who think long-term, however, the math goes something like this:

20 extra hours of work =
75% greater chance of doing another transaction with that same client in 5 years
+
75% greater chance of getting 1 referral a year for the next 10 years from that client.

No matter how you slice that one, that’s a lot of money the Realtor is leaving on the table by being shortsighted.
Ultimately it comes down to this…there are two kinds of incentives: short-term and long-term. If you emphasize the short-term ones, then, yes, a Realtor will look after himself every time. If you think long-term, however, a Realtor’s best interest will indeed be the same as the client’s.

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Written by Kevin · Filed Under Disintermediation, For sellers, Freakonomics, Mark Nadel, Real estate 

Comments

2 Responses to “For Realtors who don’t look past the end of their noses, the Freakonomists just might be right”

  1. Contra Freakonmetrics: The Big Picture in real estate negotiations . . . | BloodhoundBlog | The weblog of BloodhoundRealty.com in Phoenix, Arizona on October 17th, 2006 5:18 pm

    [...] Taking on Mark Nadel’s white paper on real estate commissions, Kevin Boer at Three Oceans Real Estate points out that there is more at stake than any one particular negotiation: Successful agents, however, know that a solid business is built on long-term relationships with satisfied clients.  If a past client indeed thought his Realtor had left $10,000 on the table, that would be the end of that relationship.  No more future deals, and no more future referrals. [...]

  2. Good Agents Think Long Term at livium-the blog on October 17th, 2006 8:39 pm

    [...] Kevin Boer at Three Oceans Real Estate makes a simple observation about real estate commissions as incentives that is often overlooked… [...]

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