The Insider’s Guide to Real Estate / Pricing Concepts / Brokers Lead Owners To Lower Prices

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Misaligned incentives create low prices for home sellers

Don't fall for the "multiple offers" hustle

Brokers and agents talk home sellers down on price prior to listing and the research behind the Stanford Study measures the magnitude of that downward guidance and impact on the net proceeds. Sellers who get confused and underprice as a result, risk losing missing out on 6 to 8% of their home value.

The ‘Stanford Study’ was published in 2008 by Bernheim & Meer titled “Do real estate brokers add value when listing services are unbundled?” The focus of the Stanford Study is “to measure the effects of real estate brokerage services provided to sellers, other than MLS listings, on the terms and timing of home sales.” In other words, what do brokers do of value, outside of the critical function of listing your home in the multiple listing service?

Well, it turns out brokers do something, but it’s not all good for net proceeds, and this time, it has nothing to do with commissions.

This research on the topic was made possible by a peculiar group of 750 homes in Palo Alto California that are part of the Stanford University campus. These homes are restricted to ownership by affiliated staff and faculty at the University and because of the limited pool of buyers, cannot be advertised in the local MLS. Instead, the homes were listed and sold in a “single open-access listing service” that functioned as a small private MLS at Stanford. Homes were bought and sold this way for decades until the mid 90’s when spiraling home prices lead local brokers to take notice.

Increasingly Stanford owners started to work with brokers to handle their home sale, and while brokers could not list the homes in the local MLS, they did market the homes in the open-access listing service. By 2005 nearly 60% of the homes had brokers involved on the listing side of the deal. But in 2006, the use of brokers ground to a halt.

Things dried up for brokers at Stanford immediately after an early draft of the Stanford Study circulated amongst owners. The research found that owners using brokers got lower prices, by as much as 5.9 to 7.7% less than owners who did not use brokers. The fact that brokers prefer a full commission today versus an uncertain slightly higher commission in the future is a well-documented fact in the research literature, and when brokers sell their own homes, they do it differently because they are concerned with net proceeds, not commissions. Brokers benefit from quicker sales on client homes because it allows them to skip work on pricing, reduces the amount of time on market, and eliminates delays or complications with getting their commissions. And while a price difference of 6 to 8% is a massive amount of money to a home seller, it’s barely a meager tip when applied to the commission. Not surprisingly, the Stanford study also found that brokered homes sell about 19 percent faster than homes without brokers, which is a symptom of the rush around multiple offers.

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So when it comes to pricing one of the most considerable assets you own, you can’t afford to let someone else do it for you, especially if you want to maximize your net proceeds. Make sure you spend some time looking at your home price directly yourself.

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