The main idea behind hiring a broker or agent is that they know more than you do about selling homes. Except with sky-high commissions on the line and infrequent sales for owners, it can be hard to tell if all that expert information is used to your advantage or theirs. And if you catch real estate professionals in the act with their hand in the cookie jar, how would you even identify the heist?
One research study did just that when it looked at what happened when real estate agents sold 3,300 of their own homes and then compared the outcome of the sales with how it went for 97,000 of their clients. What Steven D. Levitt and Chad Syverson found in the paper Market Distortions When Agents Are Better Informed: The Value of Information In Real Estate was that when agents sell their own homes, they “sell for about 3.7% more than other houses and stay on the market about 9.5 days longer.” The research extends prior work that showed when it comes to a clients home, agents talk owners down on price because it benefits them.
In a similar earlier study, Rutherford, Springer and Yavas also found that agents sold their own homes at a 4.5% premium compared to their customers. Which adds up to $20K on a $500,000 home!
Lower prices for owners benefit brokers and agents in many well-documented ways. Firstly pricing is challenging to get correct and consumes much time, even for experienced brokers and agents. When the pros price their own homes, they do the time-intensive work and try to design a price that will barely stick to the wall with just one of the many buyers out there. In contrast, owners get convinced by those same agents that getting multiple offers are a good idea and that it is better to have buyers competing in a hurry for the home to bid up the price. Note that multiple offers do not signify a ‘hot market,’ rather that agents find it far easier to get owners to underprice when prices are rising quickly, and uncertainty around values amongst owners is higher.
Underpriced hot homes sell quickly within a week, often involving an offer review date to limit seller risk, and these listings do not stay on the market very long. This shorter time on the market reduces the amount of work and also makes it guaranteed that an agent will get paid a commission from the work. But when agents sell their own home, they skip the rushed fire drill and let the home stay on the market longer, which requires more work and then yields higher prices.
If you want to review more of the evidence base on underpricing, also check out The Stanford Study which showed that broker underpricing could cost homeowners even more, up to 5.9 to 7.7% of the value of the home. Working with any broker is a necessity if an owner wants to get access to the MLS, which they do since that is where the buyers are. Just be sure to recognize that it pays to do the pricing work yourself so you don’t get guided to a suboptimal outcome on price when it comes to listing because it will have a negative impact on your net proceeds at the end of the sale.