Real Estate Incentives

The incentives for a Realtor to sell your home are many. There’s the smile on your face when they sell your home. It’s so sincere. And then there’s the moment of tension at any closing where some thing doesn’t go the way of the seller. Those are also sincere, but not as much fun. There’s the sticking of the SOLD sign in your front lawn- except that I don’t do that because I think it’s cheesy- but even so. And then there’s the real motivation, and this is going to come as a complete and utter shock: Realtors sell homes to make paychecks.

Horrifying, I know. But in the same way that your roofer doesn’t spend hot hours in the sun because he’s looking for a tan, and in the way that your attorney doesn’t write your trust documents because he enjoys the creative writing exercise, Realtors do not sell homes because they necessarily enjoy having buyers and sellers blow up their phone all day, every day. They sell real estate to make money. This shouldn’t be such a taboo subject, but taboo it is.

This incentive is what causes a potential conflict of interest. It’s this motivation that causes sellers to distrust their brokers when they tell them to accept a price that appears to be too low. It’s the same motivation that causes buyers to balk at a final push to match a number. The parties in the transaction know the broker is in business to, gasp, make money. If this desire to make money clouds the vision of a broker, this is horribly unfortunate. This is why it’s best to not work with a broker who sells very few homes. Few sales means lean times and lean times means potential contradictions in the pursuit of value and/or paychecks. This aspect is also taboo, but as true as the day is long. And this day is going to be very long.

The shame of real estate transactions is that buyers and sellers rarely trust their brokers as they should. That isn’t to imply that every broker and agent is worthy of implicit trust, but it is to say that once you have a proven track record with a broker and you trust their insight, you should adhere to that advice. It should be easy to understand that the words of someone who sells many homes a year carry more weight than the words of your neighbor’s son in law who says that your price is too low, or too high. Yet, it rarely is. If my mechanic tells me that my engine is going to blow up in the next 100 miles unless I pay him $1500 to fix this brewing catastrophe, I would be right to question his judgement. But do I know better than him? Nope. Do I wonder what his motivation is? Yes. Do I want to embrace the risk of my engine blowing up very soon just because I don’t quite trust him? Not exactly.

Real estate is the same way, except that the $1500 engine fix is downright cheap compared to the amounts of money that are made and lost in real estate. I remember sellers from years ago. They were so confident. Some were sitting on homes that might have been worth $300k in 1999 and were then, in 2006, worth $1MM. These sellers weren’t interested in selling at the 300% gain, as it wasn’t enough. How foolish of me to suggest that it was! Those same sellers, in many cases, are now able to sell in the $700k range, which isn’t bad. But it isn’t great compared to the fabulous riches that were once theirs.

Those sellers didn’t listen then, just as some sellers haven’t been listening all that much in recent years, and it all comes down to trust. If a hypothetical seller wants $10MM for their property, I’d love to work with them. I’d then tell them that a huge win for their property would be $5MM. They’d tell me to get lost. And then I’d bring them a cash offer for $5MM and they’d tell me to get lost again. What they don’t know is that their property is really only worth $4MM, and a $5MM offer far exceeds their actual value. I tell them this. They don’t trust me. Why not? Because they’re thinking about that dirty paycheck that I’m hoping to earn. Ignoring wise counsel is a bad idea and a costly one at that.

Buyers do it too. If a property can be bought for $1.1MM and I recommend it as a screaming deal, there isn’t any doubt that I’m telling anything but the absolute truth. But buyers have been taught to be fearful of magnetic-car-door-logo-loving-Realtors, and to some extent this is a wise weariness. But it is only wise behavior if you have reason to doubt the agent and their track record of identifying value. This is why you must find out what sort of properties your particular agent has been busy selling, assuming they have been selling at least something. If they have been selling what it is that you’re buying, and they have a long tenured history of doing just that, perhaps to extend a little trust their way is a wise move.

I’m speaking in vagueries on purpose. What I mean to say specifically is that my own personal motivation to help a seller sell and a buyer buy is to make certain that they secure the best deal they can. For buyers that means a terrific price. For sellers it means the same. Paychecks are nice and necessary but they do not factor into the age old pursuit of lasting value.