Have you ever read an article with advice about how to compare realtors, or how you can know if an agent is good or bad? I’ve done several web searches on the topic and frankly, I feel like I’m being talked to like a toddler by the agents who write the articles! They go something like this: “Agent should be reputable, experienced, and professional… Agent should communicate, listen and follow-up well… Agent should know how to prep your home for sale and be great at marketing it.” Or they vaguely talk about the importance of working with a “top” agent/broker/realtor/team. There are exceptions, but few give hard numbers exactly what that means. Or they focus on red herrings like how long the firm has been around or how high its volumes are. In reality, the oldest firm might be the worst, and high volume only matters if the volume is quality. After all, it’s easy to move a lot of homes quickly if they are being priced too low!
Unless you’ve bought and sold hundreds of homes in your life, you probably have a poor ability to benchmark these qualitative indicators real estate agents marketing exclusively to the under- experienced often say to prioritize. Obviously, things like communication skills are important, but they aren’t the same thing as executing well on the job. Execution must be measured in more quantitative terms. In fact, a reputable realtor who is an exceptional communicator and connects with you emotionally can be a poor executor! A realtor who stages the home, spends a couple minutes to list it on the local MLS (Multiple Listing Service), and puts a sign in the yard has not made any notable marketing accomplishments. These are among the many commodities of the service.
Just because a real estate broker made you feel good while completing the job doesn’t mean he/she actually did a good job.
So you bought your home and you felt good about it. But was the real estate broker above average? Below average? Focusing exclusively on these “soft” indicators can distract you from looking at the “hard” indicators. If you are like me, you don’t just want to feel like it was good, you want evidence — you want to know. How do I know my agent is a better-than-average negotiator or marketer if I’ve not bought thousands of homes? I don’t, without hard data. Of course, I’m an investment advisor, a numbers guy. If you are tired of the fluff and want to know how to judge the job an agent is doing, you are in the right place!
How should we talk about performance for real estate? In investment management, we use benchmarks, standards against which performance can be measured. Finding the proper benchmark is critical to setting reasonable expectations in investment management as well as in real estate investment. In stock market investing, for example, the first benchmark people typically hear about is usually the Dow 30 or S&P 500. The Dow 30 is a poor benchmark for almost everyone, but that’s a different topic. The S&P 500 is an appropriate benchmark for some people but is an absurd benchmark for most people, yet advisors often depend on it just because most people have heard of it. It’s not a proper benchmark for most people because the risk of investing in the benchmark changes over time, usually faster than an investor’s risk tolerance. So only investors willing to take the same risk as the S&P 500 at all times (read: continuously change their risk tolerance), regardless of whether the risk is very high or very low, should be benchmarking their performance against the S&P 500! With this in mind, I’ll propose some benchmarks for realtors.
Sure, working with a “top-selling real estate agent” may make sense when prices are going down, inventories are going up and houses are staying on the market longer, but when the opposite is true and especially if you are in a hot neighborhood, why pay a realtor so much? Before directly tackling that question, let’s explore the main factors that make a realtor’s job more or less difficult.
If you were trying to unload a $400,000 home during the great recession, your selling agent had a lot of things working against her. Prices were trending down, inventories were high and trending higher, homes were staying on the market longer, and fewer people could even qualify as buyers. It was what is commonly referred to as a “buyer’s market,” because all the advantages were with the buyer of a home. With that in mind, if you were selling your home, you’d want your home to look more attractive than other comparable homes, and thus you’d want to incentivize your agent to work harder to get your home sold faster than its competitors. After all, time is money! In this situation, it might be wise to offer your broker an even higher commission than average if she can “beat the market.”
Right now, the opposite scenario is true in most of North Texas. It’s a “seller’s market,” meaning all the advantages are held by the seller. In a seller’s market, a seller’s agent’s job is a lot easier! Should you pay your real estate agent the same rate you would pay them if it was a buyer’s market? After all, if the market is taking care of the hard work for you, your real estate agent isn’t selling your house so much as facilitating the sale. But if the market isn’t doing you in favors, pay up for a broker who is willing to hustle and demonstrate results!
As a seller, how do you know if your agent is doing an above-average job?
How do I know if your agent is beating the market?
Price of comparable homes on the market that have sold recently and are currently for sale. Before a real estate broker advises you on asking price, she will “run the comps,” meaning she will look at similar homes that have recently sold as well as homes that are currently on the market as a baseline for your home. The price per square foot of the comps is often the single biggest determinant for what your realtor will recommend you sell your home for. If comparable homes are selling for an average of $2/square foot, that’s your benchmark. All other factors excluded, if your agent gets you $2.10/square foot, she beat the market! One word of caution though: every home is different. There are often features that make homes more or less enticing. For example, let’s say your home doesn’t have a pool. If a pool is considered a desirable feature, and most of the homes in the comps going for $2/square foot have pools, that benchmark may be less realistic, and you may need to adjust your expectations.
- If you want to go a little deeper into understanding price, ask to see the market’s average percentage of list-to-sales prices. This tells you something about the trajectory of prices since it considers not just the price homes are selling at, but looks at it in the light of what they were listed at. If the list price is $2.10/square foot and homes are selling for $2/square foot, that means homes are selling for 95.24% of their list price. That’s likely a sign that prices are going down or sellers have set their expectations far too high. This also gives your broker a chance to demonstrate value. It might be wise to list lower than $2.10, but listing for $2 is being a price taker and your broker may not be adding as much value if she just gets you what the market is currently accepting. Remember, the market’s ratio just tells you what the current benchmark is, so you’ll want to ask the agent’s ratio as well to see how they stack up. A seller’s agent with a ratio of 100% may not be so impressive if the market’s average is 105%, unless she can give you an explanation that is backed up with numbers about why her ratio is lower. What’s an example of a time when a lower ratio might be warranted? That brings us into why benchmark #2 is important.
- Note: If you are buying a home, you’ll treat this benchmark differently, meaning all other factors excluded, you want to see discounts instead of premiums!
Average days on the market for comps. If the broker is selling property significantly faster than average, a lower ratio could be not only warranted, but appreciated! For example, let’s say your real estate broker listed a house for $400,000 and sold it for $400,000 in 30 days for list-to-sales rate of 100%. The market average ratio is 102%, meaning comparable houses are selling for $408,000. Your agent is lagging behind the market, but is said lag significant? If the average days on the market for the comps is 120 days, your broker is selling the home in a fraction of the time! In this case, the lower ratio may be well worth it to many sellers, who would rather have their home sold 90 days faster than have a few thousand more in their pocket! Individual seller circumstances may vary, but to most sellers, this slightly lower average price to sales ratio adds value.
Another reason could be that sellers are simply pricing their homes slightly higher in anticipation of prices going up. For example, let’s say the market is pricing comparable homes at $400,000 and selling them at $408,000, for a 102% rate. If your broker priced comparable homes during that time period at $408,000 and sold them at $408,000, her rate is just 100%, yet the price is the same! Understanding these things helps you understand if your broker is successfully pricing aggressively, and allows you to decide is that’s a mentality to which you relate. This is also why I recommend using several benchmarks; no single one captures all the ways value is added. The first benchmark is essentially price, while the second is speed. You have to decide which is more important, given your circumstances. Revisiting the example, the comps are showing an average of 120 days on the market, so that’s your benchmark. If your seller moves your home in 30 days, she beat the benchmark easily! But if she’s lagging the benchmark for price and speed, that may be a red flag. Remember, however, this is a moving target. It’s no secret that houses typically sell faster during the spring than they do in the winter. Thus, if you list in February, you may naturally expect that things will speed up regardless of what your broker does. Likewise, if you are listing into the holiday season, your broker can’t control the fact that things are likely slowing down. The more recent the data, the better, but there is a seasonal component to this moving target.
The great confounding factor: inventory level of comps. When you hear the word “inventory” in the context of the real estate market, think competition. Competition may dramatically impact price and speed. The lower the comparable inventory (read: less competition), the easier your selling agent’s job. Likewise, the higher the inventory (read: more inventory), the harder their job. This is a tricky one because it impacts the two benchmarks I listed, and you want to make sure your expectations for your broker are fair. For example, let’s say the comps are $1.50/square foot with an average of 30 days on the market. That data might not be as important if the inventory has suddenly risen or fallen dramatically! If there is a lot more competition this month than there was last month, you may need to cut your broker some slack because making your home stand out in a crowded market will be much more difficult. However, if the inventory has dried up a lot since last month, you may be more justified in expecting your broker to beat the market on points 1 and/or 2!
Be fair to your realtor by considering her work in the context of the current marketplace.
My “great confounding factor” is essentially an understanding of the terms “buyer’s market” and “seller’s market.” The better things look for one, the worse they look for others. Inventory can be thought of as a proxy for demand. The lower the inventory, the better things look for sellers because buyers are now competing for their homes. The opposite is true for buyers — lots of inventory is good for them because sellers are competing for their business! Understanding this dynamic is the single most important factor in understanding and assessing your realtor’s performance.
What about professional real estate photos?
This is important — especially since most buyers do their homework online to determine what houses they want to see in person! Still, this shouldn’t be a big part of your realtor’s sales pitch to you. Professional photos should be a commodity, not a differentiator. Even video work is pretty standard these days. If they are doing some sort of elaborate video or staging work that is going to cost you more, there should be evidence it is effective in the numbers. Ask to see some of the realtor’s past or current listings to see if the photographs look good, and compare them to some other listings. Remember, anyone can call themselves a professional photographer, so you’ll want to see the photos to make sure!
Conflicts of Interest in the Real Estate Market
Obviously, your agent is supposed to be on your side at all times. Still, there is some conflict of interest of which you need to be aware. This is best illustrated by giving an example. My assumption is that you’ve listed the home for $420,000, which is right in line with what the market has been demanding, and you are expecting to pay the typical 6% total commission. The average home has been selling in 20 days. Ten days into your home being listed, you get your first offer for $400,000. Do you take the offer, or wait for a better offer? You decide to wait since you are still only halfway into the average time it is taking to sell a comparable home. By the time 10 more days have passed, you’ve gotten three more offers, the best being $410,000 from someone who says that maxes out their budget and it’s as high as they can go. You ask for your realtor’s advice, and this is where it gets confusing!
Your broker advises selling the house for $410,000 instead of holding out. The explanation your realtor gives could be perfectly logical and backed by facts! Maybe the market has softened and inventory has risen dramatically in the last 20 days. Maybe comparable homes are taking longer to sell, too. You’ll have to weigh out the response received, but as you do, you must be aware of the realtor’s unavoidable conflict of interest. Let’s run the numbers to illustrate what I mean by looking at the difference between selling for $410,000 and waiting to try to get $420,000.
If you sell the house at $410,000, the total commission is $24,600, $12,300 of which goes to your broker, and $12,300 of which goes to the buyer’s broker.
If you sell the house for $420,000, the numbers look much different! Now, your broker makes $12,600 — just $300 more than if she sold the house for $10,000 more! But what about you? If you get $10,000 more on the sales price, you pocket thousands more after paying each broker an additional $300! In other words, you have a lot more to lose settling for $410,000 than your broker does. How much does an extra $300 mean to her? In a hot market, probably not very much since she’s got many other homes to work on. In a cold market, probably not very much since a bird in the hand is worth two in the bush!
Does that mean the advice to take the $410,000 offer is bad? No, not at all! If you aren’t living in the house, every day your home doesn’t sell is costing you money. Maybe the realtor has a very good reason for recommending you take the offer. Further, certainty has value! So, be aware of the conflict of interest and look at the realtor’s advice in light of your situation to determine what you are willing to risk.
Your Role in Buying or Selling Your Real Estate
If you haven’t been honest with your realtor, you can’t judge her. If you really need to move the house in 30 days, don’t keep that hidden out of the fear that she’ll want to lower the price too soon. Just be honest and tell her you really need to move the house in 30 days, but you want to try to balance that with getting the best price you can. You can come up with a plan from there!
Wrapping It Up
These points I discuss act as levers that impact each other. You’ll need to judge your realtor based on your unique circumstances, in light of your circumstances and within the current market environment. For example, you know time is money. If you have already bought another home, you have double the bills until your current home sells. In that case, you may want to price your home a little more aggressively to give your broker an advantage in selling it faster. The same goes if inventories are growing dramatically or if the calendar is rolling over into a slower selling season. If you are in no hurry to move out, you might sacrifice speed for price. If your realtor prioritizes speed, you may notice that while they tend to beat the speed benchmark (average days on market), it may just be because they are pricing homes too aggressively, which could mean less money in your pocket! That mentality might be right up your alley, but if not, you may want to talk to someone else who performs better in the benchmark that means more to you.
In summary, it’s wise to rank your benchmarks in light of your personal priorities. You can rarely have it all. If you price your home far more than the comps, you are making it harder on your realtor and you need to acknowledge that. Going after an aggressively higher return on investment means you are taking some short-term risk in that your home might not sell as fast! Sounds a lot like investing in the stock market, doesn’t it? (Yes, but many times less complicated.) The more conservative your expectations, the more quickly you are likely to sell your home, though you lower your chances of getting a higher selling price.
Speaking of finding a realtor, I’ll cover that in my next piece in this series. I’ll also talk about what questions you should ask, and if/when and how you should negotiate fees.
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