The Mortgage Reports

A client of mine with a pending purchase is selling his home and openly expressed his disdain for real estate agents, specifically his real estate agent .

Citing Chapter 2 of the book Freakonomics, my client believes that the real estate agent is not incented to fight for the highest sale price possible on his current home.  He received an offer for his home yesterday and he is questioning that his real estate agent recommends he agree to the buyer's bid.

After two or three back-and-forth negotiations, buyer and seller are about $7,000 apart on a $500,000 sale.

Should he or shouldn't he accept the bid isn't the issue here.  The question that keeps popping in my head is: "Does the Freakonomics Theory apply in a down market?"

For the indoctrinated, The Freakonomics Theory states that the $7,000 spread between buyer and seller means a lot more to the seller than it does to the real estate agents involved in the transaction. 

Because to the selling agent, an extra $7,000 in sales price represents about $175 in commission, the selling real estate agent has no reason to fight for the extra $7,000 for their client. 

This is what my client is silently accusing his real estate agent of trying to do.

Whether Freakonomics is right or wrong about Human Nature, I'd like to put this all in context of the current market conditions in Chicago, and elsewhere.

A casual stroll down any street in America will show an abundance of For Sale signs.  Because there are plenty of homes for sale, there is a downward price pressure on all homes and their sales prices.

This is Supply and Demand at its finest.  Assuming demand for homes has not changed, there are a lot more homes from which to choose.  A buyer can choose from any number of homes that meet their criteria and the media is pounding into their brains that "more choice" should equal "lower price".

So, let's bring Freakonomics back into play. 

In a flat or downward market, a real estate agent's incentive changes dramatically.  It is no longer about the extra $175 commission on a $500,000 sale -- it's about the $12,500 commission on selling the house at all! 

Real estate agents know that their commission is zero dollars and zero cents if the home doesn't sell. 

Any this is why Chapter 2 is irrelevant to my client -- he has much more to lose in a flat or declining market than does the real estate agent.  Take the figures above and reverse them.

The longer a home sits on the market and the more the original listing price is lowered, the less money that the seller will net in the end.  Once again, the difference is more palpable for the seller than the real estate agent .

For example, a home listed at $500,000 can't find buyers and instead sells at $485,000, the seller has "lost" $15,000 versus $375 for each real estate agent. 

Current market supply outweighs demand and I have two very real concerns for my client because of it:

1. If he doesn't reach agreement with the current bidders, how much more supply will enter the market before their home is sold?  As more homes are for sale, he'll have to lower his sales price just to compete.
2. If he doesn't reach agreement with the current bidders, how much negotiation leverage will he lose as his Time on Market grows?

In both scenarios, common sense tells all of us that my client will net less money in the long run if they don't reach agreement today.

I understand why my client is angry.  He thinks that his stake in the agreement is much larger than his real estate agent's stake.  His home has been listed for 106 days and he wants to squeeze out every dollar that he can (and rightfully so).

The real estate agent , on the other hand, is likely nervous that the client's proposed sales price will drive away the buyer and the home will sit on the market for another 106 days.

Real estate agent friends of mine tell me all of the time -- the first offer is usually the best one.  When a buyer wants to buy your home, find a way to make it work because you never know when the next buyer will come along.

In a down market, this is especially true. 

According to Freakonomics Theory, the real estate agent is telling my client to accept the buyer's bid so that their commission will be paid.  But, given the abundance of supply on the market, the real estate agent's push may actually net more in the long run for the client, too.

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Dan Green is an active loan officer. Reach Dan via email at or call toll-free to 877-DAN-GREEN.