Freakonomics got real estate wrong...

In the book, Freakonomics, the authors, Steven D. Levitt and Stephen J. Dubner, claim to be experts on hidden incentives that drive human behavior. In the introduction to the book and in Chapter 2, they refer to real estate agents, and they have made some major oversights.

Levitt and Dubner cite a study that was done in the Chicago area that supposedly showed that real estate agents sell their own personal homes slower and for more money than their listings of clients' homes.

After reading the complete study (which is not in the book), I found that there are flaws in their methodology and conclusions.

Levitt and Dubner claim that because the incremental difference in the commission amount is so small, the agents advise their clients to accept offers for an average of $10,000 less than on their own homes.

One flawed assumption they make is that all real estate agents are on 50/50 splits with their companies. This is ludacrous. In the real world, the great majority of real estate agents receive much greater splits, and many receive 100% of the commissions. For experts on incentives, the authors entirely miss the point that 100% agents have a huge vested interest in their clients' getting top dollar and being satisfied with the service and representation they get from their real estate agent. In fact, their study specifically excludes 100% agents, who happen to be the most productive and experienced in the business.

Oh, and by the way, it is not the decision of the real estate agent to accept the offers brought to the sellers. It is sellers who decide to accept or reject offers on their properties.

In addition, most real estate agents would prefer to receive their compensation on the sale of their own house as a capital gain instead of ordinary income. As a result, prices of homes can be adjusted for the commission to be waived, but built into the selling price to accomplish this tax maneuver. The study shows that on average, real estate agents' homes sell for $10,000 more than their clients'. Taxes on $10,000 ordinary income could easily be $4000 for the agent, where taxes would be $1500 on the capital gain.

How could the "incentive experts" miss this one?

Exit signs need to go to radioactive dumps.

I got a real charge out of this article in BusinessWeek magazine! One of my competitors has based its marketing program on exit signs...Now we find out that exit signs are toxic trash.

Evidently, most of them contain tritium, a radioactive isotope of hydrogen, and the old ones get discarded into landfills where the tritium, a known carcinogen, percolates into the area's drinking water.

It is now required that exit signs must be taken by licensed haulers to special radioactive dumps.

Response from USA Today reporter, Noelle Knox

I received an email back from the USA Today National Real Estate Reporter, Noelle Knox. She had a couple of points that I need to address: She claims that some MLS systems were/are/can be exclusionary and that is why the FTC and DOJ have started legal actions. My response to that is: Even though there may be some rogue MLS operations excluding members based on their business models, the great majority of MLS systems are open to any members regardless of the way they do their business. I would hope that the Department of Justice would not broad-stroke the entire concept of MLS because of a few bad seeds.

She went on to say that she believes or has heard that much time has been saved on chauffering clients around from house to house, and clients now narrow down their choices because of the Internet. This is true, but my point is that these are not major costs in real estate transactions. She did agree with me that buyers and sellers have, in general, not been willing to take full responsibility for themselves when mistakes or changes of mind occur in the transaction. This is what really impacts the costs of a real estate transaction.

Noelle then agreed that she would never advise anyone to buy a home 100% over the internet as the subjects of her article did.

USA Today Article - "Home shoppers do their hunting online"

On Friday, February 9th, the Money section of USA Today ran a story by Noelle Knox regarding how the internet has changed how people buy and sell real estate. It featured a couple who had purchased a home over the internet without ever seeing the home or even visiting the city where it is. Below are the headings of my response. For the full version of my reply scroll down.

• The MLS system is NOT exclusionary.


• The abundance of real estate information on the internet does NOT reduce the true costs of a real estate transaction.


• Buying real estate on the Internet is NOT like buying books, airline tickets, stocks or computers online.

Dear Ms. Knox,

I enjoyed your article (“Home shoppers do their hunting online” Feb. 9, 2007) today about the couple that bought their home sight-unseen over the Internet. I believe that they are the exception to the rule and will continue to be. Here are a few points regarding the real estate industry that seem to get overlooked when discussing this topic.


· The MLS system is NOT exclusionary.

The MLS system is open to everyone who pays the fees and plays by the rules, just like the New York Stock Exchange. The MLS was created in the 1950s to bring order to a chaotic market where buyers had to call or visit every single real estate office in the area to find out what was for sale. The MLS motivates Realtors to publicize their sellers’ properties to the world because they know they will get paid if the transaction is successful. This benefits buyers by creating an orderly marketplace where they can view everything for sale.

· The abundance of real estate information on the Internet does NOT reduce the true costs of a real estate transaction.

The truth is that real estate commissions will never be lower unless the most of the customers want to do most of the processes of the transaction themselves (research tells us that they don’t), real estate offices and personnel are not needed (research and experience of new models say they are), and most importantly, buyers and sellers of real estate take full responsibility for their own non-disclosures, mistakes, forgetfulness and changes of mind. In my 30 years of experience, it is this last point that creates the largest costs of real estate transactions.

· Buying real estate on the Internet is NOT like buying books, airline tickets, stocks or computers online.

Those items are commodities: a plane ticket from Dallas to San Francisco on American Airlines is virtually the same as one on US Airways. One hundred shares of Oracle stock is the same whether it is purchased through Etrade or Morgan Stanley. However, a resale 3 bedroom, 2 bath house with a fireplace is not a commodity. One is usually significantly different from the other – even if they are in the same subdivision by the same builder. Also, if something breaks on the Dell computer you bought online, it is pretty easy to return it and get it fixed. Try that with the house you bought over the Internet. You might then discover why the good real estate professionals get paid what they do.