I see it all the time and it often leaves me scratching my head. Two similar properties sell for significantly different amounts of money. Or maybe the homes are in fact different but the price differences seem disproportionate to the differences in the properties. On the surface it looks like somebody got a really good or a really bad deal. How exactly do you explain the variations that sometimes exist in Chicago home prices?
There are only 4 possible explanations:
- One of the listing agents did a much better job than the other agent
- One of the buyers’ agents did a much better job than the other agent
- There is considerable random variation in what properties sell for depending on who the sellers is, what buyers are in the market, and what the homes are competing against
- There is some difference between the properties that we are not privy to
Considering the huge variation in the quality of real estate agents in the business it is indeed possible that a listing agent or a buyer’s agent does an extraordinarily good or bad job and that results in a sales price out of the ordinary in one direction or the other. Since it’s much easier to articulate what a real estate agent can do wrong let’s look at some of those examples. The real list is actually infinite but here is what quickly comes to mind.
A listing agent can end up selling a property too cheaply by:
- Underpricing a property
- Using amateur photos
- Being unresponsive to showing requests
- Putting the property on a lockbox
- Failing to highlight the property features
- Tipping the seller’s hand during negotiations
- Letting potential deals fall apart because they aren’t creative enough
A buyer’s agent can end up overpaying for a property by:
- Overvaluing the property
- Overselling a property to the buyers
- Failing to make their buyers aware of credible alternatives on the market
- Tipping the buyer’s hand during negotiations
Yes, any and all of those things can happen but there are a few checks and balances in place that often mitigate the damage. For instance, it’s not enough that the real estate agent screws up for there to be a price discrepancy. Their client also has to screw up, the appraiser has to screw up (on the buy side), and (on the sell side) all the other buyers in the market have to screw up by letting the property sell too cheaply. So, while I do believe that real estate agent performance can make a difference, I’m not sure that explains all the differences we see in the market. For instance, I wrote a post about 3 weeks ago on Real Estate Negotiation Myths and Reality when selling a home in which I made the point that, while real estate agents can make a difference in negotiations, their influence is far less than imagined by buyers and sellers.
The factor that I think is most under-appreciated in the real estate industry is the impact of random variation: what buyers are in the market at a given point in time, what are they looking for, what else is on the market, and what is the mentality of the seller. The very nature of the real estate market is that every buyer and seller have different motivations so it should be no surprise that if you put different buyers and sellers together in different environments you are going to get different results. However, a stochastic process does not fit the narrative of real estate agents and their clients that both like to pretend that the right real estate agent is going to get a significantly better result for their clients. In fact, many real estate agents brazenly and falsely advertise about their “results”.
With regard to the last possible explanation, unless we have personally seen all the properties we are comparing we are never going to know for sure if there is some material difference that accounts for a price difference. So we are always going to be left wondering about that.
Here is one example I recently ran across of an odd price variation in University Commons.
Gary Lucido is the President of Lucid Realty, the Chicago area’s full service discount real estate brokerage. If you want to keep up to date on the Chicago real estate market, get an insider’s view of the seamy underbelly of the real estate industry, or you just think he’s the next Kurt Vonnegut you can Subscribe to Getting Real by Email using the form below. Please be sure to verify your email address when you receive the verification notice.