This is Part I because I have a feeling that I am going to be writing about this topic for a long time.
Having spent a lot of time in past lives analyzing data to make business decisions I know how people often mistakenly use data or intentionally use them to misrepresent the facts. The real estate industry is ripe with examples of statistics used inappropriately and, frankly, I can’t tell if it’s just incompetence or maliciousness. Let me give you a few great examples.
Example 1
My favorite is the real estate industry’s often trumpeted “Research shows that in 2006, sellers who worked with a real estate professional sold their homes for an average of 32 percent more than homes that sold directly by their owners.” That particular quote is from the March 2008 issue of Realtor Magazine but I’ve seen variations of this quote all over the place. We’re encouraged to use it to convince sellers to use a real estate agent to sell their home. I guess they expect the cowering seller to immediately sign up for a 6 or maybe even 7% commission, which is a small price to pay for realizing a 32% higher sales price.
Excuse me? How stupid do they think we are? I don’t doubt for a minute that the statement and underlying statistics are 100% correct. And I also don’t doubt that a really good agent can get a higher price for a home than a seller can on their own. But 32%? Come on! As a REALTOR® I would be embarassed to tell a seller this.
So what’s really going on here? I think it’s pretty simple. People with more expensive homes are more likely to use a real estate agent to sell their home. This could be for any number of reasons:
- They have higher incomes and can afford to pay a commission
- The volume of home sales in their price bracket is lower so it’s a little bit harder to sell their home
- They tend to be older with larger families and have less time to spend selling a home themselves
- More expensive homes offer more fertile prospecting for real estate agents so they’re all over these owners
I think we’ve beaten this one to death.
Example 2
“Our brokerage’s sales volume is up X% over last year while all of our competitors have shown sales declines”. Again, this is intended to wow the unsuspecting buyer or seller into signing with that particular brokerage firm.
Well, I’m sure the data is correct but the implied conclusion is wrong. There are two problems with this statement:
- The number 1 way for a broker to grow is by recruiting agents from their competitors, so odds are that this is exactly what happened. I happen to know for a fact that the fastest growing broker in Chicago right now is growing exactly in this manner and is using the resulting data to try to market themselves.
- The implication is that when you sign with an agent you are somehow also benefiting from all the success of that brokerage. While that would be true of a firm that actually employs their agents, like ours, it makes no sense at all for a firm that uses independent contractors.
This issue of how brokers grow and the drawbacks of the independent contractor model are covered in more detail in our real estate industry white paper if you are interested.
This misuse of the data is endemic to the real estate industry. If it weren’t so pathetic it would actually be funny but at least it provides plenty of fodder for future blog posts.