It turns out that you can understand a lot about what happens in the real estate industry by just trying to answer one simple question: Why are real estate commissions so high? And the mythology around the real estate negotiation process is a perfect example because one of realtors’ chief value propositions is that with their superior knowledge and skill they are going to help you negotiate a better price for your home.
But what realtors peddle and the reality of what they do are two very different stories. The vast majority of realtors over-promise and under-deliver in the negotiation process. One of the reasons for this gap is that what they promise is often detached from reality and the other reason is that they just aren’t doing their job right. And then there are the inherent limitations of the process itself.
For the purpose of this post I’m going to focus on home selling since, in my experience, home sellers place a much greater emphasis on the perceived negotiation prowess of their realtor than home buyers do (BTW, behavioral economics predicts that). And just so you know I’ve drawn my conclusions here from hundreds of our observations of listing agent behavior when we have represented buyers. I’ll flip perspectives in a future blog post.
Real estate agents often inflate their negotiation prowess when trying to get a listing and the most successful agents are really good at playing into the fear of the home seller that their home won’t sell at a high enough price or fast enough. The story they like to sell is that they “are the neighborhood expert” or “know the building” and they have this network of agents that they have experience with and they know how to SELL the value of your home to the buyers and their agents who are going to succumb to their logic and information. Some agents will even make totally unsubstantiated claims that they sell homes for X% more than other agents. That is a very compelling story indeed and it would certainly justify a 6% commission if much of it were true – except it’s not.
The Showing
As far as I’m concerned the negotiation process starts at the first showing. That is the only time (unless there is a second showing) that the listing agent will have a shot at making their case directly to the buyer. They can point out all the features that make the property unique, size up the buyer so that they know who they are dealing with, ask questions, figure out what the buyer likes and dislikes and why, and maybe even determine what other properties they will be competing against in the buyer’s mind.
But guess what? In most parts of the country, including the Chicago suburbs, the homes are on lockboxes and the listing agent does not attend the first showing – and most of the time not even a second showing. Surprisingly, even in the city of Chicago listing agents are MIA with greater and greater frequency. Just this past weekend we showed a buyer 5 West Loop condos and were not met by a single listing agent. Missed opportunity.
So here is a key part of the selling process and it’s easy to ascertain if the real estate agent provides this service yet home sellers are not pressing agents on this? I don’t get it.
But even if the listing agent does attend showings how effective are they in presenting the property? In all of the showings I’ve attended I can only think of one listing agent that I have really been impressed with in this regard. There are several others that do a good or adequate job but the vast majority pretty much open the home and let you walk around with minimal interaction. Not very effective.
The Buyer’s Perspective
During the negotiation so much depends on the buyer’s perspective, on which everyone has pretty limited influence. The buyer has been looking at a number of homes and has established their own relative value scale based upon what matters to them – and it’s a long list. When they start bidding on a house they already have a number in mind and it’s only loosely based upon some market value. What’s most important to the buyer is what are they willing to pay for this particular property vs. their next best alternative. That $10,000 Sub-Zero refrigerator has no value to them if they would be just as happy with a Frigidaire.
You know this has to be true because if buyers bought homes based upon market value and all buyers could be “educated” on the correct market value of a home then every home would have multiple buyers very quickly. Yet, sellers live in this fantasy land where the right listing estate agent can produce a set of arguments which will part the clouds and get the buyer to accept the “true value” of their home. Well, listing agents have some limited ability to influence the buyer but nowhere near the ability that they lead sellers to believe they have when they are trying to get the listing.
Contract Negotiations
Eventually a formal, written offer is submitted and the back and forth begins. Apparently, home sellers envision their realtor engaged in a knock down, drag out battle of wits and data with the buyer’s realtor, who already knows their realtor and trusts them. They think that the two agents are spending hours arguing about each of the last 10 sales in the area. Welllll, most of the time the two agents don’t know each other and I don’t see the typical listing agent spending that much time debating comparable sales. Quite often it’s pretty obvious that the listing agent is just relaying information back and forth between parties, passively waiting for the next response. If the listing is long in the tooth then they might actually be doing battle with their seller.
However, the better listing agents will discuss comps with the buyer’s agent – maybe they will shoot them the list of sales they are looking at – and point out the unique features of the home that help justify the value. But this only occurs during the first or second round. After the second round that point has been made and that narrative is pretty old. By then either the buyer has accepted the reasoning or not.
So at that point the discussions move on to a dance where each side is trying to figure out their own and the other side’s bottom line – and this is where the rubber really meets the road. What do good listing agents do at this point to facilitate the process? When I think back about the most effective listing agents with whom I have negotiated here are the best practices that I have seen employed:
- Try to understand what’s important to the buyer
- Try to convey what’s important to the seller without inadvertently providing leverage to the buyer
- Try to keep their seller calm and rational
- Try to keep the buyer and their agent calm and rational
- Make sure that all the basics are acceptable – e.g. dates, earnest money, financing
- Make sure all the documents are filled out properly
- Try to prevent their seller from selling for less than what they think another buyer will pay in a reasonable amount of time
- Try to prevent their seller from walking away from a decent deal
- Try to quantify the value of certain negotiable factors – e.g. early closing, cash vs. financed deal, furniture, known repairs
You will notice two things about this list: 1) There is no way to know ahead of time whether or not a particular listing agent is capable of effectively playing this role unless you spend way more time interviewing them than you want to. Oh well. 2) There is nothing on this list that gives a so-called “neighborhood expert” an inherent advantage in dealing with the buy side. Frankly, agents that make this claim to fame don’t negotiate any differently than agents that don’t make this claim.
The Wall Between Buyer And Seller
One of the frustrations that many buyers and sellers experience during the negotiation process is that they feel like there is this partially impenetrable wall between them and their counter-party to the transaction – everything has to pass through 2 agents, which seems really inefficient and is reminiscent of the telephone game. Occasionally either the buyer or the sellers will even suggest that they speak directly to the other party.
Before I got into the real estate business I believed that this wall existed in order for real estate agents to justify their existence – they need to be critical to the process. I still think that is partially true but there are also legitimate reasons for that wall being there. The two sides should not necessarily hear everything that the other side says – see #3 and #4 on my list above. Or, without that wall, they may hear something very different than what was actually said. In addition, there is a risk that either the buyer or seller will thoughtlessly reveal information that gives an advantage to the other side (I’ve seen it happen).
However, this also means that a lot of what the seller and their agent want the buyer to hear may never actually get to the buyer because the buyer’s own agent filters it out. Why would they do that? Because maybe they think it will piss off the buyer or maybe the seller’s argument makes no sense and is not worth debating with the buyer who they know will almost certainly decimate the argument.
But there is an even more insidious reason that the buyer’s agent may not share certain arguments with their client. Let’s say the buyer is being unreasonable and the listing agent makes a perfectly reasonable argument to the buyer’s agent. The buyer’s agent may bury that argument because simply conveying it to the buyer with even the slightest degree of conviction may be viewed as an act of treason. The 8 words that no agent ever wants to hear from their client are: “You are not acting in my best interest.” (However, there is actually a way that either a buyer’s agent or a listing agent can manage this risk.)
My main point here is that this notion that well reasoned arguments and information are flowing from the listing agent directly into the ears of the buyer and will convert the buyer to their way of thinking…that’s a fantasy.
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In summary, what it comes down to is that there are basically 3 reasons why the reality of the negotiation process is a far cry from the promises made during the listing presentation. 1) Real estate agents over-sell their abilities. Imagine that! 2) Some simply don’t deliver on what they should be doing and 3) There are inherent limitations in the negotiation process.
If you are planning on selling your home just try to keep everything in perspective. It will help you choose a better listing agent and make the whole process of selling your home smoother.
#RealEstateNegotiation #RealEstate #HomeSelling
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.