First I’m going to apologize in advance. I am about to insult all real estate agents out there.
Here’s a personal story (very current) that I think you’ll find interesting, insightful or maybe just rude. …
Couple things…
It’s always been my opinion that real estate agents are nothing more than glorified secretaries that enter info into a computer database and make sure you fill out paper work properly. They do not add value to any transaction they’re involved with. In fact I could say they detract value. Let’s say a new house sells for $300K with standard 6% commission (yes agents are often involved in the sale of new homes) – that’s $18K in commission. Five years later the house sells for $325K (another 6% or $19.5K in commission). Then ten years later it sells for $340K (another $20.4K in commission). This is not an unrealistic situation. Fifteen years, three owners, $57.9K paid in commission on a house which is now worth $340K. Where’s the value added?
If I hire an accountant to do my taxes, there’s a 100% chance that accountant will save me enough money to justify the service. If I pay him 500 bucks, he’ll save me $1000 in taxes. Most services work like this; you get enough value to pay for service – sometimes many times over. I can’t say the same about real estate agents. Not only will an agent not be able to sell a house for 6% more to justify the commission, she actually wants you to lower the price because it makes the property easier to sell, and it doesn’t cost her much.
In doing research for Freakonomics, Steven Levitt and Stephen Dubner uncovered some interesting facts about real estate – that when a broker sells her own house, the house stays on the market for longer and fetches a higher price than when she sells someone else’s house. The reason? Selling her own house for an extra $10K puts $10K in her pocket, but selling someone else’s house for an extra $10K only makes her an extra couple hundred bucks. It’s not worth the effort. She’d rather dump it at what the industry calls a “competitive price,” and take the money and run.
So here’s my personal story.
I own a condo walking distance to the slopes at Keystone. With infant twins now in the family, I’ve only used it a couple times the last year. I don’t think prices will be going up much the next couple years, so I’m considering selling it to save myself the monthly payments and then rebuying another unit in a couple years when the kids get older.
So I’ve started talking to a couple agents and have been extremely surprised by the vibes I’ve gotten from them. I thought they’d want my business; I thought they’d be happy to work with me because the market is slow, but they don’t – unless it’s on their terms. I told them I’m not desperate, and if someone low-balls me an offer, I’ll reject it. If I get a decent price (not great, just decent – I’m not greedy), I’ll sell, but absent a decent price, I’m not selling. The implied responses I’ve gotten go something like this: “I’m only interested in working with you if you’re willing to drop the price to a very competitive level. Otherwise it’s not worth my time.”
The definition of “competitive level” is: a level low enough to induce a quick sale.
So here’s my rhetorical question. What do I need a F#%king agent for if all she’s gonna do is drop the price, throw some info into a computer system, do a couple open houses, hang a $30 lock box on the front door and then wait for all the buyer agents in town to show the unit off? What exactly am I getting for the $25K in commissions I’m going to end up paying? If I’m going to pay such a high price to sell the unit, shouldn’t the agent work hard to get me a higher price, not lower?
While on the phone, all the agent did was paint a very negative picture…”there are twice as many units on the market as usual, the number of closings is down 70% from just two years ago” etc etc. Her only goal was to convince me that I should list the unit at a “competitive price.”
It doesn’t matter my building is only 10 years old when most buildings in Keystone are > 20 years old.
It doesn’t matter my building’s HOA has > $200K in cash in the bank when many buildings are scrambling to build up reserves.
It doesn’t matter my monthly HOA fee is half of what most buildings charge and one-third what is typically charged in River Run.
It doesn’t matter there is no 2% transfer tax as there is in River Run.
On the surface, my 2BR/2BA unit which is walking distance to the slopes seems indistinguishable from several dozen others which are on the market, but I can make a strong case my building (and therefore unit) are unique because of the HOA’s strong financial position and lower on-going costs. But none of this matters to an agent. The only thing the agent cares about is dropping the price to a ridiculous level so she can make her money and run.
Sorry, ain’t gonna happen.
My conclusion from dealing with agents the last week…
1) Freakonomics is right. Agents don’t care about getting a good price for your house. In fact they want you to lower the price to make it easier to sell, so they can make their money and move on.
2) I am right. Agents are nothing more than glorified secretaries that add no value to the transaction. It doesn’t take a rocket scientist to enter info into a computer, send out an email to 1000’s of brokers and then sit back and wait for the phone to ring.
3) If agents only take on clients who are willing to dump their properties at very low prices or if agents highly encourage sellers to drop their prices, the real estate market has a long way to go before bottoming.
I probably won’t sell the condo, so if you’re in Keystone this winter, look me up. I’ll be zig-zagging out of the trees on Outback. 🙂
More ranting…
The entire industry thrived when they had access to information no one else had access to. That was their business model – the less info everyone had, the more people needed them and the more power they had. Then along comes the internet and destroys their world. I don’t need an agent to find out what other units have sold for (in my building or anywhere in town). Suddenly an agent’s competitive advantage [over the rest of society] and justification for employment has vanished, and their world is crumbling.
This reminds me of the airline industry. Remember back in the early 90’s. You call United to get a price. Then call right back, get a different operator and a different quote. You wondered if you should call on Sunday afternoon or Tuesday night knowing the prices will be different. The industry did well because no one knew anything. The along comes the internet. Now everyone knows all prices at all times. The industry has crumbled.
This relates to an issue I have with the health care industry. When was the last time you walked into a doctor’s office and saw a bulletin board with a list of services rendered and prices? Probably never. Why are prices kept a secret? Do they not want you to shop around? I’m guessing yes. I’m not talking about heart surgery here, but there are many procedures that are very routine – things a much less skilled person without 10 years of school can do. Are doctors afraid many of the services they render are commodities, and if prices were advertised, they’d lose business?
IMO, any industry which thrives by being a closed system that keeps information a secret will eventually be destroyed. It happened to the airline industry. It’s happening to real estate. It’ll happen elsewhere.
Jason Leavitt
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To take your analogy of health care providers even farther, not many other businesses are allowed the luxury of not even letting you choose the services you want based on the price. You go in and you have no idea what thing costs somethign extra versus included in the service. It’s like getting a house built and agreeing to do it and getting blindsided by charges for the nails.
BTW, I lived in Dillon and taught snowboarding at Keystone for a few years. I totally agree about the uselessness of a seller’s agent. Maybe on the buy side to save me time from sorting through all the listings… but the fee is egregious.
Wow. Some pretty strong opinions. After 25 years in the banking business (and 3 homes of my own sold) I share many of your same feelings. The one thing they do do, is call the day after a signed purchase agreement to tell you that this is a “special rush” deal – as if every deal isn’t a rush – and that if it doesn’t close in the next week three other deals will collapse because I couldn’t get the first deal done in time. I figured out pretty quickly to tell them that if indeed that was the case they need to start making calls now because no deal gets done in a week and they know it!
Their motivation is not to serve their client, but to get the commission.
Jason,
I have been trying to sell a 3k sq ft office condo for 3 years in No. Va. (30 mins from Wash DC). I feel your pain. I call realtors, Tour Guides. Hey, it just amy be that prices are that low. Have you checked into comps in the area? I’m sure you can find that data quickly on web. http://www.zillow.com
Glenn,
The brokers are comparing my place to others that appear the same, but in my opinion are different. A 2BR/2BA condo walking distance to the slopes is the same description that can be applied a 1000 other units, so I wouldn’t sell it as such. To sell, I need to differentiate.
Instead of selling my unit, I’d sell the entire building….cash rich HOA, lowest HOA fees anywhere in Keystone, HOA fees have not been raised in years, there has never been a special assessment, there is no transfer tax.
Suddenly my unit is different than all the rest, but all these brokers want to do is compare me on a $/SF basis. They don’t want to do the work to find the hidden gems. They wouldn’t sell my unit as if it were their own.
JL. . …
First off: I’m not a real estate agent, never have been. …It should be obvious to The World that this business thrives on a huge interlocking directory, all dependent on each other for income. ..such is the nature of bureaucracy. ..
I was a lumber/panel broker for 30 years and was always overwhelmed by the amount of paperwork involved in a simple real estate transaction when, in my business, I was able to buy a million dollars worth of product with a simple phone call/reputation for performance the only requirement. …
You have a choice. .. use an agent or go it on your own. ..there is a price to be paid if you use an agent . . ..ditto for stocks or anything else. …there’s no injustice here. … …select your agent with care. As you well know, you get what you pay for. . .
Thanks Doug…as a do-it-yourselfer, I’m tempted to go it alone and then send a note to all the agents that strongly hinted they didn’t want to work for me. But this would be hard with infant twins. 🙂
Jason,
I’m married to a female real estate agent for 28 years. (There are many male real estate agents) I own multi-family rental properties. I’m familiar enough with the business to comment.
There’s a lot of mediocre real estate agents and some very good agents. Most people who sell or buy a house do it once or a couple of times in their life. A good agent does it every month which is a big help to those who are not familiar with the process. This goes beyond the paperwork. A punch list is developed to properly prepare the house for sale…this adds value….most homeowners are not objective enough about their home to do this on their own. Proper staging of the home will help to get the most dollars for the house…adding to the value. An experienced agent coordinates this process.
Many homeowners are unrealistic about their home’s value. Studies have been done where people believe that the market has declined for everyone’s house except their own. If a house is priced too low by an agent the market takes over and you find that you are in a multiple offer situation. The speed at which an owner wants to sell impacts what the listing price should be. If you’re going for the long dollar expect to have the house on the market for a longer period of time. The agent will question the owners motivation and urgency to sell which helps in pricing the house in a way that will fit the current market conditions and the owners time frame.
The home inspection invariably presents problems and areas of conflict between the buyer and seller. The agent having done it many times knows what things should or shouldn’t be done to keep the deal together. Without an agent the buyers and sellers operate mostly from ego and their desire to come out on top of the negotiation. Agents save the buyers and sellers from themselves and make the transaction work. Can’t tell you how many times I’ve seen a $300 or 400k deal get stuck on the last $500 because each side has dug in their heels. A good agent overcomes this bit of stubbornness.
The lawyers involved in the process spend very little time watching the deal. A good agent checks and double checks details with the lawyers. Many times the agent uncovers missed steps on the part of the lawyers. The agent will also find things that the opposite side is trying to slip past or into the deal.
Oftentimes sellers are dealing with changes in their life due to the three d’s….death, divorce or debt. An agent can guide the sellers or buyers in such a way that the real estate transaction does not add to the disruptions in their life.
A good agent in the northeast works 7 days a week, is always on the phone even when on a vacation. In a good office they can make 100k or so. They are not over paid for the work they do and the assistance they give to the clients who do not know or understand the market, the business or the process of buying and selling real estate.
Not every seller is a business person such as yourself. Many need an agent’s help and become very satisfied customers after the deal is complete. It may not be for you but it’s not fair to paint an entire established industry with one broad stroke because you don’t feel it’s particularly suitable for you. The uninformed could very easily pick apart the day trading business and question its value to society. Please use your forum to promote your industry not denigrate the industry of another.
Thank you,
Chris
Chris,
Thanks for your comments. I have no doubt there are people out there who very badly need an agent because as you say, they only do this once or twice in their life whereas an agent has many transactions under her belt.
Here’s the most obvious question…
Why does the industry so desperately want to keep everything a secret? Why can’t I list my property in the MLS? Why can’t I have access to the same information agents have access to?
If agents real do add value as you’ve outlined above, they should make all this information available to the public. The fact that they hold onto it so tightly tells me they’re scared it’s the last thing that keeps them employed. JMO of course.
Jason
As was pointed by others you can list in the MLS as an individual. At a cost of course. The industry is set up as a business to make a profit, they are not giving their service away…they wish to control as much of the information as they can. Every industry works this way. Big business lobbies congress for laws and regulations that will favor their interests and make it more difficult for the competition. Building material vendors work with architects for favorable specifications that would exclude other suppliers, etc., etc.
In the end the marketplace casts its vote as to the value or need for an industry or service in spite of the laws or efforts to maintain information exclusivity. My wife has many letters of recommendations from satisfied clients and is very busy year round. Much of her business is from referrals, both buyers and sellers. In my mind the marketplace has spoken.
I would suggest that you go it alone as you seem to have some strong opinions…there are many FSBO listings…for sale by owner. Or, continue to interview agents…hopefully this forum has provided some additional perspective.
Chris
Jason: The public has direct access to the MLS through our company website. I believe Realtor.com also does a fine job. Your idea that realtors hoard information is incorrect. A good realtor can provide extra insight not available from the media. Plus, today there are so many problems in financing that the general public is unaware of. When we encounter a flat-fee broker representing a seller, we usually moan “Oh, no. Now we’ll have to do all the follow-up work.” The flat-fee ($500) broker is gone.
I’ve only used an agent once for a transaction, and that was a buyer’s agent when my family (my wife was 9 months pregnant) and I were moving across the country on literally 2 weeks notice for a job.
Everything else we did on our own, with a lawyer to review the documents. Selling the house…transaction cost: $1500 (MLS listing, sign, and lawyer). Buying the new house: Lawyer: $500, inspection: $300, appraisal: $350.
There’s really no reason to use an agent as you state, unless you’re in my first situation–moving far away and wanting to buy right away. Or moving away and needing to sell right away. Any local moves and such, just do FSBO, get on the MLS and buy yourself.
How does one get on the MLS?
Jason:
I think u experienced “par for the course”.
What I would do if i were u is put an ad on craigslist “cost equal ZERO”. I’m guessing Denver. Hopefully u have some photos to paste as well.
you can state all your prerequisites and do almost everything over email. You probably can contract with condo management or a neighbor or….someone who can show the property to prospects that you have qualified.
I guarantee you will have a much better experience, sell faster and make a better bargain for yourself and your buyer.
If you need some sample contract docs, let me know.
once you have a buyer, you need to get some earnest money and then take that plus the signed docs to a title company in colorado. Your buyer will have to get their financing unless they are paying cash or you are providing some financing. Once that’s in place, you are ready for closing which the title company will take care of for you.
Chris Dress
Thanks Chris…if I go it alone and sell it, I’ll be in touch with you. 🙂
Jason, You are 106% right!! It offended me greatly to see RE agents making huge money for doing little back when the market was flying out here in the SF Bay Area. I vicariously enjoyed watching my neighbor sell his home himself for >$1million (the highest selling price in the immediate area!)
I’ve done business with lots of real estate agents who like to call themselves professionals and most of them are not worth your time. A few of them will fight for you, but very few. And most are also not very professional, either. And I was dealing with the high end people and it’s down on the smaller properties.
jason….the secret is to sell it yourself (i realize this is more difficult when it’s a 2’nd home so far away)……………..as a seller..i have never had any need for a real estate agent to tie up the property……most people who try and sell by themselves..FSBO…..hope to beat the RE agent out of the commission…usually doesn’t happen..and they eventually end up listing it…..what i have always done….is figure out what the property is worth….subtract an amt equal to the RE commission….you are then under comparable properties that are listed with a commission factored in…..and the property sells….probably done it 5 times………(not in a mkt like this tho)
side note…i really, really appreciate your “before the bell” morning comments…you are the best…and i’ve been looking at a bunch of free internet stuff for 15 yrs or so….
best regards..
frank koss
Thanks Frank…I’ll probably put it on the market and if it doesn’t sell in the next two months, I’ll pull it and enjoy the ski season. I’m in no hurry. I don’t need to sell – that’s the part agents don’t like.
Jason:
I remember hearing a person say once: “All my mistakes happened because I was too cheap.” Chicago Title & Trust Company prepared a pamphlet a few years ago: “Go and Sell your Home on your Own, you Fool” or something like that. Anyone can be their own doctor, lawyer, accountant, etc. Isn’t there a saying about that with the word “fool” in it? (Only a fool is his own doctor.) Once you determine what you can or cannot do from long distance, find a reputable realtor (interview several personally) and explain your position. You should be able to find competency. Then, don’t be greedy about the 6% handling charge. JMT.
Having been is the Real Estate industry for years I understand you feelings but disagree on many issues. If agents just priced properties “to sell” why do they still sit? It is very tough to sell in many areas unless you price ahead of the market. Listing properties at over market prices is time consuming and costly to agents. You end up with 30-40 properties that sit and the Sellers want to know why there home has not sold. The agent does not price the market. This is my guess as to what the agents you spoke has had happen. The few Buyers that are out are certainly bottom fishing. Many Sellers want a certain price, but if it is not realistic, I would want my agent to tell me so. There are many different types of sellers. Some want a certain price and don’t really care if it sales. Others (including foreclosures) want it sold NOW. Condos are the worst to resell, IMHO (unless it is a very hot project). Lets sale I have a Buyer that calls and says I like the “Super Keystone condos”. All you have to do is pull up every unit for sale. Many times they are the same floor plan. Lets say you pull up a home for $340,000, $330,000, $320,000 and one for $290,000. The Buyer looks at all of them and of course in many cases the lowest price is the one that sales first. The competition in condo complexes can be brutal. In this market there are always a couple of distressed sellers or foreclosures that always sale first. And there are always sellers that say “my unit is better” it has this and that. But in reality you can paint and carpet and have a “new” unit for the difference. As far as commission, understand that is most cases the commission is split between a sellers agent and Buyers agent. And then 30-40% goes to the agents Broker to pay for office and staff. Your agent will most likely see about 2% of the commission. Two years ago agents were over paid, today most are hanging on. I think we will see the day when more sales will go to the internet. But most Buyers are not comfortable searching and buying without the help of an agent.
RJ…my biggest issue is the agents I’ve talked to are not interested in “selling” my place. I want a salesperson…someone who will fight for me…someone who will explain to people why my building is actually different than the others. My experience so far is these agents do not work in sales, they are secretaries who do paper work. I want a salesperson who will get out there and sell my property as if it were they’re own.
The internet is destroying this industry just like the airline industry. Good brokers will stay in business and thrive. The secretaries in the industry will disappear.
Mr. Leavitt,
I’m sorry your experience with real estate agents has been negative so far. There’s certainly some truth in what you’re saying, but all agents are not created equal!
The industry does tend to be protectionist (e.g., lobbying to limit the role of banks in real estate), and artificial barriers like licensing tend to lower the bar and give less competent agents — who couldn’t survive in a truly free market — enough of an edge to keep them in business.
The Internet has loosened the stranglehold agents formerly had on information — always a good thing — but it’s hard to judge the net effect. In some respects it tends to weed out lazy agents who relied on secrecy and dependence to keep their customers. Agents now have to prove their value in other ways, and those who failed to adapt are already going out of business.
On the other hand, a lot of this free information is conflicting and not very reliable (e.g., Zillow.com prices). Raw *data* is freely available, even if the quality is at times uncertain, but *judgement* and *analysis* are not. In that sense, agents are more useful than ever.
It is also possible for lazy agents to get even *lazier* — since now they don’t even have to search for properties anymore 🙂
Standard commission arrangements arose in earlier times, when the practice of real estate was quite different. There were no buyer’s agents — all agents worked for sellers, so sellers paid the entire commission.
I expect these arrangements will change, albeit slowly, as the consequences of the information age play out. There are already many alternatives to the standard 6-7% seller commission. There are discount brokers who list for less — and of course provide fewer services. You can get on the MLS for a flat fee in some areas, and some agents work on flat fees instead of on commission. A healthy market will support all these possibilities, and gradually converge on whatever makes the most sense.
Most of your frustration seems to come from agents’ unwillingness to list at your price. Unfortunately there are sound reasons for this. Part of it is of course the fact that agents are paid only at closing. If there is no closing, all their work is for nothing. The work may not seem like much to you, and it’s true it isn’t rocket science. But it *is* time consuming, and you’re not their only client! It would be easy for me to fill my days “working” with people who will never buy or sell, but I’d quickly go out of business. Real estate is a business, and you have to expect agents to run it that way.
>On the surface, my 2BR/2BA unit which is walking distance to the slopes seems
>indistinguishable from several dozen others which are on the market, but I can make a strong
>case my building (and therefore unit) are unique because of the HOA’s strong financial
>position and lower on-going costs. But none of this matters to an agent.
More importantly, it doesn’t matter to buyers! (And that’s why it doesn’t matter to agents.) If you need a PowerPoint presentation with P&L charts to explain how your apparently identical condo is actually different from the others… you’ll never get the chance to give it.
There is no way to search for “HOA financial soundness” on the MLS. Agents will simply type in 2BR/2BA and the location, and out will pop a list of condos. If you’re the highest priced one (and additionally the lowest commission :-), you won’t get shown. No sale. Frustration for you, wasted time for the agent. Since this is unpleasant for all parties, most agents will walk away from this prospect.
I also have to respond to the “glorified secretaries” comment 🙂 I think of agents more as mechanics. What people who aren’t in the business don’t realize is that 80% of the work occurs *after* the sale, before the closing. There are myriad details and lots of people to coordinate. Things happen on inspection that need to be handled (often delicately) to preserve goodwill and the deal. We have to deal with appraisers, mortgage and title companies, and ever-shifting regulations. Can any reasonably intelligent person do this? Of course. You could change your own oil, too, and maybe replace your own brakes. But do you really want to? Can you take off work 14 times to show your house?
For busy people with little time, or those with personalities ill suited to delicate negotiating, agents can be very valuable indeed. Also, in keeping with your tax preparer analogy, they provide you with some legal cover. Avoiding legal pitfalls and ensuring compliance are other often-overlooked but valuable real estate services. A single lawsuit costs a lot more than the commission, even if you win!
Anyway I wish you the best of luck if you decide to sell. You have a lot of options, from interviewing other agents, to discount brokers, to flat fee MLS services, to taking full responsibility for selling it yourself. (FYI, buyers who look at for sale by owner properties know you aren’t paying a commission, and tend to lower their offers because of it — a perverse effect of the commission system; you just can’t win 🙂
Jeff, you’re points are taken, but (and I’m sure you’ve heard this before), I think my situation is different. If you’re being a vacation home at a ski slope, the 4 most important criteria are: how many bedrooms, how many bathrooms, how far to the slopes (walking distance or not) and what’s the HOA.
Some buildings have HOAs which are $1000/month. That’s a mortgage payment which can’t be paid off!!!
If an agent tries to sell my place on a $/SF basis, they are totally incompetent. The HOA fees are a major expense that must be used to differentiate from other units. Failure to use this as a selling point proves my point that agents simply list the property rather than sell it.
I think real estate agents excel at telling you all the things that are wrong with your property,
not how your property compares to similarly priced units
No apology necessary, Jason……in fact, I thought your story was rather subdued!
I just sold a house after 9 months of depending on three different agents. What I learned is this: The whole point of being a real estate agent is to “get the listing.” Selling the house is someone else’s job. That’s why they have “open houses”; to attract other agents with clients who might buy. As to price, always have your home appraised by a licensed appraiser. He/she will know what price the house should list for. Then tell the agent you’ve chosen that her job is to beat the appraised price and you’ll share some of the difference (I suggest 25%). The agent must have a positive incentive above her normal commission or all you’ll ever get for an offer is 5% below your asking price. Believe me, 95+% of real estate agents are soccer moms looking to make a few extra bucks…at your expense.
Here’s a crazy question. If I spend $10K to fix the place up and that enables me to sell it for and extra $12K, should I pay comm. on the full $12K or just the $2K profit? 🙂
Dear Jason:
I read with interest your piece on realtors. I would like to address your “issues” as they read.
Jason: It’s always been my opinion that real estate agents are nothing more than glorified secretaries that enter info into a computer database and make sure you fill out paper work properly. They do not add value to any transaction they’re involved with. In fact I could say they detract value. Let’s say a new house sells for $300K with standard 6% commission (yes agents are often involved in the sale of new homes) – that’s $18K in commission. Five years later the house sells for $325K (another 6% or $19.5K in commission). Then ten years later it sells for $340K (another $20.4K in commission). This is not an unrealistic situation. Fifteen years, three owners, $57.9K paid in commission on a house which is now worth $340K. Where’s the value added?
If I hire an accountant to do my taxes, there’s a 100% chance that accountant will save me enough money to justify the service. If I pay him 500 bucks, he’ll save me $1000 in taxes. Most services work like this; you get enough value to pay for service – sometimes many times over. I can’t say the same about real estate agents. Not only will an agent not be able to sell a house for 6% more to justify the commission, she actually wants you to lower the price because it makes the property easier to sell, and it doesn’t cost her much.
Response: The commission is split four ways most of the time. Most sales are cooperative where a second company represents the buyer. This is actually better because no agent can easily represent both sides. Then, each company splits their commission with the agent. The company has to pay for “bricks & mortar,” staff, supplies, telephone, and corporate marketing. At an annuual meeting about five years ago, the Chairman of my company divulged that we only make about $350 per transaction ($550 if the client uses our in-house lender and title company) after expenses. Oh, did I add the cost of attorneys required to represent agents in lawsuits? Agents are required to pay for all other expenses: cost of vehicle; marketing materials (mailers); health & errors & omissions insurance; licensing and continuing education requirements; plus memberships in the multiple listing associations, National, state and local real estate associations; wardrobe; and entertainment expenses.
Jason: In doing research for Freakonomics, Steven Levitt and Stephen Dubner uncovered some interesting facts about real estate – that when a broker sells her own house, the house stays on the market for longer and fetches a higher price than when she sells someone else’s house. The reason? Selling her own house for an extra $10K puts $10K in her pocket, but selling someone else’s house for an extra $10K only makes her an extra couple hundred bucks.
Response: Everything hinges on the “motivation.” An experienced realtor can get a sense of the market’s direction and hold out for a high price. But, in this market, I’ve seen realtors take losses.
Jason: So I’ve started talking to a couple agents and have been extremely surprised by the vibes I’ve gotten from them. I thought they’d want my business; I thought they’d be happy to work with me because the market is slow, but they don’t – unless it’s on their terms. I told them I’m not desperate, and if someone low-balls me an offer, I’ll reject it. If I get a decent price (not great, just decent – I’m not greedy), I’ll sell, but absent a decent price, I’m not selling. The implied responses I’ve gotten go something like this: “I’m only interested in working with you if you’re willing to drop the price to a very competitive level. Otherwise it’s not worth my time.”
The definition of “competitive level” is: a level low enough to induce a quick sale.
So here’s my rhetorical question. What do I need a F#%king agent for if all she’s gonna do is drop the price, throw some info into a computer system, do a couple open houses, hang a $30 lock box on the front door and then wait for all the buyer agents in town to show the unit off? What exactly am I getting for the $25K in commissions I’m going to end up paying? If I’m going to pay such a high price to sell the unit, shouldn’t the agent work hard to get me a higher price, not lower?
While on the phone, all the agent did was paint a very negative picture…”there are twice as many units on the market as usual, the number of closings is down 70% from just two years ago” etc etc. Her only goal was to convince me that I should list the unit at a “competitive price.”
Response: If you bought in the past five or six years, the price today is probably less than what you paid. Real estate cycles just like everything else. When Alan Greenspan kept interest rates so low, fast money rolled into real estate (from tech) and created a gigantic parabolic. You as a trader should have seen this. Just as a stockbroker has to tell a client that his $70 stock is only worth $35 now, realtors today have to tell sellers the truth. The price is dictated by how supply and demand plays out. With less demand today, there is no point in listing a property higher than the last comparable sale. We are taught to look sellers in the eye and say “I don’t do magic.” Perhaps the agent could have been more tactful instead of telling you the blunt truth. (More in next email.)
Betty…I’m not going to go point by point, but I will let you know this. I bought the condo 3-1/2 years ago, and based on the unit next door to mine which just closed last week, my unit is up almost 20%. I’m not down money – I’m up a bunch.
Jason: This is part 2 of my response.
Jason: It doesn’t matter my building is only 10 years old when most buildings in Keystone are > 20 years old.
It doesn’t matter my building’s HOA has > $200K in cash in the bank when many buildings are scrambling to build up reserves.
It doesn’t matter my monthly HOA fee is half of what most buildings charge and one-third what is typically charged in River Run.
It doesn’t matter there is no 2% transfer tax as there is in River Run.
On the surface, my 2BR/2BA unit which is walking distance to the slopes seems indistinguishable from several dozen others which are on the market, but I can make a strong case my building (and therefore unit) are unique because of the HOA’s strong financial position and lower on-going costs. But none of this matters to an agent. The only thing the agent cares about is dropping the price to a ridiculous level so she can make her money and run.
Response:
Have not great companies on the NYSE sold at 90% less than their high? And come back?
The only thing that matters is what a buyer will pay you today, and buyers have an uncanny ability to ferret out recent sales as comps. In a declining market, successive sales happen at lower levels, same as in the stock market.
Jason: 1) Freakonomics is right. Agents don’t care about getting a good price for your house. In fact they want you to lower the price to make it easier to sell, so they can make their money and move on.
Response: Same thing can be said about stockbrokers. I have known ethical ones. You are crying because you are underwater on an expensive investment which is illiquid. (More . . .)
I disagree here. A selling agent is supposed to SELL properties, not just list them. A good salesperson will figure out how and why a property is different and hit on those points. Any agent who represents me who doesn’t brag about the low HOA fees and zero transfer tax isn’t doing her job.
And as I said above, I’m not not down money. I’m up almost 20%.
And I’m not crying. Ski season is right around the corner.
Jason: 2) I am right. Agents are nothing more than glorified secretaries that add no value to the transaction. It doesn’t take a rocket scientist to enter info into a computer, send out an email to 1000’s of brokers and then sit back and wait for the phone to ring.
Response: I like to say that real estate sales is not rocket science; it’s harder. When was the last time you dealt with The Public? The role of the Realtor is extremely difficult. One has to be psychologist, financial consultant, skilled negotiator, knowledgeable about the inventory, have some legal knowledge (contracts), and be willing to work evenings, weekends and holidays. Trouble is we make it seem so easy. In my market, we don’t do lock boxes so agents go mostly on all the showings and make live presentations of the properties.
I don’t need a psychologist, financial consultant, lawyer etc. I want a salesperson who will SELL my property, not just list it.
Finally, Jason: 3) If agents only take on clients who are willing to dump their properties at very low prices or if agents highly encourage sellers to drop their prices, the real estate market has a long way to go before bottoming.
Response: When I sold a condo development in 1979 at the top of the market, it wasn’t until 1998 that prices returned to the 1979 level. So, be prepared for a long wait if you don’t want to take a loss now. How is this any different than the stock market? You simply bought wrong. P.S. I sold in 2001 and have been renting ever since. Of course, I missed the final fling (5th wave, extension, or whatever); but now I am waiting for prices to roll back more before jumping in. Good luck! Realtor, 36 years.
See above comments…I’m up almost 20% and the market isn’t illiquid. Buyers are low-balling offers which I have no problem with. I’d do the same thing if I was a buyer.
and BTW, in addition to being up almost 20% on this property in the last 3-1/2 years, my primary residence which I bought 15 months ago is up at least 10% based on appraisals done to determine my property taxes and other like houses in the neighborhood that have sold in the last couple months (new home development)
It is said that “information wants to be free,” and we are seeing the freeing of information. In the old days real estate agents and their multiple listings info was very much like the book of a marketmaker on the exchange. Because he had the best info (the best book) on buyers and sellers and transactions he could use that info to make money. Similarly when the only way to sell used goods was the Classified Section of your local newspaper, it became (along with Sunday ads) the financial mainstay of the papers. Now that Craigslist helps you sell your car, kayak or road bike for free, the newspapers are in free fall. I have noticed that the Craigslist real estate ads appear to be growing. The only problem for Jason with his condo is, assuming he really can market his apartment to a willing buyer, then who is going to be on site to show it? In general, what you still get with a real estate agent (particularly for a 2nd home) is someone on site with a lockbox. Maybe they won’t get you the best price, but they will be pushing for a likely transaction (which means some sacrifice on the price).
In this market, generally, I don’t think the agents are actually lowballing Jason, or exhibiting sloth. In this market everyone wants to make money if possible. But, in this market, the agents who know the market are not going to be interested in putting their money (the slick multiple listing pamphlets, newspaper ads, etc.–these are not free, even though we pick them up for free at the Safeway) and time into an unrealistic project or a lost cause. Jason may need to re-evaluate his condo and the reality of selling it. He should also really think about his price. As we know from behavioral economics, once a person actually takes possession of anything (1,000 shares of stock, a used car, an ugly commemorative mug) it begins to take on an irrational value (the “endowment effect”) out of proportion to its true, market value. Look through the sell by owner car listings on Craigslist and compare the asking price with kelly blue book’s private party prices: 90% of the listers somehow believe their their Toyota Avalon with 165K miles is actually worth north of retail blue book–they would not even deign to think about private party “excellent” for their beautiful 12 year old car.
http://en.wikipedia.org/wiki/Endowment_effect
Thanks for your comments Doug. I’ve a very logical person. My opinion of what my unit is worth is based mostly on what other units have sold for the last two years and especially what my next door neighbor’s unit sold for last week. I’m not greedy, and I have no disillusions as to what I ‘should’ get.
There seems to be a cruel irony about all this, from a trading point of view. Adding value to a transaction? Do traders do that? “The entire industry thrived when they had access to information no one else had access to.” Insider trading? Flash orders ahead of the market?
Perhaps the most foreboding comparison is the following: “…any industry which thrives by being a closed system that keeps information a secret will eventually be destroyed.” Well…, volume has been down lately.
I was waiting for someone to make this type of comment. 🙂 This is an entire blog post by itself.
my stock account is down 60% for 2009. as far as I am concerned all services are worthless. I subscribe to 3 news letters. whats the difference between most stock news letters and real estate brokers. you are going to lose money with both.
Jason, I would lump everyone and every business into your “glorified secretaries” just skimming off the top…….except me of course, I’m worth every penny I charge. CPA worth it? Ha, you can do your taxes w/ TaxCut or TurboTax and save thousands…. just go online and read-up on tax tricks – no brainer. If you have to, use your accountant’s last year tax return as a guide.
Why pay an attorney $400/hr to read boiler-plate contracts or work up “Power of Attorney”, “Directive to Physicians” and more as these are statutory forms, that’s right, Statutes written into State Law…..at least in my state. Attorneys take everything to court, tell you you’ve got a good, strong case and lose…..pay up buddy, they don’t give a flip. Wait until you go to settle an estate…$$$$$$$$!!!!
Bankers……now that’s a smart crowd. Re-order transactions to rack up overdraft fee. Charge 5% on mortgages & 30% on credit cards and pay .25% to the Fed. That’s passing along savings.
Buy a green car, idiot…..buy a used Minivan or Taurus for $4000 and save $20-25K EASY. That’s a lot of gas.
Shall I go on………..?
Hey David…
Funny you bring up attorneys. I needed a contract drawn up a couple years ago. A guy wanted to charge me $1000 which I knew was a joke because he worked in the industry and was most likely to just take copy and paste from an old contract. He made is seem like he was going to do something special from scratch – he wasn’t.
So a friend gave me a contract she had previously used. I gave it to an attorney in my state to make sure it was kosher. She made few changes and charged me for 1/2 hour of work. 🙂
Regarding taxes…I’ve never hired an accountant. I’ve always done my own taxes and have always erred on the side of paying too much because just in case I get audited, it’s not worth the hassle to justify to the IRS why certain write-offs are legit.
And I totally agree on your car comment. Buy used and drive it into the ground. Why dump money into something that so quickly depreciates in value?
Jason:
You may be smart enough to do your own taxes. My accountant gives TurboTax free to clients who want it. A good realtor is worth her weight in gold. The market is the market. Sometimes flat, sometimes down. No amount of marketing will change the trend, and that is what the realtors you talked with wanted you to see. Can you imagine what the stock market would be like without market makers? Stalemate. BTW, realtors don’t set prices; appraisers (from the banks) do. Get your unit appraised, show it to your realtor, and list it there. If it’s priced right, you will know by getting a quick sale. If too low, you will get an auction scenario. If too high, you will remain an owner. In most areas, real estate has an efficient working model with the Multiple Listing Service being the cornerstone. Do you know what the main drawback at this time of year is? Football. Wives can’t get their husbands up off the couch Sundays to look at property. The cycle begins all over again after SuperBowl Sunday when people begin to think about taxes and housing. So, enjoy your skiing this winter and list in January would be my suggestion.
So what’s the difference between a snowboarder and a real estate agent?
I do like the viral video idea skiing down the mountain of capitalism. Your condo, portfolio, and AIG, with Ford GM and the USD. You can portray the agent as a snowboarder (perfect fit), AIG a fat pig on four sticks, the USD a bead laden tree, an example of throwing money away. For GM I’ve got this overstuffed weekend vehicle in mind chugging up the mountain grade. So weighted down you wonder if it’s going to make it. Or better yet, shedding weight as it goes down and you wonder if anything will be left.
The more things change the more they remain the same Jason.
Well, by rough review, a large majority of comments conclude that Jason probably has it wrong, that he doesn’t understand the real estate business (which is to get transactions done, after all, no transactions, no commissions) or its economics, and has probably mispriced his condo. Since we infer that Jason is not a real estate professional (that is, agent, developer, speculator, builder, etc.) then it’s not surprising that he would end up with an un-professional conclusion. When you talk with a non-trader at a party, what is the likelihood that they will say anything worth noting about the markets?
Interesting perspective. It’s true I’m not a real estate “professional,” but I’m not so sure what a professional is. It would take 6 years to duplicate my MS in engineering back ground. It would take a couple months to pass the state and national real estate exam and call myself a “professional.”
There are no doubt good agents out there who consider themselves salespeople who will sell your property rather than just list it. But the barriers to entry in the industry are so low, the number of agents who meet my “glorified secretaries” descriptions is much higher.
Jason,
Words like professional and amateur sometimes carry loaded meanings, but they should not. A professional is simply someone who makes his living at a certain business. If I put in a brick pathway in my garden (which I recently did), that does not make me a mason, even if I researched how to do it, got the proper materials and executed a nice looking and durable path.
When I say you ended up with an “un-professional” conclusion about your property, the evidence seems clear. First, if you don’t make your living speculating in, developing, or broking in real estate, then you are an amateur, in the true, non-loaded sense of the word. If no real estate agent wants to handle your property, then you have two possible explanations. First is that they are all lazy or crooked, which seems to be the conclusion you have drawn. This seems unlikely, since we know how markets work. Second is that they are rational professionals who recognize an unprofitable trade (your proposal, to them a seller who is irrational about his property’s value) from a distance and won’t invest (time and money) in it.
I recently bought a car for my daughter from Craigslist, a first for me. After looking over maybe 200 listings, calling maybe 40 listers, I learned a few things. If the seller’s listing is long and ornate and his ask is well above the Kelly/NADA/Edmunds blue book values for the car, it’s not worth it to even dial him up or send an email to inquire. Why? Because he is an irrational seller. For example, one guy in response to why he was asking $3,000 over “excellent” blue book value for his Avalon told me, “Look, I need $8,800 for that car.” Apparently, it was what he owed on the car, but that was his problem, not mine. Another thing: if the price looks too good, say $2~3,000 below “good” or “fair” blue book values, then it is either a salvage title or a scam. It quickly became apparent to only call reasonably detailed listings, with photos, that were priced rationally. Any other activity was simply a waste of my time. I had, over the course of 3 weeks of doing this, become more “professional” in my approach. Good luck in selling your place, though.
Hi Doug…
I’ve gotten a lot of criticism here by people who don’t know the fact…they just make assumptions.
I’m not greedy or unrealistic.
For the record, I bought the condo 3-1/2 years ago for $345K. My next door neighbor who has the exact identical unit as me just closed last week at $408K. I don’t think it’s unrealistic to list the condo at $415K and after some haggling, sell it for somewhere between $405 and $410. But one agent would list it at $399. Why in the world would I do that?
Jason
Jason,
So much of real estate is local and specific. It’s why, in fact, for some legal cases, there is no possible monetary award that can make a plaintiff whole other than the “specific performance” of the contract on real estate (and some works of art, etc.), so the court orders the property to be conveyed.
I don’t know your area (I ski the Cascades, not the Rockies), but if an “identical” unit (Unit A) just closed at $408K, I would look not to the identicality of the units, but to the non-synchronous nature of the 2 transactions. Unit A was contracted for maybe 4 months ago, and at that time the market had absorbed and reflected a certain amount of news. One (only 1!) buyer stepped up and made what he thought was a rational decision: he contracted to pay $408K and put down, say $25K on the deal. That property might have been valued one year earlier at $508K (or higher) and the buyer thought that he was getting it at the absolute bottom. In the 4 months since Unit A was contracted for, the market has absorbed more information and now reflects more information. Prior to that moment 4 months ago, maybe the last 3 sales of units identical to Unit A sold for no less than $440K, which was then established as the “floor.” With Unit A’s contract a new floor of $408 had been established–but the trend was down (we know a little about trends, don’t we?) and, one would think, all identical units now had taken a significant hit. Unit A and its clones no longer traded in a range of $440K~480K, now the range was $400K~430K. Other real estate data may have impacted the area as well. Your real estate agents may not have been lowballing you or lazy, they just might have better information. I certainly don’t know.
Another nice gift from our government was the cash for clunkers program, which at one fell swoop destroyed perhaps $3 billion worth of serviceable, roadworthy vehicles in exchange for perhaps the purchase of $20 billion worth of vehicles which were financed with 80% debt. This new debt (say you traded a 1995 Nissan Quest, got your $3500 and bought a Honda Civic) in a deleveraging world impacts other leveraged transactions. If Randy and Sue just took on $18,000 in car financing, then they are more likely than they were before to pull back on that condo they had been planning to buy. Multiply Randy and Sue by 2 million and see what effect that might have on all sorts of purchases. In effect, not only did the government destroy $3 billion worth of value, but they subsidized it by de-valuing by some percentage another $17 billion of assets. Perhaps your condo’s new “professional” pricing represents this haircut.
One thing for certain, you may look back in one or two years and think that $399 ask, $392 closing was an excellent exit on your investment. Good luck.
Doug
From a legal perspective most RE Agents present problems for the seller that are very serious. The most important is not getting the facts correct, and misrepresenting the facts and entering into side deals with the buyer. My firm sold its 8 million dollar office suite in a high rise and the agent representing our interests entered into a side deal with one buyer which was a serious conflict with our agreement. When confronted he said he felt his commission from our sale would not be sufficient without a “Kicker”. We sued and collected damages, only to discover that the RE agency he is employed with regularly did side deals with the a stranger/buyer to the transaction that was contrary to the sellers interests. It is a case that most of us are too busy to attempt a sale since the opportunity costs are often great.
I have no doubt a sellers agent is not completely representing the best interests of the seller and a buyers agent is not completely representing the buy. The two agents get together and figure out how they can get a deal done at a price (even if it’s not at the best price for their client) because a bad deal for a client is still a pretty good deal for the agent.
How is this any different from a stockbroker, who wants a commission? I know plenty of realtors who side with their clients and suggest they reject a low offer. I have seen this work and not work (in other words the final price is lower). Sometimes paranoia is helpful, but not always. Also, as a Realtor for 36 years, I have rarely become a buddy of the competing agent. You may be transferring this technique over from the lawyers. Do you know the difference between a lawyer and a rat? There are some things a rat won’t do. Sign me, “Ethical in Chicago.”
Jason,
No one forces either of the principals to sign on the dotted line, no matter what the agents gin up. As for agents getting together to figure out how to get a deal done at a mutually agreeable price, well, that’s what you have an agent for, and that’s why the agents will talk. What agents should not do (it’s a breach of their fiduciary duty) is divulge any information or make any proposals not in line with what the principal has instructed. Most principals in residential real estate deals do not comprehend this, and many agents will fly with whatever vague instructions/lack of instructions they receive.
The most common “bad deal” in a real estate transaction is when the unwary buyer comes into a town and is escorted from house to house with the friendly real estate agent in the gold coat. The agent quickly establishes a “rapport” and a “trust” with the buyer, getting tidbits of information from the prospective buyer who thinks the agent he is talking to (so friendly, so nice, working so hard) is on his side. Of course, whether it’s a seller showing a 4-bedroom or a 10-year old Chrysler at the discount lot, it’s caveat emptor. At least if the seller feels his agent has misrepresented him he has a judicial path. Most real estate transactions are lopsided in this way, and the sellers and their agents usually have the upper hand.
The law was changed a few years ago. Anyone escourting a buyer around is a “Buyer’s Agent,” and is not working for the Seller. Before this change, the buyer’s “agent” was a “sub-agent” of the seller. If a buyer meets a seller’s agent, that agent Must discuss “Dual Agency” and present a form for signature of same. Many people won’t have dual agency because it is too risky.
Thanks for your note. Two questions, though. If the listing agent shows a buyer the house, is the listing agent no longer working for the seller in general or just vis a vis that one buyer? Second, the law of agency is a state law, not a federal law. When you say the law was changed, which state law was changed? Is there some sort of Uniform Real Estate Agency Law (as there is for commercial transactions, etc.)? Thanks.
A fraud writing a fraud. Shame on you! What was your purpose here?
After 25 years of selling real estate it is and always will be the client 1st!
I’m a fraud? On what grounds?
Hey Jason,
I’ll give you 100K cash for the condo.
Don
🙂 You can have one of the bathrooms for $100K.
LOL…Is that what a realtor told you the bathroom is worth…Sounds like you’d better hire him/her.
If you have visited my website at http://www.tradingwellandliving.blogspot.com you will know that I am a great proponent of “comic relief”. In that ‘spirit’, pardon the soon to be realized pun.
I hereby offer up this seasonal joke as an attempt at humor:
Q. Where does the ghost family go when they want to find a new house to haunt?
A. To the UNREAL estate agent
Jason,
I agree. I have never been involved in a real estate transaction in which either my agent or the the other parties agent knew more about the deal than I did. Very frustrating at closing watching the agents get their checks.
Try this, do not use a buying agent at all. Call the listing agent. Agents pretend to represent buyers, but legally, the ‘agency’ the buying agent is under is loyalty to the seller since that is who pays the commission.
The complaints above about the costs of the real estate industry is a joke. I laugh at the need for brick and mortar. Agents should be OUT! Not in the office… if my sales staff was sitting in the office then I know they are not out closing! Rent a conference for you monthly meeting. This is just one example.
And I refuse to call an agent a Realtor(tm). A made up word for those pretending to be professionals.
Jason,
You and Freakanomics are absolutely correct. I came to these exact same conclusions when I sold my first house. They were confirmed once again when I sold the second house. In both cases, my wife and I interviewed at least 5 agents, and we let them all know that we were interviewing others. In both cases, most of the agents strongly suggested relatively low listing prices and warned us in very solemn tones about the danger of listing too high. In each case, fortunately, there was one agent who was supportive of our suggested price.
Here’s the punch line: Both houses sold VERY quickly at a price within 1% of our asking price, and 7-10% higher than the prices suggested by the lazy agents. In the case of the second home, the agent listed it on a Sunday and held the broker’s tour on Tuesday. One of the agents who toured on Tuesday wrote an offer that evening. We countered with a price that was within 1% of our asking price, and our agent told the buyer’s agent that we had an open house planned for Saturday. In order to avoid the potential competition, the buyer accepted our counter and we went under contract within 72 hours of listing. Both sales closed without significant problems.
I would offer two other suggestions for selecting an agent if you go that route: 1) DO NOT select a “big name” realtor. These are the ones who rely on high volume, and generally have minions (either low-wage employees or fledgling agents) do all the real work. They meet with you once at the time of listing, and that’s the last you see of them except for their picture on the sign in your front yard. 2) Make sure the agent you select is a FULL-TIME agent. There are tons of “agents” who do not sell real estate full time. Often, these are retirees or spouses who do not need to make a living selling real estate. In other cases, these are people who have a few properties of their own, and got the license in order to save some commission on their own transactions. You want an agent who needs the income and works full time at it. If you inadvertantly get stuck with a “big name” or part-time agent, you may be stuck with him/her for the duration of your listing contract.
We also found it helpful to discuss our expectations with each agent. HOW will they market the property? How many open houses? Can we reach them 24/7 if need be? Will they be present during inspections? Will they line up and manage contractors if any repair work is needed? Will they agree to keep having open houses without requiring a drop in price if there is no action within the first few weeks?
Keep looking. There are some good agents out there – and in the long run, they will eat the lazy ones’ lunches. I still think they are overpaid – especially for high-end properties, which require no more work to sell than fixer-uppers (maybe less).
ZeusDog
On the real estate (thanks for the reply to my previous post), you’re proving the point that all real estate is local. If you do seek help at some point, make sure the agent or other professional understands all your HOA issues. If you get a blank stare, keep looking!
One other common practice you might run into, if you sell it yourself and get on the MLS through a flat fee service, is buyer agency agreements with minimum commission clauses. Buyers coming through an agent will typically ask for 1/2 commission (buyer’s side), and will have a prior contract with the buyer saying if the seller doesn’t pay, the buyer pays (or they don’t buy that house). Here you’re paying for the broader exposure you get from the MLS. And remember, fees are always negotiable.
On health care, have you ever actually walked into a doctor’s office and asked what something costs? They’ll look at you like you’re a lunatic, or assume you don’t have insurance. The problem is third party payment. The fact that, because of a tax-code-induced distortion, the third party is usually the employer — in these times when people change jobs every 3-5 years — creates a perpetual and completely unnecessary crisis whenever employment change occurs. (It’s about to happen to me, which I hope excuses my answering your rant with another rant 🙂
The distortion is especially apparent if you’re older or worked somewhere a long time and got sick during that employment (i.e., you now have a pre-existing condition). The whole premise of insurance is that you buy into it young, pay relatively cheap premiums for a long time, pay the little stuff along the way yourself — and then it’s there for you when you get cancer or have a heart attack. Artificially tying health insurance to something that changes frequently breaks that model and prevents insurance from functioning. There is no “crisis” in life insurance, auto insurance, boat insurance, home owner’s insurance — or *any* kind of insurance that the government doesn’t control and distort.
As it stands, nobody cares what things cost, because 1) the patient isn’t paying it; and 2) the doctor doesn’t control the cost anyway; it’s set by the government or by contract with the (heavily regulated) insurance company. The market is so hopelessly distorted, I’m not sure the concept of “price” even applies. There are no market prices because no free market exists for most health care services.
To see markets working in health care and find real prices, you need to look at services that aren’t covered by the government or most insurance — like Lasik eye surgery or cosmetic surgery. Lasik behaves like a market — ever higher quality at ever lower prices. Things run by the government behave like government: ever lower quality at ever higher prices.
Costs are out of control now because demand is artifically raised, supply is artificially restricted, and third party payment disconnects the corrective market pricing system entirely by separating producers from consumers.
When untempered by the reality of having to make choices with finite resources, demand is infinite, because human desires are unlimited. Forcing people to pay for something whether they use it or not naturally leads people to use it as much as possible. Similarly, if the marginal cost is zero because someone else is being forced to pay, “free” services will also be used as much as possible. It’s a “tragedy of the commons,” and the very opposite of personal responsibility. You’re responsible for everyone *except* yourself! You’re paying for all others’ health care *except* your own.
It’s just human nature. Look at the AARP. If you tell people they’re “owed” or “entitled” to something, they will want and demand it — even if they don’t need it. Whenever you create general entitlements like Medicare based primarily on, in this case, age — regardless of need — you massively increase demand. Yet new doctors and hospitals don’t magically pop into existence to meet this excess demand.
What if you passed a new law giving everyone over 65 food stamps? The overwhelming majority of seniors are well off enough to feed themselves without resorting to cat food (or at least have families to rely on). Nevertheless, if such a massively expensive program were enacted, you can bet the AARP would be lobbying to expand it — and saying anyone who opposed it was trying to starve the elderly!
After disconnecting the price system, the government tried to control the resulting spiraling costs through massive regulation — sort of like smashing a Swiss watch, then hiring thousands of bureaucrats to individually control each gear 🙂 One result was a union-like separation of functions into dozens of separately licensed occupations (physician, nurse practitioner, registered nurse, pharmacist, etc.), each of which can only do certain things. This creates all manner of unnecessary bottlenecks, and prevents economies of scale.
If you want a simple tube of prescription dandruff shampoo, you can’t just walk in and buy it from a pharmacist. Even in Germany — hardly the poster child for free market economics — you can do that. No, you have to make an appointment with your PCP (one sanctioned by your employer’s random insurance carrier), wait a few days, get a referral to a dermatologist, wait a couple more weeks, *then* get a prescription so that you can finally go to the pharmacist.
It reminds me of my travels through East Germany and attempts to shop in their “supermarkets”. One line to find out what’s for sale. A second line to find out what it costs. A third line to pay for it 🙂 Surely pharmacists, with 6 years of medical education, are competent to sell shampoo.
And surely nurses could set up their own specialty clinics to do nursey things that don’t require full M.D.’s (flu shots, lab tests, etc.) And there could be Lasik-like medical procedure shops that only did one thing (e.g., appendectomies, hip replacements, gall bladder removals, transplants, hernia repairs), and whose practitioners wouldn’t necessarily have to go through the entire 8-year process of becoming general M.D.s. These would all compete with each other (and with the general M.D.s), to keep availability high and prices low. Who knows what innovative products and services would emerge in a free market? Anyway, all this present stratification and regulation drastically restricts supply.
And ever since its founding in the 19th century, the pseudo-governmental AMA has been limiting the number of medical schools and students, defining ever-higher licensing barriers to entry, lobbying for more regulation, etc., further restricting supply.
Finally, as I started to say above, “insurance” isn’t really insurance anymore. It’s no longer performing the core business function of insurance: assessing premiums based on individual risk, predicated on a model where large risks are transferred, but small risks are borne. (Who has a zero-deductible auto insurance policy that pays for inspections, brake lights, and oil changes? And if you did, what would it cost?) “Insurance” companies now are mostly just conduits for massive government transfer programs.
You pay for this through taxes — i.e., according to your income, instead of according to your risk. And you receive benefits, regardless of your contribution, according to “need”. (From each according to his ability, to each according to his need; hmmm, where have I heard that before?)
If you did that with auto insurance, 17-year-old high risk drivers, who don’t typically have much money, would have virtually free insurance; whereas responsible 40-year-olds would pay through the nose. If auto insurers were forced to charge everyone the same, regardless of their accident history (pre-existing conditions) or any other risk factors, they would of course cease to function as insurance companies, and simply exist to transfer tax dollars from one group to another. (Specifically, from the responsible to the irresponsible, thus encouraging a teenage demolition derby fueled by their parents’ money.)
Government intervention increases demand, restricts supply, and disables the corrective forces that would otherwise keep prices stable. Out of control costs lead eventually to price controls, which create shortages. The shortages are then dealt with through rationing.
Repeal the intervention, and all health care would be like Lasik — and doctors would be advertising their prices on billboards.
Jason –
I agree Real Estate is a scam. It is a monopoly, where there should be plenty of competition at 3%, but there is practically none. Why is this? Why do you have to be licensed to sell Real Estate? You don’t have to be licensed to sell lamps or computers, even in deals equivalent in size of Real Estate. Don’t get me started on title companies and appraisers . . . it is a whole industry of fleecers all getting a cut.
Did you know the term Realtor is trademarked? Had a customer that had a website that was designed for “For Sale By Owner” folks called Realty Free and that customer got a letter from a lawyer to take the site down because of the trademark infringement.
http://www.realtor.org/archives/lawoct04
The real estate industry is anti-competition, and should be busted for anti-trust violations.
They add very little value. They are fleecing people.
Having bought and sold many home over the years my thoughts are this. Yes, a good real estate agent can provide needed services for some folks, other don’t need these services. But for the ones that do need them I ask, at what price? 6% is a ridiculous amount for the services rendered which, if purchased on a one off basis, would be much less. Jason is right, they add nothing to the process other than cost. And their selling “strategy” is guess what, to lower the price, move the property quickly, and collect the commission. Oh and by the way, Jason, when you try to differentiate your property they are quick to tell you that the buying public does not care about that. This is their way of saying “lower the price”.