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FSBOs Get More Money! We Don’t Think So

We hold the Kellogg School of Management at Northwestern University in very high esteem. They are without question one of the finest research institutions in America. Their work on the psychology of strategic defaulters has been mentioned in this blog on several occasions. That being said, we want to take a close look at an interesting paper they highlighted this month.

Kellogg looked at a study that took on the question of whether or not it makes financial sense to hire a real estate professional when selling your home. Some have reported that the paper shows that sellers actually sell their homes for more if they DO NOT USE AN AGENT.

What did the paper actually say?

According to the summation page for the report, the researchers found:

Our key finding is that Realtors do not offset the cost of their commission; they do not get you a higher price. Your cost for the Realtor is your full commission.

They went on to attribute the difference to this factor:

Sellers who used FSBOMadison.com to sell a second home after they sold their first home via a Realtor were notably different from homeowners who only sold their homes through a Realtor. Specifically, they tended to get a higher than expected price when they sold their first home via a Realtor. This suggests that they were special in some way—more confident or more patient, perhaps—and that these traits would allow them to get a higher price for their home no matter what means they were using to sell it.

Should we put stock in its findings?

We have already said that we admire the insights Kellogg brings. However, we find this paper to fall short on several key issues:

All the research was confined to one city.

The entire data compiled for the study came from the city of Madison, Wisconsin. Our lead blogger, Steve Harney, is quite familiar with Madison. He has had the honor to address leaders in both the mortgage and the real estate industry in Madison on several occasions over the last few years. Though Steve agrees with the report that “the Madison market is not as unique as you might think”, he disagrees that it could accurately reflect most regions in the country.

We realize that it would require an army of researchers to aggregate data from every market in the country. However, using only one city in the middle of Wisconsin to justify national trends seems rather limited.

The report covered the years from 1998 – 2004.

Using data over six years old to determine housing trends in today’s rapidly evolving market is a perilous proposition. The report’s most recent data was from 2004. Since then, the housing industry has experienced two very dramatic cycles – the ballooning of prices in 2005-2006 and the bust in housing values since.

The study claims says:

Also unknown is whether or not these results apply to the current housing market, which has been deflating for some time. The time period studied, which begins in 1998, includes an era before the housing market took off, suggesting that the effect is not dependent on rapidly rising house prices.

However, after researching median housing values in Madison for the period 1998-2004, we found that prices had increased over 35%. Selling is a much easier task in an appreciating market. The seller, at that time, also had much less to be concerned about when it came to the ability of a potential buyer to attain a mortgage. It was during the years of the study that lending standards had been lowered to such a point that almost anyone could qualify. Those two points combined may have allowed a better educated and more informed seller to sell on their own. Especially, if there was a resource available in Madison for them to use.

It compared the MLS to only one For Sale By Owner resource.

Even within that one city, the researchers further limited their study to only one outlet that FSBOs used in that city. As the report states:

The study compared sales via the Multiple Listing Service (MLS), used by Realtors, to those via FSBOMadison.com, used by home owners.

Many agents are familiar with the National Association of Realtors’ 2010 Profile of Buyers and Sellers which shows that the average sales price of a FSBO is $59,300 less than an agent assisted sale. Realtors don’t claim we can sell an individual home for almost $60,000 more than a FSBO could sell the same home. We know that the data is not comparing apples to apples. The subset of sellers who decide to FSBO may have different characteristics than the subset that takes on the services of an agent.

Perhaps, the same is true with this study.

Madison is a college town – the home of the great University of Wisconsin. It is probably safe to assume, as such, that the average intelligence and level of education is higher in Madison than in many parts of the country. Could it be that the better educated sellers (who probably lived in the more expensive homes) better used the internet back in the early parts of the last decade? Could it be that the better educated and more affluent buyers were the ones searching the internet in larger percentages a decade ago? Realtors and many buyers were late to internet search opportunities. Obviously in Wisconsin, FSBOMadison.com was not.

That is no longer the case however. According to the NAR report, the percentage of buyers who found their home on the internet has increased over 450% since 2001 (8% to 37%).  The NAR report also showed that purchasers today favor the local MLS sites to the FSBO web sites by almost a 4-to-1 margin (59% to 15%). It would be interesting to compare FSBOMadison.com today against the best industry developed web sites in Madison.

Even FSBOMadison.com now realizes the importance of the MLS in today’s market. According to their site:

We are still not realtors, but our Tech Support buddy of 10 years, David Zwiefelhofer, now has a real estate broker’s license and will provide access to the MLS for a very reasonable fee. You are still a fsbo seller, you will still do the work yourself, but if you feel you need to extend a hand to buyers with real estate agents (and agree to a buyer’s agent commission).

The seller “will still do the work” and pay half the commission anyway!

Bottom Line

There is no question a real estate professional can better navigate the minefield of challenges that occur during a housing transaction in today’s market and it is definitely worth the expense to hire one. On top of that, will they also bring the seller more money? Maybe. All we know for sure is this study sheds no light on the subject.


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1 reply
  1. Matthew Ferrara
    Matthew Ferrara says:

    Great post, Steve. I think Kellogg has made an error, but it’s in their conclusion, not their research.

    What if we take Kellogg’s conclusion at face value: The cost of the REALTOR IS the cost of the cost of their commission. So what? Don’t we expect to pay someone for services rendered? Are we hiring REALTORS to “raise the value of our homes” or to provide us with real estate sales and marketing services?

    That’s where Kellogg’s report falls into the common misconceptions of what REALTORS do and why they should get paid. Hiring a REALTOR is just like any other service – they provide functions, features, convenience and value – and they charge a fee to do so.

    We don’t expect other service providers to be “cost free” but instead expect them to ACHIEVE a value for us: Dentists make our smiles brighter, lawyers help us with legal disputes, computer geeks fix our computers. They create outcomes we’re willing to pay for, even if they don’t raise the “intrinsic” value of our teeth, legal standing or laptop *per se*.

    We must not let Kellogg or anyone else mislead the public into thinking that REALTORS should somehow “offset” their fees by increasing the dollar value of the home. REALTORS have little to no ability to affect market value of commodities; expecting them to do such would be like expecting our stock brokers to increase the value of a stock purchase before they deduct their commission from it.

    We should always discuss the value gained for the costs incurred with clients – in real estate, as well as everywhere else.

    – Matthew Ferrara

    Reply

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