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026 Agents Buy at a Discount – But Not For Clients

Prof. Darren Hayunga, Terry College of Business, University of Georgia...

... in a more technically detailed podcast than usual in this series, discusses his finding that while agents sell for higher prices when then sell their own homes than when they represent clients, they also seem to do the same on the buy side.  The negotiating advantage they demonstrate equates to a 3.4% overall advantage in the market over clients.  Hayunga also discovers that businesses tend to outperform agents and thinks that perhaps because they are not including personal utility into their calculations - the utility gained from buying a home for direct personal use - gives them an advantage over home owners.

Agents Buy at a Discount

The finding that agents sell their homes for more than they do when they sell for clients has been established in multiple studies.  While it may not be entirely surprising to see a professional outperform in their own industry, the issue for agents is the fiduciary responsibility that they owe to their clients to act in their best interest.  If agents are performing better on their own account than they are when acting for themselves, there appears to be an inherent conflict of interest when representing clients.

The study being discussed in today’s podcast examines the ability of agents to negotiate when buying a home, rather than when selling their own home.  When selling their own home, the agent is control of the process, but when buying they are competing against the entire corpus of other agents.  If agents are truly representing themselves with greater discipline than they do when they represent their clients, we would expect them to perform better when buying for their own account and, indeed, this is what is found in this study.

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Overall a 3.4% Market Advantage

Taking the examination of this issue beyond simply the role of the agent and looking also at how other actors in the real estate market perform, such as companies, or trusts, or the government for example, it is found that while agents outperform when acting on their own behalf, companies demonstrate even stronger bargaining skills than the individual agents.

Approaching the problem from a different angle and applying an additional layer of statistical analysis to around 200,000 home sale transactions in Dallas from 2002 to 2013, the study adds a degree of refinement to this idea that agents have unique expertise that is not shared when applied to their clients.  Specifically, agents sell their homes for 1.7% more than they do when selling for their clients and also buy for a 1.7% discount relative to how they perform when representing clients.  This equates to an overall bargaining advantage of 3.4% that they use on their own account but not for clients.

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Anecdotal Evidence of Bringing Value?

The study also found that companies, when acting to buy or to sell, outperform agents by about 3.4% on both the buy and the sell side for a total bargaining advantage of 6.8% over agents.    Companies are tending to purchase properties that are lower priced, however, than the average purchased by individuals or by agents.

That said, those agents that have extensive experience in a market and are highly knowledgeable about a specific market can and do bring value to clients.  They might notice an error in a listing that can bring tremendous value to a client, such as seeing a basement wrongly categorized, or the total square footage of a property incorrectly calculated.  These errors might only be picked up by an agent with the expertise to recognize them and in those circumstances, they may justify a higher share of their commission.  That said, for every error picked up by an experienced agent and passed on in savings to a client, there is a seller who was badly represented and who lost money as a result of an agent getting a fundamental fact wrong on the listing.

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