Sunday, December 29, 2013

Get a better price selling your house

In Freakonomics: A Rogue Economist Explores the Hidden Side of Everything by Steven D. Levitt and Stephen J. Dubner the authors show that there is a failure of alignment between what you as the seller and the estate agent want.  Yes, you both want a high price, but with typical fees running at 1% or less an extra £5,000 on the sale price is only worth £50 (or less) to the estate agent.  They show that estates agents when selling their own properties typically keep their houses on the market longer and get a higher sale price.  How much additional effort will an estate agent consider putting in for £50?  They are better off selling quickly at a slightly lower price and selling a few extra houses each year.  This is the misalignment between you, as the seller, and the estate agent.  They want the greatest annual income, you want the highest price on your house.

When I was selling my house I therefore decided that it would be worthwhile taking account of this and changing the fees that were payable to the estate agent, so that our interests were better aligned.  This would mean that if the house sold for a higher price the fee payable to the estate agent would be considerably higher, but that I would also receive more money (win-win).

To do this I had to determine a reasonable sale price, which I did in the usual fashion of asking several estate agents to give me a guide price for the sale of the house.  The prices were similar, so I worked from the average.  I then asked the estate agents for their fees, which were all 0.75%.  This was at a time when most houses were selling for 10-15% less than the asking price, so I would be happy to even get the asking price.
With this information I worked out a formula which would give the estate agent an advantage if they sold the house for the asking price or better.  Specifically I chose 0.5% fee for the first 95% of the asking price and then 10% of anything above that, giving a break-even price 97.25% of the original offer price.  Anything above that and the estate agent would make a greater profit, but given the market we would also do better.  I offered this deal to all the estate agents that I had asked for estimates, and only one of them was willing to be flexible and try the formula rather than their fixed percentage.

In the end we sold the house at the asking price, but in a rising market I would expect to do even better.  Of course, the estate agent does better too, and you have to be happy to see a larger slice of the asking price going to the estate agent than you would with the ordinary fee structure.  But the point is that you sell the house at higher price because you have made it worthwhile for the estate agent to invest additional effort in selling your house, rather than going for the quickest and easiest sale.

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