Low Fee Agents Cause Serious Seller Losses in Northern Virginia

Risk Reward 5

What Defines a Low Commission, Bargain-Priced Agent?
The average listing fee to sell a home in Northern Virginia is approximately 2.85% (excluding the fee to a buyer’s agent). Generally, a low commission, bargain-priced agent prices their listing fee in the range of 1 to 1.5%. That’s an astonishing 50 to 65% below most full-service agents. Low commission broker-agents are generally brokers or agents who center their day-to-day service model around simply being the low-cost provider without much else in terms of value offered to sellers. Low-cost providers usually come from two schools of thought. One is the belief that technology has so revolutionized the home selling process, and in so doing, it has eliminated the long-standing complex process of selling a home. This is largely the point of view shared by internet-based brokers who equate buying something from Amazon or making an
online hotel or airline reservation as being nearly the same as selling a home. The other school of thought is from traditional, independent agents who decide on a low commission offering because they’re either intentionally ultra high volume, low service agents or agents who find it difficult to compete on performance and service so they differentiate themselves on price alone. 

Confirmation Bias = Poor Choices in Real Estate
The human mind is subjected to many psychological biases when it comes to decision-making. Confirmation bias is one such bais and it can be quite strong in our general behavior. It
can lead us to make biased decisions because we don’t factor in all relevant information. Here are some common examples of confirmation bias that I’ve confronted when meeting with sellers. 

  • A seller relies on inaccurate estimates of value like Zillow Zestimate or tax assessments when precise value can only be determined by close inspection of the home and a comparable analysis performed by an experienced agent or appraiser.
  • A seller believes improvements are worth what they paid for them instead of the value a buyer estimates at the time of an offer.
  • A seller overlooks the absence of improvements and upgrades in their home when compared to similar homes sold with improvements or the seller lacks appreciation for what could be considered an undesirable condition.
  • A seller generally assumes that the approximately 16,000 real estate agents in Northern Virginia will materially deliver the same outcome and seller experience in the sale of their home despite clear differences in performance, expertise and commitment that exists among the agents.

The Value Trap – Would You Risk $38,496 to Make $9,828?
When asked this question sellers almost universally answer, “no”. This is certainly the anticipated seller response because a rational risk-taker is usually willing to risk $1 to make $4, but risking $4 to make $1 is generally considered an undesirable proposition. However, that’s indeed what most sellers do when they decide to hire a low-cost broker-agent as described in the table above. These sellers often don’t go much further in their agent selection analysis than calculating the cost to sell their home (agent commission). Consequently, they can become grounded in the attraction of low commission and resist considering other compelling differences among agents
that weigh heavily into a seller’s financial outcome and home sale experience.

Statistics Separate the Wheat from the Chaff
As shown in the above chart, in Northern Virginia a low-cost broker-agent can on the surface save a seller on average $9,828. This is calculated by an average savings of 1.6% in listing fee commission multiplied by the average home price of $614,236. However, the potential seller savings don’t operate in a closed-system without other risk factors that can, and often, produce serious seller losses. First, Bright MLS statistics show that in 2019 homes listed by a typical low-cost broker-agent accumulated nearly twice as many days on market than average (and three times as many days as Top Producing agents). Regardless of seller patience in the sale of their home, excessive time on market is a serious destroyer of market value. When time on market extends beyond typical neighborhood experience it almost makes a seller price reduction a certainty to attract a buyer. The average initial price reduction for sellers is 2.9%, producing a seller loss of $17,444 in the example above. The additional time on market also means increased carrying costs for a vacant home. The average home carrying cost is 0.5% per month – an additional $3,000 of losses in this example. This $20,000 in seller losses has already doubled the $10,000 in commission savings, but we haven’t even begun to inspect the most critical risk factor.

Sellers are shocked to learn Bright MLS statistics show that low fee broker-agents experience a 30 to 50%+ failure rate – meaning their listings have an extraordinarily high probability of going unsold – either expiring without a seller extension, or being withdrawn or canceled by the seller. The road to a failed sale exacerbates seller losses even further with additional carrying costs and price reductions, not to mention hurting the home’s market reputation. Sellers must remember their home’s reputation (selling information) remains in the MLS and public domain for buyer consumption long after a failed sale. All told in this example of a $614,236 Northern Virginia home, sellers can easily risk $40,000 in losses with a reduced fee agent to save just $10,000 in commission. This is a perfect example of a Value Trap.

Selecting an Agent is Almost Like Buying a Stock – Avoid Value Traps
The discussion of a Value Trap reminds me of very important words by some of the smartest financial minds in money and risk management. I believe their advice can be easily overlayed to sellers when analyzing commission and broker-agent selection.

“Low price [commission] is very different from good value, and those who pursue low price [commission] above all else can easily fall into ‘value traps’.” – Howard Marks, Co-Chairman – Oaktree Capital

“The best way to avoid a value trap is to ask the obvious question; “if this stock [agent] is so cheap, why is it cheap? The cheaper it is the more the market [consumers] is telling you there is something wrong. If that’s the case and you’re still intrigued, you better dig really deep”. – Preston Athey, Wealth Manager – T. Rowe Price Group, Inc.

“We try to avoid value traps by not making price [commission] the first, second, or third thing we look at. We never base our investment thesis [agent selection] on price [commission] alone.” – Dan Davidowitz, Portfolio Manager – Polen Capital

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