Ethical Homes

Slowly but surely, the public is figuring out something that should have been obvious to them: in most financial transactions, there are very few people involved in the transaction who share the same interests.

Perhaps the most striking example of the growing awareness of this fact is the buzz around Steven Levitt’s book Freakonomics, which has been getting a lot of press lately; Levitt’s specific interpretations of information are sometimes either flawed or else poorly explained by his co-author, but one of his basic premises is a sound one—that most human behaviour can be explained by figuring out what “economic” (where economic doesn’t necessarily mean monetary) incentives there are for the various options available to a person. In particular, his chapter about real estate agents (an excerpt of which appeared in Wired magazine) shows how the incentive for an agent to help a seller get an extra $10,000 for their home is often a mere $150 more in that agent’s pocket; for most agents, the risk of losing their commission in its entirety isn’t worth that extra $150, so the temptation is very strong for the agent to advise the seller to accept a lower but more secure offer.

Another recent article, this one in the Washington Post, touches on the same idea, noting that many buyers are ending up with worse loans than they ought to get, because the lenders who are advising them on what loan to choose have a vested interest in making sure that the buyer chooses some loan, even if it isn’t the best one.

Clearly, the best solution to these sorts of problems is to directly align the interests of the parties involved; within the next year, for example, I hope to have all agents working for Ethical Homes be paid on salary rather than commission, with incentives tied to the overall satisfaction level of our clients (rather than to the number or size of transactions closed, as they are at most brokerages). Getting to that point will take some time, unfortunately, and some of my more innovative ideas for how to directly align agents’ interests with those of their clients aren’t allowed at all by any of the major brokers (including Prudential Carruthers Realtors, with whom I am currently affiliated), meaning those pieces of the puzzle will have to wait until either I get my own brokerage license (in 2007) or I find a broker progressive enough to let me change the current real estate commission model drastically.

It’s exactly for these reasons that I spend so much time educating my clients about how their transactions will work: it’s only when my clients really understand both the possible conflicts of interest at play and the probable consequences of their choices that they can be sure that, regardless of the incentives that might be influencing other people, they are making the right choice. (It doesn’t hurt that the knowledge my clients gain into the motives of the various parties involved in a sale also helps them in the negotiation process, of course; that’s a large part of the reason that even in a hot seller’s market like this one, my buyers in 2005 have so far been able to purchase their homes for an average of $15,000 below initial list price; my sellers in 2005 have “only” sold their homes for an average of $8,000 above initial list price, but those list prices, based on what I showed my clients about how markets actually work, rather than how most agents think they work, were already an average of $30,000 more than the sellers in question had been told that they could get for their homes by other agents.)