Why Home Prices Increase for Buyers Without an Agent

Posted by Help Now on Wednesday, June 10th, 2009 at 4:05am.

"What? My Home Price went up because I didn't use an agent?" The buyer's Ceteris Paribus Paradox!

Recently I had a buyer call our office wanting to see a home. We showed him the home and when it was time to write an offer he expressed that he didn't want to be represented. When his offer was submitted the bank countered back with a price 3% higher than a buyer who was represented by an agent. What?! Really?! The buyer with no agent was countered 3% higher? Why would this happen?

3 Reasons why prices go up when you don't have an agent.

Economists have a term called ceteris paribus. This term used to drive me crazy in economics classes. It means that all other factors remain the same. This drove me crazy because they use the term every time they change one factor in a model (such as price or demand). They really drilled in the fact that their predictions require all other factors to remain the same. However, they always taught that never, ever, do all things remain the same. Other factors always change. It is the same in real estate. Some buyers have said that if they went directly to the agent listing the property they would save on commissions and get a lower price. Yes, that is possible... ceteris paribus. But not all things remain the same when you are unrepresented. What are the factors that change? Here are the top 3 reasons why prices go up for those who don't use an agent.

First, X-Ray Glasses are being worn:

With real estate, those with experience can easily read the 'cards' of everyone at the table. I have been in two recent situations where buyers gave the other side an advantage. In the first situation, I was representing the sellers. An unrepresented buyer came to me to write an offer and engaged me in small talk. Over the course of our conversation the buyer made some comments that insinuated how much more he was willing to pay above the offer he was currently writing. Because of my experience I knew his current offer was fluff and he was willing to pay a lot more. I saw all his cards. An unrepresented buyer will let these details slip, not even realizing what they have done.

The second situation occurred when I represented the buyer. We had put an offer on a for-sale-by-owner home. The buyer was under the impression that because it was a for-sale-by-owner they would be able to negotiate a better deal on their own. So they talked with the seller without me there. Following the unrepresented bargaining session the buyer came to me confused because the seller actually increased the price to $175,000. I was a little irritated of course because I had already negotiated it down to $170,000. Because they decided to negotiate without me I had to do extra work to get it back to the original price. There is something about talking directly to the seller (or their agent) that always makes the buyer lose more money than they would with an agent representing them.

Second reason prices go up: Rules are Broken!

Too much focus placed on a single desired outcome violates a fundamental negation rule. Without an agent the buyers don't know the rules and consequently don't follow them. There are several good books out there on negotiation. One great negotiating book is written by Chester Karrass who is renowned as a negotiation master. His book title captures the danger of breaking rules, "In business as in life, you don't get what you deserve, you get what you negotiate." Another great book is, "Negotiate This" by Herb Cohen. These books talk about the rules of negotiating. Whenever I see a buyer negotiating by themselves they always break the rules of effective negotiation. As a result they don't get a deal done as they would like. What are some of the rules that are broken? Here are some examples: they don't know when to be silent, they don't know when to talk, they don't know what to ask for or how to ask for it, they don't know how to overcome a standstill, or they focus too much on one issue. The ironic thing is that people who break these rules are often the ones that believe they are the best at negotiating.

Special thanks to Scofiled Editorial, Inc. for making this video to demonstrate the nature of price negotations.

Third reason price goes up: The Law of unintended consequences.

Historians believe that the Treaty of Versailles imposed too many harsh restrictions on Germany which unintentionally caused World War II. The only way to prove this would be to go back in time and change the treaty and keep everything the same (ceteris paribus). However, the fact remains that this is a prime example of the law of unintended consequences. Because not having an agent changes the situation there are many unintended consequences when buying a home unrepresented. The result of these unintended consequences is an increased price of the home.

Recently we had a buyer have us show them a home, answer questions, and write up an offer on one of our listings. Then, they demanded we give them half of our commission because they didn't have an agent. This same scenario has played out about 3 times this year so far. What the buyer failed to realize is that commission is between a seller and their agent. The buyer had not signed any documents which would entitle them to a percentage of that commission. What makes a buyer feel entitled to the seller and agents' money? When you want a good deal on a home you should not make such demands of the person providing the deal.

So what happened? Our sellers flat out refused to work with the buyer because they perceived them as being dishonest. On all of these occasions the home was sold to a represented buyer, not the one demanding a percentage of the commission. The unrepresented offer encouraged others to make offers. These offers were made by represented parties and every single time, the sellers sold the property to the represented buyers. This is the law of unintended consequences in action. In an attempt to get someone else's commission some buyers sacrifice the home they want. Their focus should have been on buying the home instead of getting a commission split.

We had a similar scenario with one of our bank owned listings. The bank sees an unrepresented buyer as risk. As a result they increased their price to compensate for the increased liability of an unrepresented buyer. Without representation there is the risk of the deal falling through. When a buyer has a real estate agent, they have someone to hold accountable. When a buyer is on their own, there is no accountability.

If the price of a home goes up without an agent why would anyone attempt to purchase a home without one?

3 Reasons why people may not use an agent.

1 - They believe they can do it themselves and save money (Ceteris Paribus Paradox).
2 - They had a previous bad experience with an agent.
3 - They knew the person they were doing the transaction with.

These reasons may sound legitimate, but watch out for the unintentional consequences of un-representation. The price goes up, rules are broken, and opportunities are lost.

How did it work for those who tried it on their own? According to NAR Profile of Homebuyers and sellers (2008) only 16% said they would do it by themselves again. That's right, only 16% of for-sale-by-owners, or those who sold their home to someone without an agent, said they would do it again. Even when selling to someone they knew the majority believed having a real estate agent would be better next time.

How do you get the best deal?

You call an agent with experience to help you! An agent will avoid all the problems listed above that cause people to pay more for a home. Most times, un-represented buyers don't even realize how much additional money they are spending because they don't have an agent. Should I call any agent? No way! Interview your agent and make sure they are going to fit what you are looking for. They need to have extensive knowledge about the business as well as the experience to adequately represent you. The number one mistake people make is choosing an agent based on commission. If you have agents offering you cheap discounted commissions, you know you chose the wrong agent. I have 20 reasons why choosing an agent based on commission causes you to lose every time. The main reason is that the focus is on commission....not on the quality of the agent or the service you want to receive. The result of this narrow focus is unintended consequences. Focus on the service you want to receive and you will find that quality agent who is right for you. Good luck!

About the Author:

Utah Dave - Neighborhood ExpertUtah Dave - Daybreak Neighboorhood Expert and Local Resident

My friends nicknamed me Utah Dave in high school because they said it didn't matter where we went in Utah, I would know how to get there and who we needed to talk to. The name sticks today as UtahDave has formed into a professional real estate network of Neighborhood Experts all across the state. I live in Daybreak with my wife and 4 amazing children. I enjoy dancing (which is how I met my wife Dawn) as well as traveling, coaching, and learning.

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