Escape From Pianosa

I’m reading Freakonomics, a wildly popular book that has also caused some controversy among real estate agents. First off, the book really is a great read and fascinating for anyone, not just amateur econ-nerds like myself.

The gist of the real estate section is that the incentives of real estate agents are not perfectly aligned with the incentives for home sellers. Sellers naturally want top dollar for their property, although they will not wait forever to get it. And of course agents also want high sales prices. So what’s not aligned?

Well, let’s say that your home is listed at $300,000 and after a week on the market, you get an offer for $290,000. That’s $10,000 less than what you wanted, a very big number to you. However, it’s not so much for your agent. If the seller’s agent is getting 3%, and has to pay half of that to his broker and the IRS, then a reduction of $10,000 in the sale price equates to a $150 reduction in the agent’s commission. Not really a big deal for the agent, money-wise.

The homeowner has a very strong incentive for wanting a higher price, while the agent only has a small incentive. The homeowner might be willing to wait three more weeks or three more months to get a higher price, while three months for $150 just isn’t worth it for the agent. The homeowner makes the final decision, but the agent has influence on the homeowner’s decision.

Now I believe that good real estate agents will recognize this situation, ignore it, and act in their client’s best interest. In fact, Dubner’s analysis doesn’t take into account another incentive that agents have–the fact that getting a higher price for their client will make for a happier client and ultimately more referrals.

I suspect that the misaligned incentives have a greater effect on agents who are more shortsighted and aren’t thinking about the longer run incentives of providing the best service possible. Any ideas on how to determine whether or not a prospective agent would be affected by the incentive to sell quickly?

Some of the pols are calling for laws that disallow the creation of new ground rents - I don’t really see the point of this. Not too many sellers create ground rents when they sell, and if you’re worried about it you can always specify in the contract that no ground rent will be created at sale.

Ground rent owners need to have a way to legally collect the rent due to them, but being able to seize a home over a $240 debt doesn’t make sense. I don’t see any problem with being able to force a sale, but the ground rent owner shouldn’t get any more than the debt owed and maybe legal fees. If they were limited to collecting their unpaid debt + expenses, I think this problem would go away pretty quickly. Who’s going to sue for $240?

In case you missed it, the Baltimore Sun is doing a big series this week on ground rent in Baltimore.

• Part 1 - On shaky ground
• Part 2 - The new lords of the land
• Part 3 - Demands for reform

Buying a house with your boyfriend/girlfriend isn’t really the greatest idea on Earth unless you’re really sure that you’re going to get married eventually (in which case, why haven’t you just gotten married already?) But if you insist, you should get an agreement in writing that specifies exactly what will happen if you break up (prepared by a lawyer of course).

Who gets to keep the house? How is the other person going to be compensated? Do you sell and split the proceeds?

You should also know what percentage of ownership you have. If you make the down payment, and then split the mortgage payments every month, what percentage of the equity are you entitled to?

This also goes for buying investments, whether it’s with a business partner or a romantic partner. When things go bad, a good partnership agreement will make life so much easier, unless you enjoy litigation.

Tom at The Real Estate Bloggers reports that the government is looking more closely at commercial lenders. I have a feeling that banks would be less likely to over-leverage themselves if they didn’t think that the government would be there to bail them out when things go south.

I’ve been having TV envy lately. OK, not really because I don’t watch much TV–although I don’t hold it over anyone’s head. I actually like a lot of TV shows but not enough to make them a priority–except for The Wire and pretty much anything else HBO produces.

Anyway, I went to look at a house yesterday and what do I see in the living room? A humongous flat-panel TV that must’ve cost at least $1000. And what else did I see in the living room? Nothing. As in no furniture whatsoever. No furniture upstairs in the bedrooms either. I can understand the desire to have a very large television, but at the cost of furniture? I don’t pretend to know what’s best for other people, but that certainly boggles my mind.

Apparently, being a real estate agent is not prestigious at all. Of course none of my previous jobs were mentioned; I’m confident that real estate agent would rank above busboy, gardener, bartender, and bureaucrat.

From now on I’m just going to call myself a real estate developer. I’ll be happy if that puts me above union leader.

What I don’t understand is how anyone thinks that being a farmer is ‘prestigious.’ I mean, when was the last time you heard someone say “oh my son, we’re so proud, he was going to be a doctor or an engineer but he decided to be a farmer instead!”