By Ken DeLeon | Founder
A famous empirical study by Steven Levitt, one of the authors of the famed Freakonomics, discovered a fundamental difference between listing prices that real estate agents choose for the homes of their clients and their own properties. An economics professor at the University of Chicago, Levitt examined the Chicago real estate market and found that agents would price their own properties higher than those of their clients. The agents’ properties would take longer to sell but, in the end, obtained a higher price.
The motivation of the agents mainly stemmed from their receiving all proceeds from their own home sales as opposed to the three-percent commission on their clients’ home sales. Summarily, it was not worth their time on an hourly basis to price the homes of their clients as high as their own and wait for the right offer.
Silicon Valley sellers are some of the most astute in the nation, and thus inherently lack trust in their real estate agents when they suggest listing the price attractively and below market value. However, under the right circumstances, the DeLeon listing team takes this approach, and with marked success. Understandably, sellers sometimes have concerns about this strategy and, occasionally, they even bring up the Freakonomics study to back up their argument.
Given my strong background in economics, which includes formerly serving as an economics professor and being accepted into the economics Ph.D. program at the University of Chicago, I have given this study a lot of thought. I believe it is the principle—not the example—that should be followed. The principle is to price a client’s home just as a listing agent would price his or her own home. Then, taking this principle a step further, the pricing strategy should be tailored to the local market. While that tailored solution may mean overpricing in the slow Chicago housing market, a very different solution is appropriate for Silicon Valley.
For prime Silicon Valley cities, the housing market is completely different from that of the rest of the nation. So, if clients apply this principle, they will follow my own personal strategy I have taken with my own properties, which is pricing low but selling high.
Ever since I entered real estate a mere 15 years ago, I have consistently priced my own properties below market value to create an auction dynamic that, in the end, results in the highest price possible. In addition to paying attention to how agents price their own homes, clients should also look at the performance of their agents’ investments in their own properties. After all, clients are indirectly buying their expertise. The agents’ personal track records with property investing, both in success and breadth, add to the depth of their insight.
I am confident in the DeLeon pricing strategy because I believe in the strength of both the market and our listing team’s marketing. One cannot underprice and expect success with poor marketing. If a tree falls in the woods, does it make a sound if it is unheard by anyone? Although a home has an attractively low price, will it draw multiple offers with weak marketing? The answer is a resounding “no.”
The same argument in Freakonomics applies to the marketing employed by the DeLeon listing team as compared to that of an independent-contractor agent at another brokerage. As one would imagine, I would want my properties marketed aggressively since I have great incentive to generate excellent results. Applying the principles from the study, the property of the client should be marketed as strongly as the property of the agent. DeLeon Realty does just that.
The DeLeon listing team is bestowed with all of the benefits of a positive reputation since we are one brokerage with roughly 50 employees, not hundreds of independent contractors operating in silos. Thus, it makes sense for us to spend an extra $20,000 in marketing so that our clients will net another $200,000. We may only receive an extra $6,000 for our extra efforts and expense, but we get a lot of goodwill. Neighbors see the great results we get for our clients and they soon call us, further incentivizing us.
But, for an agent affiliated with a large brokerage, the goodwill is substantially bestowed upon the brokerage. In fact, many neighbors may not even remember which agent handled the sale. It does not make sense for independent agents to invest extra money when their economic return is so small. The dissipation of goodwill results in a lack of incentive for independent agents to market their clients’ homes as aggressively as their own. DeLeon Realty is different; we spend that extra money to make our clients much more, and we make up for the short-term shortfall through volume and growth.
For underpricing to work, it must be coupled with best-in-class marketing to draw the highest number of buyers to the home. In addition, it is important to follow what your agent does to prepare his or her own home for the market. For instance, I remodel and stage my properties, and ensure they are vacant to further enlarge the buyer pool and allow the auction dynamic to take hold with multiple offers.
When considering the DeLeon Team to represent a home, it is important to consider my track record for my personal properties, including the following:
When I handled listings in the past, I stayed true to these principles. Since taking over the listing side of DeLeon Realty, Michael Repka and his team have taken this concept to an even higher level — a level simply unattainable by any individual agent or small team. As a result, we have gained the trust of a large number of sellers as demonstrated by our sales volume—over $400 million in listings alone in 2016.
However, despite my stellar education, impressive pedigree, and vast real estate experience, even I struggle when implementing this aggressive pricing strategy on occasion. For example, I recently purchased a home in Los Altos for $2,520,000 and then invested almost $300,000 in a significant renovation. When my plans to rent it out changed eight months later, I decided it was a good time to sell. The recent sales in the area indicated the home was worth about $3,200,000, so I figured we would list it for $2,988,000. However, Michael suggested that I price it at $2,488,000—$32,000 less than I paid for the original house before the renovations—because buyers could be scared off by the big jump in list price in such a short time period. Intellectually, I knew the strategy was right, but emotionally I had some doubts. Fortunately, my intellect and experience overcame my fear; we listed the home at Michael’s suggested price, and it sold for $3,500,000, which was about $300,000 more than I had hoped.
As Levitt revealed in his study, the real estate industry historically has had misaligned incentives between agents and their clients. DeLeon Realty is changing that, resulting in a professional selling experience for sellers. This allows them to truly trust their agent as their fiduciary because they know their property is being treated just as their agent’s own property would be.