Theory of the Starving Real Estate Agent

When I received my real estate license 5+ years ago, I entered into one of the hottest real estate markets in the country, at the beginning of one of the hottest real estate booms our nation would come to see. Real Estate licenses were flying out of the California Department of Real Estate as fast as they could print them. In San Francisco alone, I think the number of agents hit 5000+. (Keep in mind our population is only around 750,000+.)

Now the market has cooled, but at last check there are still some 4500+ licensed real estate agents in the city of San Francisco, and a lot less deals going around, and still “20% of agents doing 80% of the business”. So what happens to the rest? They need to pay bills, put food on the table, and pay the cost of living in San Francisco, and that leads to my theory.

The “theory of the starving real estate agent”: I think that a good percentage of the astronomical overbids, and market run up we had seen, were a result of agents pushing their clients to a higher offering price in order that they themselves would get paid. This is a theory I’ve had ever since I got my license and represented my first client on their first losing offer, and I thought, “How can you possibly make a living in real estate when you not only have to hustle to get clients, but also compete on every offer you write for them?”

Who knows, maybe I’m just frustrated myself for the countless buyers I represent that continue to get blown out of the water by other buyers, and I’m trying to come up with a logical explanation as to why this keeps happening, but I’m still left scratching my head.

I know the majority of agents in this city, especially those that I have dealt with first hand, would never do such a thing, but sometimes I wonder about many others. This is America after all. Capitalism at its finest, where only the strong survive.

A lot of the overbid prices were, in fact, a result of frustrated buyers who had been beaten out on several other offers, then just got fed up and threw in the highest offer they could and usually blew the others out of the water. But it’s the properties that sold over asking when perhaps they shouldn’t have, that give me concern, and those alone could have had a sizable impact on the market dynamics, given the limited supply here in San Francisco.

I don’t know, but it’s a burning thought that’s been lingering in my head nonetheless, and aren’t you lucky I’m sharing it with you. ;-)

And yes, you heard me correctly, multiple offers are still happening…regularly.

-Why’s this keep happening to me!? [theFrontSteps]

-636 Steiner, an offer and a UFC style beat down [theFrontSteps]

-Battle Royale: San Francisco or New York City, if you had to choose [theFrontSteps]

20 thoughts on “Theory of the Starving Real Estate Agent

  1. I don’t think it’s agents. It’s supply and demand, primarily. If a house sits on the market for three months (very common in many other markets) the agent and buyer check it out and write a “reasonable” offer. Then the negotiation begins between one buyer and one seller. That kind of market is more normal. Here, we often don’t have that luxury. If the house sits for two weeks and then takes offers, just two buyers can create a bidding war. When I bought my first house in the Bay Area, we bid on six properties (each over asking) but lost. It was frustrating but I didn’t wildly overbid on number 7. And, luckily, I got it…

  2. i totally agree! the agents around deserve a huge portion of the blame for the bubble. the mortgage brokers didn’t ask people to pay ridiculous prices for the same property year over year. it was the realtors!!!!

  3. let’s make sure we blame everybody EXCEPT the buyers that actually paid those amounts. two years ago, when people were writing 2-3 offers a month, only to get outbid time after time, they continued to increase their purchase price. some buyers got so fed up with the game, they were willing to “overpay.” real estate is not a 2-5 year game/investment. it’s a place to live and a long term investment. those that paid “too much” two years ago, may have seen a dip in the value of their home as of today, but what happens in 7-10 years–i tend to believe that their investment will be safe. every party privy (say that 3 times fast) to the transactions should take some responsibility–it was no one party. agents, lenders, buyers, lack of inventory and sellers all had/have something to do with it.

  4. I think it’s all about perseption.

    most of the “baby” agents think that their only goal is to close and get their chinchin.

    most of the “older” agents think that their goal is to have a happy buyer, a happy seller and 5 years down the road, get REPETING business from BOTH. (with a caveat – some agents have been in the business so long that a few completly lost their touch of reality)

    We had that talk during a competitive war on a specific property, and our agents were asking us to go +12% on a property to get it. Under pressure, and unwilling to make such a commitment, I looked in their eyes and asked quite rudly if they had any interest in closing at a higher price. And they answered that no: They would help their clients choose between – getting the property at the lower possible price (what they were doing in that case) OR bidding a reasonable price (knowing that we would be overbid MANY times).

    On that one, we didnt WANT the property, bid a reasonable overbid for the property, but a low bid for the market. And got outbid by $200K – to which they would not have accepted to help our offer (overpriced)

    However, that argument did set up a excellent environement for the rest of our search, and we closed on our house with an offer we were very happy with.

    During over 200 open houses, I did ask many times the touring agent HOW the property was priced. I’d say that 1/3 had done their homework: comps, listing the good and bad selling points etc.

    And for about 2/3 of the properties, the asking price was set by the homeowner – on totally messed up informations… we could assume that those “starving-agents” would just do ANYTHING to be able to list a property… including being the joke of the year by choosing to list a stalefish.

    Alex, keep your integrity and honesty. Rough times might be ahead, but the good agents will always get recommandations. Hang in there.

  5. Attrition is the optimal term, not layoffs. Realtors don’t get a paycheck, remember. The theory of the starving agent probably has some merit at times, I guess. On the other hand though, it is market driven after all. Too expensive is too much to pay. Even in a boom market, overpricing is the one mistake you cannot make.

  6. i’m not sure when the last time most of you went through the process of a transaction but it sure seems like the legalease required these days to get one done kind of makes two realtors/brokerage firms redundent. that would take care of 2500 of them right off the top.

  7. Yeah. That’s sort of true James. It has been lawyered pretty extensively by now. If a buyer or seller can do it his or herself, god bless. Go for it. Some people can. Most people cannot. There is a whole lot of time consuming thought processes that make for a viable transaction. And experience … the art of the deal, so to speak. That can be invaluable. But no doubt, some folks are equipped. And the paperwork is attainable.

  8. The customer and buyer’s agent do not have the same goals. Agent wants you to “win” the auction and the buyer wants to pay as little as possible. Therein lies the issue. Many customers I am sure put too much faith in their agent not recognizing this inherit conflict with their buyers-agent relationship. If a buyer / customer is blindly listening to their agent than they sort of get what they are asking for in the process. But a good agent should really understand their clients financial situation and make sure the buyer knows all of the risks and potential downfalls. A good agent should know when to put the brakes on to protect a client.

    I do agree that most over-bidders are 2nd and 3rd time losers on previous offers and much like gambling additions, buyers hate to lose. This can make an additional 50 or 100k seem like nothing for a potential buyer if they can ‘win’.

    Note to buyers: If you see a property and like it; get out to see it urgently and make a same day bid at, or below asking price before the place gets tons of bids. Most agents wait until the offer date or until after the open house / brokers tour. All offers expire in 24 hours from time presented unless stated otherwise, which puts the seller in a unique position of having to make a decision. This puts you in control.

    Note to agents: get you buyers to make offers; even if they are low-ballers. How many agents had their customer go into contract on their first offer? LOL. Get your customers to make an offer. It cost’s nothing but time and when they see a property they love they will be more inclined to put in a winning bid.

    In this market, there are still a lot of qualified buyers, but they are now competing for the best properties.

    E.

  9. Cue the violins now.

    I think it’s all about GREED. Blame the sellers for thinking their property is the greatest in the world and worth top dollar. Blame the Realtor for coaching them to get the outrageous price, which only ups the realtor’s fee. And finally, blame the buyer who chooses to pay the outrageous price.

    Trouble is with that theory is this: As a homeowner, I know that I will want top dollar for my fabulous house, when it comes time to put it on the market.

    so I guess I’m guilty too..sort of.

    Oh, one more thing. GOD ALMIGHTY. I wish this site had a built-in spell check…well. for some folks. LOL>

  10. You all make very good points. Sophie, I’m not needing to hang in there, and therefore my clients will get the best price they can. But at the beginning of my career, I had to wonder, and i still do. Especially when representing a seller, getting 5-10 offers, 2 are lowballs, 7 are right around the same, and one completely blows everyone away.

    I also understand the whole dynamic and it is a very touchy situation. You are all right. It is our job to get you the place at the lowest price, but your (buyers) job to get the place, as it is your money and your comfort level that has to be maintained. And that, unfortunately means you have to throw in all your chips sometimes. It is a balancing act, that is for sure. My clients who are working with me now, know that I struggle everytime I know we have to go over asking. You just never know how much is enough, or how much is too much. You gotta pay what you’re comfortable paying, and offer a price you’d be comfortable knowing was your best if someone comes in $1 higher, so you don’t think, “I would have paid that.”, and ultimately lose the home.

    At the end of the day, I still think many an agent is starving and doing what it takes to get their “un-educated” clients to go way over.

    But fear not! You are all educated. You’re reading this blog ;-) and the countless others. You will win in real estate!

    Eddy, you are absolutely correct about just writing the offer. You have nothing to lose. You can’t win if you don’t play the game.

  11. This is the first time I’ve read a post by Duggo and actually agreed and wondered “Is this really Duggo?” All parties involved in a house transaction are responsible for the prices people pay, but the buck stops at the buyers (unless of course the realtor is holding a gun to your head). We all do research when we’re going to buy something as minor as a tv, car, to make sure we are making the best decision for ourselves yet somehow that doesn’t happen as much with buying real estate. I don’t get why, especially since you are spending an exuberant amount more.

    As I read Duggo’s last comment I realized this couldn’t be anyone other than him; since once again, he is flaming on someone. When is the madness going to stop Duggo?

  12. my, my. let’s not take this all to seriously boys and girls..this is a form of entertainment, after all..right?

    we talk. we learn. we converse. we opine. we whine. we rant. we bark.we have fun too.

    if eye wuz flamming anyon, you wuld definetely no it.

    oh by the way, thanks Randy for agreeing with me. Lots of people do, now and then.

  13. We can blame the agents all we want, but it’s the buyers who should be ultimately responsible for their own bank accounts. When I was looking for my home in ’04, my first agent kept on showing me dumpy places and kept on reminding me that until I put more money on the table, I would not be able to get nicer places. My agent knew that I had a lot more in the ‘reserve’ and kept on encouraging me to put more chips on the table. I on the other hand already knew what my game plan was and how much I wanted to spend so I would not budge. After a few months with this agent I realized this one wasn’t right for me so we parted ways.

    My second agent was great. Knew what I wanted and understood my plan (it involved a 1031 and possibly a reverse 1031 if timing didn’t work out). He told me it would take time to find what I was looking for. I told him I was in no hurry. He didn’t bother sending me to places that he knew I didn’t much care for, so we had very few interactions. Then one weekend he called me and said, “I got one for you,” and that was it. I would use him again when I sell.

    Both agents were relatively new to the trade in ’04. But their styles were very different. The first agent was a pusher. The second was an adviser. I still believe it’s the buyer who is responsible to know his financial comfort zone and to find the right person to work with. If the buyer overpays, he has nobody to blame but himself.

  14. But their styles were very different. The first agent was a pusher. The second was an adviser. I still believe it’s the buyer who is responsible to know his financial comfort zone and to find the right person to work with.

    it’s amazing the number of people who do not interview their agent (selling or buying).

    My answer is generaly that one: If you divorce and have to split (or hopefully NOT split) $1M, you surely would find the best possible lawyer to protect your assets.

    A house is about the same amount of money… and somehow, people dont even see the need for a good agent – as in “we interview many agents and picked the one who had the best identical vision to protect our assets).

    Or is it pride that “they actually dont need an agent, so anyone would do”? I dont get it.

  15. kenny,

    i wasn’t advocating a fsbo type approach. i was suggesting that one licensed professional was enough per transaction.

  16. Real Estate 101 & the Current Financial Crisis

    To understand the real estate market you have to keep in mind there are several different values for any property at any given time:
    1. Assessed Value – Value given a property by local and state authorities for purposes of taxation. Depends on your laws governing the state and local taxing authorities’ criteria. This is usually lower than all the other values but not necessarily.
    2. Appraised Value – Value given a property in relation to comparable closed sales within the area adjacent or within close proximity to the property. An appraiser can only pull those comparable sold property records that are ‘LIKE’ properties, meaning closest matching the property being appraised. Falsely providing wrongful appraisals can get an appraiser in serious trouble with fines and or jail time. This is considered a snapshot, the truest most up to date value of any given property at that time. If property values decline it can be due to economic, employment, crime factors, etc…
    3. True Value – Value the public gives a property based on a particular requirements like: area, availability, desirability, schools, etc… This one is tricky and where alot of people have misconceptions of value. This is the price a property sells for regardless of the other values. Most of these types of properties sell above appraised values as there is a low inventory to choose from and a larger pool of buyers wanting in. Lenders will only lend up to the appraised value and the difference between two values will have to be paid in cash by the buyer.
    4. Actual Value – Value an insurance company or a builder may use for purposes of replacement or remodeling or to build new. This is usually a flexing formula for the area defined by the price and availbilty of materials, price of labor, price of land, etc… This is usually lower than the other values depending on build criteria but not necessarily.

    REALTORS do not set the prices on properties based on their own formulas. They understand how to properly price property based on comparable values similiar to an appraiser. But it is the lenders that determine the appraisal company to be used thereby setting the trend for the value of the property.

    This toxic loan mess was first created by creative financing by low level loan companies. EX: A couple wanted to purchase in the area they grew up in or to be closer to work but could not afford to as prices were out of their qualifying range but the property values were sky-rocketing every year (any property value rising above 3-5% per year will eventually create it’s own bubble). So the loan officer put together a loan package that was solely meant as a short term interest only or less loan that helped qualify the couple and WA-LAH… a new loan for their new home. Problem was this works only at the beginning and middle of the bubble. Bubbles burst, people lose their homes. This has been going on for some time in California especially in S.F and L.A. and other fast moving real estate markets.

    What made the current crisis come to a peak was that this became the new lending norm along with much loved and overly used 100% financing. Then to make it worse these loans were then bundled and rebundled and sold over and over as viable securties on Wall Street. Most investors had no idea what they were buying till the poop hit the fan last October, causing a financial crash, the closure of many companies, mass layoffs and deflated property values. History shows us that Real Estate is still the best hedge against inflation and for long term personal wealth.

    There is fault in the system and will take some long term pain till it is over. For the future – Don’t be greedy looking for short term gain without long term investment, invest in your property with a down payment even if you have to relocate to where it’s more affordable, don’t live beyond your means buying more property that you can afford. Abide by the simple financial rules we followed for years and almost anyone can eventually become a property owner.

  17. “This has been going on for some time in California especially in S.F and L.A.”

    I disagree. I think people will be surprised how contained such loans were, by and large. San Francisco’s supply-demand was out of whack. Consequently 2004 through fall 2008 you wound up with people with the MOST money down getting the properties. Not the opposite. Why choose the guy with 5% down versus the guy with 30% down, who could borrow more? This is why we’re seeing the market we’re seeing. The southeastern quadrant of the city saw more “toxic” loans.

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