Monday, May 08, 2006

Business is Different for Investment Properties Than Primary Residences

The best-selling book Freakonomics: A Rogue Economist Explores the Hidden Side of Everything by Steven D. Levitt and Stephen J. Dubner argues that REALTOR®-owned homes sell at a higher price than others because they stay on the market longer, and the authors suggest that somehow REALTORS® do a better job of selling their own properties than they do for their customers.

The fact is that a large percentage of the REALTOR®-owned properties the Freakonomics authors studied were investment properties, not primary residences. With investor properties, the seller can wait out a bad market and wait for the prices, not worrying about the timing of a job transfer or the start of school year. In the Freakonomics study, the data sample consisted of 3,300 REALTOR®-owned sales out of 98,000 total sales. That is, REALTORS® engaged in 3.4% of all home sales. Yet REALTORS® represent only 0.8% of the general population. That percentage is much larger than would be expected out of the general working population. Clearly, the high percentage of REALTOR®-owned homes can only be attributed to investment properties.

Freakonomics assumes that the longer a property is on the market, the higher the price at which it will sell. In fact, the opposite usually occurs; price concessions become deeper the longer a home stays on the market. For sellers needing to move, they have to concede lower price with each passing week. Investors, on the other hand, have less incentive to concede. So the fact that REALTORS® are selling a client's home with fewer days on the market is a value-added contribution.

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