Principal Agent Problem
Examine a well-known principal-agent contract, the sale of your home by a licensed realtor. You will use the following data to analyze this case.
Your home is the typical home, approximately 1,875 sq ft with 3 bedrooms and 2.5 baths. You will list the home at the median home price for your area $425,000. You have done some research and most homes in this value range are closing within 26 days of being listed.
The typical commission for homes in your value range is 6%. You and your realtor have signed a sales agreement for a 6% commission. The commission is typically split between the agent for the seller and the agent for the buyer, i.e. 3% of the 6% commission will go to your agent.
Research shows that realtors in your area, when selling their properties, typically leave the properties listed for 10 days longer than the average listing-to-closing time of 26 days.
After 15 days on the market, you receive an offer of $405,000. The agent recommends that you accept the offer.
Also, see the help provided in the discussion preparation.
Principal: You, the homeowner Agent: Licensed realtor
Principal's Goals:
- Sell the home for the highest possible price within a reasonable timeframe.
- Minimize selling costs and agent fees.
- Avoid unnecessary delays or complications in the selling process.
- Sell the home as quickly as possible to earn commission.
- Secure a deal that satisfies the buyer's requirements.
- Maintain a positive reputation and relationship with the seller.
- Listed Price:$425,000 (median price)
- Median Listing-Closing Time:26 days
- Real Estate Commission:6% (3% for seller's agent)
- Realtor Listing Time Preference:10 days longer than average (36 days)
- Received Offer:$405,000 after 15 days
- Price Reduction:$20,000 below the listed price.
- Timeframe:Received after a relatively short listing period.
- Pros: Quick sale, certainty of closing, avoids holding costs.
- Cons: Potentially lower price than achievable with longer listing.
- Pros: Potential for higher offers, aligns with agent's timeframe preference.
- Cons: Delays the sale, incurs holding costs, risk of no higher offers.
- Market conditions: Are houses similar to yours selling quickly or sitting on the market?
- Negotiation potential: Is there room for negotiation with the current offer?
- Your urgency to sell: Are you flexible on timeframe or do you need a quick sale?
- Discuss concerns with your agent:Voice your concerns about the potential for a higher offer if you wait. Ask them to justify their recommendation based on market data and comparable sales.
- Negotiate the offer:Consider negotiating the price or other terms before rejecting the offer outright.
- Seek additional insights:Consult other realtors or a real estate appraiser for valuation and market insights.
- Weigh the options:Carefully consider the potential benefits and drawbacks of accepting the offer now versus waiting for potentially higher offers.