Every statistics class I’ve taken includes a healthy dose of how to lie with statistics. It’s a legendary part of the advertising industry that preys upon the typical consumer who just isn’t educated enough to see through all the BS.
Well, the real estate industry is no exception to this long standing advertising tradition – except that the stakes are a lot higher than simply determining if you should buy Coke or Pepsi (you can probably get “more people” to like either one). There is no end to the claims that realtors make to prospective clients in order to get their business but putting those claims in printed advertising really takes chutzpah.
Recently I’ve seen a full page ad from one of Chicago’s “top producers” in a high end Chicago magazine – the kind of ad that only a traditional full commission realtor could afford – that makes the rather outrageous claim that “I sell my homes 50% faster and for 5% more money”. But this claim is wrong on so many different levels that I feel compelled to thoroughly and completely dissect it to expose the utter nonsense that many consumers would love to believe – that picking the “right” realtor can help them sell their home faster and for a higher price.
How is it even possible to claim faster and higher home sales?
The message that the prospective real estate client is supposed to take away from this ad is pretty clear: “If I list with this agent my home will sell 50% faster and for 5% more money than if I list it with a different agent”. But how could Mr. Top Producer ever measure this without having a different agent simultaneously sell the same homes that he sells and then compare the results? Obviously this experiment can never be conducted so the simple fact of the matter is that what is being claimed here is ultimately unknowable. That should be enough to shut down this ad campaign but wait, there’s more!
Real estate sales performance data
So what data is this guy using to make this claim? Well the ad’s fine print says “Information supplied by Broker Metrics. Statistics include all listings listed and sold in 2011. Percentage calculation based off list to sale ratio.”
Oh, boy! Let me explain what he’s really measuring. First, there is the market time reported by Broker Metrics, which is actually pretty straight forward. But then there is the list price to sale price ratio, which has nothing to do with selling a home for “more money”. Would a home seller rather sell their home for 90% of a really high price or 99% of a really low price? The percentage of list price is irrelevant because the list price is not the appropriate benchmark. The market value is the only benchmark that matters but unfortunately the market value is unknowable.
What does the real estate sales performance data really show?
I have access to Broker Metrics data so you can see where this post is about to go given my penchant for data analysis. Let’s go along with the premise of this ad for a while and see if the irrelevant claims made are even true based upon the irrelevant data.
For all the deals that Mr. Top Producer closed in 2011 his market times averaged a little over 192 days. But that compares to an MLS average of a little over 160 days. Hmmm. That sure doesn’t sound like 50% faster. More like 20% longer. (BTW, there is no such thing as 50% faster in selling homes. A car can go 50% faster than another car but how do you sell a home 50% faster? Maybe he meant 50% less time?) So how could he get his numbers so wrong? I can’t be sure but I suspect the answer lies in the fine print of the ad, which cleverly states that he’s including “all listings listed and sold in 2011”. In other words, I think he threw out all the listings he carried into 2011 from 2010 – the ones that were already getting long in the tooth. Basically he conveniently filtered out the listings that took him longer to sell!
As for his list to sell ratio it averaged 95.9% vs. the MLS average of 88.4% so his ratio is actually 7.5% higher than the average. However, not only is this an irrelevant measure as pointed out previously but the data is also seriously flawed. You see the list price used by Broker Metrics in calculating this ratio is the starting list price for the last listing for the property. When a property gets stale an agent will often relist it but when that happens Broker Metrics loses track of the list price from the original listing. In the case of Mr. Top Producer, he relisted 8 of the 26 listings he closed in 2011. For example, one of his 2011 closings started out at $1 MM but ended up relisted for $949,000 and sold for $925,000. So while it really closed for 92.5% of it’s original list price it is reported at 97.5%.
Averages don’t tell the entire story
Suppose you don’t buy into any of the above discussion about the uselessness of the list to sell ratio and you’re determined to find a realtor with a great ratio? Well, in that case you should know that 16.7% of the agents out there have a better average than this guy. In fact, one realtor averaged 76% above list price on the 2 listings she sold in 2011! You should go with her.
But there is even more bias in the data!
If you think about it just focusing on the properties that closed in a given time period inherently biases the results of this kind of analysis because it excludes all the “failures”. I’ve done many time dependent analyses like this in prior lives and the correct way to do it, which is actually a lot of work, is to examine a cohort of properties all listed within a specific time frame and then follow them to their ultimate conclusion.
Let me give you a sense of what you would find if you did this analysis correctly. Mr. Top Producer had a total of 42 listings that he worked on during 2011. Of those he closed 26 in 2011, which I have previously analyzed for you, with the remaining 16 listings carrying into 2012. Of the listings carried into 2012 7 listings have either closed or will close this year, while another 8 either expired or were cancelled. One listing is still active. So the listings with some of the longest market times – those that carried into 2012 – were excluded by focusing on 2011 closings.
It also depends upon what you are selling!
This effect is really impossible to quantify but suffice it to say that a realtor’s “performance” is going to be heavily determined by what kind of property is being sold and how realistic the sellers are. Given an overpriced home in poor condition in an undesirable neighborhood, no top producer is going to be able to use their non-existent magic dust to make a quick sale above market price.
Who would ever buy a home from an agent that sells for 5% more money anyway?
My wife (I married a smart woman) pointed this out instantly. As a buyer, would you ever buy from an agent known for getting you to pay 5% more than you otherwise would? As a seller would you want to list with an agent that buyers were avoiding like the plague? Or are we to believe that his advertising message will only be seen by sellers?
What about Truth In Advertising?
There are actually a number of laws that prohibit this kind of advertising in my opinion. First, there are the truth in advertising laws under the Federal Trade Commission Act:
- Advertising must be truthful and non-deceptive
- Advertisers must have evidence to back up their claims
- Advertisements cannot be unfair
Then there is the Illinois Real Estate License Act of 2000, which states:
No advertising, whether in print, via the Internet, or through any other media, shall be fraudulent, deceptive, inherently misleading, or proven to be misleading in practice. Advertising shall be considered misleading or untruthful if, when taken as a whole, there is a distinct and reasonable possibility that it will be misunderstood or will deceive the ordinary purchaser, seller, lessee, lessor, or owner. Advertising shall contain all information necessary to communicate the information contained therein to the public in an accurate, direct, and readily comprehensible manner.
So, what do you think? Think this ad passes the smell test?
So how should a prospective home seller pick a listing agent then?
So it should be painfully obvious by now that if you are looking for definitive data to help you select a listing agent you simply aren’t going to find it. As much as you’d like to believe it, no realtor has magic dust so don’t let anyone fool you into believing that they have it. So what should you do? I’ve previously written a few pieces on how to select a listing agent but the number one factor that anyone should focus on is what exactly the realtor will do for you and how they will do it. If a realtor does the right things then you have a better chance of selling your home for the highest price and in the shortest time possible – a better chance but no guarantee. In the absence of magic dust success in this business simply comes down to intelligence, responsiveness, and execution. It’s that simple.