What if Real Estate Agents ran eBay?

By Brett Woolley
Author’s email: BrettW76@cox.net

With 20 years’ experience working in the real estate industry, I have observed both the good and the bad in terms of traditional practices. The amazing thing about real estate is that no matter how bad the practice, the industry almost never changes. Consider that it took nearly 70 years before the real estate industry finally acknowledged that buyers should have their own representation.

Buyers are not the only ones that have suffered from bad traditions. Sellers can be harmed as well, even in a “sellers” market. Some real estate practices actually stifle free-market forces and do not allow the market to determine the value of the home. The practice I am referring to is the one where there are multiple offers on the home, and the listing agent holds a “blind, silent, auction” in which no one is given any information, and all buyers are told to offer their “highest and best.” Is there any other market you can think of that uses the blind, silent, auction method?

Let’s consider one of the most efficient markets ever developed in our day—eBay! Sellers place items for sale on eBay, everyone knows when the bidding will end, and bidders can see the current highest bid and they are only allowed to make a higher bid. If the buyer is willing to pay more than the current “bid range” they can enter a “reserve.” For example if the bidding is up to $50 and the buyer will go as high as $70, he or she would put $70 as a reserve. But not all of that reserve is at risk. If the highest bid (including reserve) from other bidders is $52, then the buyer with a $70 reserve will only have to pay a small amount over the $52, they do not lose their entire reserve. If the whole reserve was at risk, no one would do it. Buyers on eBay are willing to pay a dollar or so over the next highest bidder, but not $20 or more than necessary. The eBay system allows the buyer to bid with confidence knowing they won’t pay more than they have to. The free market is allowed to determine the highest price for that seller. Remember, buyers simply would not put in a high reserve if it was all at risk.

What if real estate agents ran eBay? How would it work? First of all, buyers would not be able to see the highest bid or track the bidding leading up to the auction end. You would have absolutely no idea what anyone else has bid, or in some cases whether there are any other bids at all. You would not necessarily know when the bidding has ended, either. The eBay message would simply say “offer your highest and best.” Secondly, if you put in a reserve the seller would take ALL of it, even if no one else bid anywhere near your bid. Ask yourself, who would use such a system? The answer is no one, and eBay would have vanished from the marketplace.

Buyers and Sellers suffer through the present real estate market because there is no alternative. If you want to buy a home, you have to play game the real estate industry has set up. So if a buyer sees a home listed at $150,000, and is informed that there are multiple offers but given no information, what do you offer? Even if you look at comparable solds that only tells you if the original $150,000 asking price is reasonable, it tells you nothing about the current auction situation you are in. The listing agent engages in this practice with the hope that the uninformed buyer will bid something outrageously over everyone else. But almost no one will do that, because no buyer wants to bid more than they have to, and it may not appraise later on if they do.

Let’s say a home has multiple offers and at least one is already over the list price. The listing agent who will not disclose offer information gives their client, the seller, this scenario for all other offers coming in: 1) it could come in as the highest so far, 2) it could come in over list but not the highest, 3) it could come in at list price, or 4) it could come in below list price. The seller has (assuming even probability) at the most a 25% chance of getting a higher offer. But we know it is not an even probability because no buyer wants to pay more than they have to. So the likelihood of getting a higher offer for that seller is actually quite remote once you are already over list. This is because the list price acts like an anchor and few, if any, buyers want to go very much over the list price not knowing if they have to.

I have experienced this many times with my clients. We had no information and offered our best. We then see later what the home sold for, and my buyer says he or she would have offered more had they known what the current high offer was. They were not willing to make a wild guess and pay $10,000 over the next highest offer, but they would have paid $1,000 over the next highest offer. So the seller actually lost money because their listing agent refused to let the free market work. To help my buyers I write offers with an “escalation clause,” which says that we’ll pay $1,000 over the next highest offer and up to a set amount (sort of like an eBay reserve). But many times the listing agent refuses to present it! Talk about harming the seller and not letting the free market work.

When I work with sellers, I tell them in my listing presentation that I am the “Anti-Agent” and that I am different from all other real estate agents. I inform them that if we get into a multiple offer situation, that I am going to let the free market bring them the highest price possible. I will disclose to any and all buyers’ agents the current high offer, especially if the highest offer is already over our list price. This allows the buyer to make an informed, intelligent offer rather than a wild and crazy guess. If the bidding is too high, the buyer can move on without wasting hours of time for everyone by making a lower offer that has no chance. I inform my sellers that if the buyer does make an offer, there is only ONE possible outcome—A HIGHER OFFER! You have a 100% chance of a higher offer with each subsequent offer, until the market reaches its peak, rather than some remote chance in the absence of any information. Remember, if all buyers have access to information then a real free market auction happens. Even the first to offer can change their bids. There is no such thing as a “free market” without information. Which would you, as the seller, rather have?

How many sellers out there could have had a thousand dollars or possibly a lot more for their home had the free market been allowed to operate? In the Phoenix Metro area alone I estimate home sellers lost a collective $80.7 million dollars in 2012 due to the “silent auction” practice of real estate agents (Conservatively assume one third of the 96,885 transactions in 2012 averaged a $2500 loss). I know that I could never change the way my colleagues practice real estate. What would you expect when they have all been taught to use the silent auction method for nearly a hundred years? For me all I can do is let my clients, and any prospective clients, know that I am here to offer them an alternative—a free market alternative, if they list with me.

Comments on this entry are closed.

Previous post:

Next post: