Wednesday, November 13, 2013

How to Buy a House

If you go to a real estate agent in search of a house, there are two questions you are likely to be asked. One is how much you want to spend. The other is what sort of house you are looking for—how large, how many rooms of what sort, in what location. 

It is in the agent's interest to ask the first question; since his commission is a percentage of the sales price, he would like to sell you the most expensive house you are willing to buy. It is not clear that it is in your interest to answer it. Even if you can afford a two hundred thousand dollar house, you might prefer one that fits your requirements a little less well and costs substantially less. If you tell the agent that you are willing to spend two hundred thousand dollars, he may decide not to show you any house that will sell for much less than that.

The second question raises another problem—what you want to buy depends on what it costs. You would prefer a house with a bedroom for you and your wife, a bedroom for each child, and an extra room for a home office—but if an extra bedroom increases the price of the house by too much, you could put your desk at one end of your bedroom or persuade two children to share a room. In order to give a sensible answer to the question, you need a price list, a description of how much more you can expect to pay for a larger house, one with more bedrooms, one in a better location. If you had such a list, you could figure out about what sort of house you wanted to buy and what it should cost and ask the agent to select houses to show you accordingly.

So far as I know, no such price lists are currently available—but there is no good reason why they shouldn't be. Realtors have access to extensive information on houses that have sold. In any area with a sufficiently lively real estate market, it should be possible to use conventional statistics to work out from that data about how much more a house costs with one more bedroom, all else held constant, or with an additional hundred square feet of area, or with a larger yard, or in a better school district. My proposal is that somebody, perhaps the existing multi-lister service that provides the data to the realtors, should do so. The realtor could then provide his customer with a price list, the customer could decide about what sort of house he wanted, and the realtor could proceed to find the houses that came closest to fitting what his customer wanted.

I should  add that it is almost twenty years since I was last in the market for a house. If what I have just proposed is, at this point, common practice in the industry, perhaps one of my readers with more up to date information can tell me.

16 Comments:

At 2:25 PM, November 13, 2013, Blogger jimbino said...

Wouldn't it be wise to decouple the RE agent's fee and the price of the house by paying him by the hour or by the number of houses he shows you that satisfy your preferences?

 
At 2:27 PM, November 13, 2013, Blogger Tibor Mach said...

I learned the lesson about "not telling how much I want to spend" in a different context recently. I was looking for a firm to make an inbuilt wardrobe in my flat. One gave me an offer (and sent me an email with the price calculation and an outline of the wardrobe) and then I just sent it to a couple more without thinking about it very much asking if they could do it cheaper. My father told me that was stupid, since if he received such an inquiry, he would simply offer 10% less or something like that even if he could do it 50% less since now he knows how much the competition is offering. I mitigated my error by doing it in iterations (when I received a cheaper price from one, I then contacted all of the others again saying that now I have an even better offer...but it still cost me time if nothing else), but next time I should think more like an economist (or a businessman such as my father) when doing this next time.

I'm not sure this is all that relevant. If you consider it a bit too off topic, feel free to delete this.

 
At 3:24 PM, November 13, 2013, Anonymous Tom Bri said...

Realtors do have access to that kind of info. It isn't so clear cut, as a lot depends on construction values, but it is available. In my Realtor experience, no one ever asked me for that.
These days, everything is online, so if you know which neighborhood, and how much you want to spend, just do the search yourself. Takes only a few minutes. Choose a few houses and then call a Realtor to set up visits.

 
At 4:52 PM, November 13, 2013, Anonymous dale said...

David's suggestion gets to appraisal techniques, and would might run into licensure obstacles.

 
At 10:16 PM, November 13, 2013, Blogger John David Galt said...

There are several web sites that will give you prices and descriptions of homes recently sold in an area. Zillow.com is one. (Some folks say they're not very complete.) This information is made public every time a deed is filed with the county recorder, so nobody is going to be able to keep it secret.

 
At 5:23 AM, November 14, 2013, Anonymous TJIC said...

It's been 20 years (well, 18) since I bought my current house.

I'm in the process of selling my MA house and buying a NH house (Free State Project!), and I can confirm that realtors work today much as they did 20 years ago.

As John David Galt says, Zillow is a great too. We've done most of our house hunting via Realtor.com, Zillow.com, Google Street View, NH online tax records, NH online zoning maps, etc.

Our particular experience: we took roadtrips up to various parts of NH and decided that our desire for

* rural-ish
* rolling hills
* ability to get to Boston < 2 hours
* artsy / craftsy people nearby
* etc

were well satisfied by something in the Hillsborough county area.

After making that determination I looked up property tax rates for every town in NH, narrowed it down to a handful of towns, drove those towns extensively, and then moved to Zillow and Realtor.com

In our particular intersection of desired acreage/bedrooms/price range there are just a handful of houses at any given moment (and given that this area of NH has around 6 months of inventory, the selection doesn't change quickly).

This has made it very easy to narrow in quickly.

 
At 5:25 AM, November 14, 2013, Anonymous TJIC said...

@jimbino

> Wouldn't it be wise to decouple the RE agent's fee and the price of the house by paying him by the hour or by the number of houses he shows you that satisfy your preferences?

With rare exceptions, the realtor is paid by the SELLER, so the current system does a good job of aligning seller and realtor interest. ...but it doesn't put them in perfect alignment. A realtor would be happy to sell a house at $300k when he or she might be able to get $320k with double the labor. Better 1.5% of $300k with 20 hours of work than 1.5% of $320k with 40 hours of work!

Buyer's agents do work as you've described.

 
At 5:58 AM, November 14, 2013, Blogger dWj said...

At least in NYC, sellers take 6%, maybe as little as 5%, but if there's a buyer's agent the buyer's agent gets half of that. It seems like an even odder system than just the flat percentage, but it is the case that (again, at least in NYC) the buyer's agent does not work as jimbino describes. (Nominally the seller pays the fee, but I assume that means prices are slightly higher to compensate. Sellers who are trying to sell "by owner" and make agreements to pay 2.5% or 3% to any buyer's agent are, for example, more flexible with price if a buyer finds them without a buyer's agent. Don't confuse legal incidence with economic incidence.)

 
At 6:03 AM, November 14, 2013, Blogger dWj said...

This may be what dale is hinting at, but from some reading I've been doing recently on housing appraisal, a frequent technique actually involves having these numbers on hand. As you might imagine, you want as many comparable sales as you can get, but you want your comparable sales to be as comparable as possible, so what's at least sometimes used is a system of including houses with salient differences, but adjusting the price by the appropriate amount for the local market and reducing the weight. (In fact, when we bought our apartment some of this was listed on the report we got from the bank appraiser; I certainly remember seeing how much price was adjusted based on which floor an apartment was on. This, of course, is rather later in the process than we could have used the information the way you're suggesting.)

 
At 8:29 AM, November 14, 2013, Anonymous Anonymous said...

Consider a fulcrum commission instead of flat fee. This provides a linearly increasing reward to a realtor as the price rises. Paying steep costs for average performance is silly. This is the basis for ETF's and index funds reduction in fees, they hit the average as cheaply as possible, instead of promising to beat the average and then ruining your personal returns with fees and expenses.

 
At 9:03 AM, November 14, 2013, Blogger David Friedman said...

For what it's worth, when we were last on the market almost twenty years ago I did a good deal of searching online from Chicago. We then flew out to Chicago to actually look at houses.

While the internet makes that easier, I don't think it provides what I've described--the ability for the buyer to decide what he wants on the basis of data about how much he can expect different features to add to the price.

 
At 7:42 PM, November 14, 2013, Anonymous TJIC said...

@dWj said...

> At least in NYC, sellers take 6%, maybe as little as 5%, but if there's a buyer's agent the buyer's agent gets half of that.

I think we may be using terms inconsistently.

In a typical transaction agent A (the listing agent) works with the home seller, and agent B (the showing agent) works with potential buyers. When the house sells, the home seller pays 6% (typically), which is split 1.5% to listing agent, 1.5% to listing agent's office, 1.5% to showing agent, and 1.5% to showing agent's office.

Note that both agent A and agent B are selling agents and are paid by the house seller, and have legal and ethical duties to the house seller...even though potential home buyers work very closely with the showing agent and tend to think of him or her as "their" agent.

A buyer's agent is something entirely different: this is an agent who usually surplants the showing agent and is ** PAID by the buyer **, and therefore has the buyer's interests in mind.

 
At 7:47 PM, November 14, 2013, Anonymous TJIC said...

@David Friedman said...

> While the internet makes that easier, I don't think it provides what I've described--the ability for the buyer to decide what he wants on the basis of data about how much he can expect different features to add to the price.

Certainly the software could be better - in the ideal world and a very liquid market with lots of inventory, it would be possible and I'd like to see features that said "within 5 blocks of a school costs $22k +/- $3k ; a master bath with a jacuzzi costs $39k + 0.02% of the base house price ; etc."

I've worked out a bit of a regression by hand for the areas I'm looking at:

* for up to 10 acres, land is $5k/acre, but in larger chunks it seems to be more like $2-3k/acre
* house construction is $x / ft^2
* a barn costs ~$10-25k.
* etc.

It's remarkable how closely this predicts prices of new houses coming on the market.

Of course, there are few enough new houses entering the market that I could easily be seeing a long run of coin flips coming up heads and am in the process of congratulating myself on my [ flawed ] model.

 
At 10:01 AM, November 15, 2013, Anonymous Anonymous said...

We just bought (and sold) a house. I had no problem in telling the agent we were working with exactly how much we were willing to spend. In fact, I had no problem in telling him about everything concerning our financial situation. Here is why: we were in complete control over what houses we looked at. In fact, the only thing we needed him for was to 1) let us in the house and 2) be another opinion on the houses we were looking at. In our search our agent was very helpful in these two respects. He (due to his experence) was able to see things I would have never seen.I don't see that he had any chance of manipulating me at all.

 
At 1:53 AM, November 20, 2013, Anonymous Alina said...

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At 11:32 AM, November 21, 2013, Blogger Dimitriy said...

The interpretation of regression coefficients from these sorts of hedonic models is actually pretty tricky. Usually, the coefficient on number of rooms will be negative if you control for area, since this corresponds to the thought experiments where you subdivide the house into closet-sized warrens. The ceteris paribus effect is actually not that useful here.

 

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