A lot of people do not trust real estate agents, and many people even feel that real estate agents cause high housing prices. Even appraisers have told me that real estate agents are the cause of the housing market’s last downfall because they forced their buyers to pay too much money for houses. I have been a real estate agent and real estate investor for over 15 years and have my own opinions about real estate agents inflating housing prices. After being around hundreds of agents and doing thousands of deals, I think it is extremely rare that any agent inflates housing prices for their own personal gain. They may have a part in housing-price increasing, but their job is to get as much money for a seller as they can. The job of an agent working with a buyer is to get as a good of a deal for them as they can.
Do real estate agents get rewarded for selling houses at a higher price?
I think the misconception that real estate agents try to sell houses for higher prices comes from how agents get paid. Real estate agents get paid a commission based on the sales price of the house. They make more money the more a house sells for. For example, HUD pays a 3% commission (all commissions are negotiable) for the seller and buyer side on a transaction. Here is what the real estate commission would be on a $200,000 house using the HUD commission:
- Buyer’s agent; $6,000
- Seller’s agent: $6,000
The real estate agent does not get to keep that entire commission. They may have to pay 20 to 50% of their commission to their broker. The real estate agent may keep $3,600 of that commission after paying their broker. If the agent were to sell the house for $210,000, they would make $6,300 or $3,780. The agent would make more money by selling a more expensive house.
Do agents try to inflate prices to earn more commission?
In all my years of being a real estate agent and investor, I have known of one agent who tried to inflate prices. That agent worked with primarily non-English-speaking clients and was usually the listing agent and buyer’s agent. That agent also ended up getting in trouble with the real estate commission, and I believe they lost her license. There are many reasons why real estate agents would not inflate prices just to earn a higher commission.
- Real estate agents are more concerned with selling houses than the exact amount they make on each transaction. Trying to inflate prices would make it harder to get a deal done, which could cost them a commission.
- Real estate agents who list houses for sale usually try to get the seller to list their house for less money as opposed to more money. If they list a house too high, it won’t sell, and the agent will not make any money.
- Real estate agents need to sell a lot of houses to earn a living. If they tried to inflate prices, it could deter their clients from using them again. The best source of leads for an agent is clients they have worked with in the past. The better deal they get for their clients, the more business they will have in the future.
The only way for an agent to inflate houses prices fraudulently is to be the listing agent and buyer’s agent on the same deal. They would have to convince their seller to price the house high and then convince the buyer to offer high. The house would then have to appraise for the higher price as well.
What about buyer’s agents convincing buyers to pay more than list price?
In hot real estate markets, you will see houses selling for more than asking price. It happens in my market in Colorado all the time. Sometimes, a real estate agent will suggest the buyer pay more than asking price. It happens because that may be the only way a buyer can end up buying the house they want. I have bought many houses myself for more than asking price. Just because a buyer pays more than the asking price, it does not mean that they paid too much for a house. Some houses are under priced or priced to low to generate many offers over asking price.
Some appraisers I have talked to imply that real estate agents cause housing prices to be too high because they encourage buyers to pay more than list price. The real estate agent’s job is to help the buyer figure out what market value is and to find a house. In order for the buyer to get a house, they may have to pay more than list price. It is not the real estate agent’s fault if demand outpaces the supply in some markets. Many times, a buyer has to miss out on houses they like because their offer is too low. I love to get a good deal, and I am not saying putting in low offers is bad, but in some cases, you may have to offer high to get the house you want.
What causes housing prices to rise and fall?
Real estate agents are not the reason housing prices increase; otherwise, housing prices would go up forever and never decline. The market determines what prices will be. If there are too many houses for sale based on the number of buyers, prices will fall. If there are not enough houses for sale for the number of buyers, prices will increase. We have seen this in Colorado over the last 20 years. Prices went up in the early 2000s thanks to loose lending guidelines. They dropped when they overbuilt the area, and it became harder to get a loan on houses. Then, prices increased again when they stopped building houses, the economy improved, and many people moved into the state. It is actually harder to make money as a real estate agent in Colorado now with higher prices because there are so few houses for sale.
Real estate agents can cause the list prices and offer prices to be high or low. However, those prices are based on current markets conditions and the needs of the buyers and sellers. Real estate agents very rarely will inflate housing prices because it will hurt their business. For more information on buying and selling houses check out: How to Buy a House: What Everyone Should Know Before They Buy or Sell a Home.