What Do Real Estate Agents and Stock Brokers Have in Common?
In the 1970s, a relatively unknown investment banker named Jack Bogle, shook up the financial world with an innovative idea known as the index fund. Simply put, an index fund is a mutual fund that matches large market indexes, such as the S&P 500 or the Dow Jones Industrial Average. Index funds are highly diversified (thus less risky), and have extremely low operating expenses, since individual stocks are rarely traded.
Prior to the advent of the index fund, mutual funds were managed by highly-paid investment bankers, who constantly traded stocks based on research, analysis, and speculation. And while these funds generally out-performed the market, they were really expensive to manage. In fact, after factoring in overhead and transaction fees, these funds (on average) under-performed performed the market. Why? As it turns out, the stock market is highly speculative. Sure, you can make some good bets, but it's really really difficult, and really really expensive.
Jack Bogle recognized this as an opportunity, and founded Vanguard, the world's first index fund, in 1975. He called it The Vanguard 500 Index Fund, which simply tracked the S&P 500. No active trading, no expensive fund managers, and no excessive fees.
Unfortunately for Bogle, Wall Street didn't take too kindly to his innovative idea. The new Vanguard fund was commonly referred to as "Bogle's Folly" and considered un-American. Fidelity Investments CEO, Edward Johnson, even said he "[couldn't] believe that the great mass of investors are going to be satisfied with receiving just average returns."
But after years of analysis, it turns out that Jack Bogle's model was right. Once you factor in management and transaction fees, most active investment firms fail to outperform a basic index fund. According to Fortune, "The S&P 500 outperformed more than 92% of large-cap funds over the last 15 years. Mid- and small-cap funds fared no better over the time period, with their benchmarks besting them 95.4% and 93.2% of the time, respectively."
Index funds are simple, cost effective, and yield tremendous results. But what exactly does this have to do with real estate?...this is, after all, a real estate blog. I believe the index fund revolution of the 1970's is very similar to the real estate revolution of today. Like the advent of indexing, the internet is lowering the cost of selling homes. Despite this fact, most real estate agents still boast about their traditional marketing tactics, and continue to charge a 3% commission.
Before the internet, agents had a ton of influence over the sale price. Marketing meant everything, and a marketing package could make or break one's ability to sell a home. Here's a list of some common tactics that made a significant impact on their results:
Postcards and Mailers
Company Brand Recognition
Networking (among other agents and buyers)
Fortunately (or unfortunately, depending on how you look at it), this stuff simply doesn't work like it used to. And in a matter of years, such strategies will be utterly obsolete. The reason is the internet.
In 2012, the National Association of Realtors found that 90% of home buyers "searched online at some point during their home buying process". With 90% of people looking for their own homes online (via Zillow, Realtor.com, etc.), this leaves just 10% using "traditional" home search methods (i.e. newspaper ads, postcards, etc.). It's now 2018, and my guess is that the number of people search for homes online is upwards of 98%.
We're now in a unique position where the consumer holds most of the information necessary to find a home. Real estate agents are no longer the gatekeepers to homes for sale, since everything is readily available to the the masses on the internet.
Because of this, there is little a listing agent can do to influence the sale price of a property. Their efforts to do so are in vain. It's like a gas station boasting a full-page newspaper ad showcasing their low price of $2.50 per gallon , when the station across the street has a sign saying $2.40. While the newspaper will certainly attract attention, it's completely futile! I know homes are unique, and much less a commodity than gasoline, but the analogy still applies. Thanks to information availability, home prices are now public, comparable, and subject the invisible hand of the free market. Increased marketing simply doesn't matter anymore.
This might sound like a bold statement, but I believe it to be true. Check out the data...
This chart shows how different real estate companies actually performed in 2017 (includes all Central Ohio single-family homes and condos, excluding new construction, foreclosures, and estate sales).
As you can see, there's not a significant difference in their results, which is pretty astounding considering they all brag about their amazing marketing tactics. In fact, if you want to talk results, take a look at the Discount Brokers, who outperform everyone else in days on market and sale price. While I can't speak for all discount agents, many (such as myself) are able to charge lower fees by eliminating expensive marketing costs that simply don't work. The data shows this to be true, since they're outperforming the competition.
With that said, this is not a perfect science. While days on market and list to sale price ratio are great gauges of an agent's success, they are a lot of other variables that should be considered (time of year, location, price point, etc). Further, there are certain properties that may benefit from increased marketing. Commercial real estate, farmland, and luxury estates over $1 million, tend to require more work. But for everyone else, it simply doesn't matter.
After reading this, I bet you're wondering why you even need a real estate agent to sell your home. First and foremost, we are experts at managing your contract and negotiations. Selling a home can be daunting, and we ensure that everything is done correctly. Further, we provide access to the MLS, giving your home maximum exposure on hundreds of home search websites worldwide.
Similar to index funds outperforming their expensive counterparts, discount brokers are helping people save thousands of dollars in real estate. To list your home for just $2,500, visit https://www.commoncents614.com/list-now!