Three Bogus Statistics You Need To Understand: ( credit to the outstanding Manausa blog and to Joe Manusa)
- 80% of the business is being done by 20% of the agents
- The average market time to sell a home is 153 days
- The average home sells for 97.3% of its listed “for sale” price
The 80/20 Rule
One of the sharpest people that I know in the real estate industry owns manyHomes And Land Magazine franchises. He is a good friend of mine and I respect his knowledge, insight, experience, and most importantly, his success as a business owner. So believe me when I tell you how shocked I was when
He Used An Unfounded Statistic With Sources Back To NAR
He told me “Joe, this market is tough. I now understand that NAR says the 80/20 rule is the 90/10 rule!”
I’m not sure what industry started this “statistical rumor” first, but I heard it back in 1991 when I first began my real estate career. I was told that our industry was lopsided, and that according to NAR (the National Association of Realtors), our industry was the perfect representation of the 80/20 rule: Eighty percent of the business is done by twenty percent of the agents. So, like many others, I took this at face value and believed it to be true….. for a while.
Years ago, when pulling real estate market reports, I figured I would test the 80/20 rule. You see, Tallahassee quite often is a great microcosm of the national real estate industry. Our average sales price is typically close to the national average, and our market typically moves up or down in parallel to the national real estate market. So I figured we would be able to validate the 80/20 rule as well.
Much to my amazement, the results of my study showed that the 80/20 rule was not true in Tallahassee. Every so often, I try the test again, only to reaffirm the initial findings. Somebody made this up! While my study in Tallahassee does not represent enough evidence to refute a national study, I suspect that a national study cannot be found. If so, send it my way.
For the purpose of this blog, I pulled all of the sales from the MLS in 2007 and came up with the following graph:
As you can see clearly from the above graphic (click the image for a larger view), 20% of the business is being done by less than 64% of the agents, while 45% of the business is being done by 10% of the agents. So the 90/10 rule is off by 100%! Why does this matter? Because if the 90/10 rule were correct, then the consumer would be wise to pick one of the few elite agents in the realestate market. Rather, the findings suggest that picking the right real estatecompany is far more important. The workload is spread out among many agents in the market and the consumer should be focused on the issues that are critical to the consumer, such as the bundling of services offered and howthe company is prepared to work to the benefit of the consumer.
Average Market Time
If I see another report by a PhD that talks about “average market time” to sell a house, I just might throw up. For anybody who has studied statistics, you will appreciate that garbage data will yield garbage results. This is the case with average market time. You see, all these people generating these reports have overlooked some pretty important “noise” when conducting their findings. Certain elements that do not make it to the market time measurements include:
- The amount of time a home was on the market under a previous listing number
- The amount of time a home was on the market “by Owner”
- The amount of time a home was on the market (when the home in fact never sold)
- The fact that many Realtors will cancel a listing and re-list it to make it appear “fresher” in the market
Here is a scenario that will demonstrate why “time on market” should be ignored. Mr. and Mrs. Homeowner decide they would like to move. They put asign in their yard and they advertise online that their home is “For Sale By Owner.” This goes on for three months, with no contract for the Homeowners. They decide to list with Broker A because they’ve known Broker A for 20 years. Broker A lists the house, puts it in the MLS, and proceeds tomarket the property for sale. Six months later, the Homeowners decide they need to talk to another real estate brokerage company. They have since moved to their new home and they are really needing to sell their home. They interview Broker B at Brokerage B Realty and decide that they will list their home with that company. Brokerage B puts the property in the MLS and sure enough, a contract is executed in just 1 day. The Homeowners are ecstatic and they close on their home 45 days later. So, what was the market time for the Homeowners house?
If a Realtor pulls a market time report, homeowners house will show 1 day ofmarket time for the closed sale. It will overlook the 6 months of market time which failed to produce a sale with Broker A and it will not even know that the Homeowners marketed the home for three months on their own. This discrepancy of roughly 150 days on the market means that we cannot trust themarket time being measured by the MLS systems.
Why does this matter? Because of 2 major reasons. If your real estateprofessional is quoting you average market times, then most likely you are not dealing with a professional. Additionally, you need to question your realestate brokerage company about time expectations and what kind of price range should produce predictable sales results. A competent real estateprofessional should be able to give you a price range that will get your home sold in the time frame in which you require for your move.
Sales Price to List Price Ratio
Much like market time, the ability of the real estate professional to manipulate data (often times for good reasons) renders this measurement nearly useless. How important is this statistic if the typical homeowner were to know that the ratio represented the average sales price compared to the FINAL LIST PRICE of the property. Imagine the scenario used above, where the Homeowners first listed their property as a “For Sale By Owner,” then with Broker A, and then finally with Broker B. The only ratio measured would be with Broker B’s list price.
Why does this matter? Because of the same two reasons listed above. If a realestate professional is discussing average ratios (like claiming she has a higher than average sales price ratio), then the homeowner needs to understand that this person is either being deceitful or ignorant, and neither trait will be beneficial in the process of selling the homeowner’s home. Secondly, if this kind of information is used to help the homeowner determine the asking price set by the homeowner, it could end up costing the homeowner a bunch of money through lost market time or incorrect pricing.
The fact is that the MLS is not a great source of factual statistical data for many reports, as it is a marketing tool designed to help brokers market their properties – to other brokers. Often times, MLS information is manipulated in the effort to aid a client. Plenty of other resources exist that will allow a realestate professional to study real estate market statistics.
Know the source of the data and you will know whether or not the results of the study have merit, and more importantly, whether or not you should rely on the reports. Knowing these three bogus statistics can help you confidently select the next real estate brokerage company that you decide to use to sell your home.