The Agency Problem Asserts Itself – I

A recurring theme in any real estate hunt is the many ways the agency problem screws over the principal actors. The agency problem refers to the misalignment of incentives between a principal and her agent. For instance, a selling agent paid on commission has very little incentive to push for the best possible deal, after a point the marginal effort required to get a better deal does not pay for itself in the commission paid out. In a real estate transaction, 6% of the sale price is usually split by the seller’s and buyer’s agents. Usually, the agent herself makes about a third of the 3% that she gets, the rest going to her employer and so forth. In the Bay Area, this means that on a million dollar sale, an agent stands to make about $10,000 just by being there for it, but spending an additional week or two to get the price up by $100,000, surely a princely sum for the seller, is rarely worth it to the agent, the additional $1000 that she might make is not worth the opportunity cost of not being there for all the other million dollar sales that are happening. For a seller the usual problem is that the agent might not be interested in pushing all the way for the best possible price. But consider the curious case of 947 Celia Dr. It listed on March 10th 2007 for $1.1M. This was the same week as another house with somewhat similar dimensions listed for approximately the same price: 3471 South Ct listed for $1.098M. By the numbers, one would imagine that 3471 South probably listed under the market by a bit while 947 Celia probably listed over the market by a bit. The South Ct house held an open house, the Celia Dr house didn’t. They also both went off the market at the same time. We learn now that South Ct appears to have gotten mixed itself in an insane bidding war that raised its price to $1.22M, while 947 Celia seems to have surrendered at a meek $950,000. Location and condition might explain this $270k swing between two Palo Alto streets. But perhaps we should consider that the Celia Dr house had the same agent representing both sides of the deal. Well played Ms Ogasawara, well played!

There is a personal story here of course: we were somewhat moderately interested in looking at the house. The asking price was well above what we were willing to pay, but the pictures indicated a Japanese style interior design, and if anybody knows how to use scarce space effectively, it is the Japanese of course. So we eagerly looked forward to the open house that never happened. We were quite disappointed when it went off the market before we could get our agent to take us in and get us a look-see.

One final note: the sales record indicates that the happy recipient of this awesome sub-million dollar deal in Palo Alto was…Mr Bilal Musharraf! Musharraf! You mocked us from the heights of Kargil when you occupied that prime real estate before we could. And now you mock us from prime real estate in the Bay Area. Will the mockery never end?

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