(This article first appeared in Real Estate Investor's Monthly.)

Book review: Freakonomics

The current best-selling book Freakonomics is most famous for revealing that the drop in crime in recent years was caused by Roe v. Wade and more police, not new police techniques or demographics.

Basically, Roe V. Wade resulted in a dramatic increase in the number of abortions—over a million a year. Statistically, it can be shown that unwanted children and those born to the sort of mothers who most often obtain abortions disproportionately grow up to be criminals. That’s politically incorrect, but it also is true.

The book also contains a number of discussions of interest to real estate investors. One points out something I wrote about in the late 1970s—that real estate agents do not try to get you more for your property because their commission is tied to your sale price. I pointed out, as does Freakonomics, that individual agents only get about 1.5% of the sale price and therefore are not going to jeopardize a multi-thousand-dollar commission in order to get 1.5% of another $5,000 which would only be $75.

Freakonomics also reveals stuff about agents that I did not know. For example, they studied how much agents get when they sell their own home compared to what they get when the sell a client’s home. Turns out agents get 3% more when they sell their own home than when they sell yours.

Why? Apparently because they keep them on the market an average of ten days longer holding out for a better offer. When they sell your house, the urge you to take the first decent offer so they can lock in their commission. But when they sell their own home and get 100% of any incremental price, they hold out longer than they tell you to hold out.

Makes sense, although it must be said that such a double standard is unethical. They have a fiduciary relationship with their clients. That means they are supposed to treat your affairs as they would their own. Apparently they are not doing that.

Freakonomics also refines the standard article about translating real estate advertising terms to the truth. They say that certain advertising words correlate with higher sale prices. Basically, the ones that correlate with higher prices are objective and specific like granite and Corian. Those that correlate with lower prices are vague like “fantastic.”

I do not believe this means you can raise the sale price of your house by using the right ad words. Rather, the cause and effect are the opposite direction. Attractive houses have specific, objective, positive things that can be said about them because they are fundamentally better houses.

It reminds me of the old Madison Avenue admonition: “If you have something to say, say it. If you don’t have anything to say, sing it.” In other words, if your product has no real advantages over the competition, use a jingle to advertise it, e.g. “Winston tastes good like a—click click—cigarette should.” Real estate ad words like “cozy” and “charming” are the print equivalent of a radio or TV jingle. JTR