Bad Broker Behavior: Perverse Incentives

The Bad Broker Behavior series is intended to highlight some of the bad behaviors of some of the dental practice brokers in the US.  I do not suggest that all brokers behave this way, only that some do.  This series is offered to help dental practice sellers and buyers beware…

You may recall Dr Sally Seller from a previous post.  She is selling her dental practice through her longtime acquaintance, Bob Broker.  Bob was fairly quick to convince Sally to drop her listing price.  The conversation went in this order:

1. “Sure Sally, I think we can get $800,000 for your practice.  Because I make 10% of the selling price, it’s in my best interest to get you the most for your practice.”
2. two weeks later: “Sally, my buyer decided to look elsewhere.  We may need to drop the listing price to attract new buyers.”
3. two weeks later: “Sally, the market seems to have gotten really slow, we better drop the price to $700,000 if we are going to sell anytime this year.”
4. two weeks later: “Sally, I just don’t know what has happened to the market.  We better drop the listing price to $650,000.”

Yes, Sally fell for the old Buying The Listing trick.  But there is much more going on here.  Bob suggested he was tying his incentives to Sally’s by getting a percentage of the final sales price.  Sally didn’t know that Bob’s incentives were really not in line with hers.  In a study done in the real estate business (see below for reference), it was proved that broker listed properties sold for less than properties owned and sold by the same brokers.  The brokers held out for higher prices when they sold their own properties.

That seems counterintuitive, but the study found that the incremental increase ($5,000) that Bob will see by working extra hard to get another $50,000 for Sally ($700,000 instead of the new lower price of $650,000) creates a desire in Bob to close as fast as possible so he can get another listing and get most of the commission.  By dropping the price, Bob only loses $5,000 in commissions, but stands to gain a fast $65,000 at the new lower price.  The additional work to sell at the higher price is not worth it.

Sellers Beware of Bad Brokers’ perverse incentives.

See Rutherford et al., supra note 16, at 629 (“Given that the agent receives a small portion of the transaction price as commission, the agent’s goal of maximizing the expected commission may diverge from the seller’s goal of maximizing the selling price. Furthermore, given that the targeted selling price will impact the time the asset stays on the market, the agent’s desired time on the market may diverge from that of the seller.”).