Easton Realty Company Assignment

Easton Realty Company Assignment

Easton Realty Company
Sam Easton started out as a real estate agent in Atlanta ten years ago. After working two years for a national real estate firm, he transferred to Dallas, Texas and worked for another realty agency. His friends and relatives convinced him that with his experience and knowledge of the real estate business, he should open his own agency. He eventually acquired his broker’s license and before long started his own company, Easton Realty, in Fort Worth. Two salespeople at the previous company agreed to follow him to the new company. Easton currently has eight real estate agents working for him. Before the real estate slump, the combined residential sales for Easton Realty amounted to approximately $15 million annually.

Recently, the Dallas-Fort Worth metroplex and the state of Texas have suffered economic problems from several sources. Much of the wealth in Texas was generated by the oil industry, but the oil industry has fallen on hard times in recent years. Many savings and loan (S&L) institutions loaned large amounts of money to the oil industry and to commercial and residential construction. As the oil industry fell off and the economy weakened, many S&L’s found themselves in difficulty as a result of poor real estate investments and the soft real estate market that was getting worse with each passing month. With the lessening of the Cold War, less federal money was being spent on defense. The federal government closed several military bases across the country including two in the DFW area. Large government contractors, such as General Dynarnics, had to trim down their operations and lay off many workers. This added more pressure to the real estate market by putting more houses on an already saturated market. Real estate agencies found it more difficult with each passing month to sell

houses.

Two days ago, Sam Easton received a special delivery letter from the president of the local Board of Realtors. The Board had received complaints from two people who had listed and sold their homes thrpugh Easton Realty in the past month. The president of the Board of Realtors was informing Sam of these complaints and giving him the opportunity to respond. Both complaints were triggered by a recent article on home sales appearing in one of the local newspapers. The article contained the table shown below.

Typical Home Sale in the DFW Area
Average Sales Price $ 104,250

Average Size 1860 sq. ft.

Note: Includes all homes sold in Dallas, Fort Worth,

Arlington, and the MidCities over the past 12 months.

The two sellers charged that Easton Realty had underpriced their homes in order to accelerate the sales. The first house is located in Arlington, is four years old, has 2190 square feet, and sold for $88,500. The second house is located in Fort Worth, is nine years old, has 1848 square feet, and sold for $79,500. Both houses in question are three-bedroom houses. Both sellers believe that they would have received more money for their houses if Easton Realty had priced them at their true market value.

Sam knew from experience that people selling their homes invariably overestimate the value. Most sellers believe they could have gotten more money from the sale of their homes. But Sam also knew that his agents would not intentionally underprice houses. However, in these bad economic times, many real estate companies, including Easton Realty, had large inventories of houses for sale and needed to make sales. One quick way to unload these houses is to underprice them. On a residential sale, an agent working under a real estate broker typically makes about 3% of the sales piece if he originally listed the property. Dropping the sales price of a $100,000 home down to $90,000 would speed up the sale and the agent’s commission would only fall from $3,000 to $2,700. Some real estate agents might consider sacrificing $300 in order to get their commission sooner, but it is unethical because the agent is supposed to be representing the seller and acting in the seller’s best interests. Sam had to convince the two sellers and the Board of Realtors that there was no substance to the complaints. The question was how was he going to do it?

First, he needed to obtain recent residential sales data. Unfortunately, the local MLS (multiple listing service) did not contain actual sales prices of homes. However, Pat McCloskey, a local real estate appraiser, did maintain a data base that had the sales information Sam needed. Phoning Pat, Sam found that she indeed had the data he required, but she would have to merge her personal database with data downloaded from the MLS in order to give Sam the necessary information. Fortunately, this was a relatively simple task and Pat could get the data on a disk to Sam the next day.

Sam asked Pat to give him all the data she had on home sales that had taken place in the DFW area over the previous four months. While Pat’s database did not contain all home sales in the DFW metroplex over that period of time, the data she had were representative of the entire population. The data for each home sold included the sale month, the sale price, the size of the home (in square feet of heated floor space), the number of bedrooms, the age of the house, the area within the DFW metroplex where the house is located, and the real estate company that sold the home.

Assignment

The real estate data compiled by Pat McCloskey for Sam Easton are contained in the file EASTON.JMP on BlackBoard. The Data Description section provides a partial listing of this data file along with definitions of the variables. Using this data set and other information given in the case, help Sam Easton show that the underpricing claims of his former clients are not true. First, you should determine whether or not the two houses in question were underpriced relative to the market, i.e., relative to comparable houses sold by other realtors. Secondly, you need to determine whether or not Easton has been underpricing houses relative to its competitors. The Case Questions will assist you in your analysis of the data. Use important details from your analysis of the data to support your recommendation.

Data Description
The data for the Easton Realty case is contained in the file EASTON.JMP on Blackboard. The file contains data on home sales over the past four months in the DFW area. A partial listing of the data is shown below.

Month Price Size Bedrooms Age Area Agency
3 82400 1800 3 3 3 0
3 72800 1362 2 7 2 0
3 90000 1819 3 6 2 1
3 67600 1594 3 7 7 0
. . . . . . .
. . . . . . .

The variables are defined as follows:

Month: Month in which the sale took place:

3, if March,

4, if April,

5, if May,

6, if June.

Price: Sale price of the house in dollars.

Size: Square feet of heated floor space.

Bedrooms: Number of bedrooms in the house.

Age: Age of the house in years.

Area: Area in the DFW metroplex where the house is located:

1, if Dallas,

2, if Fort Worth,

3, if elsewhere in the metroplex.

Agency: 1, if Easton Realty Company sold the house,

0, otherwise.

Case Questions: Easton Realty Company

1. First consider the claim that the two houses in question did not sell for their fair market value.

a. Compare the selling prices of the two houses to the average selling price of all houses sold in the four-month period. Does the difference appear to be substantial? Explain using the data and summary statistics to support your statements. Attach any relevant supporting output.

b. Provide at least three reasons why the comparison in part (a) is not fair, i.e., describe factors impacting on sales prices that are not taken into account in drawing the comparison in part (a).

c. Use the data to present an accurate and fair comparison of the selling prices of two houses to other home sales. Were the two houses underpriced? Explain. Attach any relevant supporting output.

2. Now consider the claim that Easton Realty Company has been underpricing its residential properties relative to other real estate companies.

a. Use numerical and graphical summaries to compare the pricing by Easton and other realtors. Attach computer output to this page and briefly describe your findings below.

b. Conduct a fair and accurate statistical analysis of the difference between pricing by Easton and other realtors. Attach any relevant supporting output to this page and summarize the results below. Is Easton underpricing relative to the other realtors?

c. Prepare a brief, convincing response to the claims of underpricing.

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