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Does the Internet Cut Costs for Out-of-Town Buyers?

The internet was supposed to make countless aspects of daily life better, faster, and easier. That obviously isn’t always the case, but a new study by Collateral Analytics examines how the internet is—or isn’t—making it cheaper and more efficient to buy a home. Specifically, Collateral examined whether the abundant availability of free real estate information online is helping remove some of the costs out-of-town buyers have traditionally faced as compared to locals.

In the past, buying a home out of town has been significantly more difficult than shopping in your own city. Out-of-town buyers often have less time for their searches, don’t know the market as well as they do their own town, and sometimes are unwittingly affected by the “anchoring effect”—in this case, a tendency to bring assumptions about housing prices in their own market into their search in the new one, thus possibly overestimating how much a home should cost. The rise of the internet, and specifically home-search websites such as Realtor.com, Zillow, and Redfin, should, at least theoretically, help alleviate some of these problems and shrink the efficiency gap between locals and out-of-town buyers. But has it in actuality?

Examining 15,795 transactions from the Miami-Dade market (5,446 in 2005 and 10,349 in 2015), Collateral’s analysis set out to answer three questions:

(1) Do out-of-town buyers pay more for real estate compared to locals? (2) If so, is that premium caused by different search costs (distance), biased beliefs (anchoring), or the level of personal income (wealth)? (3) Did the search cost premium decrease from 2005 to 2015 due to better public information provided by the internet?

Sure enough, the internet has made a difference during that 10-year gap … although perhaps not as much of one as you might expect. Collateral found that the out-of-town premium paid in 2005 averaged 5.72 percent, while the average 2015 premium was 4.95 percent. According to Collateral’s report, “This is only a slight decline, which suggests that search costs still matter and that other sources of information may dominate the price paid by buyers.”

The report continues: “For the mean property value of $275,837 in 2005, the coefficient translates into out-of-town buyer leaving an average of $15,777 on the negotiating table, relative to in-town-buyers if he lives 100 miles away. In 2015, this premium is only $13,939.”

Collateral theorizes that, in spite of the plethora of online data available to buyers today, many still aren’t using it, instead continuing to rely on real estate agents and other sources.

To read more about Collateral’s analysis, click here.

About Author: David Wharton

David Wharton, Editor-in-Chief at the Five Star Institute, is a graduate of the University of Texas at Arlington, where he received his B.A. in English and minored in Journalism. Wharton has nearly 20 years' experience in journalism and previously worked at Thomson Reuters, a multinational mass media and information firm, as Associate Content Editor, focusing on producing media content related to tax and accounting principles and government rules and regulations for accounting professionals. Wharton has an extensive and diversified portfolio of freelance material, with published contributions in both online and print media publications. He can be reached at [email protected]

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