Real Estate Brokers Must Hate Economists

If any one profession should be cursing the rise of empirical economics, it has to be residential real estate brokers who earned some $55 billion in commissions in 2007, down from about $68 billion in 2005.

One study conducted in 2005 found that real estate agents got better prices for their own homes than for their clients' homes, on the order of 3.7 percent. The reason is that real estate agents don't have an incentive to push for a few thousand dollars more for their clients' homes since six percent -- the typical commission -- of that extra amount isn't all that much. But when it comes to their own homes, it's a different story.

Then in 2007, another study comparing homes sold through the Multiple Listing Service which could only be accessed by agents found that homes didn't sell for any more when they had representation. The best thing that the study's authors could say about realtors was that they "can save sellers time and generally help through a stressful and maybe difficult period."

The next reason to reconsider using a real estate agent -- or paying them the six percent -- comes from a new NBER paper by B. Douglas Bernheim and Jonathan Meer of Stanford University.

The duo looked at six services, typically bundled, that real estate brokers offer and tried figure out if the typical commission was worth it.

The six services they identified:

1) Preparing homes for sales, circulating flyers, placing advertisements, holding open houses, and recommending the house to buyers

2) Assisting with negotiations

3) Matching buyers and sellers

4) Providing access to the Multiple Listing Service

5) Providing market information and recommendations on the asking price

6) Assisting with paperwork and legal documentation

How much do these cost on their own? Access to MLS can be had for about $300, market information from professional appraisals usually costs a few hundred dollars, and in Illinois were sellers are required to retain real estate attorneys, legal fees cost $700. So, half of the services real estate agents provide cost $1,400, Berhneim and Meer estimate, which is only enough to justify a 6 percent commission on a $23,000 home.

That must mean that the first three services either must be quite valuable, or highly overpriced.

To find out, the researchers looked at how real estate agents affected list prices, selling prices, and speed of sale for homes sold on the Stanford University campus over a 26 year period. The university keeps a list of all homes on sale and assists with paperwork so services four and six are not required in transactions. The eligible pool of people able to buy the homes is also small, so service three is out too.

Bernheim and Meer found no difference in sale price between homes sold through a broker and those without representation, which means the value of service five was low and service two greatly diminished.

But if you do want to sell your home fast, then using a broker seems to be the way to go. On the Stanford campus, the probability of a sale was 25 percent higher if a home was represented by a broker. (But as the 2005 paper showed, that probably means the homes could've been sold for a higher price.)

The median home in their data sold for $570,000. A six percent commission on that is $34,000. A hefty sum for providing a service that seems to be worth much, much less than that.

With homes sales on the decline around the nation, if sellers opted to forgo brokers and framed the six percent that would've gone to the agent as an unexpected windfall, the housing crunch might not feel so bad. And if you live in a region where home prices have declined by less than five to six percent, you might even think you came out ahead.

Comments

[the gugg:]

I'm curious if Jubin has ever worked with a Real Estate professional before? So Jubin are you jealous, or are you another finger pointer from behind the screen of a computer. I see so much lounge chair quarterbacking, I don't see you in the trenches where people get hurt, just another finger pointer assigning blame to bring traffic to website. I'm not sure who is worse the Real Estate industry or the blogging industry. Real Estate is highly regulated, bloggers like you can say what they want, with out recourse. I'm sure you see the world like an avatar buying and selling real estate with out commissions, with out lawyers, mortgage companies, title insurance, and why don't we say the hell with taxes as well. The government is not efficient with management so lets just not pay then either. Maybe we can remove all sales people from the equation that receive a commission because are the services worth it? Well Jubin I don't buy your sales pitch.

2008 Feb 15 07:38 AM

[jagerdjs:]

As an agent, Ill agree that many agents receive far too much for their effort. A good agent however is at the forefront of market research and becomes more of a client advisor rather than a salesman. I have saved my clients hundreds of thousands of dollars in the past two years at my own detriment. When they wanted to buy, I told them to wait. They still want to buy, and Im still telling them to wait. The transaction costs can of course be had cheaper by selling a home yourself, but that certianly doesnt outweigh bad decisions. While your at it, why dont you get rid of financial advisors and CPA's as well? Tell your family to rely on MSNBC and TurboTax and see what happens.

2008 Feb 15 12:09 PM

[Go West:]

Strange article. I'm not sure about this, but isn't the fee structure generally 6-7% on first $100,000 then 1-2% on the rest?

2008 Feb 15 12:47 PM

[pochovilla:]

Here's a depressing thought (for journalists): What do you believe a team of PHD economists would find when they compared the marginal economic benefit between a journalist and a blogger?
I always wonder why it takes so many people (reporters, camera crew etc) to cover the antics of Hilton, Spears and crowd and this stuff is on the evening National news.
As in any business there are "professionals" and then there's the rest. Professionals add value. I am not in the real estate business.

2008 Feb 15 01:05 PM

[JohnB:]

Very interesting study, thanks for sharing it. Ignore the ad hominem comments from affronted parties.

2008 Feb 15 03:06 PM

[Parkite:]

Go West - The fee structure is 6% usually ON THE ENTIRE SALE PRICE. So a $1M home sale results in $60K of commissionable revenue....usually split 50/50 b/w the buyers and sellers agents. It is a complete ripoff.

2008 Feb 15 05:14 PM

[locke:]

I wouldn't know how to start when selling a home, but I would rather buy a "for dummies" book and do it myself than pay some college dropout $20k for a little help with paperwork.

2008 Feb 16 01:34 AM

[DCM:]

Interesting but useless conclusions have been drawn based on some studies. I have been involved in real estate since the early 70's in 4 different states. I can only offer anecdotal comments. The most obvious is that real estate agents, brokers, their training and expertise, and marketing dynamics vary widely from place to place. Also, fees, commissions and advertising costs vary from place to place. Certainly integral to the entire equation is the sophistication of the buyers and sellers, their time, their jobs and their interests. Given all the variables, it is hard to glean much from the studies conducted or your comments.

Nevertheless, it must be acknowledged that buyers and sellers are seldom best served by their respective real estate agent because of the nature of commission sales. Are there exceptional agents who’s motives are completely altruistic? Of course, but you can imagine, they are few and far between. There is little doubt in my mind that the real estate industry needs to be completely revamped for the sake of the client. Agency agreements between agents and buyer/seller need to be revised to reflect specific obligations and functions that must be performed for compensation or face remunerative penalties. Further, compensation should be fixed or at the least broadly bracketed based on sale’s price AND based on services provided AND current market conditions. A seller should be willing to pay for greater market exposure and time to sell in slow markets like today’s. I believe most agents would agree that there is little difference in the amount of work, time and expense between selling a $100,000 property and $1,000,000 property again assuming they are doing their job to the fullest. On the other hand, selling a home in a slow market is completely different than selling in an active market. Commission sales does not fairly address sales price or market conditions.

Articles such as this do an injustice to these kind of topics when less than half the story is told. Unfortunately, as so often is the case, articles in this genre never correctly, completely or properly summarize referenced studies and other articles. On the other hand, readers seldom have the time or inclination to get the whole story as it applies specifically to them. The comments posted thus far reflect the articles value.

2008 Feb 17 09:45 AM

[Ex15:26:]

I strongly believe there are great professionals out there that add value and can help negotiate a deal for more money or expedite a close. Each realtor I've used have made a valuable impact and earned their commission. Just like in every profession, there are folks that are not highly skilled and don't earn their pay.

Personally, I do not like the standardized pricing you get in dealing with a realtor. Yes, a few can negotiate to give you a 1 percent reduction if you complete a buy and a sell, but largely the entire industry sets a standard price for any transaction at 6% (3% for each side). Clearly a large undeveloped track of land requires more skill (and compensation on a percentage basis) than an average home, don't you think?

Finally, the impact of the NAR (National Association of Realtors) to squash competition from discount realtors that offer listings on MLS only or 1% commission fees rather than the standard rate indicates that this is more like price fixing than it is about letting competitive market forces work. Don't misunderstand me - commercial brokers have the ability to negotiate fees that are higher than 6%, so I fully agree with them that if they can earn it and negotiate it - GO FOR IT!, but setting a standardized commission floor like NAR does seems like they are stacking the deck against the consumer.

2008 Feb 17 11:05 PM

[Employment ...:]

Service 7: providing a convenient person to sue if something goes wrong.

Although I haven't read the study, your explanation of it suggests that the authors aren't accounting for the value of the time that an unrepresented seller expends on 1 and 3. I always assumed that was the primary thing a seller pays for.

In other words, an unrepresented seller may get the same price ultimately, but they do more work.

2008 Feb 18 01:50 AM