Profile picture for Bette Defarm

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.

Continued.....

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February 15 2008 - US
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Brokers must hate those mathmatics even more! lol

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February 15 2008

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.

 

Bette there is a great book called 'Freakinomics' It has a whole chapter on why most agents own homes spend more time on the market and sell for higer prices. It pretty much boils down to the fact that more time on the market for say 10k wouldn't equaly a large difference in commission so there is no incentive for the agent but there is in the sale of the agents own home because they pocket that 10K and there is incentive to hold out for the higheer price and leave the house on the market longer wiht out dropping the price.

 

The book backs it up with facts and numbers and I am sure it puts it better than I do.

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February 15 2008
Profile picture for Bette Defarm
Thanks for the tip, Bubba. I'm a voracious reader and "Freakonomics" sounds like something I'd really enjoy.

Agents are too defensive on this subject for me to believe there isn't something to it.
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February 15 2008

They don't get as much money as you think. It's split, then split again.

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February 15 2008
Profile picture for Bette Defarm
Debts,

I'm well aware of the expenses and how the commish is broken up. I just don't think what you get in return is worth it. I'm on the record as thinking the present model needs a drastic overhaul.
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February 15 2008
Profile picture for klarek the realist

It needs to be a flat fee service, paid up front.  And I'm not talking about a flat $10k, we're talking $2k tops.

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February 15 2008
Profile picture for Randy_H

Freakonomics is a great book, and easy to read.  A few things in there sorta press the limits of causality versus correlation, but overall it's incredibly enlightening.

 

There has been so much economic study on the field of real estate agency and transactions that I'm quite fankly surprised there hasn't already been heavy reform and regulation.  There is a bounty of empirical evidence that all kinds of collusion and asymmetry exists.

 

Perhaps the problem with sticky, overpriced homes here in Marin has to do with the unbelievably high saturation of people with their agent's license?  It seems that 2 of every 3 people I run across trying to sell their home include a housewife or mother-in-law (or believe it or not, stay at home dad) with a license.

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February 15 2008
Profile picture for Mtmozart

I agree.  As house prices bubbled up  so did commissions even though no extra work was being done.  

 

A friend of the family sold their home  in 2005 (!) for 1.5 million and paid a 6% commission.  The house sold in 2 weeks with no fuss or muss and the commission was $135,000. 

 

To which I could only say ......WTF! 

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February 15 2008
Profile picture for BuyEqualsRent

I negotiated down to 4.5% when I sold my condo in August 06.  I'm betting today I could get that down to 3%.

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February 15 2008
Profile picture for Alan May

Well... first of all, farmd0g, anybody who paid a full 6% commission on a 1.5 million dollar home, didn't do their homework, 'cause they could easily have gotten a reduced commission, at least certainly on the amount over a million, from most full-service agencies.

 

Secondly, I think if you do the math, you'll see that 6% of $1,500.000 is only $90,000... so I doubt the commission was $135,000!!  I would have happily taken the listing at a flat 5% for the first mill, and then 4.5% for the balance... saving them $17,500!!!

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February 15 2008
Profile picture for Randy_H

Our 2005 listing, which was over $1mm, was for 3.75%.

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February 15 2008
Profile picture for Alan May

Our 2005 listing, which was over $1mm, was for 3.75%.

 

There ya go... see, someone who did a little research, and found a full-service agent/agency who'd accept a discounted rate for an expensive listing.

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February 15 2008
 
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