How Much Is a Realtor Worth?

We’ve got a column appearing in the June 10 issue of the New York Times Magazine, which is a special issue on the U.S. wealth divide. Our piece deals with some interesting new research on real-estate sales (more on this later today).

I know what you’re thinking: more Realtor bashing! Well, no. Even though we’ve written various things about the imperfection of the Realtor’s commission model, this column takes a somewhat different tack.

But if we had wanted to write a really good column about Realtor commissions, we would have been wise to base it on this draft paper by the economists Igal Hendel, Aviv Nevo, and Francois Ortalo-Magne. It’s called “The Relative Performance of Real Estate Marketing Plaforms: MLS versus FSBO.Madison.com,” and it aims to assess the value of a Realtor’s contribution by measuring the sale price of homes sold by Realtors and those sold directly by owners. Jeff Bailey has a good writeup on about the study in today’s N.Y. Times.

While we sketched out a similar argument here, their paper puts the argument to a large empirical test. They cite the National Association of Realtors’ claim that using a Realtor brings sellers a significantly higher price, even after controlling for differences in house and seller characteristics. But that is not what they found in the data:

Controlling for differences in house and seller characteristics we find that listing on the MLS does not yield a price premium relative to listing on FSBOMadison.com. This is not to say that using a Realtor is not worth the commission. Realtors can save sellers time and generally help through a stressful and maybe difficult period.

The authors are careful to say that their findings are based on an unusually successful for-sale-by-owner site in Madison, Wisc., which handles the sale of roughly 1/4 of all homes in the area. So this makes it harder to generalize their findings.

But the paper supports the argument that, unless you’re the kind of person who needs a little help through a “stressful and maybe difficult period,” and unless you’re unwilling to wait a little longer to sell your house, then the commission that you pay your Realtor is in essence a big fat tip.


elisharene

True, agents may not bring in a larger sale, but they do usually save time and limit hassles. Is it worth the commission? Depends. How valuable is your time?

jdshipley

Can this "unusually successful" FSBO site be duplicated? Yes? Then this is a slow fuse burning through the real estate industry.

dufless

In the NYT Article it mentioned:
"Like many FSBO sellers, Dr. Sharata said he would gladly pay an agent representing the buyer a 3 percent fee, or $19,470 at his asking price, but felt little need for an agent's help in selling."

Was this 3% fee paid by FSBO sellers factored into the final price?

Also in the article it said:
"On average, it took FSBO homes 125 days to sell and agent-sold homes 105 days. A faster sale, of course, can save money on mortgage payments, taxes and insurance, the economists noted."

What that amount factored into the final price?

I recently sold my home through craigslist. It took a month longer than it took my neighbor, and I ended up paying the buyers agent commission. If you calculate the extra month of mortgage I paid, my neighbor ended up with a better deal, after paying the full commission.

dufless

One more point, the article also mentioned:
"The authors are also analyzing Madison data from 2005 and 2006, when the housing market cooled after a long run-up, to see how their findings might have changed."

I think their study of the slowdown will show that trying to sell a house now via FSBO is ridiculously hard. Just look at craigslist these days, there are so many houses out there, that its impossible to sell via that route. My sister put her house on craigslist, and reposted the ad every two days for two weeks, yet didn't even get one interested e-mail. All she ended up getting were e-mails from title companies trying to get her business.

Fat Tip? Hardly. Your blog posting, managed to make a conclusion without looking into the actual details.

bob_calder

Reducing the value of a service to a competitive cost model would be OK if the services were similar. Allowing the phrase "marketing platform" to represent the entire service creates difficulties for me.

In my twenty something years of experience, there were a substantial number of persons engaging in dealing (ie, making a living from buying and selling) who were in the FSBO environment and who took unfair advantage of the average buyer as a matter of common practice. FSBO sales routinely do not go according to a rational plan. Sellers and banks in particular often do things that are incredibly selfish and coercive.

Engineers, lawyers, contractors, Realtors, and pest inspectors all can have vital roles from time to time. Each party to a sale can and should have advocates. Comparing an unbundled service model with a bundled one is unrealistic.

battingyouhome

When the market was hot, successful FSBOs were much more likely. When the market was hot, escrows were easier - after all, buyers were hesitant to ask for repairs when a line of backup buyers were in placed.

In the buyer's market we're experiencing nationwide right now, a good Realtor (i.e. one who knows how to market a home to buyers AND more importantly other Realtors and is a seasoned negotiator) is worth every penny.

FSBOs remind me of gamblers - most only brag about their wins, you don't hear about their losses. Over 90% of FSBOs end up hiring a Realtor to sell their home.

jason_potter

Living in the Madison area, the FSBO draw is amazingly strong. While not as popular with the down turn in the market (as well as more recent competition from other FSBO and Flat Fee MLS companies) - the site still has a large number of homes for sale (upwards of 650 ads vs ~3000 listings in the MLS).

And while BATTINGYOUHOME notes that 90% of the FSBOs end up hiring a realor nationally (or conversely a 10% success rate), I believe that in the Madison area it is only a 25% turnover rate (i.e. 75% sell their home themselves).

I certainly can't explain the trend here, but it is popular...

battingyouhome

Jason,
First, the Madison market is an anomaly (love the city, by the way). The proof of the pudding is whether 1) other areas and replicate the success of the Madison FSBO market and 2) is it sustainable in Madison now that the market is weaker. My guess is that the answer to the first point is 'no' and the second point is 'probably'.

For full disclosure, you might want to mention that you have a stake in the outcome (your FSBO/mls site - which is pretty cool).

jason_potter

Will (battingyouhome),

I apologize for not specifically pointing out the website that I co-own (it was only linked in my signature). However, we are not a FSBO - we are simply a search engine which indexes everything for sale - FSBO or MLS, so I see the FSBO data "floating" through our site on a daily basis.

To be honest, the idea for the site came about because of the success of the FSBO model here - my wife and I were frustrated with having to search so many different website to see all of the potential homes for sale. I just decided that it would be easier to have a single site to see everything at.

That still doesn't explain the popularity in this area of the FSBO model - and I don't know that I totally disagree with you about the potential success of the FSBO model everywhere else. I think that something along the lines of redfin.com is more likely to work elsewhere.

(and thanks for the positive comments on the site)

Read more...

www.reddoorhomeloans.com

The Madison market is not a large enough study to be significant. What is significant is the market. Sellers overwhelmingly choose to list with real estate agents for one reason and one reason only -- those agents are providing value that exceeds their cost. The great thing about the free market is that when the FSBO makes economic sense, real estate agents will need to find a new line of work. Until more convincing data is supplied, consumers will continue to use real estate agents.

katie t

This is SO TRUE. Real estate is changing. My sister sold her house through www.choicea.com and it was free in Portland and their site is very slick. I think the trend is leaning toward fsbo, especially in lean times when people don't have equity.

J. Bentz

FSBO sellers still don't know their housing market any better than the information they receive. If they are going on sites like Zillow or Cyberhomes to try and get their home value, they will likely list at the high end of the range. After doing that, there is a good chance they will outprice their market in today's housing trends. For more info on determining how much your house is worth, check out www.getmyhomesvalue.com/how-much-is-my-house-worth

elisharene

True, agents may not bring in a larger sale, but they do usually save time and limit hassles. Is it worth the commission? Depends. How valuable is your time?

jdshipley

Can this "unusually successful" FSBO site be duplicated? Yes? Then this is a slow fuse burning through the real estate industry.

dufless

In the NYT Article it mentioned:
"Like many FSBO sellers, Dr. Sharata said he would gladly pay an agent representing the buyer a 3 percent fee, or $19,470 at his asking price, but felt little need for an agent's help in selling."

Was this 3% fee paid by FSBO sellers factored into the final price?

Also in the article it said:
"On average, it took FSBO homes 125 days to sell and agent-sold homes 105 days. A faster sale, of course, can save money on mortgage payments, taxes and insurance, the economists noted."

What that amount factored into the final price?

I recently sold my home through craigslist. It took a month longer than it took my neighbor, and I ended up paying the buyers agent commission. If you calculate the extra month of mortgage I paid, my neighbor ended up with a better deal, after paying the full commission.

dufless

One more point, the article also mentioned:
"The authors are also analyzing Madison data from 2005 and 2006, when the housing market cooled after a long run-up, to see how their findings might have changed."

I think their study of the slowdown will show that trying to sell a house now via FSBO is ridiculously hard. Just look at craigslist these days, there are so many houses out there, that its impossible to sell via that route. My sister put her house on craigslist, and reposted the ad every two days for two weeks, yet didn't even get one interested e-mail. All she ended up getting were e-mails from title companies trying to get her business.

Fat Tip? Hardly. Your blog posting, managed to make a conclusion without looking into the actual details.

bob_calder

Reducing the value of a service to a competitive cost model would be OK if the services were similar. Allowing the phrase "marketing platform" to represent the entire service creates difficulties for me.

In my twenty something years of experience, there were a substantial number of persons engaging in dealing (ie, making a living from buying and selling) who were in the FSBO environment and who took unfair advantage of the average buyer as a matter of common practice. FSBO sales routinely do not go according to a rational plan. Sellers and banks in particular often do things that are incredibly selfish and coercive.

Engineers, lawyers, contractors, Realtors, and pest inspectors all can have vital roles from time to time. Each party to a sale can and should have advocates. Comparing an unbundled service model with a bundled one is unrealistic.

battingyouhome

When the market was hot, successful FSBOs were much more likely. When the market was hot, escrows were easier - after all, buyers were hesitant to ask for repairs when a line of backup buyers were in placed.

In the buyer's market we're experiencing nationwide right now, a good Realtor (i.e. one who knows how to market a home to buyers AND more importantly other Realtors and is a seasoned negotiator) is worth every penny.

FSBOs remind me of gamblers - most only brag about their wins, you don't hear about their losses. Over 90% of FSBOs end up hiring a Realtor to sell their home.

jason_potter

Living in the Madison area, the FSBO draw is amazingly strong. While not as popular with the down turn in the market (as well as more recent competition from other FSBO and Flat Fee MLS companies) - the site still has a large number of homes for sale (upwards of 650 ads vs ~3000 listings in the MLS).

And while BATTINGYOUHOME notes that 90% of the FSBOs end up hiring a realor nationally (or conversely a 10% success rate), I believe that in the Madison area it is only a 25% turnover rate (i.e. 75% sell their home themselves).

I certainly can't explain the trend here, but it is popular...

battingyouhome

Jason,
First, the Madison market is an anomaly (love the city, by the way). The proof of the pudding is whether 1) other areas and replicate the success of the Madison FSBO market and 2) is it sustainable in Madison now that the market is weaker. My guess is that the answer to the first point is 'no' and the second point is 'probably'.

For full disclosure, you might want to mention that you have a stake in the outcome (your FSBO/mls site - which is pretty cool).