Want to Jump-Start the Housing Market? Get Rid of the Realtors!

(iStockphoto)

Okay, okay, that’s not quite the message of a new working paper by Panle Jia Barwick and Parag A. Pathak called “The Costs of Free Entry: An Empirical Study of Real Estate Agents in Greater Boston.” But for those of us who have thought about the Realtor’s role in the housing market, it’s tempting to jump to that conclusion. Here’s the full version of the study, and here’s the abstract:

This paper studies the real estate brokerage industry in Greater Boston, an industry with low entry barriers and substantial turnover. Using a comprehensive dataset of agents and transactions from 1998-2007, we find that entry does not increase sales probabilities or reduce the time it takes for properties to sell, decreases the market share of experienced agents, and leads to a reduction in average service quality.  These empirical patterns motivate an econometric model of the dynamic optimizing behavior of agents that serves as the foundation for simulating counterfactual market structures.  A one-half reduction in the commission rate leads to a 73% increase in the number of houses each agent sells and benefits consumers by about $2 billion.  House price appreciation in the first half of the 2000s accounts for 24% of overall entry and a 31% decline in the number of houses sold by each agent.  Low cost programs that provide information about past agent performance have the potential to  increase overall productivity and generate significant social savings.

And where is all that money going that’s not being spent on home sales? Maybe … the Zillow IPO.

And just for kicks, here’s a clip from the Freakonomics movie in which Levitt and I ask the question: Does your real estate agent really have your best interest in mind?

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COMMENTS: 54


  1. Sunfell says:

    A year ago, I started shopping -seriously shopping- for my first home. I decided to go with a realtor, because there was simply too many balls to keep in the air, and being a first-time buyer, I did not know all the ins and outs of home-buying- even after reading about a dozen books about the subject. (In fact, the books convinced me that having a professional on my side was worth it.)

    It took six months, tons of emails, 40 walkthroughs, and four offers that fell through before I landed a home that fit my parameters. I know I ran my realtor ragged- she earned her commission. And I got a great place to live.

    Sadly, she left the business shortly after I got my home- there were simply NO buyers out there. She told me about several open houses where no one showed up at all- even in highly desirable neighborhoods. Worse, many of the homes I looked at last year are STILL on the market. And I live in an area where housing prices are relatively affordable, and the bubble did not hit us that hard.

    Well-loved. Like or Dislike: Thumb up 19 Thumb down 4
    • Squareknot says:

      Problem: Zero interest in an open house even thought it is in a desirable neighborhood.

      Solution: Lower the listing price to something compelling.

      Well-loved. Like or Dislike: Thumb up 14 Thumb down 1
  2. kevin says:

    I’m selling my house right now (have a contract). I’m not sure what the realtors really do to garner the commissions they get.

    The internet has impacted just about every other industry where “agents” used to exist. Best example is travel agents.

    There is absolutely nothing my real estate agent has done that I could not have done for a flat fee on realtor.com, and the time investment from me is the same.

    Yes, they negotiate, but I can do that too. Yes, they understand the contracts, but that could all be created as a simple workflow on a website (like your taxes and wills are today).

    And, finally, they come in and tell you how great your house is, and as soon as they put the sign in the yard, they tell you the price is too high, and changes you should make.

    All sales agents – all of them – work for the buyer. In any industry.

    Hot debate. What do you think? Thumb up 24 Thumb down 24
    • Mack says:

      “All sales agents – all of them – work for the buyer.”

      In terms of real estate, that’s absolutely untrue. The “listing agent” has a legal, fiduciary obligation to the seller. And in fact, absent a contract specifying otherwise, so does any agent you hire as a buyer.

      And in general terms, it’s hard to understand how you could think that. A salesman works for his employer, the seller, in every transaction.

      Hot debate. What do you think? Thumb up 22 Thumb down 21
      • Mike says:

        Mack is 100% correct ! In RE you have a fiduciary obligation to the seller.

        Well-loved. Like or Dislike: Thumb up 15 Thumb down 3
      • Just Tired says:

        Mack is theoretically 100 percent correct! Like Yogi Berra said: “I theory there is not difference between theory and practice. I practice there is.”

        Thumb up 4 Thumb down 3
      • Just Tired says:

        In theory… In practice…

        Thumb up 0 Thumb down 1
    • Mike says:

      Well, simple solution is….Sell it yourself? If it was so EASY to do don’t you think it would have been done 90% of the time like folks do when they sell their own cars.

      Thumb up 7 Thumb down 3
      • Frank says:

        Mike says:
        July 26, 2011 at 7:02 am

        Well, simple solution is….Sell it yourself? If it was so EASY to do don’t you think it would have been done 90% of the time like folks do when they sell their own cars

        Well actually it is easy to sell it yourself! The real estate industry has so many people bamboozled into thinking it is not.

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    • Rob says:

      “Yes, they negotiate, but I can do that too. Yes, they understand the contracts, but that could all be created as a simple workflow on a website (like your taxes and wills are today).”

      You’re exactly right. Let’s take that same argument to ANY service industry, like bookkeeping or mechanics. You can find ANYTHING on a website – -from how to work Quickbooks or how to rebuild a carburator. But the question is…WILL you? WILL you be available for every showing? WILL you follow up with every person who sees your home, to get feedback as to why it didn’t sell? WILL you keep up on rapidly-changing appraisal criteria to know if your home is still correctly priced (it was a month ago when you put it on the market, but what about today)? WILL you maintain marketing not only on the MLS (which, if you get rid of all the Realtors, would go away), but on Craigslist, Yahoo!, and hundreds of other websites – none of which you can definitively point to as the source for your next buyer? WILL you look at tens of other homes weekly to stay current with housing and decor trends? WILL you devote full days to networking with prospective buyers (you can’t network with sales professionals, remember? They’re all gone) to the detriment of whatever employment you have?

      Look, it’s not rocket science to be a Realtor. But it does take tremendous amounts of time and energy to correctly market and sell a home. Yes, you can do it. But WILL you? Ask any For Sale By Owner, and you’ll find that approximately 90% found it to be more difficult that they bargained – which is why they ultimately decided to hire a Realtor.

      Well-loved. Like or Dislike: Thumb up 8 Thumb down 3
    • Frank says:

      “All sales agents – all of them – work for the buyer. In any industry.”

      Regardless if they are selling a home or are supposedly representing a buyer for a home all sales agents work for themselves! As noted in the video agents are human and work on incentives. Their incentive is their commission and they will do whatever it takes to make that commission. If that means telling a seller to lower their price when the seller already has a rock bottom price then they will do it. If it means convincing a buyer to overlook all of the flaws in a home that make it a “Money Pit” then they will do it.

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    • - says:

      correction: All sales agents – all of them – work for themselves.

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  3. John Bakker says:

    Hidden due to low comment rating. Click here to see.

    Disliked! Like or Dislike: Thumb up 23 Thumb down 28
    • Joshua Northey says:

      “The Realtor if he or she does their job should also be sharing what is happening in the market, share market trends, comparable sales and yes sometimes the first offer is the best offer while also waiting can also be in some cases lead to a potentially higher offer price”

      I might be more interested in these services if the realtors I have spoken to/hired appeared to be able to actually provide them. After the bad experience with the first realtor we shopped around a lot before settling on the second one. And while a bright and personable guy who had gone to Yale in retrospect he did not add anything to my understanding of the things you quoted.

      I targeted a few zip codes. I found around 200 houses that fit our parameters. I went through pictures of them with my wife and narrowed them down to 50. We drove past them and narrowed them down to 20. Then he got involved and mainly worked to speed us through the process as quickly as possible. Wanting us to narrow our list, and to not broaden the area of search after being initially discouraged at the selection. When we settled on three and actually started making offers he provided me zero guidance. No comments about what has been happening, no encouragement or discouragement of the different offers I was contemplating other than to make one as soon as possible.

      He was mainly useful as someone who had dealt with the paperwork before and someone who was familiar with the process. I should be able to find that for $200 not $6,000. The Edina Realty website provided me with about 100X more information then he did and it was free.

      Well-loved. Like or Dislike: Thumb up 13 Thumb down 7
    • Gerald T. says:

      I’m not saying these discussions are clearly manipulated, but look at what happens when a Realtor leaves a well thought out, reasonable and pleasant commentary, it gets hidden. I guess the complainers never like to see some truth shine in on their complaining.

      Thumb up 5 Thumb down 5
    • Misha says:

      I concur. My husband and I are on our 2nd home. We learned a lot with the first home and one of them was INTERVIEW the realtor BEFORE-HAND. We started off with an older woman who had been in the business for many years and new the market/area we were interested in. Unfortunately a family emergency forced her to drop out and we were passed onto someone much younger and much less experienced. I look back now and laugh but at the time my husband and I were frequently perplexed. So what if I’m the one checking out the garage and the state of the furnace and my husband is the one checking out the kitchen! Nor did this young realtor have a clue as to the cost of replacing a garage. I had found dry-rot in the wood by the simple test of pushing my thumbnail into the corners and sides of the garage. It sank in by a ways, not a good sign.

      Experience is the key, a well trained and experienced Realtor can cut through a lot and reduce the driving around and viewing. If they’re good they have sized you up and listened carefully to your list of needs and can zero in on the houses that best match your wants. I would say to anyone who was complaining that they were doing all the looking and checking to find themselves a new realtor. But save yourselves future headaches by interviewing the realtor first. After that first experience when it came time to sell our house we visited open houses and talked to the realtor and followed up with a private interview with the ones that interested us. Our 2nd experience with a realtor was much, much better.

      Thumb up 1 Thumb down 1
  4. Joshua Northey says:

    It is a classic protection racket. You need to a real estate professional to protect you from the other person’s real estate professional, and they need them for the same reason.

    The realtor on my first house was horrible and actively misinformed us about what were standard practices (telling us it was normal to assume the properties assessments from the previous owner, when it is in fact unheard of in this part of country).

    Worse yet when we left the area and had to put the house up as a rental he refused to listen to our comments that we would be willing to take less for our place then he suggested. We just wanted someone in there, the marginal $25 did not mean anything to us. He seemed strangely reticient to knock the price down. Later I found out he manages 100 rental properties, so of course he doesn’t want us to lower the price!

    The realtor on our next house was a lot better, but I basically did all the work and research. I only needed him to get keys into the houses because many houses won’t let you in without one. He did do some paperwork, and steered us to a mortgage broker and inspector who in retrospect were a little lacking (but were friends of his). I do not feel like we got close to $6,000 in work out of him, nowhere near that. If I ever purchase a house again I am doing 99% of the work and will give some realtor $200 bucks to stand there for the last two meetings.

    Well-loved. Like or Dislike: Thumb up 29 Thumb down 7
  5. kristine says:

    while I believe there are *some* Realtors/Agents in the market who *may* garner what they are worth in commissions to the buyer or seller . . . . after buying and selling four homes in three markets (las vegas, iowa, idaho) by and large the 6-7% fee is worthless. We’ve sold an bought by-owner, with a discount brokerage, and full-service agent. I have never seen an agent in the business who doesn’t put their own needs first:

    1) Buyer’s use agents because they are not charged for them, sellers are. Thus, the sellers have little market demand without listing on MLS. (Unless you live in the rare enclaves with healthy FSBO system/markets).
    2) Even if you are listed on MLS (say through a flat fee agency), agents with buyers, out of self-protection of their industry, do not show buyers homes listed by-owner (unless buyers DEMAND them to be shown). Even if said home is the best available option for the buyer. And most FSBO listings offer buyer’s agents commissions. I’ve had a Realtor who was a member of our church basically tell me if you didn’t list with her brokerage (who listed half of the homes in town) we wouldn’t be able to sell, because all of the brokerage’s agents show each other’s homes first – to keep the commissions in house (and to help annhialate competition). How is this in the best interest of the customer?
    3) Even if you use a licensed agent there is no guarantee they will give you good advice. We used personal recommendations for our last agent who pressured/bullied us into an offer likely $5K+ above market price at the peak of the market. Then after buying all our own appliances and another $15k of improvements (furnace/ac, roof, sprinkler system, garage door, drywalling basement, soft water etc. etc.) do we realize we’ve been had.

    We bought this house for $150k and could likely sell for $135. After over $20k+ in improvements we still owe $150k. I could likely qualify for a personal line of credit for half of it and come up with the $15k we are underwater and be able to honestly sell our home and keep our contract.

    Oh wait! Minus $8100 agency fees. Minus $4000 to cover buyer’s closing costs (90% of homes are selling with in our market). Minus $2000 other fees and charges at closing.

    There isn’t any way we could come up with $30k-$40k to get out of our house. We listed it for 3 months until we were able to face reality.

    We recently rented it losing $300 per month and moved into a ghetto basement apartment in an effort to save money and improve our situation (did I mention my husband has 1.5 jobs and I have 3 part-time jobs with no prospects of being able to add more income?) Said husband is getting job offers for $4-6k more out of state. We can’t afford to move without facing reality and taking the hit of the short-sale or foreclosure. Thus bringing down prices in the neighborhood, etc. and prolonging the dip in the market.

    Or the gov’t could set up a central website in each city/state where buyers and sellers meet (think single payer insurance like) and pay a set fee for the legal work (titles, contracts, etc.). And let me tell you the downturn in the market wouldn’t last for much longer.

    Oh, did I tell you the National Association of Realtors is in the top 10 largest, most powerful lobbying groups in DC and spends more than Pfizer or Lockheed Martin in giving/bribing public officials?

    SHHHH! They don’t want you to know!

    Well-loved. Like or Dislike: Thumb up 26 Thumb down 8
    • Frank says:

      kristine says:
      July 22, 2011 at 12:58 pm

      EXACTLY! There is little need for real estate agents anymore except to open doors for homes since buyers can not access them directly.

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  6. Patrick Roach says:

    As a Realtor, this video is disturbing due to the assumptions that are made. It also seems out of date/context to our current real estate market. In a boom market, when selling a home seems easy and the Realtor seems irrelevant, I can understand how someone might feel that the commission was unearned. Also, if a seller “knows” they can get an extra $10k for waiting a week, of course they should wait a week. Who gets that luxury?

    In today’s market, working with someone who can come along side a seller or buyer and help them understand a home’s value is extremely valuable. Not just for first timers, but anyone who does not track home values on a daily basis can have inappropriate expectations of a home’s real value.

    I think the best way a Realtor can truly serve their client’s best interest is by taking the time to layout a home’s value and an appropriate market value PRIOR to making or receiving an offer. If a seller can see that similar homes have sold between $275-$285, while homes that are selling for $270 are clearly dificient, and homes selling for $290 are clearly superior, the seller can make a principled decision prior to an offer coming in of what should be considered acceptable. Granted if they get an offer in the acceptable range and decide to hold out, that is well within their right. But if a seller knows the offer is acceptable and chooses not to accept it, the Realtor might want to think of moving on to another client. The Realtor’s primary role (which I believe many Realtors do not truly understand) is to be a market expert for their client. If a Realtor cannot prove to a seller why a home is worth what it is worth, they are off to a bad start and are likely to breed distrust at some point.

    Hot debate. What do you think? Thumb up 16 Thumb down 18
    • Joshua Northey says:

      A) I can find all of that information about my home relative to others online for free with 2 hours of work. If I have a friend in real estate I can even get the more detailed MLS information.

      B) Market expert my ass. When we interviewed a half dozen relators for our second house at least half of them straight out lied to us. Maybe one or two had a better handle on the market then myself. One realtor (in fact one of the leading ones in town) told me he 100% could sell our previous house in 2 months or less at a price $25000 more then what we eventually listed it at. Obviously we didn’t use someone who would tell such blatant lies.

      Months later not only had it not sold, not a single house in that price range had sold anywhere in that whole quarter of town. Zero sales. There were no sales except slumlords buying up forclosures for half off.

      Well-loved. Like or Dislike: Thumb up 18 Thumb down 6
      • Melina Tomson says:

        This is called “buying a listing” where the listing agent essentially tells the seller what they want to hear and then requests price reductions soon thereafter. The reason they do it, is because it is highly effective. You were well researched enough to see that this wasn’t reality for your home, but many sellers don’t do any research at all.

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    • Tazman says:

      When the housing market was ood, realtors wanting 6% commision. Now that times are not so good guess what, thay still want 6%. Maybe when houses were selling for less than $60K a 6% commision was needed but with houses selling for $300K to plus 1million in many areas why do they still think they need 6% commision. The average realtor does not do near enough work to make $18K plus or even $9k plus if split.

      Thumb up 7 Thumb down 4
  7. Anne says:

    So what incentives would you put in place to avoid this scenario? Also, this doesn’t seem to take into account that most agents get a lot/most of their business from referrals, so it is in their own best interests to keep clients satisfied over the long term rather than just going for the quick buck. While there is certainly self-interest involved, most agents I know (maybe I’m lucky?) really try to do what’ s best for the client. What would you do differently to get better/unbiased information?

    Well-loved. Like or Dislike: Thumb up 9 Thumb down 3
    • Joshua Northey says:

      Well for my selling agent instead of 6% of the gross I suggested an arrangement that he be paid say a flat $500 on the first 80% of the value, and then an increasing % of any amount above that he could get.

      He said that the realtor’s association had lobbied to make that illegal in my state. So we couldn’t do that. It would be one way to help fix the incentives. But the realtors don’t want them fixed.

      Well-loved. Like or Dislike: Thumb up 17 Thumb down 5
  8. Melina Tomson says:

    I am a brokerage owner and real estate agent.

    The factor that the study doesn’t take into account is the risk factor. Real estate agents can justify their fees anyway they want with this marketing or that marketing, blah, blah…but the real reason commissions are disproportionately high is because of risk. Doing real estate on commissions is kind of like gambling. If you win and sell a house, you win big. If your lose, you lose big. Because real estate agents take a large risk that they will spend money marketing a house and not getting paid, there is an inherent “risk factor” built into the commission structure to make it worth it.

    In my city, Salem, OR, there is a 54 month inventory of homes priced over $600,000. So if I take a 6 month listing agreement on a house and spend $2-3k or so marketing the property, and I have a 10% chance or so of selling the house in 6 months, what is that risk worth? That is why commission go up so much as the home price increases. 1) The risk associated with spending money and not making anything back is huge, and 2) They take a lot longer to sell so more money and time will be spent than in your 40 hours of work you had in your opinion piece. It’s a gamble. High risk means high return.

    Most people don’t have a high tolerance for risk which is why and I can say this because I do this, when given a choice between an all or nothing commission that costs more, or a lower flat rate (fee-for-service) that is guaranteed, consumers will overwhelmingly choose to pay the agent more. I have done fee-for-service for many years and consumers generally prefer to pay me more money at the end for the privilege of not having to pay me in the event the home doesn’t sell.

    Cutting the fees down without cutting the risk is business suicide. The only way to change that dynamic is to have about 50-75% less real estate agents in the industry. That isn’t going to happen because large brokerages make their money on agent fees such as desk fees. The more agents they have, the more a brokerage can make in fees.

    And Kristine, the NAR just passed a fee increase earmarked for lobbying. It was highly controversial among members (I am not a member of NAR). I don’t think it is a big secret that the NAR is a powerhouse in the lobbying world. There were a bunch of public blogs written about it so I don’t consider that being secretive. Just because you aren’t aware of something doesn’t mean that there is this conspiracy to keep it a secret.

    Well-loved. Like or Dislike: Thumb up 24 Thumb down 12
    • Daniel says:

      Why should your customers pay for the risk caused by others? I would much rather pay a realtor an hourly fee for the actual work they do than pay the extortion-like commissions. If someone wants a realtor to hold their hand and drive them around town, fine, let them pay for the time. I would prefer to find my home, pay for an hour or two of time for a realtor to open the door and then get out of my way while I look at the home. Realtors are clinging to an outdated business model and using laws and protection schemes to survive.

      I am electrician. If I were to charge an hourly rate based on the value of my customers property, it would be considered outrageous. Why do we put up with this from Realtors?

      Well-loved. Like or Dislike: Thumb up 21 Thumb down 5
      • Toothy says:

        The percent based fee is what is killing the market – pay a real estate agent by the hour. Case closed.

        Well-loved. Like or Dislike: Thumb up 18 Thumb down 7
      • Mike says:

        No one wants to pay an hourly fee that is the problem. They want FREE service from a realtor. Drive them around, call them anytime, hold overpriced open houses. Advertise fro free and if the house does not sale say they were a lousy realtor.

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      • Mary Blackburn says:

        I would love to get paid by the hour!!!!!!!! I’ve put in a zillion hours showing property, emailing customers, running to and from home inspections, speeding to fed ex boxes to get in docs on time….and NOT A DIME IF IT DOESN’T CLOSE. Are we also going to get paid for the time we spend after closing when we have to let movers in, cable guys in, run down and let the homeowners in because they forgot their keys…..

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      • Melina Tomson says:

        Because consumers don’t want to pay it. It really is that simple. I do hourly rates, flat rates or commissions. About 75% of the time consumers choose commissions.

        There are hourly rate agents all over the country. Most consumers just don’t know that it is an option and don’t look for them.

        Thumb up 5 Thumb down 1
  9. Dixon says:

    Can we be clear that this article means real estate agents/brokers generically, not specifically the brand of agents/brokers called the Realtors?

    Well-loved. Like or Dislike: Thumb up 9 Thumb down 1
  10. Enter your name... says:

    I am an agent and I completely appreciate that you can become a little frustrated after dealing with an agent. In my day to day, I come across many agents who seem incompetent, but please keep these two things in mind – i) not all of us are created equal, and ii) Cost is only a factor in the absence of value. If your agent isn’t demonstrating value, fire him (yes you can fire him before the contract expires). Simple as that. My clients rarely take issue with my commission, after I demonstrate how much I can help them gain. Granted up here in Canada, we only charge 4.5% – 5%.

    Thumb up 5 Thumb down 3
  11. Mike says:

    That was a pretty WEAK discussion. In 90% of the listings that we market in my area we do not take the first offer on the house. We market it and hold a Brokers tour and 2 Sunday open houses and set a date for offers usually2 weeks or more AFTER it is listed. If it is priced well it may have several offers at that time and may bid the price higher than list price! If it is priced to high no offers will come and you end upp lowering the price until it sells. Then folks blame the realtor for selling to low?

    You didn’t discuss how many sellers don’t listen to the advice of their realtor and price it way to high and the realtor works many months on it, advertising costs, brochures, showing it, Virtual tours,Gasoline, assistants, office expense, Irate calls from the seller as to why the house is not selling and the realtor is not doing enough yet they won’t adjust the price and they take it off the market becasue they did not GET what they wanted? The realtor worked for free for many months and lost money on it ou tof his pocket. Then later they re-list at a lower price with another realtor and it sells?

    ANother solution is the seller can pay a Realtor an hourly wage to list it at the high price and if it does not sell the home owner has to pay a raltor for his time even if it does not sell? How many would do that? Pay the realtor a fee of $50 per hour if it does not sell. Oh no, they don’t like that but they don’t mind wasting his/her time and pricing it to high. You can’t have it both ways.

    Well-loved. Like or Dislike: Thumb up 12 Thumb down 4
    • Melina Tomson says:

      But it isn’t the consumers fault that agents agree to take listings on commission that are overpriced. That is a poor business decision on the part of the agent. They need to be responsible for that choice. It just means they are unable to evaluate risk well.

      Thumb up 4 Thumb down 3
  12. mike says:

    Hidden due to low comment rating. Click here to see.

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  13. MinnItMan says:

    It’s been six years since this was laid out in Freakonomics, and a lot has changed, particularly the dramatic shift from a so-called “buyers market’ to a “sellers market.” Back then, it was relatively easy to “overpay” as many of the other third-parties to real estate transactions like lenders and appraisers weren’t taking a hard look at pricing. Now, they are much more of a force of resistance. Also, it is much more difficult for a buyer to get away with carrying a property while closing on a new purchase. Oh, and the fact that the number of transactions is down and the prices are down 20-50-plus%, directly reducing the commissions, not only of realtors, but loan originators, etc. I would like to see how much these factors bear on the basic Levitt/Dubner point. It would be very interesting if there was no effect.

    Melina Tomson makes good points, IMO. The problem with commissions (any commissions) is that they incorporate many different bets, and people don’t like losing bets. My hunch is that the 80/20 rule has all sorts of interesting applications to this problem. Realtors kill themselves on 80% of their deals and lose money, and make a killing on 20% where they don’t. The difference between success and failure for an agent is how they reduce the number of losers, and increase the number of winners. Essentially, their goal should be to do “no” work. Talk about misaligned incetives! Shocking.

    As a lawyer (a real estate lawyer) who does not do contigency fee work, but is frequently asked to, I would also like to see a compare and contrast on contigency legal fees. One obvious contrast to me is that contigency fees “only” work for legal matters that are nearly certain to pay, and pay in “large” amounts when they do (personal injury and employment law being the best examples). Accepting matters on a contigency basis – like standard residential real estate matters as a bad roof, septic system, wet basement etc. – that fail one or the other criterion is a newbie, solo-practitioner mistake a/k/a rite of passage, and frequently precedes these lawyers finding other jobs, after they’ve personally financed, say $5,000 of third-party legal costs (filing fees, court reporters, expert fees, etc.) and maybe get a $10,000 settlement. Do the math and I think that nets the client $1666. This is a best-case scenario, by the way.

    I raise this comparison because it’s another area where almost everybody hates the way something is priced (1/3 of the gross), but the “hidden side” of legal contigency fees might be revealing in all sorts of ways. Tort reform targeted the practice – and it was easy to target – but was it right?

    How would this proposition be properly formulated as a Freakonomics question or set of questions? Has this been done?

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  14. MinnItMan says:

    Another way of posing my question at a general level is “how does ‘cost-shifting’ affect what and how we pay for things?” Pretty big question, no?

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  15. MinnItMan says:

    I made a remarkable spelling error that was consistent throughout my post. I actually do know how to spell “contingency.”

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    • Scott says:

      I love how economists use models based on a perfect world… A bit of a false dichotomy… How do you know that you will have another offer in a week? The agent is speaking from experience, and getting that first offer so quickly was a surprise to the agent, only because he knew that there were few to choose from. Ignoring the agent’s advice is almost a recipe for disaster. It’s easy to sit back and draw a model and sling criticism, but when you are doing it day in and day out, you are accountable for results… If someone tells me that they need to sell their home, I can’t sit back and draw a model, then run a scenario that will enable their home to sell immediately…. I have to make the best decision about price and home improvements based on experience and knowledge of the market’s potential buyers… Certainly, an imperfect world!!

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  16. Latesummer2009 says:

    Excellent piece on what really motivates a real estate agent when representing a seller. Any commissioned salesperson is going to try and maximize their time and efforts. This means freeing up their time to hunt down more commissions. Especially, the most successful agents which have multiple listings. High powered agents will always prioritize duties by what brings them in the most commission.

    Perhaps another piece to this puzzle is how real estate agents use “White Lies” in order to sell a property. If you have ever shopped for a house, than you know what we’re talking about. For example, “Multiple Offers”, “I have a Pocket Listing”, “Safe Neighborhood” , to name just a few.

    We are compiling as many “White Lies” used in the real estate industry, as possible. Hopefully buyerf and sellers can educate thelmselves, before entering any type of real estate contract. If you have some, please let us know.

    http://www.westsideremeltdown.blogspot.com

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  17. Damon Wyler says:

    And in since real estate values have been DECLINING for several years now, where does that higher offer come from through waiting? If you wait another week and the next offer comes in at $280,000, the property owner has lost $20,000, but the weak real estate agent has only lost $250 in commission. You get what you pay for. My advice is to hire the best agent you can find to get some good representation. If an agent can’t negotiate a good commission rate for themselves, then you will lose more than the perceived commission savings, when it comes to marketing and contract negotiations. Good luck.

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  18. seeyes22 says:

    You find a nice home at a good price and the realtor drives up the price. Home owner wants to list his property say at 200,000 and the realtor says oh no..tooo cheap and then puts on a high price tag. They never give the owner your offer UNLESS it gives them a good commission. I find it difficult to even make an offer on a home without the realtor calling and saying boy did you know what you offered on that home..that is way too low. Owner never gets the offer. Sad

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  19. John says:

    I was in Atlanta not long ago and a friend told me of another friends desperate need to sell his condo. I went to see it and talked to the friend who has been unemployed for two years, way behind on his mortgage, his mother recently died … he was in a pickle. He introduced me to his local bank that had the mortgage. The market value was clear. It was much less than what he owed. I talked to the banks distressed asset manager and said I’d write a check on the spot. We can agree to having an appraisal done etc but I wanted the condo.

    The banker told me that any offer HAD to be submitted through a Realtor!! The seller HAD to list his house on the “open market” and present the offer to the bank for consideration. Now how goofy is that? I had my check book in my hand and was ready, willing and able to give them a check right, then and there. But no. The condo went into foreclosure and was auctioned off by the bank – at less than what I was ready to pay. The bank took a hit all sorts of ways, auction fees, etc to say nothing of the hit on the mortgage itself. Talk about stupid.

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  20. Rick says:

    There probably are many people who can and should buy or sell properties without the use of an agent.

    However, what often is overlooked is this question: how much money does an agent make when the customer doesn’t buy, or when the seller won’t take an offer? How many people in what types of occupation will work for you with zero guarantee of a penny of income? What types of work are you willing to do that does not guarantee a penny of income?

    My wife was a Realtor (they have a trademark on the capital R) but gave it up because there are too many lookers and not enough buyers to even pay for the gas she uses. She doesn’t expect anyone to feel sorry for her – that’s the luck of the draw. However, when we decided to buy our own house, we used a Realtor who was thoroughly familiar with the neighborhood/area and its nuances while we were not, and we are risk-averse. There was no “referral” fee involved, yet we think we got our money’s worth, assuming you accept the notion that ultimately it is the buyer who pays the commission.

    FSBOs have been around forever. More power to those who choose to go that route. One saves 5-6% by adding a layer of risk. That’s not a new concept at all.

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  21. Gerald T. says:

    Very interesting. I also did a study and found out that if you got rid of all the economists in the world, we would have saved $984 billion which could have been used to stimulate the economy, lower taxes, and increase home affordability.
    But there’s more. If we reduced dentists’ fees in half, we could all afford to buy more teeth, why we could all have two mouths full of teeth. By golly, if we cut janitors’ salaries in half….and doctors…and heck, everyone! Oh wait, lowering salaries has a few ripple effects, oh well our “model” needs tweaking.
    Possibly the most abused (and useless) discipline in this world is economics, and this is a clear example. Throw a few 25 cent words around, twist a fact here and there, create a few more, and voila, you can support any position.
    People, don’t fall for this silly stuff.

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  22. Nestor says:

    House listed at 125,000 I have 5 offers Seller is refusing to accept a$120,000 offer
    no problem we just wait until it sells for 125,000 of course house has been in the market for 5 months

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  23. Mike says:

    FSBO.COM ftw

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  24. Sheila Lawrence says:

    I suggest these two guys follow an agent around for a month before passing judgement. It’s easy to criticize someone else’s profession when you’ve not been exposed to it.

    The one thing real estate agents don’t seem to excel at is communicating just how much work is involved. We don’t start work when someone walks in with a listing or a need to buy, we’ve already been working and that’s exactly why we can help you.

    Also, sellers who represent themselves are taking tremendous risks. (Funny how often they don’t mind picking my brain though.) I refer people to lawyers if they are bound and determined to sell their own homes because most lawsuits are brought by the Buyer against the Seller, not the other way around. At least with an attorney they’ll know they made all the right disclosures and hopefully did not say anything that could be construed as a mis-presentation by a Buyer.

    I don’t double end my transactions even though it is a lucrative practice, because it adds another layer of protection to my Seller clients. Are there rotten, lazy agents? Absolutely! Just like there are rotten, lazy lawyers, plumbers, doctors, electricians, ….

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  25. Pat says:

    IN TODAYS REAL ESTATE NEWS

    Former FSBO CEO sells home the traditional way
    Founder and former CEO of ForSalebyOwner.com, Colby Sambrotto listed his 2,000 square foot New York condominium on his own through online classified ads and FSBO sites, but after six months, he opted to hire New York broker Jesse Buckler who immediately advised a price change as the listing was not attracting the right buyer.

    After giving up on the DIY route, Sambrotto’s decision to hire a broker led to attracting multiple offers, closing for $150,000 over the original asking price. The WSJ reports the listing sold for $2.15 million including a 6% commission.

    Many FSBOs turn to Realtors
    The news stands as an enormous validation of the real estate profession and while some may tease, it is no laughing matter and the former FSBO CEO made a good financial decision.

    AGBeat columnist Herman Chan said, “If people want to take a stab at For Sale By Owner (ie FSBO), go for it. But well over 80% of FSBO’s eventually have to list with an real estate agent to get their house sold. It’s harder than it looks!”

    Not a new dilemma
    Marlow Harris, Seattle Residential and Investment Consultant at Coldwell Banker Bain Associates told AGBeat, “The ForSaleByOwner.com founder’s dilemma is one we see quite often and is not unusual. Trying to sell your own property yourself or using a discount brokerage, is not the solution for everyone. Unusual properties, properties in the higher price range, these are more difficult to sell and often require specialization.”

    Harris continues, “We see these choices across the board, from single family homes to huge housing developments. For instance, Vulcan, one of Paul Allen’s companies which has invested heavily in Redfin, does not use Redfin to market their many condominium projects. They use traditional real estate firms such as John L. Scott, Williams Marketing and Matrix Real Estate, finding that the do-it-yourself approach to real estate just doesn’t work for these types of sales.”

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  26. Rex Blackburn says:

    So the question is whether the agent is acting in the best interest of the client or putting his/her self interest first? Realtors live by a Code of Ethics and have a fiduciary responsibility to their clients. Of course, the catch is, can an agent live by that code or does temptation get the best of people? I prefer to think that most will be ethical and moral in their actions. In any profession, there are practitioners who abuse the system, and/or break the law. We read or hear on the news, stories every day of attorneys, doctors, politicians, etc, who are convicted of crimes related to their profession.
    As you might guess, I am a practicing Realtor. I am also a Real Estate Trainer. Although our income is based on a percentage of a sale, I do not consider my fee when offering advice to my clients, and teach this practice as well. If we provide all of the information necessary for our clients to make a qualified, educated decision, then it is in fact their decision. I believe that, as a professional Realtor, I will be well compensated and will build a business based on a solid reputation with all of my clients.
    The example used in this video does not take into account all of the potential facts or statistics that might apply. Will you get a full price offer in 10 days? Is $290,000 a fair market value based on prior sales? Is the house in need of any repairs that might be reflected in the offer?
    This debate will always be around, but I believe, so will our Profession.

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  27. RobR says:

    There are other incentives. Funny you didn’t consider anything else. I read Freakonmics. Funny that a MASSIVE amount of research went into all other stories but this one. So how about the truth….

    An agent takes his/her own advice and STAGES. That costs money, but your home outshines the competition by a LOT. We painted, gardened, cleaned up, had extra open houses – did everything that our clients find so annoying and expensive.

    We also know when the negotiate and when not to negotiate. The idea that 10 days makes a difference is ridiculous unless there is other interest. 10 days – in what? How many total days in your research? From 10 to 20? From 30 to 40? From 60 to 70? Let me guess – publishing that fact wouldn’t help this piece of nonsense.

    Now about incentives. $10,000 may not mean anything in commission to us – but if you have ever been a Realtor you know that almost any number is meaningless. We don’t count commissions between a $200,000 home or a $300,000 home. I suppose it changes when you at least double the price – in that you would spend more time on a $600k home than a $300k home. But when it comes to $10,000 differences the ONLY thing that matters is whether or not you are going to have a satisfied client who will give you a positive testimonial, and may refer you other clients. So in fact, if 10 days would help me earn than $10,000 I would do it every time. But the reality is they are sick and tired of cleaning up for open houses and appointments, they don’t want to carry their mortgage any more, they don’t trust what might happen next, and they never listened to my advice in the first place about staging, decluttering, cleaning up, and so on.

    And you guys? Pathetic. An amazing amout of research before you throw teachers under the bus. But one stat, and one interview, and you make MASSIVE assumptions. Pathetic.

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  28. Jim Lee says:

    Cute cartoon. The flaw in your logic is that unless you know beyond the shadow of doubt that you will actually get a $10K higher offer next week, you’re far better off with the known now than the unknown later.

    A solid buyer right now is much more valuable than a ‘maybe’ buyer later.

    Were I your agent and knew for a fact you could sell for 10 grand more in a week or a month or two my advice would absolutely be to wait.

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  29. Steve says:

    I found a great home on the internet that was listed that morning and informed my buying agent I wanted to see it. This was early 2007 when nothing was moving in CT. She had not seen the house before but agreed it was a great house for the price. We went back to her office and I learned that she worked with a partner, with whom she split everything. She told her partner about this great house, and then we put in an offer on the house. The next day she told me there was another offer on the house, which surprised me. When I went back to her office, I noticed on her white board that her partner had a buyer put in an offer on the house that I had found! I was LIVID. I asked her about the other offer and she said her partner took another client to see the house that I FOUND and that person went ahead with an offer. I told her that that wasn’t in my best interest and yet she didn’t see a problem with what had happened. I told her to get her manager and then I reamed them all out, making sure that what they did was wrong, and also making sure whoever was in that office heard what I was saying. I can only hope I scared away some potential client. Realtors don’t care at all about their clients….they care about transactions. They get paid on transactions. And by putting two offers in on this house, she and her partner decided they had a better chance to close a deal if two offers were made on the one house.

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