Note to Realtors: You May Want to Skip This One

In the interest of not piling on, I was initially reluctant to mention this working paper, posted on the AEI-Brookings Joint Center for Regulatory Studies website, about the flaws in the commission structure used by Realtors. Especially since its author, an attorney for the federal government named Mark S. Nadel, cites our book as well as a more recent article we wrote about Realtors. But Nadel lays out the case so cogently that I think it’s a valuable addition to the ongoing about Realtor commissions. From Nadel’s executive summary:

While real estate brokers have long set their fee as a straight percentage of a home’s sale price, this formula is an anomaly and a primary reason why such fees may be inflated by more than $30 billion annually. Although competitive pressures ordinarily produce a fee structure reflecting costs, real estate broker commissions are strangely unrelated to either the quantity or quality of the service rendered or even to the value provided. Rather, this fee has been based solely on the price of the home. (It is as if tax preparers set their fee as a flat percentage of a client’s gross income, irrespective of how difficult the return was to prepare or how much their efforts saved the taxpayer). Oddly, not only is there no evidence that it is any more costly to sell higher-priced homes than median-priced properties, but it is possible that the opposite may be true! Furthermore, the straight percentage fee formula creates little incentive for real estate agents to provide home buyers or sellers with additional value.