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.