Real Estate Agents, Revisited

Still skeptical (even after evidence like this) about Levitt and Dubner’s conclusion in Freakonomics that having a real estate agent sell your home won’t necessarily result in a higher sale price? Stanford economist B. Douglas Bernheim and Stanford grad student Jonathan Meer provide further evidence in their working paper, “How Much Value Do Real Estate Brokers Add? A Case Study.” Their findings are described as follows:

Sales commissions for residential real estate brokers historically average nearly six percent of a home’s closing price. Do brokers add sufficient value to justify those commissions? We address this question using a unique data set pertaining to sales of faculty and staff homes on the Stanford University campus. We find no evidence that the use of a broker leads to higher average selling prices, or that it significantly alters average initial asking prices. However, those who use brokers sell their houses more quickly.


Emmanuel M

I think the problem comes down to incentives.

In "cold" markets it's difficult to find a serious buyer, hence a 6% flat fee for making the transaction at a correct price.

However in "hot" markets finding a serious buyer is easy so :
* you can find a buyer by yourself
* you want to sell to the highest bidder, being interested in finding the best deal
* brokers still ask for an inadequate percentage based fee.

This means that in a hot market, as a seller, for a 250-350K house, you should hire a broker only for for
* 20% on the value between 200K-300K
* 30% of the value above 300K
* nothing below it
So if the house goes for 350K he get 35K (10%) but you get 315K (more than the 300K average value of the house sold by yourself)
In order to have the broker's interests match YOUR interests. The problem comes form the fact that you usually pay the borker for selling your house whereas you want to pay him to get as much value as possible from it.

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Houstonian

Yes, it's true that sites like zillow.com, realtor.com and (in my market) har.com provide copious information about asking prices, with pictures and virtual tours. Buyers are much savvier than they used to be. But those sites don't give you the most important information: days on market and price history. Without those, you have no idea whether the comps that are being presented to you are really comps. When my wife and I interviewed real estate agents before selling our house recently, we made sure that they were able to justify their proposed asking prices for our house. That is, we made them explain in detail how their "comps" really compared to our house. "This one had a pool, but hadn't been renovated at all since the 1970s. This one was really cute, but the sellers insisted on asking $475k, when I told them they should ask $425k. They wound up selling for $415k and it took 183 days." Anyone who presents you with just a spreadsheet with a breakdown of asking/sale price per square foot is lazy or incompetent.

We were absolutely willing to pay an agent to sell our house (which they did, very quickly, for what seems to us to be an excellent price). Could we have sold the house ourselves? Probably, but more slowly. In the end we decided it wasn't worth the time and headaches to save 3%. We would not have been able to negotiate with the buyer's agent as skillfully about which repairs we were and weren't going to pay for. I think we would have been better off had we been able to negotiate an hourly fee schedule similar to what mikecandoit proposes, but I don't think our agent would have accepted that. Great idea, though. I think a graduated commission schedule (6% of the sale price up to $200k, then 5% of the sale price between $200k and 400k, then 4% from $400k to ..., etc.) would be much fairer for the seller. But good luck getting the cartel to accept that.

I should note that "inside-the-loop" Houston is still a strong market. Great demand for houses, lots of buyers. Lots of new construction. It was still worth paying an agent to sell our house.

BUT - when it came to buying our current house, we did it without agent representation. We were able to negotiate a 3% price concession from the builder because we didn't have an agent. This only worked because we knew the market very, very well. We went to a few hundred open houses over the last 2 years. There were houses we were very interested in, but never saw the inside of because we didn't want to have to give up that 3% to what commenter #8 rightly refers to as a realtor who was nothing more than a GPS with a Supra key.

If only we had had access to the realtors' in-house database about actual sale prices and days-on-market - then we probably could have paid even less. That's the kind of information asymmetry that the Realtor cartel uses to protect their niche and commissions. And why not? They have gone to considerable expense to generate and protect their prorietary information.

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Jane

Flat Fee Brokers to me seem like the best value I'm using this one for only 300 bucks.

Denise Walsh, CT

Agents do have their place in real estate transactions and can positively affect both time on market and final sales price.

Agents negotiate commissions often, depending on several variables. The days of 6% have changed as agents work with sellers in a slow and unforgiving market at lower commissions, with more tools in their tool box, and for much longer periods of time. Neogitation in these markets are also key.

In high inventory/slow markets, agents make a difference in price and in market time. 1) Agencies spend more money on advertising,marketing and internet than most owners would gamble towards the sale of their own home -- and with longer market time, all those expenses are much higher. Since 74% of buyers starting looking on the internet and 80% of their time is spent on Realtor.com, etc. you cast the widest net by allowing an agent/agency to get your house out there and one that uses professional photography, videography and world class sales collateral. A professional photo with wide angle lens makes the difference in a buyer clicking on your home for more info or clicking on the next one instead. Most FSBO's wouldn't spend the money. 2)The longer a house is on the market, the less desirable it appears to potential buyers, the holding costs mount, the desirability decreases - as well as the perceived value and the house almost always sells for less. That is why choosing the highest - but most acceptable price is important from day one.
But the huge value an agent brings is the years an agent has spent GOING INTO houses and seeing what condition a house was in before it became a "sold" statistic. Even if sellers had the data available on sold homes, and got a look at the pictures, it is only the first hand knowledge of the houses' true condition, how that street differs from the one 2 blocks over, that the back yard was really a cliff....that decides what comps are the best, why they are the best, and ultimately the highest, but most acceptable price to list a house at.

For Sale by Owner works the best for sellers that are in hotter markets, have some desirable quality (location or condition, etc.), and are priced correctly. That person can save on commission and days on market. Buyers looking locally can go straight to the listing agent and save on buy side commission (sometimes).

But if you are moving out of state or out of town - having a buyer's agent is a wise investment since Zillow or any other internet service can't tell you the difference in perceived and true values between one mini neighborhood and the next. And when comparing comps to determine how much that house is really worth can't give you even a glimmer of what those "solds" were truly like inside or out.

I'm an agent and I believe you can't make a generalization on agent's impact on price or sales time in any meaningful way. There are too many variables. Some agents would have a huge impact, some agents would have none. Its the difference between why one 3,000 sf house on Avenue 1 sells for $2,000,000 and the other 3,000 sf house a little farther down the street sells for $3,000,000.

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Brandon Green

I'm a real estate agent and I really enjoy the conversations on this site about commission. If you don't think your Realtor is worth the 3% commission they charge (remember the buyer agent gets the other 3% so very very few Realtors take the full 6%) then you're not working with the right Realtor.

Price is only questioned in absence of value. A good Realtor provides more than enough value to charge a full commission. If they aren't - fire them and hire someone else! (if they resist you, talk to their broker) The market is bringing the best to the top - and the lousy Realtors are going out of business. www.brandongreenandassociates.com

Craig

My wife and I were trying to sell our Florida house just as the glut of up-for-sale houses came on the market. Potential buyers came and went; all liked it, but none made an offer: there were plenty to choose from and many were more desirable due to layout (we were already priced lower than most competitors). It was because of our agent's contacts that we eventually found a serious buyer, and that enabled us to sell within the tight timeframe that we required. We obviously didn't get the top net dollar but I think it was well worth it.

Steven

It does not make sense to me that with the rise in real estate prices some years ago, the percentages the realtors take stayed the same. For the exact job in 2004 than in 2000, a realtor could earn more than double the profits. It is tough to justify spending $20,000 to sell a $330,000 house -- especially when some years earlier it would have cost only $10,000. Was there really $10,000 worth of additional work being performed?

DGL

However, in the current market where houses can sit on the market for six months or more, the agent's incentive (to close the deal as quickly as possible so as to make his/her commission) may in fact line up with the seller's incentive (to sell his/her house in a reasonable amount of time at a satisfactory price) - in a down market, satisficing on price is likely a better strategy than optimizing on price.

ML Harris

Hrm. Is 6% not a strong enough incentive to work the price harder? Or is it just that the price of a given house in a given market isn't that flexible? Either way, the study doesn't suggest that an agent isn't a viable answer, just that the incentive isn't working.

FWIW: I have never bought a house, I would probably buy a book on how it's done, and another on the economics and rules of mortgages. Might be worth outsourcing some expertise. Regardless of whether I'm getting somewhat jacked. It's all about my personal value scale, right?

WholeMealOfFood

In Houston, the realtors have banded together to pool their listings together at har.com. This is what most house hunters use when shopping for a home. So those that are sell-by-owner often don't get seen, especially in times of rising inventories (i.e. now). It's definitely a question of how quickly the house will be sold.

But also, you don't save the full 6% by selling it yourself. You save 3% because the buyer's agent will still ask for 3% of the sales price.

Bill

I've stated this before on this blog, but Real Estate 101 is worth repeating: As defined by the real estate industry, "the value of a piece of property is what a willing buyer will pay, and what a willing seller will accept." Period.

What you are seeing happening in the market today is simply a questioning of the economic value of the status quo of the real estate transaction process. It has been largely driven by the economy and the information revolution. When information about sales commissions and comparable market prices are easily obtained (internet) and with prices having risen the past decade and subsequently, commissions, the average person is simply questioning the value proposition offered by the status quo. Many have decided to do it themselves; many have decided to try to squeeze commissions. Many have maintained the status quo.
This process will continue until some equilibrium in the market is reached, that is, agent fees reduce, or people's own real wages increase (to make it more worth their while to pay someone), or house prices drop so far that commission real dollars seem more realistic (unlikely). The only other change that could have a large scale affect is to streamline the process (title searching, inspections, closing, etc.) to make it less scarey and onerous so that the avergage person can understand it and might be willing to have a go at it themselves. Sadly, this is where the "service" side of the real estate sales process really should be earning their commission, but many are too worried about getting the next listing to be bothered, and buyers are left to fend for themselves.

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sean

Easily, when I read Freakonomics my community was in a hot market. Prices were skyrocketing and it was obvious that the job of the Real Estate Agent was not needed.

However with houses sitting on the market for over 6 month now- you are taking on a part-time job selling that house.

I didn't see any responses to the above question addressing the time vs. money loss, so with that I'm also wondering if extra hours spent researching and marketing the house could've been better spent working (overtime possibly) in their current job.

but then again, I guess intellectual people enjoy research (more than their regular job)

Benjamin Day

Money is made on the buy, not on the sale. It is an elitist and delusion statement that all sellers have similar motivations, but this analysis comes right out and concludes that. Or are we forgetting that crack dealers live with their moms? They obviously have the same motivation to sell as a tenured Stanford faculty member. To say that someone who is not motivated and is less likely to work with an agent "because they know they will want to see a quick sale" is the kind of arrogance of someone who just returned from Neptune. Has anyone heard of the subprime crisis? Can anyone guess why the supply is so out of whack with demand right now? That supply is a supply of the troubled and unmotivated. Individuals with 100 to 125% loans going into default are often unmotivated sellers because their life is the pits. They've been sold a bill of goods by a lender, an appraiser and maybe an agent, and now they have to sell. They can't. But they end up in the statistical analysis. Right now they are flooding the statistical analysis. The real estate 101 shows the high level of variability in the emotional and personal negotiations of a real estate transaction: it takes one to buy and one to sell. If you are a need to sell seller and a buyer can close in ten days, you bet you'll take less for that sure-thing buyer. But this kind of glossing analysis makes no room for that sort of variable that fills each and every transaction. If the appraisers actually determined market value of the homes, we wouldn't have 11 months of inventory nationwide.

Benny Moo

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anne

I believe an agent is only necessary for those who refuse to accept the truth. Selling a house is a lot of work and if you refuse to accept the true value of your home, it will never sell.

In the DC area, I see it happen all the time. People try to sell a house without any real knowledge about how to do this correctly: build a website, stage your home, paint the walls white, get it on Zillow, get it on Craigslist and price it RIGHT.

Sometimes, an agent sells more quickly because they cut to the chase and tell the seller the asking price is way off.

A friend tried to sell her house for $750k and, if she had asked me, I would have told her the price was $100k over what it was worth. Five months with no offers, they got an agent. Bingo - sold for $629K immediately once the agent convinced them to lower the price. If you do not look at your house realistically, it will never sell.

Star_BD

Here's my disagreement with Houstonian's point:
"But those sites don't give you the most important information: days on market and price history."

These are clearly not the most important pieces of information. I would say they are Tier II or Tier III in terms of importance. They are useful to the person who does lots of research, but I don't believe they are of paramount importance to someone who is making a bid or the eventual buyer.
Bottom line is that the selling price is what someone is willing to pay regardless of any data points, unfounded beliefs, or irrational expectations. Days on market, price history, and all other supplementary information are useful details to some interested parties, but they may or may not be relevant to the eventual buyer who is the only person that really matters.

I agree with Houstonian's sentiment that a savvy seller should try to secure a graduated commission schedule, but the point is clearly missed w/ their suggested approach. This is the worst possible way to incent the broker to do anything other than sell your house as fast as possible. Any sliding commission schedule should be the other way - offer an agreed-upon commission and if the broker sells your home at an amount greater than your expectations, both of you get to share in the added profit.

Question to the blog - do you wonder if some posts are planted to inspire discussion? I feel like some perspectives are so poorly conceived that the blogger or an industrious contributor simply wants to inspire posts and prolong the entry's life.

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Reuben Moore

Star_BD: My earlier point to Houstonian is that there are, in fact, many agents out there who are ready and willing to compete for business. I would add, that these same agents would find your creative approach to an incentive-based commission schedule perfectly acceptable.

To your question regarding prolonging the discussion: Again, this whole issue vanishes if we discover that agents will, in fact, compete for business based on service-level and/or price (value proposition).

Benjamin Day

Just thought this was interesting.

According to Realogy and their "huge loss" in 2007, "the average sales price of transactions that Realogy-affiliated franchise offices handled fell 1 percent in 2007 compared to 2006."

So... if the average sales price of Realogy affiliated offices fell 1%, but the nation is down, what 8% according to Case-Shiller? Does that actually mean that a Realogy company was worth 7% more than average?

Granted, that's not a scientific comparison. It's not an apples to apples comparison. But it's a pretty huge sample pool.

When compared to Stanford Campus properties only eligible to be purchased by Stanford affiliates and faculty is far less of an apples to apples comparison.

John

I'd agree with Brandon. If your Realtor isn't providing the service you require or expect, fire them and get another. As an agent, I'd just like to state that most of us have a code of ethics that we abide by. I believe it was Donald Trump who said, if you're shopping for real estate, hire a broker/agent to do the work for you. You wouldn't represent yourself in court, you'd hire an attorney to do it. Real Estate agents are licensed professionals and most will be upfront and honest when completing a market analysis. In most cases, when buying a home, it doesn't cost the buyer anything. The seller pays the commission. If you were to believe that when buying a home, you went directly to the for-sale-by-owner and cut out paying for the commission, you're sadly mistaken. Most FSBO will not come off 6% or even 3% of their selling price. That's why they didn't want to use an agent to begin with. The big question is this "How much is your time worth to you. If hiring a Realtor to sell your home is worth 5, 6, 7%, then use a Realtor. If you think you'll have good luck selling it yourself, by all means, be my guest. Again, Brandon is right in that the market is bringing the best to the top. Those of us with a code of ethics and hard determination, know the market and will sell the house.

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Bob

I do have a question. Why in the book Freakonomics, real estate agents are reffered to as FEMALE all the time? Whenever you describe the actions or posessions of a real estate agent, you write "she" or "her" -- It seems from your book that ALL real estate agents are female and/or only female real estate agents resort to some of the tricks you descibe in you book. WHY is that?

Angie

I didn't read the book, but as I'm reading the responses to the book, I can surmise that there are questions as to whether or not realtors are valuable in a a real estate transaction and if they actually result in a higher sales price or quicker sales.

Let me say this: As a realtor, the value that I bring to the table is being able to sell the property with the sellers wants and needs in mind.

I've been in the business for 3 years and I've never seen a "good" market. I've also never worked harder in my life. I have several gray hairs to prove it. In my business, there's a substantial amount of "fluff" activities and unfortunately, these are the same activities that we get judged on.

The case study is in my opinion is flawed within itself. Every market is local and one can not make conclusions about the whole, when using a subset of the few.

What does your 6% pay for: Marketing, Knowledge, Ability to Negotiate, Time, Infrastructure and Shared Liability.

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