Are Real Estate Agents Overpaid?

by Russ Roberts on March 10, 2006

in Cafe Conversation

Stephen Dubner and Steven Levitt in last week’s New York Times Sunday magazine make the case that real estate agents are overpaid:

Since an agent’s commission is usually based on a fixed percentage
of the sale price — typically 5 or 6 percent, of which about half goes
to the listing agent and half to the buyer’s agent — agents’ fees have
climbed along with home prices, even though they probably don’t have to
work any harder to sell an $800,000 house than they do a $200,000

A listing agent really only performs four main
functions: setting the price of your home, finding potential buyers,
prepping and showing them the house and handling the negotiations and
contracts. Just for fun, let’s put a value on each of these functions.
Setting a home’s asking price requires a few hours of work at most,
studying the house and the data on comparable sales. Showing the
typical home might take 20 or 30 hours, with negotiations and contracts
taking maybe four hours. Attracting potential buyers is of course the
trickiest task — which is why, as the Justice Department alleges,
Realtors have tried to block access to the for-sale databases. But it’s
now easy to find independent or discount agents who will list your
house on the Multiple Listing Service for a fee of about $750.

in sum, we are talking about perhaps 40 hours of work. Let’s be
generous and say that’s worth $100 an hour. Add another $750 to list
the home. That’s a total of $4,750, which makes the 6 percent
commission that you would pay on the sale of a $500,000 house — $15,000
each to your agent and the buyer’s agent — look pretty steep. It would
seem obvious that being an agent during a real-estate boom is a great
way to earn a good living.

They then go on to talk about how real estate agents actually don’t do very well after all—when commissions are high, more people get into the real estate business, so while the commissions are high, it gets harder to get listings.  They imply this a market failure because more real estate agents should mean lower fees.  And consumers, they claim, would prefer lower fees rather than having more real estate agents in a market?  Do you agree?  Should the commission fall for higher prices houses? When a real estate agent sells a $500,00 house and earn $15,000, is this something that is worth no more $4,750?  Comments are open and I’ll weigh in with another post in the next week highlighting the best responses.


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