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
house.

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.

So
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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Mcwop March 10, 2006 at 11:27 am

One can negotiate commissions with the agent, or sell by owner.

steves March 10, 2006 at 11:43 am

Maybe I am being overly simplistic, but surely mew entrants to the market making listings more difficult will lead eventually to competition on costs, services etc.

Different agents will offer different services, or lower costs and the clients will be able to choose the level that suits them

Ben March 10, 2006 at 11:49 am

Dubner and Levitt are trying to prove the impossible, that one can objectively determine the appropriate price for a good or service.

In real life, in a free market, prices are determined by the cooperative actions of hundreds of millions of people; there's simply no way that two people could ever hope to capture that knowledge.

Furthermore, it's impossible to determine whether a service is "worth it." Only each individual can determine, based on his or her own personal value scale, how valuable a good or service is to himself or herself. Indeed, if objective value measurement was possible, then how come, in the entire history of mankind, no one has been able to develop a unified value scale with units of measure?

Randy March 10, 2006 at 11:59 am

I think that if there is a problem, the market will correct it. There is a real estate business in my area that just processes the paperwork for a flat fee. As real estate agent's fees rise, they will lose market share to such businesses.

Christopher March 10, 2006 at 12:07 pm

I may be missing something, but that happens often when I look at the NYT. ;-)

It seems to me like the market is working quite well in this case.

Don Lloyd March 10, 2006 at 12:07 pm

"…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 house. "

Are there still economists that believe that costs determine final prices rather than the other way around? Given final value, costs determine supply if costs are low enough to permit profits.

If an agent can sell your house for 10% more than you can by yourself does it matter to you whether it took him 40 hours or just one phone call? Would not that 10% not be worth more to you for a million dollar house than for $100K?

Regards, Don

Tflan March 10, 2006 at 12:07 pm

The price may not be worth the effort, but since I paid it, I guess it must have been worth it.
When we sold our townhouse (near Tyson's Corner in VA) 4 years ago, the market was hot and I knew it would go quick. It sold on the first day for $250k (one went in the same neighborhood last month for $475k) The agents did not "do" anything worthy of $15k, but it was easier to let them deal with it. Inertia is the correct answer to most problems.

If I ever sell my current house, I will put in a sliding scale based on time required to sell. If it goes quick, they get less. And if I they all refuse, I will sue them for engaging in a group boycott.

The Unbeliever March 10, 2006 at 12:07 pm

Isn't the problem with the perception that "they probably don't have to work any harder to sell an $800,000 house than they do a $200,000 house"? To the client, at least, it seems it should take more work for the more expensive house. Presumably the prospective buyers demand more hand-holding, or inspections, or lengthier contract negotiations, or whatever. At the very least, I'd expect "prepping and showing them the house" to take longer for a house with 5+ bedrooms and lots of amenities, than for the 3 bed/2 bath one.

I'm not saying this is necessarily the case, but I'd question the underlying premise that it's as easy to sell a cheap home as it is to sell an expensive one. Goods with higher price ranges often build up a different level of salesmanship and service around them; for example, compare the daily operating costs of your average hole-in-the-wall pizza joint, with the operating costs of a fine French restraunt with no prices on the menus. Both are selling food, but the former can get away with paper plates and stacks of napkins for its $10 pie, while the latter has to pay for linens, fancy silverware and glassware, paintings on the wall, etc to accompany its $50-$100 entrees.

If you were looking for an explanation for the market "failure", I'd say it is advertising of a sort that's supporting the higher prices. The neat trick is, they keep the comission rate steady so it doesn't seem as if they're trying to intentionally extract more from the sellers. Anyways, I suspect that if you're selling an $800k home, overpaying $10k to the person who takes credit for actually selling the home probably isn't too big a concern.

David Youngberg March 10, 2006 at 12:13 pm

The key problem I have with Dubner and Leavitt's argument is they presume work is worth a fixed amount based solely on how hard you work. But risk is also part of them game.

Real estate agents are selling houses during a housing boom. When the housing market drops or they are crowded out during boom times by others, their profits and commision falls. Oil companies are in the same category; on average their profits aren't remarkable. When things are well and their profits are really high, it's the market's way of compensating shouldered risk for suffering through the lean times.

Thus the high salaries are justified in two ways: the risk of entering a lean market for housing the and risk that one will loose a deal to a competitor in boom times. Given that commission percentages are pretty static (as Mcwop notes, one can negotiate with agents and it would seem that in light of that, rates aren't responding), I would imagine the bulk of the justification comes from the former factor.

The question is not just "How much do they make when the sell a home?" but also "How often do they sell a home?" Barbers could theoretically be paid $40 an hour (15 minutes for each $10 haircut) but usually they just stand around.

Dan March 10, 2006 at 12:41 pm

A bigger problem is the agency problem. It is in the realtor's best interest to sell the property quickly, as opposed to getting the higest price. After the commission is split with the buyer's broker, the cut for the franchisor is taken off the top (if the agency is a franchise of a chain), then split between the agency's owner and the broker; the agents' share changes very little with a change in price. Given the time value of money, agents would rather sell a house quickly than work to sell it at the best price. How many times have agents told the clients to accept this offer rather than hold out for a better one?

In perfect markets the commission would be zero. As any realtor will tell you, each property is different, and location is the only thing that matters. real estate is not being a homgeneous product is one reason leading toward higher commissions. A second factor is that the real estate market is tied to the business cycle as well as the season of the year. Most real estate sells in the spring and early summers. People want to be in the house before the school year starts. Households form (graduations and weddings in May and June.) As the article points out, in hot markets, it's a great business to be in. But when there's an economic downturn, it takes longer to sell houses. On a risk-reward basis, because there are these risks, realtors would want to charge higher fees.

In my neck of the woods, commissions are still 7%. But home sellers have other options: they could sell the home themselves; or go with non – multiple listing service firms, which for lower fees (2.5% locally), will only advertise one's house (the owner does all of the rest of the work). A third option is to negotiotiate a lower fee with the realtor (as I have personally done).

One question for the home seller is the search cost. Is it worth the sellers time to negotiate a fee with the agent. Also (I hate to parrot the NAR's commercial on this) what is the opportunity cost to the sellers if they do the work themselves? For most people, it apparently is worth a couple extra thousand dollars to have others do the selling for them.

Are real estate commissions too high? Probably, but again home sellers have options. I wonder if they're out of line as compared to the commisions charged by brokers of other heterogenous products (e.g., those that will sell your stuff on eBay).

Dan

Matt March 10, 2006 at 1:00 pm

It's interesting that without negotiation of commission fees, more/less realtors means lower/higher salaries, but that the cost to the home owner remains the same no many how many realtors are available for hiring. But I suspect negotiations happen, especially around here (meaning Wash DC area) and other higher priced housing markets. Because, high-end analysis aside, and unless you get a free car and safari, why would you pay someone $15,000 to sell your $500,000 house? $18,000 for a $600,000 home? Poppycock!!

cb March 10, 2006 at 1:00 pm

commissions are coming down in real estate, just as they are in my business-bond brokerage. it's a function of the internet.

Jenise Blackwell March 10, 2006 at 1:02 pm

Real Estate Agents are not nearly paid what they are worth. Consider the fact that all the work and effort they do is free until a transaction closes. They may show buyers homes and visit potential sellers for weeks and no pay. Consider this, Would you want a Physician to discount his prices? A surgery may take only 4 hours, yet you/insurance company pays upward of $ 100,000. Was it worth it? Or an Attorney may charge $ 75,000 for a 3 day trial, yet he has paralegals completing all the research and filing of motions while he spends maybe 6 hours in front of the jury. Was it worth it?

The point is, they are all professionals. Realtors, that is, a good professional works for a reputable brokerage, is ethical in business practices, has a solid background in education and keeps us home sellers legal and protects buyers. That is their job!

iceberg March 10, 2006 at 1:10 pm

Here is my own inflated 2 cents:

If we assume equal price inflation across the board, the broker who once sold houses making 6% on a $200,000 house still makes the real wage equivalent when he recieves the 6% for a $800,000 home.

Dale Gooch March 10, 2006 at 1:21 pm

I think if you just look at the successes that an agent has, 3% does seem high. Assuming the agent made $15,000 on the sale of a $500,000 house (your house), you might think you paid too much. After all, that agent basically just typed your home's specific information into the MLS system, perhaps held a couple of open houses across a couple of Sundays, then voila, your house was sold. Seems easy and over priced, right?

I think the industry has a better view of its cost structure than that. What you didn't see in my example as the homeowner is all the "dry holes" that agent also absorbed. The agent must cover his costs (and risks) that for reasons beyond his control, might result in your house not selling or taking a really long time to sell. Further, the agent doesn't pocket all of that $15,000. On average (or so I've heard, I'm not a R/E agent myself), half of that commission fee is shared with his "boss" a R/E broker. The broker "sponsors" the agent, owns the office, pays for the company's advertising, etc that allows the agent to be freed up to concentrate on sales. I'm sure there are more cost issues the broker must deal with that his half of the fee pays for.

Basically, I think it's wrong to look at the "fairness" of the fee just from the homeowner's point of view. The agent has many costs to cover. If the homeowner doesn't like that, he can always FSBO. If enough homeowners FSBO, THAT will drive R/E agent's fees down. So, ask yourself: Why don't more home sellers try to sell the house themselves? It must be the hassle and uncertainty of dealing with a very important legal and economic decision is better left to the professionals and homeowners (thus far) have been willing to pay.

William Crim March 10, 2006 at 1:27 pm

According to http://swz.salary.com/salarywizard/layouthtmls/swzl_compresult_national_SM15000047.html the median salary for a Reas Estate agent in the US is $32,843. While 6% split between two agents seems like alot of money, it really isn't. The agents have costs too.

cb March 10, 2006 at 1:35 pm

dale, you're right about the other costs, however not about what goes into it. my brother is an agent, and believe me, there is a ton more work than that. plus, it's a 7 day a week job, and he's taking calls from morning till night, every single day. imagine every waking moment of your life either working, or being on call.

Half Sigma March 10, 2006 at 1:44 pm

Real estate sales is a "winner takes all" activity. The majority of real estate agents don't do all that well, but the most successful ones make hundreds of thousands of dollars a year, a ridiculous amount of money. They are able to achieve such a high salary because they are not only getting rewarded for their own work, but also the work of many other real estate agents who aren't making much.

Like most sales people, they spend the bulk of their time FINDING customers; the task of actually HELPING customers is a lesser part of the job.

Clearly, yet another example of INEFFICIENT markets.

John P. March 10, 2006 at 1:47 pm

I agree with most of what has been said above. It would be interesting to hear from more realtors (Jenise Blackwell seems to be the only one so far).

To build on Dale Gooch's point, people have the option of selling on their own. It's more convenient now than it has ever been. More people don't take that option because selling a house is, for most, one of the largest transactions they'll ever be involved in, and they'll do it only once or twice in their lives. It's therefore rational to pay what may seem like a lot (on an hourly basis) for expert guidance.

In addition, I expect that there's a good deal of brand dependence in the market for realtors' services. Since the transaction is so large and involves significant legal risks, most sellers won't work with just anyone (e.g., a new entrant) to save money. They will pay extra for a realtor associated with a big-name broker.

johngaltline March 10, 2006 at 1:56 pm

It's collusion. It's pretty much impossible to get your house shown unless you're paying full commissions.

Even if you can get listed with an agent below 6%, the other agents won't work with him, and your house still won't be shown.

Assuming the market could break through the collusion and it became possible to list and show houses for only 5%, there's no reason to believe people would be as satisfied with 5% realtors. After all, it's not like the same people would be doing the work if it paid 15% less, right?

William Crim March 10, 2006 at 2:15 pm

Real Estate agents often have to work though Brokers. The brokers take care of things like desk space, pooled advertizing costs, secretarial staff, office equipment, computers. The individual agent has to then PAY the broker a portion of their take for the services provided. I think that agents feel that coughing up 1/3 of their commissions to the broker for desk space and stationary might be unfair also.

On the other hand, every Real Estate agent I know has a home that is WAY out of their price range. There are perks to knowing the system. :-)

KipEsquire March 10, 2006 at 2:27 pm

The agents do have a natural barrier to entry with their proprietary listing services; that counts for something.

In any case, I fear that our beloved state attorneys general will soon pre-empt a market-based equilibrium from evolving by: (a) suing everybody, and (b) pushing for regulated price ceilings.

R.J. Lehmann March 10, 2006 at 2:29 pm
Dan Hill March 10, 2006 at 2:54 pm

Here's an additional data point for what it's worth. The standard commission in Australia is 3.5% with a similar anti-competitive MLS process. Interestingly, the stamp duty (transaction taxes) levied by state governments is around 2-3% meaning the total cost to the seller is roughly 6%. Co-incidence?

Similarly, with a Torrens titling system, there is no need to title insurance but instead you pay for a "title search" by a lawyer. The total closing costs including the title search are very similar to total closing costs including title insurance in US. Co-incidences are starting to add up aren't they?

Patrick R. Sullivan March 10, 2006 at 3:19 pm

I always suspect that Levitt is clueless as to the real world costs of keeping a business open, and it goes doubly for this one.

It takes a lot of money to keep an office open. Rent, utilities, telephones, advertising, salaries of non-sales people. TAXES.

Most commission-only salespeople make 10% of their gross sales, and a RE salesperson is only getting half of 5-7%. I'm guessing the brokerage is paying what it needs to to attract the caliber of people necessary to the sales work.

And the fact that discount RE brokerages have tried and mostly failed to dent conventional brokerages market share tell me there's not much, if any, inefficiency to be exploited.

A better line of thought would be to look into the laws and regulations that prevent easy entry into the business.

Glen Raphael March 10, 2006 at 3:19 pm

Prices are coming down. I sold my house last year through ZipRealty, which offers a big rebate to buyers and a big discount to sellers. They manage to do this by not having the overhead of a physical office. Instead, the company gets business via the internet and directs it to agents who work from home.

Similarly, you can get quite a bit of legal work done by paralegals over the internet at a discount instead of by lawyers in an office. LegalZoom.com is one such service – you don't use it for trials but you do for filing patents, no-fault divorce, that sort of thing.

I don't know where in the US to find a discount surgeon, but I have noticed that dentists will offer a discount to those who pay directly instead of via insurance.

Bob Smith March 10, 2006 at 3:51 pm

Prices probably would drop, if there were competition. The national association of realtors, like the ama and aba has a monopoly which accounts for most if not all of the problem. Plus NAR is actively squashing the discount realtors in several states and working on doing so throughout the US. They want to disingenuously claim "it's the law's fault" when complaints about commissions arise.

Note that commission rates may be effectively fixed in residential real estate, but in commercial real estate commissions do drop as percentage of sales price when properties get more expensive. You don't get a 6% commission on a 10 million dollar office building.

Noah Yetter March 10, 2006 at 4:10 pm

A market with more agents charging the same commissions just benefits the consumer in a dimension other than price. If there are more agents, it is easier for me to get an agent that will spend a satisfactory slice of his time selling my property, or working with me as a buyer. If prices fell but the stock of agents stayed the same, dealing with your realtor could end up like calling the cable company or seeing your doctor (ie: long waits on hold, calls not returned for weeks, etc.).

R.J. Lehmann March 10, 2006 at 4:29 pm

I've been a realtor since the day I turned 18, and I can tell you that residential real estate commissions are by no means fixed. You can always negotiate rates, and average rates fluctuate up and down depending on the type of market. In markets that favor buyers, home prices go down and commissions tend to go up. In markets that favor sellers, commissions go down and home prices go up. This doesn't make one type of market more or less attractive to the realtor — it depends on whether you represent sellers or buyers more often, and what your particular skill set is.

Also Levitt seems to equate "time a home is listed" to "work done by the realtor" in a way that doesn't reflect actual practice. I've had plenty of clients with wildly unrealistic views of what their home is worth. I'll try to persuade them to be more realistic, but if they absolutely won't budge on the price, there's no reason why I can't take the listing and just let it sit on the market. I just won't do much to service it. Sometimes, you get lucky and someone comes along, sees the listing, and is willing to meet the asking. Most of the time you don't. But there really isn't this "pressure to sell quickly" that he assumes there is. It's not as if a realtor must wait to sell his last listing before moving on to the next one.

And more often than not, it is the CLIENT who determines how patient they are willing to be — if you're closing on another home at the same time you're trying to sell your own, you often don't have the option of just waiting it out and seeing what happens. Believe you me, the amount of work required to service a client who is in a rush to sell is much MUCH greater than for one who just wants to hold out for the best deal as long as it takes.

Yes, there are all sorts of distortionary and rent-seeking regulations in the real estate market. I talk about a few in the blog post I link to. But the metrics Levitt uses to try to assess the market just miss the boat entirely.

Dale Gooch March 10, 2006 at 5:01 pm

CB: I think we are in agreement. I didn't put a lot of oomph in to the cost side of the equation for the realtors but my point was that there's usually a lot more to that than most people realize.

Dale Gooch March 10, 2006 at 5:07 pm

By the way… Can somebody explain to me why the seller pays both sides of the commission? Don't tell me it's "tradition" (even if it is…LOL). I'd really like to know why that arrangement exists. Why shouldn't the buyer have to pay his own R/E agent for the services rendered?

If a seller is paying 3% for the service of having his home sold by a professional and then pays 3% to his agent when he buys his next house, the economics work out about the same for him. Of course that assumes the house he buys costs as much as the house he sold which probably doesn't happen often.

Still, it seems like connecting each side to his own cost makes some of the perception of unfairness go away.

Dale Gooch March 10, 2006 at 5:18 pm

Dang, I really should be working instead of posting 3 blogs in a row…

But I think I figured out the answer to my question above. Assuming that someone selling a house is going to then buy a more expensive house, the current system allows the seller to incur lower costs, while the buyer "feels" like they are not incurring costs. For example (for the seller), 6% times 500K is less than 3% times 500K plus 3% times 750K for the next house. Taking the system as a whole, no more money is made or lost if the seller pays 6% because the seller of the 750K house is also paying 6%. However, if the buyer doesn't pay on the house he is buying (presumably this house is the more expensive of the two he is buying and selling as well), it FEELS like to him he is getting a break thereby incenting the buy side of the transaction

William Crim March 10, 2006 at 5:23 pm

I'm sure all those services that help people sell their own houses are great, but they put a burden on the purchasing agent as well. Agents I know have said they didn't like dealing with Owner sales or people purchasing without an agent, since often times the inexperienced people would mess up paperwork, miss deadlines, etc. Since these dealines are fixed by law in most states, deals can fall though if the paperwork is missed.

As for commissions being negotiable, if you try building a relationship with your agent, it will go easier. But if you are just going to and random joe-schmoe agent, and you don't ever want to see them again, don't expect a discount.

http://gogmagog.vpsland.com/blog/?p=4

ben March 10, 2006 at 5:28 pm

I'm surprised nobody has mentioned monopolistic competition. It seems consistent with the high price in what appears a competitive market, and is also consistent with profits stimulating entry rather than price reductions, and zero profits per participant. If monopolistic competition is the answer, it is interesting to consider why this occurs for real estate agents fees but (apparently) not in other service markets.

Some have suggested collusion but this is a stretch in view of the ubiquity of high prices.

johngaltline March 10, 2006 at 7:39 pm

Well, when I google "realtors collusion" I get nearly half a million links.

I wouldn't say it's that much of a stretch.

R.J. Lehmann March 10, 2006 at 9:46 pm

"Can somebody explain to me why the seller pays both sides of the commission?"

This is really a matter of semantics. Since it is the buyer who is actually putting up the cash, one could just as easily say HE'S the one who pays both sides of the commission. In practical terms, though, the seller pays the whole commission because it is the seller who establishes what the commission will be when he lists the property. If it's 6%, then the agency (meaning the agent, the agent's broker, or another agent who shares that broker) can capture the whole commission if they sell it in-house. If another agency brings in a buyer through the MLS, then the listing agency agrees to share the commission with that agency.

R.J. Lehmann March 10, 2006 at 10:03 pm

Incidentally, on this question:

"Why shouldn't the buyer have to pay his own R/E agent for the services rendered?"

There are, in fact, fee-based agencies dedicated specifically to serving buyers. In fact, there's a trade organization devoted to them:

http://www.naeba.org/

There has always been something of a fiduciary agency problem when it comes to the buyer's side of the deal. One of the sticky points is the means of compensation — if buyer's agents are paid by commission, just like seller's agents, then they are at cross-purposes to the buyer's interests. If they overpay for a house, you do better, if they get a good deal, you do worse.

Different states have attempted to tackle this in different ways from a regulatory perspective, but most have settled on a model that mandates one disclose if one is representing the seller.

The murky area becomes what the burden of fiduciary agency is when you're not directly representing the seller, but don't have a contractual relationship to represent the buyer. You get into a lot of "implicit" agency problems. Some things would be clearly out of bounds. If you tell me in confidence how high you'd be willing to offer, and I slip that info to the seller or seller's agent, then obviously I've mistreated an implicit trust. But say it's something more ambiguous. If, for instance, I believe a home to be overpriced, do I have a responsibility to share that assessment with the buyer? If they've contracted with me to represent them, then yes. If they haven't, then I'm not quite so sure.

Anyway, despite the fiduciary advantages, most buyers resist signing a contract saying they will only use one realtor, as this would bind them to pay a fee or a commission even if they ultimately find a house on their own.

Bob Smith March 10, 2006 at 11:22 pm

NAR works hard to make sure agents don't actually have real fiduciary responsibility, in every state consistently advocating weakened fiduciary responsibility every legislative opportunity they get while playing radio ads proclaiming how ethical they are. All (?) states permit dual agency, a clear conflict of interest. The standard sales contracts promulgated by Realtors in every state attempts to disclaim liability of any sort on the part of the involved agents and brokers. The same contracts spend more space protecting agent's commissions than on the terms of the deal. Some states, like Florida, permit agents to represent the "transaction", not any of the parties, whatever the heck that might mean. In practice no agent will work with you without such a waiver, which effectively gives them no fiduciary responsibilty at all (other than gross misconduct, like theft of funds).

Caliban Darklock March 11, 2006 at 12:20 am

Everyone seems to be missing an obvious concern here.

Among all prospective buyers, how many want and can afford the $800,000 house? How many want and can afford the $200,000 house?

Marketing to a smaller segment *is* harder work. You can't throw out prospective buyers as easily, because when you only get one prospect a week, throwing it away means no sale that week.

R.J. Lehmann March 11, 2006 at 1:33 am

Bob, if contract law actually meant something in the services industy, you'd have a valid point. Contracts continue to attempt to build thicker and thicker liability shields because the courts routinely treat real estate transactions as if they were product liability cases, with the realtor, in effect, serving as the "manufacturer." I agree wholeheartedly that the boiler plate language reads as ludicrous, but if any of it actually held up (usually it's struck during attorney review, much less ever getting before a judge in a dispute), my E&O policy wouldn't be $12,000 a year.

I think most realtors would gladly agree to mutual disarmament with the trial bar: you drop the nonsense claims, and we'll drop the nonsense contract language. They're not about to agree to that, and with good reason — put a sympathetic plaintiff before a jury, and they'll always win, regardless of what the contract says. There's no incentive on their side to bargain back to rationality.

R.J. Lehmann March 11, 2006 at 1:35 am

"Marketing to a smaller segment *is* harder work. You can't throw out prospective buyers as easily, because when you only get one prospect a week, throwing it away means no sale that week."

While that may well be true, it's just simply not the case that high end real estate sells on the same commission basis as low end real estate. Go to Palm Beach, for instance (where I have sold real estate) and you won't even find many who work on commission at all. More commonly, it's flat fee, and very often, the seller won't even grant any one agency an exclusive listing.

R.J. Lehmann March 11, 2006 at 1:46 am

"All (?) states permit dual agency, a clear conflict of interest."

Not all states permit it, but then, not all states actually have a legal notion of a "buyer's agent," either (30 years ago, no states did.)

Where dual agency is permitted, it is always required to be disclosed. And yes, it is a conflict of interest, which is why no realtor voluntarily seeks to BECOME a dual agent, because it's also an invitation to a lawsuit from both sides no matter how the deal turns out.

Where it happens, it happens more or less by accident, and it typically goes like this: you take on a client to show them homes in the MLS. They agree to a contract of exclusivity, and you become their legal "buyer's agent." In the course of your dealings, they happen see a home that's listed by your agency, and decide they want to purchase it. Since the entire firm is already contracted as the agent of the seller, and you are contracted as the agent of the buyer, if the law doesn't grant SOME sort of legal status to the deal — be it disclosed dual agent, or transaction broker — the only way your client could purchase the home they want is to either terminate your contract with them, to terminate the listing, or be forced to grant them a waiver from the contract and refer them to another agency to show them the house they already know they want.

Mike March 11, 2006 at 8:13 am

I'm not sure I'm uncomfortable with a 6% commission on high priced houses versus low priced houses. What I am uncomfortable with is the resistance of agents (and their brokers) in my town from agreeing to graduated pay scales. For example, I have a private bid on my home for $250k. I mentioned to a realtor that if she shows it and sells only for 250 I'll give a flat fee of 5,000. Then as the sale price increases I'd increase her marginal take from the standard 6% to 10% for the first 10,000, 25% for next 20,000 and 40% for any amount beyond that. This calculation is done so that at the apparent sale price for other comparable homes, she'd earn 6%. For a price lower she'd earn less, for a price higher she'd earn more.

That my realtors have openly not even considered this is suggestive of collusion again because their response always is either, "my broker has a policy of no negotiating" or "other agents are USED to getting 3% on my sales, and if they read the seller report and see that it's less, your house will drop to the bottom of the queue."

That's garbage. But, as my area is popular with retirees, I posted it on my own in the local paper, on Craigs List, with street signs and my own webpage and I sold it for 270,000 sans broker. Total cost to me $500 and a few phone calls in the evening.

-Mikw

Debashish March 12, 2006 at 3:29 pm

"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. "

What they miss here is that its important to make a distinction between a high quality real estate agent that people want to hire and a real estate agent wannabe. The agents' commissions/fees will become lower only if the number of high quality agents offering their services in the market increases.. merely the fact that the number of wannabes has gone up (no doubt because more people are attracted to the profession by the higher commissions resulting from higher real estate prices) will not drive the commissions down.

The authors seem to be implying market "failure" here by suggesting that the theory of demand and supply is not working in the case of fees of real estate agents. That is not the right way to look at it, because merely the absolute number of real estate agents is not the correct measure of "supply". At the very least you would need to weight the value of each real esate based on factors such as past record, experience, etc. A real esate agent is not like, say, a Florida orange where each one is pretty much the same as another one and supply simply constitutes the number of oranges for sale in the market. Consumers would of course prefer lo

Debashish March 12, 2006 at 3:31 pm

If possible, please delete the last incomplete sentence from my comment – Thanks.

Greg March 12, 2006 at 4:57 pm

Reading through the above comments has been interesting. I enjoy good debates and discussions anyway, but especially when they are about my business.

I am a real estate broker in Salt Lake City and I'll let you know my perspective…

First, there are major differences between agents and brokerages. A good brokerage puts the client first and centers all of their business practices around providing the very best service for their clients. In my market I believe the brokerage I work for is the only one that does, but that's a different discussion. It sounds like many of you have worked with agents who were not good agents.

Good agents fight to protect property rights and lobby the local legislatures about taxes and low income housing. They also get very involved with city planning and expansion efforts. They help their communites with awareness campaigns and organizing local charity events. Good agents do much more than market homes. They make their communities better by being involved in many ways.

As far as selling homes. Good agents don't sell homes. No agents do. Only a home owner can sell a home. Good agents help to establish the very highest price a homeowner can sell for. They don't try to sell a home as fast as possible. Agents who sell homes the fastest also probably list them for less than they should. Good agents help the owner establish the highest possible price.

Then the good agent markets the home everywhere possible. Not just on the MLS system. The MLS helps other agents and even the public (through websites feeding off the MLS) find homes for sale. But the good agent also markets through magazines, newspaper ads, "Just Listed" postcards, open houses, virtual tours, networking with other agents, signs and sign directionals and riders, interior design consultation, color flyers, and prominent and enhanced placement on the top real estate websites.

Then the order a preliminary title report to check easements, encroachments, judgements and liens that may be on the property so they can help the seller deal with those issues (hopefully before an offer is presented). They go through the disclosures with seller and make sure all the paperwork is handled.

Then they take calls and emails every day, including nights and weekends, about the property. Sometimes one home can generate over 100 calls per day from neighbors (yes, they call often), buyers, and other agents. This includes setting up showings, scheduling tours, getting feedback from buyer's agents about what their clients thought of the property, and much more.

Once an offer is presented they help negotiate the price and terms, they schedule inspections and appraisals and disclosures being signed and addenda- all the way through closing. And if the property does not close for some reason, even after months of work, the agent does not receive any compensation.

After closing a good agent still takes calls. Calls from appraisers wanting information about the property for use in their appraisals, calls from neighbors, calls when their are any problems after the buyer moves in (and this happens all the time). The good agent also helps a client through any mediation, arbitration or litigation that arises from the sale of the property, providing paperwork, written phone logs, inspection information, and such.

Good Realtors have value for home sellers, buyers, and everyone else who enjoys better city planning, lower property taxes, property rights, providing low income housing, or for anyone who enjoys the appreciation in price or quality of life they are receiving by buying the right home with the help of a good real estate professional.

Robert Book March 13, 2006 at 3:53 am

Tflan writes:

"If I ever sell my current house, I will put in a sliding scale based on time required to sell. If it goes quick, they get less."

You need to think about the incentives this gives to the agent — that is, to take as long as possible to sell the house. To do absolutely no work — no pictures on MLS, no flyers, no postcards, maybe not even return calls from other agents — until you specifically demand it, or until the agent thinks you might pull the listing. Only then, or when your "sliding scale" hits a maximum, will the agent have any incentive to do anything.

Elaine Ashby March 13, 2006 at 11:28 am

I want to thank Greg who tells it like it really is (March 12, 2006)and has great insight of the real estate business.

I am a Realtor in Colorado and do appreciate the real facts about this subject.

James Henry March 13, 2006 at 12:30 pm

Interesting topic. My perspective is looking back at history. If one looks at the journey the travel industry fifteen years ago and where it is today and than project a similar model for the Real Estate industry you will see that the customer will be servcied via a different method. The Web provides one stop shopping where forward thinking agents will generate a la Carte menues where the buyer and seller will be able to choose the approach based on their requirements. In this approach the middlepersons are significantly reduced in number, which will reduce transactional cost resulting in a leaner industry. The better mouse trap finds the real estate industry. Major changes within 36 months.

nn March 13, 2006 at 1:34 pm

The people defending the real estate agents always point to the work "good" agents do.

If they are so good, why do they get the same commission as everyone else? Why isn't there more public variance in the commission charged?

A great agent can say, I have a track record. I take 8%. A new agent can say, Now my new services are on sale. I'll work really hard and only take 2%.

What's amazing is that both good and bad agents seem wedded to a FIXED commission percentage. This is the strongest suggestion that there's collusion or a barrier to entry.

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