Cafe Hayek - Latest Comments in Are Real Estate Agents Overpaid?

Re: Are Real Estate Agents Overpaid?

nn — Mon, 13 Mar 2006 08:34:12 -0000

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.

Re: Are Real Estate Agents Overpaid?

James Henry — Mon, 13 Mar 2006 07:30:09 -0000

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.

Re: Are Real Estate Agents Overpaid?

Elaine Ashby — Mon, 13 Mar 2006 06:28:47 -0000

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.

Re: Are Real Estate Agents Overpaid?

Robert Book — Sun, 12 Mar 2006 22:53:56 -0000

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.

Re: Are Real Estate Agents Overpaid?

Greg — Sun, 12 Mar 2006 11:57:22 -0000

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.

Re: Are Real Estate Agents Overpaid?

Debashish — Sun, 12 Mar 2006 10:31:29 -0000

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

Re: Are Real Estate Agents Overpaid?

Debashish — Sun, 12 Mar 2006 10:29:58 -0000

"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

Re: Are Real Estate Agents Overpaid?

Mike — Sat, 11 Mar 2006 03:13:01 -0000

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

Re: Are Real Estate Agents Overpaid?

R.J. Lehmann — Fri, 10 Mar 2006 20:46:23 -0000

"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.

Re: Are Real Estate Agents Overpaid?

R.J. Lehmann — Fri, 10 Mar 2006 20:35:57 -0000

"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.

Re: Are Real Estate Agents Overpaid?

R.J. Lehmann — Fri, 10 Mar 2006 20:33:01 -0000

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.

Re: Are Real Estate Agents Overpaid?

Caliban Darklock — Fri, 10 Mar 2006 19:20:59 -0000

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.

Re: Are Real Estate Agents Overpaid?

Bob Smith — Fri, 10 Mar 2006 18:22:34 -0000

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).

Re: Are Real Estate Agents Overpaid?

R.J. Lehmann — Fri, 10 Mar 2006 17:03:48 -0000

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.

Re: Are Real Estate Agents Overpaid?

R.J. Lehmann — Fri, 10 Mar 2006 16:46:47 -0000

"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.

Re: Are Real Estate Agents Overpaid?

johngaltline — Fri, 10 Mar 2006 14:39:44 -0000

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

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

Re: Are Real Estate Agents Overpaid?

ben — Fri, 10 Mar 2006 12:28:56 -0000

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.

Re: Are Real Estate Agents Overpaid?

William Crim — Fri, 10 Mar 2006 12:23:49 -0000

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...

Re: Are Real Estate Agents Overpaid?

Dale Gooch — Fri, 10 Mar 2006 12:18:07 -0000

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

Re: Are Real Estate Agents Overpaid?

Dale Gooch — Fri, 10 Mar 2006 12:07:15 -0000

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.

Re: Are Real Estate Agents Overpaid?

Dale Gooch — Fri, 10 Mar 2006 12:01:04 -0000

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.

Re: Are Real Estate Agents Overpaid?

R.J. Lehmann — Fri, 10 Mar 2006 11:29:19 -0000

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.

Re: Are Real Estate Agents Overpaid?

Noah Yetter — Fri, 10 Mar 2006 11:10:30 -0000

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.).

Re: Are Real Estate Agents Overpaid?

Bob Smith — Fri, 10 Mar 2006 10:51:27 -0000

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.

Re: Are Real Estate Agents Overpaid?

Glen Raphael — Fri, 10 Mar 2006 10:19:56 -0000

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.