It’s a very personal, a very important thing. Hell, it’s a family motto. Are you ready, Jerry? I wanna make sure you’re ready, brother. Here it is: Show me the money.
– Rod Tidwell, Jerry Maguire
I was recently researching a somewhat different topic (deflation, inflation, and price sensitivity in real estate) when I came across a paper written in 2007 by a trio of economists at respected institutions. This paper has me in a tizzy. I need to know what you think of it, and how we as an industry might answer it.
- Prof. Igal Hendel & Aviv Nevo of Northwestern University
The paper is called The Relative Performance of Real Estate Marketing Platforms: MLS versus FSBOMadison.com (PDF) and the authors are Igal Hendel and Aviv Nevo at Northwestern University, and Francois Ortalo-Magne at the University of Wisconsin.
The findings are… disturbing to say the least if you work in or near the real estate industry:
After controlling for houses and seller heterogeneity, we find no support for the hypothesis that the MLS delivers a higher sale price than FSBO. Considering that realtors charge a 6% commission versus $150 for FSBO, FSBO sellers come ahead fi nancially. The lack of a MLS premium does not mean realtors do not provide value to the seller. It means instead that the cost of the convenience provided by realtors seems to be the full commission.
And more:
The raw price comparison shows that the average sale price of homes that sell on FSBO is higher than the average price of homes that sell with a realtor. The characteristics, reported in the city assessor’s database, of houses sold on the different platforms are somewhat different. However, after controlling for these observed characteristics a significant price gap persists. Naturally, platform selection is the main suspect behind the persistent premium. We take several approaches to deal with selection. All the approaches support the same conclusion: MLS does not deliver a price premium.
Emphasis are mine. If you are so inclined, read the whole paper. I read through it, but didn’t have time to dive in. For that matter, I don’t have the Ph.D. in economics to really criticize their work.
Turns out, the New York Times had covered this paper, both in an article and on its Freakonomics Blog. This is from the blog:
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.
Oh wow. This is a problem, y’all.
Paging Dr. NAR
The paper takes direct aim at NAR’s claim that using a REALTOR means more money for the seller:
Homes sold with the help of a real estate professional in 2006 sold on average for 32 percent more than FSBO sales. The median FSBO selling price in 2006 was $187,200, compared with $247,000 for agent-assisted transactions.
I believe the financial benefit of using a REALTOR (or if you prefer, a real estate professional) has to be proven out better than just a website on the industry’s association website. Why?
First, if the gain from using a realtor doesn’t justify the transaction cost of using one — 6% of the sale price — then we all had best start preparing for a very different future.
If you believe that consumers aren’t savvy enough about things like transaction costs, you might want to take a look at the history of The Vanguard Group and its impact on the financial services industry. Vanguard is the largest money manager in the world now with over $1T (that’s trillion, y’know, Obamacare type of numbers) under management. That didn’t happen simply by chance.
There is a convenience to using a real estate agent to sell a house, no doubt about that. Homes listed by a realtor sell faster than FSBO; even the Northwestern paper proved that. And real estate agents — particularly the good ones — do offer a great deal of advice on proper pricing, home staging, etc. But unless there is a link between using a realtor and the final sale price, a seller would have to be pretty stupid to pay a commission. As the New York Times article says, “to justify a $12,000 fee on a $200,000 house, [Prof. Nevo] said, “you’d have to have a very high hourly rate” for an agent’s work.”
Specifically, those who are selling more expensive houses have every reason to start demanding flat-fee services. The authors of the study, and the New York Times blog and article, not to mention the commenters, all more or less say as much.
If there is no financial benefit to using a REALTOR, then buyer agency will look very different indeed. The argument that buyer representation is “free” only works with the most ignorant of consumers. Most savvy buyers know that they’re paying for at least some portion of the 6% brokerage commission, since the seller is going to take that cost into account.
What We Need
First of all, the study by Hendel, et. al., used data only up to 2004. The NYTimes article suggests they are now working with data from 2005 and 2006. I think they — or some other research team — should use data up to 2008. The real estate market didn’t get truly nasty until sometime in late 2007 from what I recall:
The authors themselves admit as much:
The data we analyzed so far end at 2004. It would be interesting to study a market during a more difficult time, during a cooler housing market. We could see if the cost or, returns to, using a realtor vary with the cyclicality of the market.
Second, they only used data from one city, which might be unique in how strong its FSBO market is. We need research using multiple markets to see if Madison, WI is an anomaly or not.
Third, the study did not segment real estate agents enough. Realtors themselves are the first to point out that some real estate agents have no idea what they’re doing. There is little doubt in my mind that truly expert agents and brokers do provide value that can be quantified. I know one case where a realtor listed a house that might have gone for $400K, staging it, marketing it properly, and creating urgency amongst buyers, etc. and ultimately sold it for $450K. Trouble is, anecdotes are not the plural of evidence.
But this is serious.
As an industry, we need to be able to answer this charge that using a real estate agent has no impact (or worse, negative impact) on the customer’s financial state. And while I can think of a number of companies and organizations that can step up, I think this is NAR’s ball to run with. Some of the larger companies, such as Realogy, Remax, Keller Williams, etc. should have enough transaction data in its data warehouses that they too can take on such research. I think they should. I think they need to.
Given that consumers aren’t particularly likely to trust research coming out of NAR and companies who clearly have a vested interest, the best answer might be to work with academics like Hendel, Nevo, and others. Funding these studies, working with universities, and getting them published in peer-reviewed academic journals where other academics who are unrelated to the real estate industry at all can dissect the work will all help tremendously with credibility of claims.
At the local level, if I’m a broker or an agent, I start compiling as much data as I can about my local market, about my performance over FSBO, and start trying to establish quantitative metrics of financial performance. I wouldn’t count on the consumer being ignorant of this paper or others like it.
So what do you think? Am I overreacting to this paper? Are you not at all concerned by this?
-rsh
45 thoughts on “Is There a Financial Benefit to Using a Realtor?”
1. A contingency commission is in (large) part justifiable due to risk-shifting from the Seller to the Agent. Analyzing on purely an hourly basis doesn’t take into account this value. Especially in a market with 10 months of inventory (unlike 2006). As a seller, I may be “stupid” to pay such an outrageous hourly rate if my house *does* sell. On the other hand, if after 90 or 180 days, I get sick of the process and decide to stay put, I’m a friggin financial genius as all of that advice, staging, education, and marketing effort came at zero cost to me.
2. There is clearly a qualitative difference between agents (and *potentially* for companies). I personally could care less about our ability as an industry to answer the value question. What matters if if “my company” (in my case, the ones I work with), can answer the question. Does Southwest Airlines really care that their industry has been unprofitable and has a horrid reputation for service? If anything it creates the opportunity for them to differentiate themselves.
There is an alignment of interests / business model issue that needs to be addressed for a company to truly break out the way a Southwest of Vangaurd has. Some agents make a qualitative difference – It’s not clear that a model exists yet for any company to make a claim that *their brand* consistently does.
1. A contingency commission is in (large) part justifiable due to risk-shifting from the Seller to the Agent. Analyzing on purely an hourly basis doesn’t take into account this value. Especially in a market with 10 months of inventory (unlike 2006). As a seller, I may be “stupid” to pay such an outrageous hourly rate if my house *does* sell. On the other hand, if after 90 or 180 days, I get sick of the process and decide to stay put, I’m a friggin financial genius as all of that advice, staging, education, and marketing effort came at zero cost to me.
2. There is clearly a qualitative difference between agents (and *potentially* for companies). I personally could care less about our ability as an industry to answer the value question. What matters if if “my company” (in my case, the ones I work with), can answer the question. Does Southwest Airlines really care that their industry has been unprofitable and has a horrid reputation for service? If anything it creates the opportunity for them to differentiate themselves.
There is an alignment of interests / business model issue that needs to be addressed for a company to truly break out the way a Southwest of Vangaurd has. Some agents make a qualitative difference – It’s not clear that a model exists yet for any company to make a claim that *their brand* consistently does.
Rob, they are using 6% as their holy commission grail, but that’s the top end, AND it includes a buyer agent split which in Northern Virginia is almost always 3% regardless of the total. Their data does not reflect commission paid by the FSBO to a buyer agent (I wonder, in fact, how they can tell from city assessor data whether it was a FSBO or not).
So what is the listing commission? Max 3%? What does that do to the “outrageous hourly rate?”
Rob, they are using 6% as their holy commission grail, but that’s the top end, AND it includes a buyer agent split which in Northern Virginia is almost always 3% regardless of the total. Their data does not reflect commission paid by the FSBO to a buyer agent (I wonder, in fact, how they can tell from city assessor data whether it was a FSBO or not).
So what is the listing commission? Max 3%? What does that do to the “outrageous hourly rate?”
I covered this study back in 2007 when it came out: http://ow.ly/pQBQ
First of all, the advantage was not 6%, since homes initially listed on MLS sell faster. Because FSBOS take longer to sell, the net premium was 4%. (current commission rates are closer to 5%)
Also from the study:
—FSBO success varied by neighborhood and study was limited to Madison, WI market, where the local FSBO site evidently had traction.
—FSBOs that switched to MLS commanded a significant premium & were more likely to sell
—And perhaps most importantly– there was NO statistical difference when the time frame was 180 days.
(read more findings at the blog post)
Bottom line: MLS is the best system out there to sell homes & Realtors have access to it. Once an MLS gets to crunching their data, Realtors can tout that 90-95% of homes are sold via MLS (my prediction). That’s why I think RE media sites are Truly a waste of featured listing dollars (like “playing the field” in craps)– they only add incremental value in selling homes, IMO. The reason why should be obvious– “represented buyer” eyeballs go to the MLS first and many never leave it.
Write a post about FSBOS getting on the MLS (via flat fee) and then you got something to worry about.
I covered this study back in 2007 when it came out: http://ow.ly/pQBQ
First of all, the advantage was not 6%, since homes initially listed on MLS sell faster. Because FSBOS take longer to sell, the net premium was 4%. (current commission rates are closer to 5%)
Also from the study:
—FSBO success varied by neighborhood and study was limited to Madison, WI market, where the local FSBO site evidently had traction.
—FSBOs that switched to MLS commanded a significant premium & were more likely to sell
—And perhaps most importantly– there was NO statistical difference when the time frame was 180 days.
(read more findings at the blog post)
Bottom line: MLS is the best system out there to sell homes & Realtors have access to it. Once an MLS gets to crunching their data, Realtors can tout that 90-95% of homes are sold via MLS (my prediction). That’s why I think RE media sites are Truly a waste of featured listing dollars (like “playing the field” in craps)– they only add incremental value in selling homes, IMO. The reason why should be obvious– “represented buyer” eyeballs go to the MLS first and many never leave it.
Write a post about FSBOS getting on the MLS (via flat fee) and then you got something to worry about.
Hey guys – thanks for your input.
I think maybe my concern is overblown, but some of the responses are missing the point.
This study is worrisome to me because IF there is no connection between using a realtor and the price of the home, the entire compensation model for brokerage becomes problematic. In fact, I’d say that the fiduciary responsibility thing is on shaky ground. Why?
Commissions as the mainstay of real estate relies on the idea that I’m paying for financial performance, not simply for convenience of having someone else deal with the transaction. The idea has to be that by using a professional to sell my house, I’m going to make more money. Yes, there is convenience, and yes, using a realtor means someone else takes over the marketing that I would have had to do otherwise. But underneath all of that is the idea that I’m going to benefit financially by using a realtor, and THAT is why I’m willing to pay a percentage commission.
If, however, using a realtor means no difference in the sale price, no financial benefit, then why would any seller go that route? Especially in the higher price points? The “high hourly rate” comment by Nevo (one of the economists) is spot on if there is no relationship between using a realtor and the final sale price.
This is a fairly serious challenge, from my standpoint, to the whole basis of the industry as it exists today.
But then again, maybe I’m overthinking this whole thing too. That’s entirely possible. I don’t think I am, but that’s why I want your thoughts.
-rsh
Hey guys – thanks for your input.
I think maybe my concern is overblown, but some of the responses are missing the point.
This study is worrisome to me because IF there is no connection between using a realtor and the price of the home, the entire compensation model for brokerage becomes problematic. In fact, I’d say that the fiduciary responsibility thing is on shaky ground. Why?
Commissions as the mainstay of real estate relies on the idea that I’m paying for financial performance, not simply for convenience of having someone else deal with the transaction. The idea has to be that by using a professional to sell my house, I’m going to make more money. Yes, there is convenience, and yes, using a realtor means someone else takes over the marketing that I would have had to do otherwise. But underneath all of that is the idea that I’m going to benefit financially by using a realtor, and THAT is why I’m willing to pay a percentage commission.
If, however, using a realtor means no difference in the sale price, no financial benefit, then why would any seller go that route? Especially in the higher price points? The “high hourly rate” comment by Nevo (one of the economists) is spot on if there is no relationship between using a realtor and the final sale price.
This is a fairly serious challenge, from my standpoint, to the whole basis of the industry as it exists today.
But then again, maybe I’m overthinking this whole thing too. That’s entirely possible. I don’t think I am, but that’s why I want your thoughts.
-rsh
@Joe –
Joe; where did you get this from:
First of all, the advantage was not 6%, since homes initially listed on MLS sell faster. Because FSBOS take longer to sell, the net premium was 4%. (current commission rates are closer to 5%)
I’m looking for it on your post, and I’m not seeing it. Or the justification for saying the net premium was 4%. Was that in the study?
-rsh
@Joe –
Joe; where did you get this from:
First of all, the advantage was not 6%, since homes initially listed on MLS sell faster. Because FSBOS take longer to sell, the net premium was 4%. (current commission rates are closer to 5%)
I’m looking for it on your post, and I’m not seeing it. Or the justification for saying the net premium was 4%. Was that in the study?
-rsh
Rob – I don’t think you are over-thinking it, but I do think you are missing the key point:
You are a #s guy and see it this way. The ‘typical consumer’ just doesn’t crunch the numbers. They are risk averse and as such are willing to pay a commission to alleviate the up-front financial risk if their home doesn’t sell. Point one above.
Many others have entered this space with your same basic number-cruncher assumption (“why would anyone pay that much money when I could hire out the work done at 1/5th the hourly cost?”). Redfin comes to mind – and to their credit have adjusted their model to add more services at a higher cost; and worth noting – on a commission rate plan vs flat fee.
I don’t disagree that there is monumental opportunity for a significant increase in service quality. I would hesitate however to be so willing to throw out the commission model based on the idea the Seller is paying purely for financial performance.
Rob – I don’t think you are over-thinking it, but I do think you are missing the key point:
You are a #s guy and see it this way. The ‘typical consumer’ just doesn’t crunch the numbers. They are risk averse and as such are willing to pay a commission to alleviate the up-front financial risk if their home doesn’t sell. Point one above.
Many others have entered this space with your same basic number-cruncher assumption (“why would anyone pay that much money when I could hire out the work done at 1/5th the hourly cost?”). Redfin comes to mind – and to their credit have adjusted their model to add more services at a higher cost; and worth noting – on a commission rate plan vs flat fee.
I don’t disagree that there is monumental opportunity for a significant increase in service quality. I would hesitate however to be so willing to throw out the commission model based on the idea the Seller is paying purely for financial performance.
Rob- The problem I have with these studies is how to figure out whether one group really sold for more than another. How in the world can you really figure that out? All homes are different, and conditions and locations vary, so there’s really no true way to determine who sold for more. If we were all selling 2009 Ford Mustangs with exact specifications and options, you could make a true comparison of final sell prices. With houses, it’s just not that easy, or possible in my opinion.
Time on market is also very important and not really factored in to the equation. If a FSBO takes a year to sell their home vs. 60-90 days with an agent, what about the opportunity cost of sitting on the proceeds for a longer time. What could they have done with their money if they sold quicker?
I also find this statement by the NAR to be a ridiculous way to determine who sells for more: “The median FSBO selling price in 2006 was $187,200, compared with $247,000 for agent-assisted transactions.” All that means is that homes in lower price ranges tend to sell FSBO more than homes in upper price ranges. It has nothing to do with which group was able to sell for more in a given price range.
It makes sense for lower priced homes to try FSBO, because historically these were the ones who were most likely to owe so much on their home that they think they can’t afford to pay the commission, so they go FSBO. I would also think that people in higher price ranges tend to be more white-collar and busier, so they don’t take the time to sell on their own.
It’s one of those things that I think can be argued either way, depending on which set of data you use and which side you’re on. The reality is there’s really no way to figure it out. Truth is, some sellers need help and don’t know what to do or have the time to go it alone, and a good agent provides support and service that has value beyond the final sell price.
Rob- The problem I have with these studies is how to figure out whether one group really sold for more than another. How in the world can you really figure that out? All homes are different, and conditions and locations vary, so there’s really no true way to determine who sold for more. If we were all selling 2009 Ford Mustangs with exact specifications and options, you could make a true comparison of final sell prices. With houses, it’s just not that easy, or possible in my opinion.
Time on market is also very important and not really factored in to the equation. If a FSBO takes a year to sell their home vs. 60-90 days with an agent, what about the opportunity cost of sitting on the proceeds for a longer time. What could they have done with their money if they sold quicker?
I also find this statement by the NAR to be a ridiculous way to determine who sells for more: “The median FSBO selling price in 2006 was $187,200, compared with $247,000 for agent-assisted transactions.” All that means is that homes in lower price ranges tend to sell FSBO more than homes in upper price ranges. It has nothing to do with which group was able to sell for more in a given price range.
It makes sense for lower priced homes to try FSBO, because historically these were the ones who were most likely to owe so much on their home that they think they can’t afford to pay the commission, so they go FSBO. I would also think that people in higher price ranges tend to be more white-collar and busier, so they don’t take the time to sell on their own.
It’s one of those things that I think can be argued either way, depending on which set of data you use and which side you’re on. The reality is there’s really no way to figure it out. Truth is, some sellers need help and don’t know what to do or have the time to go it alone, and a good agent provides support and service that has value beyond the final sell price.
From bullet point on post. All post bullets came from study.
From bullet point on post. All post bullets came from study.
I’m still taking it all in – that’s a great post and a very interesting study (still working through it)!
Joe – Thanks for recommending Rob’s blog . . . I can tell I’m going to like it here!
I’m still taking it all in – that’s a great post and a very interesting study (still working through it)!
Joe – Thanks for recommending Rob’s blog . . . I can tell I’m going to like it here!
Once again, thanks guys. Like I said, I might be overthinking this and overworrying. But a few more in response to responses:
@Michael – I have a hard time believing that most sellers are opting for the commission based fee simply out of the desire to shift the risk. I have an even harder time believing that most realtors are pitching their services on the basis of risk-shifting: “You should hire me, so that I can take on all of the risks of marketing this house, just in case you change your mind at some point.”
In many cases, the seller can’t change his mind — maybe he’s being relocated, or the couple got divorced and need to sell. Who knows? In such cases, I rather think that the commission is acceptable to the consumer precisely because they believe that using a professional will mean selling their house for more money.
Let’s do a thought experiment for a moment to illustrate. Let’s say that NAR undertakes the study I’m recommending — nationwide, using data from 1999 to 2009, segmenting the agents appropriately, etc. — and that study shows that using a realtor has no bearing on the sales price. Say this study gets picked up by every single news outlet, and all Americans soon come to understand that using a realtor won’t get them any more money for their house.
You go on a listings call in this New Environment. Do you really think the seller is not going to question the 6% commission model? Do you really believe that the seller would willingly pay a percentage of the sale for advice, for marketing (which makes no difference on sale price, but only on Time On Market), for transaction assistance, and for negotiation (which makes no difference on sale price)? I don’t have that confidence. I don’t think risk-shifting adequately explains the consumer acceptance of the current commission-based model.
I could be wrong; there are ways to find out. Survey sellers and ask why they chose to use a realtor, and why they chose to pay the 6% (or 5% or whatever the rate is today). See how many say “risk shifting”; I rather doubt it would be that many.
@John –
I personally think you might be on to something, I do, about the difficulty of doing statistical analysis on sale of unique products with unique conditions: homes. However, in order to argue that the Hendel study is flawed, it isn’t enough to be dismissive with words. I think either (a) you have to take issue with their statistical/analytical modeling, or (b) show different results using different data, or different analysis.
Because when trained economists who know their statistics say, “we controlled for variables”, I don’t know that a layman saying, “Yeah, but that doesn’t work” is going to be much of a rebuttal.
As for Time on Market, the authors actually do address that, and say that realtor-assisted homes sell faster than FSBO, by an average of 16 days. (p.22) But then, here is one passage from the study:
However, for price, time to sell and probability of sale within 180 days there is no statistically significant difference between agent/owner and sales on FSBO. FSBO sales on the other hand are less likely to happen within 60 or 90 days. (p. 21)
Again, I’m in agreement that a good realtor, who knows his stuff, who is an expert, makes a difference. My gut tells me that they do. I’ve seen enough anecdotal evidence to suggest that they do. It makes logical sense that they do.
But that doesn’t constitute a counter-argument to a scholarly paper.
So consider this post, and this comment, my call to action by the industry — in particular NAR, but also other major organizations and institutions — to sponsor/fund/support a more thorough research effort to show that Hendel’s findings are (a) wrong, (b) localized to just one particular unique area of Madison, WI, or (c) dependent on cyclicality — meaning, they are valid in hot markets, but totally off in cool markets like from 2007 to present day.
-rsh
Once again, thanks guys. Like I said, I might be overthinking this and overworrying. But a few more in response to responses:
@Michael – I have a hard time believing that most sellers are opting for the commission based fee simply out of the desire to shift the risk. I have an even harder time believing that most realtors are pitching their services on the basis of risk-shifting: “You should hire me, so that I can take on all of the risks of marketing this house, just in case you change your mind at some point.”
In many cases, the seller can’t change his mind — maybe he’s being relocated, or the couple got divorced and need to sell. Who knows? In such cases, I rather think that the commission is acceptable to the consumer precisely because they believe that using a professional will mean selling their house for more money.
Let’s do a thought experiment for a moment to illustrate. Let’s say that NAR undertakes the study I’m recommending — nationwide, using data from 1999 to 2009, segmenting the agents appropriately, etc. — and that study shows that using a realtor has no bearing on the sales price. Say this study gets picked up by every single news outlet, and all Americans soon come to understand that using a realtor won’t get them any more money for their house.
You go on a listings call in this New Environment. Do you really think the seller is not going to question the 6% commission model? Do you really believe that the seller would willingly pay a percentage of the sale for advice, for marketing (which makes no difference on sale price, but only on Time On Market), for transaction assistance, and for negotiation (which makes no difference on sale price)? I don’t have that confidence. I don’t think risk-shifting adequately explains the consumer acceptance of the current commission-based model.
I could be wrong; there are ways to find out. Survey sellers and ask why they chose to use a realtor, and why they chose to pay the 6% (or 5% or whatever the rate is today). See how many say “risk shifting”; I rather doubt it would be that many.
@John –
I personally think you might be on to something, I do, about the difficulty of doing statistical analysis on sale of unique products with unique conditions: homes. However, in order to argue that the Hendel study is flawed, it isn’t enough to be dismissive with words. I think either (a) you have to take issue with their statistical/analytical modeling, or (b) show different results using different data, or different analysis.
Because when trained economists who know their statistics say, “we controlled for variables”, I don’t know that a layman saying, “Yeah, but that doesn’t work” is going to be much of a rebuttal.
As for Time on Market, the authors actually do address that, and say that realtor-assisted homes sell faster than FSBO, by an average of 16 days. (p.22) But then, here is one passage from the study:
However, for price, time to sell and probability of sale within 180 days there is no statistically significant difference between agent/owner and sales on FSBO. FSBO sales on the other hand are less likely to happen within 60 or 90 days. (p. 21)
Again, I’m in agreement that a good realtor, who knows his stuff, who is an expert, makes a difference. My gut tells me that they do. I’ve seen enough anecdotal evidence to suggest that they do. It makes logical sense that they do.
But that doesn’t constitute a counter-argument to a scholarly paper.
So consider this post, and this comment, my call to action by the industry — in particular NAR, but also other major organizations and institutions — to sponsor/fund/support a more thorough research effort to show that Hendel’s findings are (a) wrong, (b) localized to just one particular unique area of Madison, WI, or (c) dependent on cyclicality — meaning, they are valid in hot markets, but totally off in cool markets like from 2007 to present day.
-rsh
@Rob- The reality is that most people, outside of us real estate dorks, just don’t care about these studies. All I know is people keep calling me to list their homes, and after selling hundreds of homes I can say that I don’t see sellers’ main motivation for calling me to be that they think they’ll net more money. It’s not even why the FSBOs give up and call an agent, and I built my business on marketing to FSBOs, so I have a lot of experience in that area.
They call agents for these reasons:
– They think they’ll get more traffic through the home, giving them a better shot at selling it quicker.
– They won’t have to deal with the day-to-day hassle of selling a home.
– They don’t completely understand the process or the paperwork involved.
– They just don’t have the time to handle the sale of their home.
I just haven’t experience sellers saying “I think you’ll help me net more for my home”, and I’ve been on hundreds of listing appointments. They’re obviously putting a value on the other reasons.
As far as analyzing and rebutting studies like the Hendel study goes, it just doesn’t matter to me. Most of these theoretical, analytical types have never sold a home or anything else for that matter, so it just doesn’t mean a whole lot. People have been selling FSBO and hiring agents too, for longer than we’ve been alive, and I don’t see it changing much any time soon. When the market is booming, you see more FSBOs. When it’s harder to sell a home, like right now, you barely see any of them as people know they need help, and they don’t care much about the commission rate. The cycle continues, and probably will for a long time.
@Rob- The reality is that most people, outside of us real estate dorks, just don’t care about these studies. All I know is people keep calling me to list their homes, and after selling hundreds of homes I can say that I don’t see sellers’ main motivation for calling me to be that they think they’ll net more money. It’s not even why the FSBOs give up and call an agent, and I built my business on marketing to FSBOs, so I have a lot of experience in that area.
They call agents for these reasons:
– They think they’ll get more traffic through the home, giving them a better shot at selling it quicker.
– They won’t have to deal with the day-to-day hassle of selling a home.
– They don’t completely understand the process or the paperwork involved.
– They just don’t have the time to handle the sale of their home.
I just haven’t experience sellers saying “I think you’ll help me net more for my home”, and I’ve been on hundreds of listing appointments. They’re obviously putting a value on the other reasons.
As far as analyzing and rebutting studies like the Hendel study goes, it just doesn’t matter to me. Most of these theoretical, analytical types have never sold a home or anything else for that matter, so it just doesn’t mean a whole lot. People have been selling FSBO and hiring agents too, for longer than we’ve been alive, and I don’t see it changing much any time soon. When the market is booming, you see more FSBOs. When it’s harder to sell a home, like right now, you barely see any of them as people know they need help, and they don’t care much about the commission rate. The cycle continues, and probably will for a long time.
John Kalinowski’s comments: http://images.jupiterimages.com/common/detail/97/51/22595197.jpg
There is a study that says the more valuable the asset, the more likely people will see value in paying more. So, Earl Scheib doesn’t do most paint jobs on Benzs, Bentleys or Bugattis. The comparison of FSBO median sales price v agent-assisted sales price may bear this out.
John Kalinowski’s comments: http://images.jupiterimages.com/common/detail/97/51/22595197.jpg
There is a study that says the more valuable the asset, the more likely people will see value in paying more. So, Earl Scheib doesn’t do most paint jobs on Benzs, Bentleys or Bugattis. The comparison of FSBO median sales price v agent-assisted sales price may bear this out.
@Rob – I think our difference is that I’m not arguing that Sellers make their decision on commission rationally. It’s very simple to test market the risk-shift premiss without explicitly calling it so (I did it as an agent and I know many others who have or continue to do so). You simply offer a menu of options to a potential Seller:
1. commission @ x%
2. shared risk (retainer + commission)
2. hourly rate + expenses with retainer up front (in which, the Seller ‘typically’ saves thousands of dollars)
A small percentage will chose #2 and even smaller 3.
In a survey the rational mind takes over and of course no sane person would pay more money for the same service (choose #1). In real life, with real Sellers, implicit emotions win and whether they can express it or now, their *actions* much more accurately point to the truth.
My guess at what that emotion is (fear of loss / risk-shifting?) could be off, but I trust live market testing more so that survey results.
Finally, I can’t let this go without giving you a hard time:
really? Do you mean the same trained economists that created the credit bubble? Or the NAR trained economists that in 1997 were still telling the public ‘it’s always a great time to buy’?
I’ll take @Johns layman experience based on hundreds of listing appointments over all the unemployed trained economists on wall street. 🙂
Thanks from prompting a lively debate.
@Rob – I think our difference is that I’m not arguing that Sellers make their decision on commission rationally. It’s very simple to test market the risk-shift premiss without explicitly calling it so (I did it as an agent and I know many others who have or continue to do so). You simply offer a menu of options to a potential Seller:
1. commission @ x%
2. shared risk (retainer + commission)
2. hourly rate + expenses with retainer up front (in which, the Seller ‘typically’ saves thousands of dollars)
A small percentage will chose #2 and even smaller 3.
In a survey the rational mind takes over and of course no sane person would pay more money for the same service (choose #1). In real life, with real Sellers, implicit emotions win and whether they can express it or now, their *actions* much more accurately point to the truth.
My guess at what that emotion is (fear of loss / risk-shifting?) could be off, but I trust live market testing more so that survey results.
Finally, I can’t let this go without giving you a hard time:
really? Do you mean the same trained economists that created the credit bubble? Or the NAR trained economists that in 1997 were still telling the public ‘it’s always a great time to buy’?
I’ll take @Johns layman experience based on hundreds of listing appointments over all the unemployed trained economists on wall street. 🙂
Thanks from prompting a lively debate.
Must say, Michael, you’re making me feel better and better by the word. 🙂
-rsh
PS: I still think there needs to be more studies/research by the Big Guys in our business. 🙂
Must say, Michael, you’re making me feel better and better by the word. 🙂
-rsh
PS: I still think there needs to be more studies/research by the Big Guys in our business. 🙂
Hi Rob,
Great subject….
We coach Realtors…
…..literally, 1000’s of Realtors are enrolled in one of our coaching programs.
Recently we held a teleconference where we discussed this very subject.
Specifically, we asked those in (virtual) attendance how many would prefer to work on an hourly basis…or a flat fee basis..vs. the traditional commission basis (6% etc)
(In no way was this a scientific sampling…)
90% + in attendance said they would be thrilled to work on a flat fee basis…and not have their fee tied to the outcome…in other words, they would be paid for the service/ their time and effort. In essence, the same way attorneys and other service professionals are paid.
From an agents perspective…being paid for their time would…in most cases…result in a HUGE increase in income. For those not in the real estate industry please understand that despite with you might believe, selling real estate…and doing it well, is not easy. Most Realtors are 100% commission based. No sales=no paycheck. How many of you reading this would ever consider working on 100% commission?
The 10% (ish) that wouldn’t want to work on a flat fee/ hourly basis were those agents who were successful at a high level. In other words, the true top producers who know how to work hard and get results ….like the current compensation model.
Why is the 6% model still alive (and well)?
Because homeowners are willing to pay for the service and see value in it. If they didn’t the model would be dead. Additionally, how many sellers (or buyers) would be willing (and able) to pay a Realtor on a non-commission basis? Not many.
Sellers have the advantage in that they get the agents time for free…until the home sells.
This study is based on home sales data from one of the peek years for the real estate bubble. ANY home sold for multiple offers from 05-07. If they do the research in this market…they will find that the advantage is cleary with the seler who lists their home with a Realtor. Add to the mix the fact that millions of homeowners are upside down in their homes and will need the services of an agent who knows how to do a Short Sale (where the fee is paid by the lender) and the relevance of an agent becomes even more obvious.
Hope all of this helps!
Tim (and Julie) Harris
http://www.TimandJulieHarris.com
http://www.HarrisRealEstateUniversity.com
Hi Rob,
Great subject….
We coach Realtors…
…..literally, 1000’s of Realtors are enrolled in one of our coaching programs.
Recently we held a teleconference where we discussed this very subject.
Specifically, we asked those in (virtual) attendance how many would prefer to work on an hourly basis…or a flat fee basis..vs. the traditional commission basis (6% etc)
(In no way was this a scientific sampling…)
90% + in attendance said they would be thrilled to work on a flat fee basis…and not have their fee tied to the outcome…in other words, they would be paid for the service/ their time and effort. In essence, the same way attorneys and other service professionals are paid.
From an agents perspective…being paid for their time would…in most cases…result in a HUGE increase in income. For those not in the real estate industry please understand that despite with you might believe, selling real estate…and doing it well, is not easy. Most Realtors are 100% commission based. No sales=no paycheck. How many of you reading this would ever consider working on 100% commission?
The 10% (ish) that wouldn’t want to work on a flat fee/ hourly basis were those agents who were successful at a high level. In other words, the true top producers who know how to work hard and get results ….like the current compensation model.
Why is the 6% model still alive (and well)?
Because homeowners are willing to pay for the service and see value in it. If they didn’t the model would be dead. Additionally, how many sellers (or buyers) would be willing (and able) to pay a Realtor on a non-commission basis? Not many.
Sellers have the advantage in that they get the agents time for free…until the home sells.
This study is based on home sales data from one of the peek years for the real estate bubble. ANY home sold for multiple offers from 05-07. If they do the research in this market…they will find that the advantage is cleary with the seler who lists their home with a Realtor. Add to the mix the fact that millions of homeowners are upside down in their homes and will need the services of an agent who knows how to do a Short Sale (where the fee is paid by the lender) and the relevance of an agent becomes even more obvious.
Hope all of this helps!
Tim (and Julie) Harris
http://www.TimandJulieHarris.com
http://www.HarrisRealEstateUniversity.com
“The value of an agent is likely confi ned to promotional services, negotiations, and the interpretation of market data.”
If a network emerged that made the process simple, reduced hassle, & delivered same reach as MLS, 6% regime would crumble. Flat Fee is interesting as a concept. Efficiency trumps all.
@Rob, Have you seen ANY research or studies published from NAR on this topic?
@Michael, understand risk-shifting concept but I don’t buy it. If an agent has a 85%+ chance of selling a home that he/she lists on the MLS, are they really taking on a great deal of business risk? Enough to justify a 6% commission rate?
Plus, the consumers decision model around risk is set at a paltry $150 (in this study). A rather insignificant amount to a seller considering which network/model to engage with. How much risk is really being ‘shifted’ to the agent?
“The value of an agent is likely confi ned to promotional services, negotiations, and the interpretation of market data.”
If a network emerged that made the process simple, reduced hassle, & delivered same reach as MLS, 6% regime would crumble. Flat Fee is interesting as a concept. Efficiency trumps all.
@Rob, Have you seen ANY research or studies published from NAR on this topic?
@Michael, understand risk-shifting concept but I don’t buy it. If an agent has a 85%+ chance of selling a home that he/she lists on the MLS, are they really taking on a great deal of business risk? Enough to justify a 6% commission rate?
Plus, the consumers decision model around risk is set at a paltry $150 (in this study). A rather insignificant amount to a seller considering which network/model to engage with. How much risk is really being ‘shifted’ to the agent?
I think that the only ones thinking about the risk involved in the transaction are the real estate folks rather than the buyers or sellers.
One thing that the study doesn’t seem to quantify is the opportunity cost the sellers gained by not having to deal with the minutiae of marketing, contracts, coordinating … knowing whether the home inspector the buyer hired is worth the paper the inspection report is written on and whether to respond in kind …
It’s often about “making more money” but more often it’s about “getting the job done.”
Take this example:
Recently at a closing I asked my client, “was hiring me worth it?” His answer surprised me a bit. He said, “I don’t know; everything seemed to go so smoothly that I didn’t really have a chance to evaluate your skills.”
To my ear, that is the ultimate affirmation of value.
On the other hand, a recent seller said, after we were nearly 20 days past closing and I was pulling everything I could together in order to just get the damn thing closed due to the fault of the other side, “you’re really earning your money on this one.” Given the choice, I guarantee you that the second seller would have gladly paid double in order to have had the experience of the first seller.
I echo everything John said –
A challenge with studies such as this is that there is no quality control for the product – the product being the Realtor. If you could ensure that seller X in San Diego received the same, competent representation as Seller Y in Fargo, then you’d be onto something.
Additionally, you’d have to ensure that the Sellers were equally unemotional, detached and reasonable.
Good luck with that. 🙂
I think that the only ones thinking about the risk involved in the transaction are the real estate folks rather than the buyers or sellers.
One thing that the study doesn’t seem to quantify is the opportunity cost the sellers gained by not having to deal with the minutiae of marketing, contracts, coordinating … knowing whether the home inspector the buyer hired is worth the paper the inspection report is written on and whether to respond in kind …
It’s often about “making more money” but more often it’s about “getting the job done.”
Take this example:
Recently at a closing I asked my client, “was hiring me worth it?” His answer surprised me a bit. He said, “I don’t know; everything seemed to go so smoothly that I didn’t really have a chance to evaluate your skills.”
To my ear, that is the ultimate affirmation of value.
On the other hand, a recent seller said, after we were nearly 20 days past closing and I was pulling everything I could together in order to just get the damn thing closed due to the fault of the other side, “you’re really earning your money on this one.” Given the choice, I guarantee you that the second seller would have gladly paid double in order to have had the experience of the first seller.
I echo everything John said –
A challenge with studies such as this is that there is no quality control for the product – the product being the Realtor. If you could ensure that seller X in San Diego received the same, competent representation as Seller Y in Fargo, then you’d be onto something.
Additionally, you’d have to ensure that the Sellers were equally unemotional, detached and reasonable.
Good luck with that. 🙂
Rob-
Preface: Our profession does need a makeover and many of us are continuing to improve our value proposition but there are a couple of big assumptions used in the article to draw some unconvincing conclusions here:
#1) All transactions include a 6% broker commission.
Not sure about everyone else, but 6% listings are not the norm for any transaction that I am familiar with. 6% is more like a starting point. Therefore, the authors may have needed to read more than the FSBO website to gather data on how much Realtors charge for services. Where else could they have gotten this data for 15,000 transactions? Nowhere except, The HUD closing statement. Anywhere else is just speculation. As a broker, is there any firm averaging 6% GCE? (3% for each side)
#2) All of the FSBO transactions were totally brokerless.
An FSBO’er may be able to list a house on the MLS for $150 but what do they pay when a Broker comes calling with a willing buyer? 2.5%? 3%? 4%?
I’ll show FSBO properties if the house seems to be a comparable choice. However, I won’t do it unless the buyer has promised to pay my fees or the seller has agreed, in writing.
And, for the following reasons, FSBO does not scale to the masses. DIY Sellers and DIY buyers love to haggle with each other. Just like there are those who like to yard sale. In my experience, most buyers have no interest in this. Why do buyers hate it so much when the sellers do not leave the property during viewings? Further, is this uneasiness supposed to go away because the home is FSBO and not broker listed? I think not.
Rob-
Preface: Our profession does need a makeover and many of us are continuing to improve our value proposition but there are a couple of big assumptions used in the article to draw some unconvincing conclusions here:
#1) All transactions include a 6% broker commission.
Not sure about everyone else, but 6% listings are not the norm for any transaction that I am familiar with. 6% is more like a starting point. Therefore, the authors may have needed to read more than the FSBO website to gather data on how much Realtors charge for services. Where else could they have gotten this data for 15,000 transactions? Nowhere except, The HUD closing statement. Anywhere else is just speculation. As a broker, is there any firm averaging 6% GCE? (3% for each side)
#2) All of the FSBO transactions were totally brokerless.
An FSBO’er may be able to list a house on the MLS for $150 but what do they pay when a Broker comes calling with a willing buyer? 2.5%? 3%? 4%?
I’ll show FSBO properties if the house seems to be a comparable choice. However, I won’t do it unless the buyer has promised to pay my fees or the seller has agreed, in writing.
And, for the following reasons, FSBO does not scale to the masses. DIY Sellers and DIY buyers love to haggle with each other. Just like there are those who like to yard sale. In my experience, most buyers have no interest in this. Why do buyers hate it so much when the sellers do not leave the property during viewings? Further, is this uneasiness supposed to go away because the home is FSBO and not broker listed? I think not.
It’s taken me what seems like days to read this post and all the comments. I don’t know that I have a lot to add, but I appreciate you bringing this to the table. Ultimately, agents need to reinvent themselves with each client. I think that there are several clients who could have avoiding the cost of the agent and done well with a sign in the yard in the 2003-2005 market – they were few and far between. The struggles are in the process from contract to closing – that should be the agents real value.
Unfortunately, not everyone touts their knowledge level because not all agents have the necessary knowledge level to be proud of.
It’s taken me what seems like days to read this post and all the comments. I don’t know that I have a lot to add, but I appreciate you bringing this to the table. Ultimately, agents need to reinvent themselves with each client. I think that there are several clients who could have avoiding the cost of the agent and done well with a sign in the yard in the 2003-2005 market – they were few and far between. The struggles are in the process from contract to closing – that should be the agents real value.
Unfortunately, not everyone touts their knowledge level because not all agents have the necessary knowledge level to be proud of.
It is a curious point, the true monetary worth of any agent (I work as one in Western Australia) and something we have to prove to our clients on a daily basis. I think your analysis is too focused on the specific monetary outcomes (as it should be as it is the easiest thing to quantify and define).
Problem is we sell homes for people for more than one reason. I recently sold a house for a woman who was pregnant and the actual sale price was less of an issue than making sure we could arrange for her to be (financially and emotionally) where she needed to be before the baby arrived.
How do you quantify what I helped her through? That peace of mind and stress off her shoulders was invaluable to her (I’d like to think 🙂 ). However in Australia commissions are a lot less usually somewhere between 2 + 3%….
Good article but until you can find a way to quantify such experiences as the one mentioned above to a monetary level you’ll probably never find an answer. (And I doubt that’ll happen, its like defining living standards)
It is a curious point, the true monetary worth of any agent (I work as one in Western Australia) and something we have to prove to our clients on a daily basis. I think your analysis is too focused on the specific monetary outcomes (as it should be as it is the easiest thing to quantify and define).
Problem is we sell homes for people for more than one reason. I recently sold a house for a woman who was pregnant and the actual sale price was less of an issue than making sure we could arrange for her to be (financially and emotionally) where she needed to be before the baby arrived.
How do you quantify what I helped her through? That peace of mind and stress off her shoulders was invaluable to her (I’d like to think 🙂 ). However in Australia commissions are a lot less usually somewhere between 2 + 3%….
Good article but until you can find a way to quantify such experiences as the one mentioned above to a monetary level you’ll probably never find an answer. (And I doubt that’ll happen, its like defining living standards)
@Andreas – Is your total listing commission in Australia “between 2 + 3%” or is that the average for just one side? If that’s true, are you saying agents work for 1 to 1.5% in Australia? I’m curious about what’s different in your system that has caused the rates to go that low. Were rates there higher in the past? Are there certain efficiencies that allow an agent to be profitable at those numbers? What split do your brokers typically take from the agent? It would be great if you could elaborate on how your system works.
By the way, everyone keeps talking about the 6% system, but I think the average is much lower than that in most areas. I’m an ex-RE/MAX agent, and I know they were one of the first companies where agents really started to cut their commissions, though no one likes to talk about it. They gave their agents that freedom, and many of them ran with it and offer all kinds of discounted rates. Not saying which side is better or worse, just mentioning the facts, as I don’t believe the “6% system” really exists any more (on average).
@ John Kalinowski
Yep you read right, generally the whole deal is done for 2-3%.
Fees used to be fixed by the government but the entire industry has been deregulated. The race to the bottom resulted in fees around 2 – 3% all up. If there is an agent introducing the buyers there is no set formula for how the commission is split but it is usually 60/40 ish (in favour of the selling agent).
One can work as a buyers agent and charge them directly.
I suppose the only way to compare them is to look at the actual cost of the product though. The median price for a home here in Perth, W.A. is roughly $450 000 AUD. I don’t know what prices are like in the states. At that price I would be charging 3%. I’m in a bit of a higher end market though so properties do start achieving one million and up and that is where I’d charge 2%. But since its all deregulated agents can charge whatever they like.
I’m not sure how to elaborate on how our system works though, I expect its probably very similar to yours but I haven’t really got a clue of how you guys operate…
@Andreas – Is your total listing commission in Australia “between 2 + 3%” or is that the average for just one side? If that’s true, are you saying agents work for 1 to 1.5% in Australia? I’m curious about what’s different in your system that has caused the rates to go that low. Were rates there higher in the past? Are there certain efficiencies that allow an agent to be profitable at those numbers? What split do your brokers typically take from the agent? It would be great if you could elaborate on how your system works.
By the way, everyone keeps talking about the 6% system, but I think the average is much lower than that in most areas. I’m an ex-RE/MAX agent, and I know they were one of the first companies where agents really started to cut their commissions, though no one likes to talk about it. They gave their agents that freedom, and many of them ran with it and offer all kinds of discounted rates. Not saying which side is better or worse, just mentioning the facts, as I don’t believe the “6% system” really exists any more (on average).
@ John Kalinowski
Yep you read right, generally the whole deal is done for 2-3%.
Fees used to be fixed by the government but the entire industry has been deregulated. The race to the bottom resulted in fees around 2 – 3% all up. If there is an agent introducing the buyers there is no set formula for how the commission is split but it is usually 60/40 ish (in favour of the selling agent).
One can work as a buyers agent and charge them directly.
I suppose the only way to compare them is to look at the actual cost of the product though. The median price for a home here in Perth, W.A. is roughly $450 000 AUD. I don’t know what prices are like in the states. At that price I would be charging 3%. I’m in a bit of a higher end market though so properties do start achieving one million and up and that is where I’d charge 2%. But since its all deregulated agents can charge whatever they like.
I’m not sure how to elaborate on how our system works though, I expect its probably very similar to yours but I haven’t really got a clue of how you guys operate…
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