Is it just me, or does it seem that the rap on real estate agents is going in the direction of lawyers? Gotta have ‘em when we need ‘em, I guess, but they sure make a lot of dough for doing not a lot of work. (Real estate agents run ads and hang key boxes. Lawyers — well I’m not sure what.) Heck, I know a guy who made three offers on a house on the lake only to have them all rejected. The eventual buyer ended up paying less than my friend offered. It turns out the buyer’s agent was also the seller’s agent. Can you say double commission, anyone?
Well, I just finished reading Freakonomics, and it turns out the case against real estate agents is also an economic one. Authors Steven D. Levitt and Stephen J. Dubner argue that the current commission-based system :
(W)hat is the real-estate agent’s incentive when she is selling her own home? Simple: to make the best deal possible. Presumably this is also your incentive when you are selling your home. And so your incentive and the real estate agent’s incentive would seem to be nicely aligned. Her commission, after all, is based on the sales price.
But as incentives go, commissions are tricky. First of all, a 6 percent real-estate commission is typically split between the seller’s agent and the buyer’s. Each agent then kicks back half of her take to the agency. Which means that only 1.5% of the purchase price goes directly into your agent’s pocket.
So on the sale of your $300,000 house, her personal take of the $18,000 commission is $4,500. Still not bad, you say. But what if the house was actually worth more than $300,000? What if, with a little more effort and patience, she could have sold it for $310,000? After the commission, that puts an additional $9,400 in your pocket. But the agent’s share — her personal 1.5 percent of the extra $10,000 — is a mere $150. If you earn $9400 while she earns only $150, maybe your incentives aren’t aligned after all. (Especially when she’s the one paying for the ads and doing all the work.) Is the agent willing to put out all that extra time, money and energy for just $150?
Freakonomics at pp.8-9. Levitt and Dubner posit that the way to answer this final question is to measure the difference between sales data for houses that belong to real estate agents themselves and the houses they sold on behalf of clients. And sure enough, it turns out that, using data from the sale of 100,000 Chicago-area homes, real estate agents leave their own homes on the market an average of ten days longer and sell them for an extra 3-plus percent — $10,000 on a $300,000 house. According to the authors:
When she sells her own house, an agent holds out for the best offer; when she sells yours, she pushes you to take the first decent offer that comes along. Like a stockbroker churning commissions, she wants to make deals and make them fast. Why not? Her share of a better offer — $150 — is too puny an incentive to encourage her to do otherwise.