From this blog in 2005:
People who sell $1 million condos often complain that paying a 6 percent standard (read “fixed by collusion” among realtors) commission is too much ($60,000 for what might only be a few days of work). Economists who have studied the real estate market, however, find that in some ways the commission is too low because realtors don’t work very hard to sell clients’ houses compared to their personal houses. In other words they sell a customer’s house relatively cheap so that it will sell quickly rather than work for many weeks to get the best price and 6% of the extra.
Why haven’t we seen anyone propose a commission structure that says the realtor gets a 25% commission… but only on the amount above the assessed value of the property? Your typical $1 million NY or Boston apartment is assessed at maybe $850,000 and could be sold for that price with almost no effort in a few days so the commission paid on such a sale shouldn’t be more than $1000. If a realtor could sell the place for $1.2 million via clever marketing, however, she should be entitled to a fat commission.
In the intervening 16 years, various Internet services have made it easier for owners to sell their own houses. We can assume that realtors add value, since most people still do hire realtors, but they’re adding value on top of an easy-to-establish base, e.g., 10 percent below the Zillow Zestimate. Presumably a “for sale by owner” (free) listing on Zillow could easily sell a house at 90 percent of its Zestimate. (5 minutes of marketing effort!) If so, the structure that would align sellers’ interests with agents’ interest is a commission that was 0 percent of the first 90 percent of expected value and 15-25 percent of the sales proceeds above that.
How can it still be case that an agent who does a terrible job, selling a house for 95 percent of its value, gets paid almost as much as an agent who does a superb job, selling a house for 115 percent of its value?
This is the kind of question I am pondering as we declutter and pack up for Jupiter, Florida!
In most of our real estate transactions we fuck the real estate agent. Typically we use a real estate lawyer to finish the transaction and they have a million ways to screw over the agent. Not sure if we have ever really paid a commission. The lawyers charge a high hourly rate but it usually doesn’t take that many hours. So feel free to have an agent show you all the wonderful homes but contact a local lawyer first and ask them their advice!
TS: I would like to see the great real estate agents get paid MORE, not be cut out of the deals. My point is only that they should be paid for value created. If an agent actually harms a seller by selling a property for only half of its value with competent marketing, the agent currently will get paid handsomely even for that.
” If an agent actually harms a seller by selling a property for only half of its value with competent marketing”
Does that really ever happen?
“… the realtor gets a 25% commission… Your typical $1 million NY or Boston apartment is assessed at maybe $850,000 and could be sold for that price with almost no effort in a few days so the commission paid on such a sale shouldn’t be more than $1000. If a realtor could sell the place for $1.2 million via clever marketing, however, she should be entitled to a fat commission.. …for many weeks…[later]”.
With a 25% “fat commission”, the seller in this example ends up worse with the 1.2 million price (The seller would get 900k) with “clever marketing” over the 1.0 million price (The seller would get 940k). And it’s “many weeks” to get 40k less.
Math is hard, I guess.
The assessed value is irrelevant.
davep: The 25% commission would be only on the amount over 850,000. The commission on the first 850,000 (assessed value) would be $0 or $1,000. If sold under the proposed tiered structure, the seller should get approximately $1.11 million (1.2 million minus 25 percent of (1.2 million minus 850,000)). Math IS hard, but $1.11 million is more than the $940,000 that the seller would get from a merely competent agent selling the property for its without-clever-marketing value of $1 million (and with a standard-for-the-time-6% commission).
Anybody talking about magical “clever marketing” is blowing smoke. Any competent agent would know that and not agree to the deal.
@davep
You’re not really addressing Philip’s points.
Philip’s point is that the agents’ their clients’ interests are not aligned, and in a manner that makes the agents simply parasitic middlemen.
He is providing a way to align their interests.
here is some supplemental info, agents use more time to sell their own houses.
https://forum.nachi.org/t/exerpt-from-freakonomics-book-regarding-real-estate-agents/56492
Lastly, I can’t find a source for this, however labor analysis has shown that in more expensive markets, rather than realtors negotiate lower commissions to get the deals (which they theoretically could based on commission vs hours work to sell home), there will be more entrants to the market, until the average realtor income becomes similar to that of cheaper markets.
In short, for more expensive markets, each realtor will have fewer clients, and presumably will on average work fewer hours.
Agents are will always be better off selling more houses than fussing over small differences in price. That means there is no incentive for them to get “the best price”. Hard to sell properties are likely used to fill in time that can’t be spent selling easier to sell properties.
In Silicon Valley, half the sales are going for $50k or more over the asking price. In such market, it is hard to see how the agents are adding much value. No one has to talk the buyers into buying. There is an excess of eager buyers.
Surely this is the point where an internet tycoon asks “What would Elon do?”, and the answer is: sell all your properties yourself (for some definition of self – maybe there is an assistant in the Musk office who operates the Zillow terminal). No doubt he has sufficient bargaining power to absorb any buyer premium in an agreed price.
Financial advisers are another B-ark group who could do with targeted commissions. Instead of walking off with some fixed fee or percentage of your investment, their fee should be linked to the performance of the investment.
“Presumably a “for sale by owner” (free) listing on Zillow could easily sell a house at 90 percent of its Zestimate.”
Back in 2016 immediately after Hurricane Matthew, I grew frustrated with home ownership and listed my single-family FL home for sale by owner on Zillow at an attractive but fair price. Over the subsequent 48 hours I got nothing but dozens of telephone calls from real estate agents trying to talk me into listing the home with them. I quickly changed my mind about selling and removed the for sale advertisement.
Earlier, in 2015, I used Zillow to list a rental unit for rent, and quickly got interest from several potential renters. I promptly found out that it’s impossible for a non-real estate professional to run credit reports on prospective tenants.* I ended up using a property management company to advertise the rental on the MLS, screen tenants, run credit histories, draft and complete the lease, and show the unit; and got a great tenant at a cost of 75% of one month’s rent.
*I’ve since learned that there are services that can run the prospective tenant’s credit report for a fee but will respond with a summary or general grading of the report rather than the actual credit score; at least that’s how I understand it.
It’s been a while since I sold a house, but at the time my understanding was the main reason you needed a Realtor(R), and had to pay their large fee for little obvious work, was to get access to the MLS – i.e. it looks a lot like a cartel.
Apparently, today you can advertise on MLS by paying a small fee (through a local realtor) if you want to sell your house on your own.
A couple of my friends sold their houses recently without a broker in MA(one of them bought and sold his third house without a broker). According to them, it was a relatively easy process in the current market.
I briefly toyed with the idea a couple of years ago but decided against it mainly due to having to deal personally with prospective buyers.
Philip, did you just say you are moving to Jupiter, FL? Tell us more.