Sunday, February 17, 2008

Are Realtors Worth the 6% Sales Commission? A Stanford Case Study

It has been often argued by me on this blog that the real estate industry needs reform. A good place for this reform to start, in my opinion, is the real estate sales profession. And one place to start with real estate sales professionals would be to address how they are compensated.

Today real estate sales professionals typically demand a 6% commission for a home sale. Some earn less. Some might manage to earn more. But 6% is the common refrain within residential real estate quarters. 6% is pervasive.

So what does this mean? If a real estate agent were successful at selling the house I am renting right from under me, and was able to achieve the Zillow market value of $600,000, then said agent would pull down around $36,000.

Are realtors worth the typical 6% sales commission?

Thanks to a recent case study (click PDF file) efforts of Dr. B. Douglas Bernheim and Mr. Jonathan Meer of Stanford University and the National Bureau of Economic Research (NBER), this question can be answered empirically.

The case study examined 6 key services that real estate agents offer and tried to determine whether the average 6% sales commission measured up to the value of these services. Below are the services identified and reviewed in the study:

1) "Staging" or preparing homes for sale, sending out sales flyers, placing advertisements, holding open houses, and recommending the house to buyers.

2) Assisting with negotiations.

3) Hooking up buyers to sellers and vice versa

4) Providing access to the Multiple Listing Service (MLS).

5) Providing market information and making recommendations pertaining to appropriate asking price.

6) Assisting with paperwork and legal documentation:
Some considerations:

Access to MLS (Service #4) = $300.00
Market info. from professional appraisals (Service #5) = $300.00
Legal fees (Service #6) = $700.00
Total = $1,300.00

Just 3 of the 6 services, the case study revealed, added up to only $1,300.00.
Just have of the services add up to 6% of a $22,000 home.

So the other three services (1, 2 and 3) must be either outlandishly valuable, or real estate sellers and buyers are both being overcharged on sales commissions.

The Stanford study proceeded to examine all services more closely. Given the peculiarities of on-campus homes sales, the case study was able to simply the data considered by deducting roles that were not applicable. This helped to isolate the effectiveness of real estate agent services with respect to listing prices, selling prices and days on market.

Dr. Bernheim and Mr. Meer reviewed how real estate agents affected list prices, selling prices, and speed of sale for the homes of Stanford staff or faculty sold on the university campus (Palo Alto, CA) campus over a 26 year period. The Stanford University FSH office (Faculty Staff Housing office) maintains a free listing of all houses on sale and assists with paperwork and legal documentation, therefore services 4 (access to MLS) and 6 (paperwork & legal doc assistance) are not needed in transactions. The eligible pool of people able to buy the homes on the Stanford campus is also small, so service 3 (matching sellers to buyers) is removed.

The verdict?

Bernheim and Meer found zero difference in sale price between homes sold through a broker and those sold without any representation and zero difference in initial asking price. This means that the value of real estate service 5 (market information and recommend asking price) was almost non-existant and service 2 (assist with negotiations) substantially diminished.

However, if speed of sale is the objective (reducing days on market), the study revealed that employing the services of a real estate agent may be a wise move (the "marginal effect of using a real estate agent").
The probability of a home shot up 25% with the use of a real estate agent or realtor in the first month on the market. In the second month, the probability of a sales was halved, but this was still considered a very significant probability by the research team.

So, out of curiousity, what was the median sales price of homes at the Stanford University campus over the studied 26 year duration?


At 6% that's $34,000 payable to the real estate agent.

According to Bernheim and Meer: "a steep price to pay for the value rendered".


HB Bear said...

Thanks for posting this. I've always wanted to see a quantitative approach to this question. Clearly the Stanford study removes all doubt: Realtors are not worth the 6%.

Anonymous said...

An Agent’s Perspective

Actually 6% does not go to the agent. The break down is as follows: 3% to the listing agent (representing the seller), 3% to the selling agent (representing the buyer). That is just the start. From there each agent has a commission split due to the broker were that agent holds their license. For example, say the typical agent gets 75% split of 3%. If the house sold for $600,000, the agent would then make $13,500. This is only the beginning. From there depending from which side of the transaction the agent is on, that individual will have miscellaneous costs (selling agent: cost of gas, insurance, wear-and-tear on car, time spent looking for property, educational requirement cost, prepare tons of documentation for the transaction, NAR/CAR dues, and list goes on). The listing agent has all of those dues, plus the cost of marketing material, transaction coordinator fees, office fees (variable), massive amounts of time and energy marketing the property, and educating the seller, coordinating showings, following up, meeting inspectors, researching city requirements, and literally the list goes on. Also, not to mention the huge liability agents and brokers face once the property is sold. If there is anything the seller did not disclose both parties end up in a lawsuit with attorney fees (or the agent and broker settle), cost of damages/repairs, and any other miscellaneous costs. And guess were all that money usually comes from. The money more times than not comes from the agent and broker. NOT the seller. NOT the buyer. The agent and broker have huge liabilities. And lastly, taxes….taxes… and more taxes.

Break down the actual monetary amounts from each side.

6% commission
Total commission: $36,000

3% goes to the selling agent (representing the buyer)
75% with broker, the agent gets $13,500
Average cost for selling agent from the list and more from above: $500
Taxes: average of 25%: $3,250

3% goes to the listing agent (representing the seller)
75% with broker, the agent gets $13,500
Average cost for selling agent from the list and more from above: $1500
Taxes: average of 25%: $3,250

This is not including time spent educating oneself, the other miscellaneous cost, the months of working with clients (time cost), and only receiving a check IF the transactions closes. Remember, agents (most) do not get a salary, health care benefits, 401k, and many other consistent benefits that w-2 works get. We have huge liability, time cost (without a guaranteed paycheck), hours of education, services provided first before we get paid. The public does not truly understand the responsibilities that we have.

Patrick said...

Are Realtors Really Worth It? A new study from Northwestern University concludes: No, not quite. Here's how The New York Times previewed the study today: "The conclusion, in a study to be released today based on home-sales data from 1998 to 2004 in Madison, Wis., is that people in that city who sold their homes through real estate agents typically did not get a higher sale price than people who sold their homes themselves. When the agent’s commission is factored in, the for-sale-by-owner people came out ahead financially."
Homes for sale and homes for rent in Albany, GA

Dawn Smith said...

As far as I am concerned this study has no validity, none. This study was not conducted in a public real estate market and can not be generalized to the public market. Shame on Standford for sending this invalid information to the public. In addition, this study does not take into consideration the time that good real estate salespeople spend with their buyers and sellers. The amount of paperwork required to close a real estate transaction in the New York Metropolitan area is equivalent to 15 feet of paper when lined up end to end. Does the average person know how to fill out this paperwork? Does the average person understand fair housing laws, property disclosures statements, and lead paint disclosure requirements? Does the average person understand how to price a home, market a home, and show a home? Does the average person even understand the legal terms of a real estate contract?
Selling a home is a time investment. A seller can choose to spend the time, or pay someone else to spend their time.

Accountpro Sales Commission Software said...

Commission agent just not get 6%. They get commission from both buyer and seller.