Technology TransactionsRight Math, Debatable Conclusions
"You cannot completely trust the advice your broker gives you," said Christopher J. Mayer, a professor of real estate at Columbia Business School. "You have to become more educated as a buyer." Why a Real Estate Agent May Skip the Extra Mile, The New York Times, February 20, 2005
I"m not sure that buyers or anyone else was especially well educated as a result of the Time"s report regarding the economic impact of real estate commissions. While the math may be right, the conclusion is surely open to question.
"Most home sales generate a 6 percent commission," said the Times, "split between the brokerage firms representing the buyer and seller. The agent generally receives half of the firm"s draw, or 1.5 percent of the sale. So if a home sells for $500,000, the agent personally receives $7,500. Not bad for what may be just a few days of work. If the agent works for an additional week and urges the seller to hold out for $515,000, that"s an extra $15,000 for the seller, but only an extra $225 for the agent. Because every additional dollar throws only a penny and a half into the pocket of the agent, the economists reason, the agent may push clients to accept lowball offers."
As evidence, the paper cites a recent study by economists Steven D. Leavitt and Chad Syverson which shows that when compared with client properties, brokers sell their own homes for 3.7 percent more money. As well, say the economists, broker homes stay on the market for an additional 9.5 days.
Given that real estate is a "nonhomogeneic" commodity -- a fancy word meaning that no two homes or transactions are alike -- it seems difficult to compare property sales. However, if we accept that brokers receive more money for their homes than non-brokers, why should anyone be surprised? Does it not make sense that professionals in real estate are better able than non-professionals to purchase, prepare, price and negotiate real estate transactions? As to why client homes are sold more quickly, one practical reason is that many sellers list as close to the time they need to move as possible. Brokers, knowing the marketplace and how to juggle settlement dates, may be in a position to allow their homes to remain available for longer periods.
But do brokers push lowball offers because they have little economic incentive to seek higher sale prices? The math would seem to support such claims, but common sense does not. Here"s why:
If you"re a real estate broker you understand that no transaction stands alone. To be successful, what you seek is a stream of income over time, transaction after transaction fueled by good results that produce client referrals.
Thus the reason for brokers to push higher sale prices is not a marginally-increased commission from a particular transaction, rather it"s to gain the referrals that a satisfied client can produce.
It"s those client referrals, not marginally-higher sale prices, which produce real broker income. Go back to the example in the Times and the logic of this notion is easy to demonstrate.
Imagine that the Smith house sells for $500,000 and produces a marginally-satisfied client. "Nice job," says Smith, "here"s your commission check." Alternatively, the Green house sells for $515,000. Owner Green is very happy because that extra $15,000 can be used to offset tuition bills, reduce credit card balances, or buy a second car.
"Here"s your check," says Green, "and by the way, the Conklins expect to be selling their home in two months and I"d be happy to suggest your name."
Suddenly the Green transaction is not worth just another $225, to use the figure cited in the Times. It"s $225 plus another transaction, perhaps another $15,000 in commission revenue.
To a large extent, real estate brokerage is a "fungible" activity -- most brokers in a given community belong to the same MLS, have the same forms and the same licenses. Successful brokers stand out because they do something which makes them different, noticeable and prominent, they offer "more or better" or at least the perception of "more or better" because they understand that a career requires more than a single transaction.
The best form of promotion, the surest way to stand out, is with the head start a broker receives when a client says to another owner or buyer "you ought to try broker Jones. She was really good and helped us get the best possible price and terms."
The value of such a recommendation is obvious: In its 2004 Profile of Home Buyers and Sellers, the National Association of Realtors found that 73 percent of all owners contacted just one broker to market their home, 38 percent used someone recommended by a friend or relative. If you"re a broker, the odds of getting a listing are overwhelming if you"re the first professional called and if you"re recommended.
None of this is a secret, and economic theory easily describes broker motivations. Adam Smith, the father of economics, pointed out that we are each motivated by the "invisible hand of self-interest." Brokers push for the best possible sale prices and terms because such results not only benefit client sellers, they inherently benefit brokers.