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Is A Realtor Worth The Commission?

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Home sellers in Madison, Wisconsin, in the period between 1998 and 2004, that sold their home using a real estate agent did not consistently get higher prices than those who didn’t. When you factor in the commission, for sale by owner sellers did better. How about them apples?

What stinks is that its likely not representative of the average because the Madison, Wisconsin for sale by owner websites are more popular than others in the nation, but it certainly points to a direction that the National Association of Realtors doesn’t want to go. The primary benefit that real estate agents offer is exposure – specifically a listing in the MLS database. As fewer prospective homebuyers rely on real estate agents and begin scouring for sale by owner, or other sources of homes for sale listing, the less value a realtor can provide.

What can a real estate agent do nowadays that will get you more for your home that you can’t do yourself? If you don’t know how to stage a home and need tips, watch some home flipping or home selling show on A&E. If you don’t know how to play people off each other and getting them to overpay, read a book by Machiavelli. Short of having the legal document templates handy, I honestly don’t think there’s much to offer outside of the exposure/MLS listing and this study backs that up.

What’s funny is that the National Association of Realtors claim that houses sold through MLS get a 16% premium over those not sold through MLS, which is really as fair a measure as the Madison, Wisconsin results when you think about it. Unless they sold identical homes at identical times, some with MLS and some without, there are so many disparate factors that the claim is meaningless. Plus, 16% is before the 6% commission, and 10% is probably getting close to how much error they had on that self-serving study.

If you want to read more, Freakonomics has a great writeup with additional reading material and the original article appeared on the New York Times.

Any real estate agents out there want to defend their commissions? :)

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23 Responses to “Is A Realtor Worth The Commission?”

  1. Chris says:

    I agree completely. You can tell from the commercials that RE agencies are really threatened by the Internet, but they just can’t come up with a concrete reason why they are better (or useful). But you can’t stop it. Here’s what I envision happening.

    First, some entrepreneur or company with a strong online presence is going to establish an “ebay” for houses, one with reasonable listing fees and no buyers fees. More sites with the same concept will spring up, driving down fee prices and many will offer a flat low listing fee and do nothing but provide contact information for the seller (like Craigslist). Other sites will spring up with step-by-step guides to buying and selling homes privately. People will probably start demanding a simplified process.

    To compete, the “realtor” group will open its MLS listings to owners selling on their own. Real estate agents will eventually become what insurance and mortgage brokers are now; they just look around for the product and negotiate a price for a small fee. Most people will end up buying/selling houses on their own. Realtors will end up doing most of their business with wealthy people buying more expensive houses.

    Just my opinion.

  2. Marilyn says:

    Yes, sellers are just going to LOVE opening their door to every phony, unqualified, contentious, weird, and possibly deranged “buyer” who knocks on it. They will be so thrilled not to have to pay a commission to a licensed broker….!

    Good luck.

  3. The NAR also claimed, until recently, that the sub-prime mess was “contained.” Any entity with a self-serving interest should never be completely trusted to report on their own success (or failure). On the other hand, your time period from 1998 to 2004 covers about three of the best years in our generation for home sellers. I would argue that, in many markets, any average Joe could have planted a For Sale By Owner sign in their yard within the years, 2001 to 2005, and do just as well or better than even the best agent could do. In fact, a significant amount of those average Joe’s thought it was so easy, they became real estate agents, themselves!

    Personally, I’ve never used a seller’s agent; however, I’ve never had to sell a home in a buyer’s market, which we are in now. It will be more interesting to see what the stats look like from, say 2007 to 2010. During that time frame, I would take a second look at using a seller’s agent…

  4. Although agents sure can be expensive (up to 6% here), they can also be useful. They have access to MLS and a ton of other agents with buyers lined up. Sure you can buy access to MLS, but do you have time to show your home to potential buyers? For me, I think they are still priced a bit high, but well worth it if you’re life is already busy enough.

  5. Chris says:

    Marilyn, I don’t think realtors will go anywhere anytime soon, but I think the for sale by owner market is going to become huge. There are going to be a LOT of people with $100k houses wondering why they are paying $6-8k just to sell the thing, especially if inventory is low. Just an opinion.

  6. Ted Valentine says:

    People complaining about Realtors are usually just cheapskates. You don’t have to use them. The cost of the realtor’s services is usually built into the price. Realtors provide a service and they should be compensated.

    I offered to buy a house that was FSBO (I had no agent) and I offered ~5% less than what homes were selling for in the area. My reasoning when I presented the offer was he was still coming out ahead of not using a realtor. He didn’t take it. I ended up buying another house FSBO that was listed for sale ~6% below market.

  7. muckdog says:

    I sold a house myself. Used a lawyer to write up the contract. Easy. The fees were extremely minuscule compared to using an agent.

  8. Lord says:

    The study managed to show buyers were suckers to buy FSBOs; they actually paid more for them! It also managed to show that in a rising market it pays to delay selling your house. Generally, a realtor’s fee will be divided between buyer and seller depending on whether it is a seller’s or buyer’s market respectively. In a seller’s market it is largely paid by the buyer anyway, while in a buyer’s market it is largely paid by the seller but that is when they need the most help to sell it. The real alternative is not private vs. public but auction vs. inventory models, best execution vs. best price, but I don’t see that changing much as sellers resist auctions in buyer’s markets and most buyers would resist them in seller’s markets. Agents have much to offer in information and that is a lot more than just saying it is on the internet, go hunt for it. As it is usually a highly personal decision and often does require selling, while the market may divide into levels of service, it is unlikely to disappear as we know it.

  9. Not defending realtors as mine stink. But they can help in long distance buying and selling.

  10. Patrick says:

    I agree, it can be very expensive to sell a house, but many times you are paying for the exposure of your property, and paying for the experience the realtor provides.

    If I already knew someone who wanted to buy my house, then I would go to a lawyer and sell it that way – and save thousands. But I will likely just put mine on the open market and the exposure a realtor brings will be what helps sell the house.

  11. guinness416 says:

    If you as seller don’t have an agent, will other agents bring their buyers to you? Estate agents in the markets I’ve purchased in always seemed to me a surprisingly small and incestuous bunch. You’d want to be very sure that you were getting the house as widely seen as you could.

  12. Marilyn says:

    Chris, I guess I have to jump in again. And, oh yes, I have been a real estate broker for more than 2 decades, almost 3…

    There have always been FSBOS out there and sometimes they sell.

    True, the internet is providing a huge amount of real estate information previously unobtainable by the consumer which makes it tempting to do-it-yourself. And yes, it has various effects on the business we have known, however….

    Your home sale and purchase are the biggest and most emotionally charged transactions that people engage in. It is daunting to have strange people in and out of your home. Also daunting to qualify and negotiate with them. How do you attain the best price and terms ? Most are clueless as to how. Do you really want to tackle this tricky task yourself?

    If you are not familiar with an area, it still is a ton of work to run around by yourself trying to find the perfect house- even with directions and computer printouts. Inefficient at the least.

    My real estate colleagues work excessively hard for their clients, huge chunks of time and expense are consistantly invested- often with no reward. Our buyers and sellers are nervous and rely upon us. They are too busy with their own families and careers to have to set up their own appointments, to be responsible for their own marketing, to deal with all the detail and potential for legal complication, and to invest all the days and weeks needed. They are most willing to pay commissions rather than shoulder all the labor-intensive work, responsibility, and stress all alone.

    It will be interesting if your prediction does comes true, but it may be considerably more challenging in actuality than it looks like in theory.

  13. I think for most more financially savvy sellers, like obviously the readers on this blog are, it makes sense to take the risk not hiring a realtor since people are already keen on the current market condition and they are fairly educated financially. But for a lot of sellers out there, from my personal observation working with many sellers directly (I am a stager), they do need someone to hold their hands through it or just have the realtors handle everything. It can be quite daunting for people to deal with invasive buyers, get irritated by not so serious buyers, or meeting with people with wrongful intention who pose as buyers. Or the sellers are too busy to deal with all these stuff themselves because they have young kids, busy jobs, life, etc. Also divorcing couples tend to use realtors as a buffer as well since obviously they don’t want to deal with each other let along work together on selling the house.

    I feel that the main reason why people hire realtors is setting the right price. (and the other is probably because in my state California we are so sue happy that people need an insurance by hiring the realtor) Sellers tend to view their home worth more than what the current market is willing to pay for it, especially they can’t accept that after all this work and etc., in a buyer’s market, they are not going to get what they want to make out of the sale, they are only going to get what the market is willing to pay for.

    I do work with FSBO sellers and investors who sell their listings on their own. They use discount broker to list the home on MLS for extra exposure, use the laywer to write all the legal stuff, and do all the marketing legwork themselves like open houses, flyers, etc. The marketing part can get tedious, you have to have patience for it. In the end they do save quite a bit of money, like $40,000 on commission for example with one of my FSBO clients.

    Personally I feel that it’s worth some time just to pay the realtor a small fee to ask for their opinion on pricing the home (or you can interview a bunch of realtors with no intention of actually hiring one to get a sense of where you should price your home at… not that I am encouraging that behavior), since most homes that fail to sell largely due to overpricing.

    Cheers,

    Cindy

  14. CK says:

    I don’t think Realtors will be going anywhere but I do think their fee structure will change. I see it akin to the old system of financial planning that was stock brokers on commission, now most people use someone who has flat fees. I think Realtors are headed to flat fees. Is it really 3 times the work to sell a 450K house then a 150K one? I think not.

  15. Marilyn says:

    In reply to the previous post: It can be that it could take 3x the work for the $450,000 sale because if that is the “high end” or “slow segment” of that particular market, it may take a lot longer to sell, therefore requiring a lot more work.

    Please note that Realtors show houses constantly most of which they do not sell, and receive NO compensation nor fee for this. Perhaps it will change that when the Realtor shows or accompanies, he/she will be PAID for the time rendered, in the same way that everyone else is.

    Also, they would be PAID when called upon for price opinions- which are now given as a courtesy (even to FSBOS)- and take long hours to write up, not including meetings with the sellers and research at the town .

    In my experience with ‘discount brokers’, they can be depended upon to do ZERO work because they can have the expectation of earning the minimum or less. In a shared transaction, I did 100% of the work because the discount listing broker did NOTHING. The payout was substandard. The discounter eventually went out of business.

  16. Foobarista says:

    In my area, where prices start around $350K for 1 bedroom condos and go up, real-estate agents rarely can command 6%. Sometimes, they do 4% (1% for the listing side and 3% for the buy-side), or simple flat-fee arrangements. It’s hard to argue that the agents are doing work worth $30K when selling a 2 bedroom condo for $500K to a couple of engineers from Google after listing it for two weeks.

  17. fcc says:

    If you really do your homework, you’ll be able to find a realtor with a decent rate. I’ve learned my lesson from going solo. It takes too much time and effort to advertise, plan open houses, etc, especially in a bad market.

  18. Jonathan says:

    I think real estate agents can and do provide a service that is valuable.

    Is it worth 3-6% of the home price? Probably not. I’m getting half of my buyer’s agent’s 3%, and I think it’s a fair arrangement.

  19. Amy says:

    Guys: I am a Realtor, and you’d better believe I earn every CENT of my commission.
    Consider a recent, fairly common experience I just had: I take a listing at 3%. Let’s say I do a CMA and list the house at $169,000.00. The average days on market in my segment are 94. I decide when I go in that the homeowner needs to declutter and paint the entire interior of the home. I pick out the paint color and arrange for the painters at no extra charge. I place a couple of ads in the paper, I have a few open houses- find buyers, negotiate the sales price of the home, the home is inspected- I negotiate what will be fixed and what won’t- possibly find people to fix what is broken….shepard the entire process through to closing- make sure all documents are where they should be at the closing table- and all the while looking out for my clients’ best interests.

    And as for the comment above about “watching a few shows on HGTV”- if everyone could do it- they would!

    So the house sells.
    The entire commission then is $5070.00. My brokerage takes 20% off the top- something most people forget- so that leaves $4056.00. I then have to take out an additional 20% to give to Uncle Sam, which leaves $3244.80. If you do the math, you’ll realize that for the amount of time spent selling this house, I am making a little over $4 a day- and this is just if the house SELLS within 94 days. Maybe some of you are low-maintenance, and with perfect houses (right!) but most people truly do need expert assistance.

    Try thinking outside of YOUR home and consider what someone like myself runs across as a PROFESSIONAL. It’s a lot tougher than it looks, folks!

  20. Christine says:

    Any jerk who is desperate to save a buck on agent fees is the kind of bottom-feeder that is likely to withhold the fact that his plumbing is 70 years old and keep backing up once a month. He won’t tell you, Mr Buyer, that the roof leaks every year… and so on.

    The idiot buyer, who works without an agent, doesn’t know to get a roof inspection, or to get a plumbing inspection and wouldn’t have know that they can ask for repairs or credit before closing escrow. He may also be leading the seller on for months, when he really never got qualified by a lender in the first place!!

    The agents are there to keep their principles HONEST!

    • Jim says:

      I don’t know if that’s entirely accurate because a lender will require that you get an home inspection and an appraisal before they’ll underwrite the loan. The part about asking for repairs and credit before closing escrow might be accurate, but someone who is that proactive probably is aware of those things if they’re price conscious.

  21. dusty says:

    We live in the age of information. I relay don’t see a use for realtors. Save the money for you and your kids and not the realtors. Think of it this way. Do you think its fair to hand over a commission that’s about the price of a car for about 1 months or les of actual work. Most Americans cant afford a car after a full years work.When these realtors say they work hard showing your house its actually the internet working hard for them. Their schooling is about the equivalent of buying a couple of books for you and me. Dont let them hustle you into thinking its a full time job that only a rocket scientist can do.


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