"Freakonomics" and real estate agents

Nick - I’m almost certain that the MLS monopoly on home listings will start to break down (or rather, continue to break down) over the coming 5-10 years, and there will be more competition in real estate sales. Not quite the equivalent of the breaking of the stock broker monopoly (guaranteed 1-2% commissions pre 1972, working down over the next 30 years to $8 commissions), but it will rock the business.

For those of you from other countries, how does the real estate broker biz differ in your countries (versus the U.S., where 90%+ of the market is on a flat 6% commission, which the seller’s agent usually splits with the buyer’s agent).

Google could roll in and completely destroy the MLS/agent monopoly if they gave it a bit of a push with marketing/PR. Buying/selling a home is as much data mining as it is falling in love with a particular place.

That’s just damn stupid, it’s like saying that you should do the lawyers job to make sure you get represented right in court.

If the person you hire isn’t doing a good enough job you didn’t do a good enough job looking for the right person to represent you.

Real estate agents aren’t like lawyers or accountants or others who provide services and are dependant on doing a good job to get repeat business. Their fees are set in stone and structured in such a way that they have a strong incentive to do a bad job. A buyer’s agent actually makes more money if they get you to close on a deal quickly and pay too much money.

Man that system sounds lousy… and I thought you guys had all the free market stuff going for you.

Yeah - to put in my two cents on the lawyer versus real estate agent thing.

Lawyers are predominantly paid by the hour*. They don’t generally have an incentive to act against their client’s interests to further their own interests. If they have to do 5 times as much work for a case, they’ll get paid 5 times as much.

Real estate agents make a fixed amount - almost the same regardless of how much work they put in. So their incentives are to do the minimal amount of work, and encourage clients to accept the first reasonable offer they get, to avoid having to do further work to earn their commission from that client.

Granted, not all real estate agents respond directly to that incentive. Many are likely quite ethical and will work hard for their client no matter what. But in general, when you are working with someone who’s economic interest are almost exactly opposite to your own, and a lot of money is at stake, you are well advised to be cautious and not trust everything they tell you implicitly [see Used Car Salesmen]

*Note, though, that some lawyers are paid on a flat contingency fee of 10-30% of the settlement value. Those lawyers in fact have exactly the same economic [mis]incentives as most real estate agents, and in fact, many of them ARE a bit unscupulous. My wife, who used to defend worker’s comp cases, said that the bad lawyers would routinely accept mediocre offers, just to clear the case and get their 10% quickly. Their clients did worse than self-represented clients, even BEFORE you factor in the 10% fee. (In Missouri, if you have a worker’s comp. claim, you can do it yourself, or hire a lawyer for a fee capped at 10%).

So, if I bring an unwinnable case to a lawyer, his clear financial incentive is to string me along, while I keep coughing up money. Sounds like his interests are perfectly aligned with mine.

In fact, it sounds like a lawyer’s best strategy in any case is to keep doing non-essential work, so that I keep paying him.

Real estate agents make a fixed amount - almost the same regardless of how much work they put in. So their incentives are to do the minimal amount of work, and encourage clients to accept the first reasonable offer they get, to avoid having to do further work to earn their commission from that client.

Real estate agents often get business through word-of-mouth. And the more your property is worth, the more likely you are to do some preliminary investigation. Sure, they can blow off one client because it’s only a hundred dollars. Then, when that client mentions to a friend that he feels the agent didn’t really go after the best deal, and the friend takes his million dollar house to another broker, the agent’s not looking so clever.

If you take the cynical view, nobody’s interests are aligned with yours, and you should do everything yourself. The builder gets paid the same whether he does a good job or a lousy job, provided he hides the defects well enough until you sign off–better build your own house. Your doctor’s incentive is to kick you out of his office quickly; he doesn’t get paid more if he has to spend extra time writing you a prescription–I hope you’ve gone to medical school. As discussed above, your lawyer’s incentive is to keep stonewalling while you pay him money–better study up on the law in your spare time. The babysitter gets paid the same whether she plays with the kids or sits them in front of the TV the whole day. And so on.

(Of course, what prevents this happening is that we don’t deal with these people in a vacuum–you check out the babysitter’s references, you talk to people who’ve used the builder, and so on. Just like you should with a real estate agent)


Not quite: when you are working with someone who knows something you don’t know you should think carefully about how their incentives differ from yours. The real estate agent knows stuff about the real estate market you don’t, and knows about her “effort” levels, broadly defined, but you don’t know. The dude you’re buying a car from knows more about the car than you do. Your mechanic knows things about how much your car needs repair that you don’t know. Your doctor knows things about the state of your health, and how interventions might change your health, that you don’t know.

Almost always, when you hire a person to do something for you such problems of asymmetric information'' arise. Economists call this the principal-agent problem.‘’ The depressing conclusion is that there generally isn’t a perfect solution. For example, the problem with your real estate agent is thta you would like her to exert $1 worth of effort if there is at least $1 of return coming from that effort. But in the contracts usually signed the agent might get one or two pennies out of an extra $1 in return, so she has incentive to not work hard enough to get that dollar. The only sort of contract which would induce the agent to provide the right amount of effort would be deals like: `the agent gets every penny of the sale price above $X dollars,’ but then of course you would see none of any additional sale price the agent is able to generate under such a contract. (In effect, you’d just be selling your house to your agent.)

I’m sure there are some around there. Many which claim to be “buyer agents” aren’t in fact “Execlusive Buyer’s Agents” but are dual licensed agents. Licensed to buy or sell real estate; and have clients that require both aspects. What a buyer really wants, imho, is an exclusive buyer agent. One’s that only job is to simply find properties for people. That’s they expertise - no distractions with trying to buy buyers for any properties!

How they get paid is the same as your standard Agent, yet as an Exclusive Buyer Broker they never take listings and never have a conflict of interest.

How I feel they work different then your standard dual agents which work with a franchise:
They tend to work with fewer clients and have more time to listens to clients…
A buyer broker is always listening, evaluating, negotiating and re-negotiating after the home inspection.
As an Exclusive Buyer Broker they want the best price and terms always!

Again since they are only looking to assist finding homes for people, and word of mouth is priceless, they are always looking to get their clients the best price possible… Not simply looking to turn a deal ASAP and getting that commission; because they have another 5-10 clients on their roster which they are looking for homes for (to buy OR sell!!!)

Yea I’m a big proponent of them.

In selling - I did a FSBO; you can now contact different companies that will assist you in listing your house; BY YOURSELF; on MLS by paying a flat fee. In addition they routed showings and schedulings to me as well. I only had to pay maybe around $500-$600. I still had to pay out 3% to the buyer’s agent, but that’s a hell of a lot better the dropping 6%!!

I wouldn’t necessarily go this route unless you know a lawyer that will be willing to take a bit of extra time going over all the paperwork. Else the broker on the other side of the transaction might take advantage of a “green” seller.

I bought a Condo that was FSBO and we didnt have an agent so the total fee’s paid came out to be like nothing. The owner contracted with an agent that charged I think it was 1% to do all the paperwork. Everything worked out great with that sale too.