It\'s the %, not the 6

A friend of mine is looking to sell his pricey condo, and is sick about the 6% cut which real estate agents demand. The nonintuitive thing (unless you are an economist) is that the real problem is not the 6, it is the %. Steve Levitt described this and produced some empirical evidence in Freakonomics, but it's such a cute little lesson in incentives that it's worth a recap.

The value a house will sell for is confined to a fairly narrow range. Therefore the realtor's commission doesn't vary much based on his effort. Say a house may sell for $1M to $1.1M. His commission varies from $60K to $66K based on his efforts. That extra $6K is much less than the $60K he'd get by just selling the house quickly and finding another client. This is true because of the range of prices, not because of the size of the %age - it's just as true at 1% or 12% as 6%.

A straight %age is OK for a normal salesman because the company wants him to sell the maximum volume of products - its OK to encourage churn. But you want your realtor to maximize the selling price of your house, which requires a very different incentive scheme. Your needs would be better served by paying, say, an hourly rate plus some high percentage (like 25%) of sales price in excess of "expected" price, which you could get an assessor to calculate for you. Alternately, you could have real estate agents bid by offering the highest target price.

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Patri, ... But you want your

Patri,

... But you want your realtor to maximize the selling price of your house, which requires a very different incentive scheme....

But this isn't necessarily true. You might want the highest selling price within the constraint that it be sold within a week. Or that the agent not take excessive risks of losing an interested buyer with just an adequate offer.

Regards, Don

(1) Tell your friend to try

(1) Tell your friend to try ziprealty.com . It's an internet thing: they don't advertise and don't have local offices - the agents work from home, cars, and coffeeshops - so they can easily offer discounts that undercut the going rate, whatever it is where you are. 4.5% or 4% is still a percentage, but it's a smaller percentage. Which is nice.

(2) Most realtors will try to match any other realtor's price rather than lose the sale, so if you like some other guy better than the zip guy, you can easily talk down the price. "Gee, I like you, but Joe over there is offering to do it for less..."

(I'm just a happy customer - I used this guy last year to sell my house in Mountain View.)

Incidentally, your friend

Incidentally, your friend should feel free to negotiate and write in any wacky commission structure he likes in the little "this is how much I will pay the realtor" field. There's nothing that says it has to be a fixed percentage. Though note that the typical 6% goes half to the seller's agent and half to the buyer's agent and if you make the buyer's side too wierd or skimpy you may get fewer buyers showing up.

Nice idea, though caveats

Nice idea, though caveats and questions abound. For instance, it create the incentive for realtors to make understated appraisals that the vendors would use to set the base price. In a proper moral world that would in turn create added reason for people to shop around as they should so that competition would make appraisals more realistic (backed up by Codes of Ethics, etc), but I fear that the more likely response in our world is for further regulation of the real-estate trade.

JJM

I think the indignation is

I think the indignation is in large part to the increading realization that r.e. brokerage is a guild stricture with no true price competition. It is, for the most part, "6% or sell it yourself."

There is, in my opinion, an intrinsic capitalist streak to most people, even if government policies don't reflect it. We expect, as a matter of instinct, to see people competing. When we don't see it, we are confused and demand an explanation.

My mother-in-law is a

My mother-in-law is a realtor in Southern California, and she is forced to negotiate commission all the time. It's not so much of a problem on the little sub-$500k houses, but when someone is selling their million-dollar home (which in todays market, could be a 1-story 3bdr that's less than 2000 sq ft), they start shopping around for agents who will drop their rate. On those homes, they'll often find themselves in the 1.5-2% range (down from 3%, not 6%, because that 6% is split between the buyer's and seller's agents).

What you will find often, and should look for when buying a house, is that your realtor shows you everything, and doesn't try too hard to steer you to houses they have the listing on. If you buy a house your realtor is also listing, they'll get that 6%, instead of only 3%. There's a big incentive for them to sell you a house you don't really like if they can get both their seller and buyer agent commission in one transaction.

My inituition tells me that

My inituition tells me that most people would pay a premium to have their property sell faster before they'd pay one to have it sell slightly above the "expected" price. Say the expected sale price is $200K. The present value of money being what it is, wouldn't you prefer, say, $195K in your pocket today, versus waiting and hoping for >$200K? Especially for those people who want (need) to re-invest their equity quickly. (Assuming a positive equity situation, that is. In a negative equity case, maybe not).

If Patri's talking about

If Patri's talking about Paul Phillips, this is a $2.5M condo in Las Vegas...

Much comes down to the

Much comes down to the marketability of your home. If you live in a high-demand area, your home will sell fast regardless of who your agent is.

What some have done in my area when agents don't seem to want to reduce commissions is put up a For Sale by Owner sign, after which it is likely you will be approached by an agent willing to deal.

In theory, having an agent help should protect both seller and buyer, but so many agents seem to understand little about various problems and in the end want simply turn over the house ASAP.

I got my agent down to

I got my agent down to around 4% a few years back. They will negotiate. This was a regular broker and not some internet thingy.