Posted
Nov 2010
The Superfluousness of Realtors
Homes sold through Realtors don’t garner a price premium over ones sold by owners
Based on the research of Igal Hendel, Aviv Nevo And François Ortalo-Magné
It’s a straightforward question asked by nearly all sellers of homes: Is it worth paying a 6 percent commission to a Realtor to sell this house? In other words, will a Realtor be able to command a price greater than 106 percent of the price an owner could get selling the house himself or herself?
If you live in Madison, Wisconsin and quite possibly other towns, the answer to that question is no. In Madison, which has an active for-sale-by-owner website called FSBOMadison.com, sellers with a little patience sold their homes for higher prices than those who sold via a Realtor.
That’s the key finding of a paper by Igal Hendel, a professor of economics at Northwestern University, Aviv Nevo, a professor of marketing at the Kellogg School of Management and a professor of economics at Northwestern, and François Ortalo-Magné, a professor of real estate at the University of Wisconsin School of Business. Their research spans the years 1998 to 2004, and its conclusions up-end the received wisdom passed on by real estate agents themselves, whose trade groups have in the past argued that agents’ commissions are justified by their ability to achieve a higher sale price.
“Our key finding is that Realtors do not offset the cost of their commission; they do not get you a higher price,” says Nevo. “Your cost for the Realtor is your full commission.”
Realtors do not offset the cost of their commission.
The study compared sales via the Multiple Listing Service (MLS), used by Realtors, to those via FSBOMadison.com, used by home owners, where a listing costs $150. With full access to data from both platforms, Nevo and his colleagues found that their raw data confirmed that owner sellers achieved higher prices for their homes. The average premium was 11 percent, or $14,800. That’s on top of the funds that sellers who used Realtors lost in the form of a commission. After accounting for the increase in home prices and market share for FSBO over the period encompassed by their data, the researchers found that the premium decreased to 4 percent, or $3,000, a value that remains statistically significant.
Patience Is Key
Nevo chalks up this premium to the self-selecting nature of homeowners who were willing to sell their homes themselves. “Those who sell their own homes are probably better at bargaining,” says Nevo. “They would get a higher price even if they used a Realtor. In fact, that’s part of what we find.”
In a variety of ways, Nevo and his colleagues controlled for the self-selecting nature of those who were bold enough to sell their homes themselves. One of the ways they controlled for the difference between seller types exploited the fact that some home sellers show up in the data twice—once when selling their home via a Realtor, and another time when selling a home themselves. Sellers who used FSBOMadison.com to sell a second home after they sold their first home via a Realtor were notably different from homeowners who only sold their homes through a Realtor. Specifically, they tended to get a higher than expected price when they sold their first home via a Realtor. This suggests that they were special in some way—more confident or more patient, perhaps—and that these traits would allow them to get a higher price for their home no matter what means they were using to sell it. It further suggests that sellers who used FSBOMadison.com were more likely to be able to command a higher price for their homes. Once the fact that FSBOMadison.com users were a special breed is taken into account, the premium accorded by FSBOMadison.com is not statistically significant.
“One idea is that people who use this for-sale-by-owner platform are the ones who are more patient,” says Nevo.
Patience is a requirement for owner-sellers because the one advantage Realtors offer over FSBOMadison.com is that they sell homes in less time. This and the convenience offered by a Realtor are, according to this study, the only advantages for which homeowners are paying with their 6 percent commission.
Whether or not this finding generalizes to the rest of the country is unknown. The researchers involved do have anecdotal evidence that, says Nevo, “the Madison market is not as unique as you might think,” but nothing rigorous that could be published.
Also unknown is whether or not these results apply to the current housing market, which has been deflating for some time. The time period studied, which begins in 1998, includes an era before the housing market took off, suggesting that the effect is not dependent on rapidly rising house prices.
While Nevo and his colleagues studied home prices from the perspective of sellers, their results are also relevant to buyers. Their work suggests that buyers who want to save money on a home might actually be better off going to a Realtor because those selling through a Realtor are likely to be less patient and / or less confident in their ability to negotiate the price of a home.
“I think there was a perception by the general public, including us before we wrote this article, that if you buy from an owner, you get better deal,” says Nevo. “It’s possible, in that case, that buyers had their guard down a bit. Which is also another explanation for why owners were getting higher prices.” In addition, there is selection on the buyer’s side of the transaction: Those with more time to look around were buying on MLS, not from owners.
Different Platforms for Different People
The researchers also attempted to tease out the effects of a for-sale-by-owner listing service on the overall efficiency of the real estate market in Madison. They found that FSBOMadison.com catered to a different set of buyers and sellers than Realtors and the MLS listings.
“Different people want different things; therefore, FSBOMadison is a good thing because it gives you more variety in the market,” says Nevo.
In the long run, he doesn’t see for-sale-by-owner sites replacing the MLS listings; rather, the two will co-exist, each serving a slightly different set of needs.
13 Comments
Nov 4 2010
This research is interesting but rather incomplete, and the conclusions aren’t adequately supported. What gets a home sold is the right marketing that includes such things as presentation, staging, and promotion. A homeowenr who thinks about those things (along with realistic comps) can succeed, but that is someone who is engaged and realistic rather than merely stubborn…
RE agents are NOT all the same. An agent who just snaps a few pics and throws up an MLS entry would not be worth the ‘cost’, but and agent who creates a “marketing plan” can easily earn their comission. {Look at the show “Selling New York” for examples…}.
In today’s buyers market, confidence and negotiating skills are meaningless unless you can first successfuilly market your property…
Nov 5 2010
Is there more information available to support a marketing plan being the critical factor? I have concerns that using New York as the base case example may be incorrect. Open to hear more, but curious where you are coming from with this comment (i.e., personal real estate experience, etc). Here is why I am a little skeptical of the value add of marketing.
Real estate is technically not a competitive market. Organizations work arduously to ensure 6% of commission stays the same despite significant evidence that it shouldn’t in a competitive market (i.e., growth over the past several decades). This seems to previously been accomplished by riders of state legislation to enforce “full service” laws and “no rebate” laws. Luckily, the FTC has made some progress in this area over the last 3-5 years.
Given this and the inhibited growth of other consumer options (i.e., redfin), I haven’t seen real estate agents adding value rather than the organization of real estate agents inhibiting value opportunities for consumers.
Nov 5 2010
Josh,
I’m a developer, and have experience with buying and selling. And, no, I have no reason to puff up anyone in the realty biz.
First, I brought up New York just as examples of what marekting CAN entail, but that’s certainly not definitive…
Second, the RE commission is negotiable. Always has been. 6% is the most common, but it is NOT fixed there.
Third, it’s not just about maximizing sale price, but also how quickly your propety sells. This article talks about sellers being patient, but that is somehwat naive. I see big differences between “sellers markets” and “buyers markets” with respect to how well DIY-ers do at selling their properties. In today’s buyers market (especially with the economy so depressed) you have to be blessed if you think you have the time to be ‘patient’ as a seller. If not, then you have to pull out all the stops and market your property to get people to view it and get offers, and THEN you can employ your negotiating skills…
Nov 8 2010
I was wondering if we’d see more or fewer FSBO signs in a down market than we did on the upside. I rarely see a FSBO sign anymore. Although sellers need every edge in a down market, that’s still somewhat surprising. Paying 6% is easier to accept when you’re sitting on a 30% gain than when you’re already eating a 20% loss. In some cases the commission could be the difference between a normal sale and a short ssale.
Nov 22 2010
Are they actually saving 6%? Is this study suggesting these FSBO’s found the buyer themselves? There’s always a buyer agent involved too, which will bring the supposedly 6% down to half, if not less. Another biassed study.
Nov 22 2010
Why would it be biased? Read the summary carefully: they are saving more than 6%: the premium for selling FSBO, after the authors correct for house characteristics, is 4% on the sale price. That means that once you net out the sales commission, FBSO prices are nearly 10% higher, on average, than MLS prices. There still might be characteristics of the listed house that are not observable in the data, but as the authors point out, the sellers themselves might be different. The finding that sellers that command a higher price when selling FSBO also commanded a higher price when they sold with a Realtor on MLS in a first sale is interesting, to say the least.
Nov 22 2010
I have the utmost respect for Kellogg’s school, but as an MBA myself I have to challenge the contents of this article. Looking deeper, I hope that you will not see that this research was commissioned by FSBOMadison.com. Tthere are so many holes in this research it is rendered nearly irrelevant.
Here’s a recent account from another article:
“Pam Lindauer of Dodgeville said she listed her mother’s house with FSBOMadison in November. She had open houses every Saturday and had a lot of people look at the East Side home, but no buyers. After six months, she decided to list the home with Badger MLS, a brokerage started in January by former legislator Bill Lorge.
“I liked (FSBOMadison),” Lindauer said. “It seems like a good company, but I’m not so sure you’re getting the visibility you need.”
Also, did it mention how much the sellers paid in marketing? Did it mention how much the carrying costs were for taking longer to sell the homes? Do we see the listing price to selling price ratio? My guess is that a professional is a better choice than DIY. Of course, you can take out your own appendix and defend yourself in court as well - of course we know what attorney says about those who do - he who defends himself in court has a fool for a client. Wonder if FSBOMadison.com uses an attorney when they go to court? Just curious. :) Tongue-in-cheek, I have no qualms with FSBOMadison.
As far as the rise or fall of commission percentage, it is not the percentage that moves but the value of homes. A 25% decrease in value is a 25% decrease in commission - when was the last time your boss approached you to say: “sorry son, we’re cutting your pay by 25% and the phone bill, car expense, paper costs, and other costs of doing business are going to stay the same.”
Lastly, at a national level, it has been proven that selling a home with a professional earns the seller more money, in less time, and with less cost than selling it on their own.
Michael
P.S. Interesting article. Glad it was brought to my attention.
Nov 22 2010
This period represented an aberration in homes sales prices over the past 50 years.
1998 to 2004 represented a wild run up in prices in most markets. Anyone could sell anything because everyone expected that houses would always increase in value and were therefore investments (vs. shelter and a stable place to raise a family).
While this study is perhaps an accurate snapshot of a period in time in a single market, it should not be considered predictive of future performance.
Nov 22 2010
It is difficult to understand how the authors came to a conclusion like this when the subject properties were not the same. Is it not more likely that the properties sold by owner were priced lower from the start?
Nov 23 2010
@Michael Maher: The authors do mention the wait to sell and the issue of visibility (size of network). Not liking the findings is not a good enough argument to dismiss them. What is the citation for the study at the national level you mention? Another study, by Bernheim and Meer, found results that complement those summarized in this article (http://www-siepr.stanford.edu/workp/swp07001.pdf). And there a study by Levitt and Syverson (http://pricetheory.uchicago.edu/levitt/Papers/market distortion.pdf) that finds evidence that realtors have “an incentive for them to convince their clients to sell their houses too cheaply and too quickly.”
@Leslie Ebersole: The interesting finding in the paper is not the price run up. It is the premium to FSBOMadison sales. If anything, professionals should be in a better position to capitalize on a price run up than amateurs. Of course, even the authors would like more years of data to look at the cyclical pattern of the price differential across the two platforms.
@Brad Andersen: The authors do account for property characteristics and the FSBO sales still come ahead, sold at a higher price.
Nov 23 2010
@Patricia Ledesma, thank you for defending the results per your position at Kellogg. I appreciate the dialogue. First, I never said I disliked the results. But I must suggest that disliking the results is no reason to dismiss the report, but liking the results is no reason to defend the research. There are many national level reports on how a professional real estate agent gets more money in less time with less hassle. Plus, having sold over 1200 homes in the last 11 years, I’ve experienced first-hand the affects of a superior marketing plan, full-time effort, contract knowledge, and problem-solving experience. A question that you can answer due to your position: who paid for this research? Was it grant money, private money (FSBOMadison), or unsupported?
I’m guessing you have a background in economics so I’m assuming that you know this study is much like taking a sampling from the ocean and saying that the ocean has too much lead in it - because the sample you took had lead in it. There’s a fallacy of generalization continues with the title “The Superfluousness of Realtors” - the title of this should be “Madison Wisconsin Sellers with Patience and Time Could Get More Money Doing it Themselves”. But of course, that title wouldn’t be catchy or controversial (and certainly wouldn’t have gotten my attention). However, it would not have been sensationalized and it would have been honest. I could go on, I care, but I started this yesterday and now it is today - so I’ve gone on too long. I appreciate the research, hate the title, love people.
Take care,
Michael
P.S. Please feel free to check out my top-selling book (7L) The Seven Levels of Communication: Go from Relationships to Referrals (Amazon, B&N, etc.). Doesn’t have any FSBOs in it, but does lay out a great plan for business owners to have a business that not only feeds their family, but also feeds their soul.
Nov 29 2010
@Michael: I don’t “like” the results, in the sense that I don’t care whether the results are in one or the other direction. I have used the services of a real estate agent and will do so again, cognizant that there is a prize for convenience. The citations of the studies you mentioned would be greatly appreciated—I’m sure other readers wonder about those, too.
The study was funded by two small research centers, the Center for the Study of Industrial Organization (http://www.wcas.northwestern.edu/csio/) and the Guthrie Center for Real Estate Research (http://www.kellogg.northwestern.edu/academic/realestate/research.htm). The funding consisted of purchasing the data.
The titles are supposed to garner attention (mission accomplished). The study focuses on Madison, but as I mentioned in my previous comment, there is similar evidence from the Stanford area in the Bernheim and Meer paper.
Dec 6 2010
I think this is a pretty good broad stroke of the brush on the industry. I have to agree with this article.
I completely disagree with the “marketing aspect” of the comments in this thread. Look, 9/10 people looking for a home already know what they want. You dont go shopping for a home the same way you do a car.
In buying a home, one will not get upgraded into a 5 bedroom home from a 3 bedroom and so on. Additionally, the marketing (especially in todays market, and in NORMAL RE markets) is worthless if you do not have a qualified buyer.
At the end of the day…...we now see RE “agents” turning from selling homes to now leasing apartments and brokering them…....they really do not add much value other than a glorified assistant.
Just look at the daunting comparison between the “everyone hop on the “agent” bandwagon” - to today…..everyone hoping on the “Recruiter” band wagon…..very similar concept…....do not add value (only very few and on rare occasion)