The Superfluousness of Realtors

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.”

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.

*This article appeared in the November, 2010 issue of Kellogg Insight.