The Superfluousness of Realtors
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Marketing Economics Apr 6, 2015

The Super­flu­ous­ness of Realtors

Homes sold through Real­tors do not gar­ner a price pre­mi­um over ones sold by owners.

Based on the research of

Igal Hendel

Aviv Nevo

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 FSBO​Madi​son​.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.

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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 FSBO​Madi​son​.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 FSBO​Madi​son​.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 FSBO​Madi​son​.com were more like­ly to be able to com­mand a high­er price for their homes. Once the fact that FSBO​Madi​son​.com users were a spe­cial breed is tak­en into account, the pre­mi­um accord­ed by FSBO​Madi​son​.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 FSBO​Madi​son​.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.

Those who sell their own homes are prob­a­bly bet­ter at bar­gain­ing. They would get a high­er price even if they used a Realtor.”

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 FSBO​Madi​son​.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.

Featured Faculty

Aviv Nevo

Member of the Department of Marketing from 2008-2016 and Department of Economics (Weinberg) from 2004-2016

About the Writer

Christopher Mims is a freelance writer based in Gainesville, Florida.

About the Research

Hendel, Igal, Aviv Nevo, and François Ortalo-Magné . 2009. The Relative Performance of Real Estate Marketing Platforms: MLS versus FSBOMadison.com. American Economic Review, December, 99(5): 1878–98. [Published version]

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