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The trouble is, your incentives are all wrong.

If the house would not sell at $900000, would sell in 15 months at $800000, or would sell in 3 months at $700000, or would sell in 2 weeks at $600000, what do you do?

You try to sell it for $600000. You tell the owner that that is what the home is worth, even if the owner is not in a hurry. Getting your share of the 6% (likely 1.5%) of $600000 in 2 weeks is better than any of the other alternatives FOR YOU.

A better way to align the incentives would be to give the seller's agent a percentage of the amount by which the sale price exceeds the price determined by an independent appraiser. The buyer's agent gets the opposite, getting paid only if the price is lower than the appraisal, and you don't get to be both agents at the same time.

You're not wrong about the incentives, but I think you miss a few things in practice:

1) If everyone else in the market is priced to move, and you aren't doing it, there is always going to be new housing stock that undercuts you. 2) A seller has to maintain insurance and the property, and typically maintains utilities (a house without water/electricity doesn't show as well). They sometimes have to pay a mortgage. And often people who are selling a house are also buying a house, and intend to use the proceeds from the sale to finance the down payment on their next house. Most people cannot treat the extra money from waiting on a better offer as 100% profit. 3) The primary purpose of an appraisal is to ensure that the underlying asset is sufficient collateral for the loan. If you manage to sell a house for significantly over the appraise value... guess what, the loan falls through.

This Freakonomics-style argument doesn't work. The only price that matters is the market clearing price. Appraisers don't know that more than anybody else. The only thing an independent appraiser would do is use (well-known) comps to anchor the price, which is not something a seller wants. Rather, a seller wants competition among buyers.

I used to think that real estate agents were a waste of time until I lived through several difficult transactions. Each real estate transaction involves negotiations for loans, inspection objections, and various legal details. For example, a good real estate agent will make sure the title commitment documents are in hand early enough that you have time to review them, because they often have a lot of mistakes. This can kill a closing and/or require post-transaction work to correct.

I bought a house in the middle of a flood (Boulder 2013). The inspection objection had already been negotiated before the flood occurred. Getting the deal done was a huge task, because the seller was lying about the house being affected by the flood. I still wanted the house, but I needed proper compensation for the remediation. My real estate agent did an amazing job of bringing the deal together by tossing in some money and getting the other broker and seller to contribute a bit.

I'm now living with the above real estate agent, and she's on the phone right now at 7:45p working on a deal. I have watched her pull together deals, and the important thing is that all her clients are happy. I have met many of them, and they are very grateful for her work. I know there are many other agents out there like her (maybe not quite as good :-).

You seem to have missed the point of the appraiser.

The market clearing price is not set in stone. It is determined partly by the actions of the agents.

The appraiser's estimate of the market clearing price would set a measuring point from which the agent's performance can be measured. Agents are then paid according to how their performance exceeds the expectation.

Without the appraiser's estimate, the performance of the agents can not be measured. There is no way to reward good performance or punish bad performance. The agents are simply collecting their cut of the transaction.

A bad measurement is worse than no measurement. The appraiser’s estimate may or may not (likely not in hot or cold markets) off a useful benchmark.

In this case, bad measurements are OK. They average out over time. If the bias is one way, then one type of agent (seller or buyer) gets a bit more pay than the other, but this is not a disaster and is compensated by agents competing to work on the higher-paying side of the transactions.

Seems to me that having the commission as a % of the sale price is not the right way to go. You lock in with an agent for 3 months and agree to pay them a set fee when they/you sell it. You should pay as a buyer for an agent to represent you. Currently, if I'm not mistaken, all most all agents get paid by the seller and, if you are a buyer, the agent has no legal responsibility to watch out for your interests.

The current situation exist due to a slow long-term evolution of events but seems like won't change any time soon. Sort of like how wage controls during WWII encouraged businesses to pay for your health care and it is not taxed, but you don't get that tax break when you pay for it yourself. An insane situation, but next to impossible to change.

You are free to get a buyers agent that does represent you. In that case, the buyer’s agent and seller’s agent split the cost.

I still don't understand this mechanism... the buying agent takes his fee as a percentage of the total house price? Doesn't this mean that both the selling and buying agents are incentivized to drive up the price?

In reality, neither is incentivized to drive up the price of the house. It’s all about selling fast.

Freakonomics talks about this all of the time.

http://freakonomics.com/2008/02/26/real-estate-agents-revisi...

A better link.

https://www.nachi.org/forum/f11/exerpt-freakonomics-book-reg...

The buyer always pays the cost of both the seller's and buyer's agent in the same way that people who rent apartments do pay property tax. That cost happens to be hidden in the sense that there is no specific charge that the buyer sees but the buyer is the one who ultimately pays it.

Well, in that case I would say "Not really then". Landlords generally don't run on a cost plus basis. They don't add up their costs add 10% and make that the rent come hell or high water. They charge as much as the can to achieve the desired rate of turn-over. If they are a person instead of a company, they may give tenets who have proven not to be a hassle and they have a personal relationship with a bit of a break on the rent.

In some markets, like the Bay area, rents are much less than the cost of owning the property, and in others, like Kent, Ohio, they are higher.

Plus: If there is a willing buyer for something you own at price X and then someone takes 6% of that when the seller pays, true the sell pays it all, but the buyer also pays it in getting less money.

There are ethical and practical reasons to avoid a system where buyers have a financial incentive to go without representation. In practice buyers without representation are unlikely to close, and sellers are unlikely to accept unrepresented sellers because the sellers agent would charge more money because. Neither the seller or the buy would save a substantial amount of money compared to the old system.

Yet somehow people still manage to buy and sell houses in the UK where buyers have no agent representing them. Buyers pay a fixed or hourly fee to a lawyer for conveyancing and sellers pay 1-1.5% to their listing agent. Overall costs seem to end up well under half that in the US (5-6% of sale price).

I do often shake my head at the ideas of "normal" that different countries have.

I'm from the UK, but in Finland these days, and the way that both of these countries work is very similar.

In America a lot of things are very odd with regard for property, even common things like tenants paying rent by posting/delivering cheques!

Yes. One needs to get rid of the idea in everyones head that one needs a buyer and sellers agent. This is a pure network effect that is keeping this over-priced service intact. Similar to the AMA's restriction on medical school licensing.

Expecting 3%/$30,000 k for being "someone that smoothes things out" on a sale of, let's say a $1M home in CA, is theft.

What if their knowledge of the market and negotiating helped you get an extra $60k in value on the sale of your home vs. selling it yourself?

Then it would make sense to have a model where the agent gets a very small percent up to a certain price, and a much larger percent above that threshold. Does this ever happen?

Someone is paying. If the agent charges $30k + extra $60k you're saying buyers should avoid RE listed properties and buy direct.

Given the amount of weird and unrealistic expectations of both buyers and sellers nonstop in a transaction " the one smoothing things out" can be translated to "the essential element to actually closing the deal". There is a reason why most FSBOs wind up with an agent. They fuck it up.

I would argue that the reason is because they're tired of being pestered by would-be listing agents. I have a property listed as FSBO for the last 4 weeks and so far I have received 67 calls from listing agents, all documented in a spreadsheet so I can block them via Google Voice.

Or it may be that buyer's agents actively steer their clients away from FSBO properties which one person revealed to me during a showing even though the listing states I'll pay 2.5% to the buyer. I requested and now have that in writing from this buyer in case I feel like filing a complaint. You should have seen the agent's face when I said my email was in the listing and she could ask me any questions directly if she liked. An agent mortified by the thought of direct communication between buyer and the person who knows the property best.

Actual potential buyers send emails. Agents seem to only communicate via phone, probably because they believe they can charm you.

Totally agree.

It's like saying if I trained hard enough I could be in the NFL. Well - "training hard enough" is actually hard to do.

I purchased a home recently and my buddy tried to sell his FSBO. I told him to use the same title company, because we had a painless closing. The title company told him that they do not do title work for FSBO's because "not enough of them actually disperse funds, so we don't get end up getting paid on the title searches and work we do before the closings. We prefer working with clients that have a much higher probability of closing".

That's a title companies perspective. They are getting paid either way and don't get paid more if it's with a real estate agent or FSBO. That's about as unbiased as you can get in that market, one would think.

It's not 3% for every price range. For example, $1 M price ranges pay way less.

You dont need to use a realtor, its a voluntary transaction. If you find the price too high dont use them.

That's the answer that's supposed to end this argument, but real estate business is a cabal: if I'm agent-less or use one of the "disruptor" services, like redfin or openlistings, agents of the other party will simply steer clear of the transactions. Some would even say that to my face.

But thats only valuable because they steer buyers as well, and if you want access to those buyers you need to cater to the agents that won their trust by educating, managing, etc.

I fail to see how they are overpaid. If someone sells 4 houses per year for 1M for 1.5% fee, that's only $60k per year. That sounds like a mediocre income in markets where houses even go for 1M.

I am using numbers for the Bay Area that I have heard of. Maybe other markets are different.

The going rate is 2.5% to both the selling agent and the buying agent, each.

Even if we ignore the expenses, that's only $100k/yr in an area where $117k/yr is below poverty line for 4 person family.

Where is your 4 homes per year stat coming from? It's extremely low.

Quick search on Zillow shows 12:

https://www.zillow.com/agent-resources/blog/commission-refer...

The key factor is that you don't have to sell houses where you yourself live.

All of the full time real estate agents I know sell WAY more than 4 hours per year.

It is an approximate number I have heard myself from agents directly.

What realtors are you using that only charge 1.5%? It was 3% each to the seller's and buyer's agent last time I moved.

They do end up not being too rich on an annual pay basis where I live because the number of realtors actively working adjusts to the volume and pricing.

A realtor's income might be 1.5% (or less) because they split the 3% commission with their brokerage house, and sometimes with supporting agents.

An average of 3 months to sell a single $1M house in the Bay Area? $60k sounds like it would translate to a pretty good hourly rate.

Better than $15/h minimum in some cities, but definitely not 'extremely overpaid'. Note the 60k is for a year, not a single house.

Not my point. How could anyone possibly spend 40 hours a week for 3 months to sell a single home at that price in that market? It's not a realistic characterization of the job.

You are not counting how many realtors there are, and how hard it is to get that listing.

A new agent might not get a listing in an entire first year. In places like SF, its all about how good you are about generating leads, the house sells itself.

It's more that they are collectively overpaid. As house prices rise the %-based commission causes new agents to flood the market, lowering the number of houses sold per agent. Agents then spend a lot of time acquiring clients in competition with each other.

If you think about what an efficient use of realtor labor would look like it would be ~2 houses a month or more with agents spending all their time on showings and contracts. In a market with $1M houses this would yield roughly 24M * 0.025 = $600K/yr and up.

Hence the market becomes flooded with people that would like to make $600K/yr on a educational investment period of 6 months or less (plus an apprenticeship-like paying job for a few years).

The industry is weird because the price of agent service is resistant to supply&demand forces for various reasons but the main reason is that it's impossible to know what the selling agent's contribution to the house price is, since you can't sell the same house twice under the same conditions.

In principle, a good agent can easily recoup their commission by adding a few percent to the house price, but in practice agents have a counter-incentive to this because the homeowner will never know what the added amount was and raising the house price a small amount adds less to the agent's bottom line than moving on to the next house more quickly. In most cases the agent is simply setting the price that will sell the house quickly for the local market. As a seller, you'd probably prefer to make an extra 20K on that 1M house by showing for a month instead of a week, but this makes the agent do 4x the showings to make 2% more commission.

Ironically, the buyers' mortgage lender will have an impartial professional estimate done after they've already agreed on a price with you. In a perfect world, the seller would get this estimate done up front and then the seller's agent would be be paid on a structure that incentivizes beating that estimate. But wait - if the mortgaged portion of the price is greater than the estimate then the buyer's lender will back out ($collateral < $loan). So if your market is mostly buyers doing 20% down then the price is soft-capped at no more than 125% of the estimate even for the best agents.

Quite the free market, eh?

Think about the amount of work that you would do to sell (ignoring buys) 4 houses.. At most 2 months of work for them.

What you said reminds me of what the piano guy told us when we asked him to bid out my wife's childhood piano for a full restoration. "If Pianos weren't sentimental, I'd be out of business." We could buy a decent babygrand or a really nice upright for the same price. But there's just something about having a home with furniture from your past in it.

When I sell my house, it'll be 100% with a realtor. Is it expensive? Yes. But my home is quite sentimental to me. I don't know enough to break down that barrier. I'd rather pay someone else to do it for me. I look at comparable homes in my area and I think, "my house is $50k better than that." But I honestly don't know. :)

Do realtors have any advantage when it comes to seeing the listing for properties before they are visible on the common real estate website (zillow et al)? I always assumed it was so, but I’d love to hear one way or another.

Usually they do; specifically the MLS has a listing type for before the house is on the market that only agents can see.

Every property we have ever purchased, except the first one, was not on the open market and the result of an agent/broker "knowing someone" that had what we wanted and managing to work out a deal for us.