How much value do real estate brokers add? Not much.

Posted by: Peter Coy on March 16, 2009

Fascinating study by Stanford University economists B. Douglas Bernheim and Jonathan Meer called “How Much Value Do Real Estate Brokers Add? A Case Study.” Bottom line: They don’t add a whole lot. “We find no evidence that the use of a broker leads to higher average selling prices, or that it significantly alters average initial asking prices. However, those who use brokers sell their houses more quickly,” the authors write.

The study was based on data pertaining to sales of faculty and staff homes on the Stanford campus over a 26-year period. “For the median home in our sample, a 6 percent sales commission totals $34,000, a steep price to pay for the value rendered,” the authors write.

The study closely resembles one in 2007 that covered brokers vs. FSBOs in Madison, Wis., another college town.

I called the National Association of Realtors for reaction and got these responses from Paul Bishop, the Realtors’ managing director of research:
—Time is money when it comes to selling a home. If it takes longer to sell a home yourself, it could mean making one, two, or three extra mortgage payments. (Fair point if you’re carrying two houses.)
—The Stanford campus may not be typical of the nation as a whole.
—The NAR’s own annual survey found that on a per-square-foot basis, FSBOs sold for $92, vs. $116 for sales by brokers. (Yes, but the Stanford profs point out that FSBO properties aren’t the same to start with—FSBO sellers tend to be older and less wealthy, for one thing.)

Over to you, dear readers ….

Reader Comments

Joe

March 16, 2009 08:56 PM

FSBO properties are marginalized by current market practices employed by RE agents so it is no surprise the sell more slowly and for less money.

Joe

March 16, 2009 08:57 PM

FSBO properties are marginalized by current market practices employed by RE agents so it is no surprise they are slower to sell and for less money.

real estate

March 17, 2009 04:46 AM

It is true that real estate brokers add great value.

SFLA Investments

March 17, 2009 08:54 AM

"Value" added by brokers can not be calculated using one simple formula in one specific niche of Real Estate transactions.

The value brought by hiring an agent can at times become immeasurable. Experience pays in this market (and really in any market). Knowing how to protect a buyer and/or seller is crucial. Understanding the ins and outs of a Purchase Contract can not only save money, but can protect your escrow deposits as well.

Can a FSBO sell on their own and get the same price an agent will bring? Probably... but can that same FSBO keep the transaction together and protect their interests during the sales process? Not as much as a licensed agent.

In these times we all want to "cut corners" to save money, but this is one moment in your life that cutting corners can cost thousands, sometimes tens of thousands.

In terms of Real Estate Investors, employing the right agent is your best source to acquiring high ROI properties in the right areas. Agents simply have more experience and information in their respective areas.

Value needs to be measured in experience gained as well as dollars "saved".

John D

March 18, 2009 10:05 AM

I wanted to sell my house and had an agent give us a comparative market value of $440,000 in 2005. My wife and I were disappointed the price was that low. We were thinking $475,000.00 We paid an appraisser to give us a price and he came up with $540,000. We put it on the market a few months later at $565,000.00 because the market was still going up the appraisser said. Every agent said it was overpriced and should be $550,000.00 but one. It sold the first week for the list price of $565K.

Gandalf

March 18, 2009 10:45 AM

The biggest bloodsuckers are Title Insurance Cos. What a scam.

Gandalf

March 18, 2009 10:45 AM

The biggest bloodsuckers are Title Insurance Cos. What a scam.

Robert

March 19, 2009 08:53 AM

“FSBO keep the transaction together and protect their interests during the sales process? Not as much as a licensed agent.”

And a real estate attorney will protect your interest, keep the transaction together, and provide representation without regard to commission..

Dave

March 19, 2009 06:16 PM

It could be argued quite strongly that the case study is inherently flawed. As I understand it (and I may be wrong), to purchase property on the Stanford campus, one must be "Stanford qualified" which means property can only be sold to Stanford employee's who are of a certain level.

The university already has a built in buyer pool (Stanford employees). The result is a limited number of qualified buyers for a limited number of campus homes. No wonder Broker's aren't perceived as adding significant value.

It would be interesting to see the data if Stanford allowed non "Stanford qualified" buyers to purchase homes on campus.

Paul

March 20, 2009 10:41 AM

But with real estate attorney you will not be able to close your transaction :-)

Jim

March 21, 2009 11:42 AM

The biggest thing a broker can do is keep negotiations at arms length. They can help with the flow of the transaction. The can help with finding the people that will provide all parts of the transaction. worth 6% no. I offer a no risk listing 4% if another brokerage sell the property. 3% if I sell it with a 1% rebate to the buyer. If you find the buyer I charge 1% and you want me to handle the transaction. If you find the buyer and want to do all the work i charge nothing.

jim canion

March 21, 2009 11:52 AM

This study is another in a long line of
cases showing how worhtless such self indulgences really are.The Stanford staff and profs. are not the average sellers and the Stanford campus is certainly not a fair sample both in size and home price. What a waste of
time and money to read something like
this.Professional help in almost any area is worthwhile. The quality and value depends on the person providing the help.

Carolyn

March 21, 2009 05:49 PM

A good agent with experience that works hard can 1) Provide invaluable advice on how to prepare your home for sale so that it will be attractive to buyers - don't underestimate the importance of this; 2) Expose your property to a larger number of potential buyers; 3) Provide invaluable guidance in the marketing & selling process, particularly in a difficult and changing market; 4) Make sure that a buyer that submits an offer is pre-qualified before you sign the contract and take your home off the market; 5) Use his/her experience in negotiating in your favor; 6) Hold the deal together and coordinate the mountain of details between contract to close; 7) More - that's just off the top of my head. Does everyone need an agent? Not if you have the time, knowledge and experience to do all of the above yourself, but most people don't.

bruce hahn

March 22, 2009 11:22 AM

The title is accurate as a generalization relative to typical "full service" (5-6%) commissions. However it is also a function of market conditions and the seller's (and buyer's) circumstances.
Now that the multiple listing services are now the Internet, most home buyers (90%) do most of their initial screening online. There's no longer any need to go to a real estate office to get access to database that previously was only accessible to real estate agents. Virtual house tours facilitate the process, and home buyers can do their own drive-bys in advance. The workload of real estate agents has been reduced substantially, so there's less justification for U.S. real estate commission rates that are about twice those in other developed countries.
Much of the remaining broker’s value lies in their ability to assist buyers and sellers in the negotiation process. However the value of that service has been undermined by recent state "dual agency" laws that allow the same real estate broker to represent both the home seller and buyer simultaneously. Under such circumstances the broker can't effectively help the seller negotiate the highest price while helping the buyer negotiate the lowest price.
However new real estate brokerage business models that allow home sellers and buyers to take advantage of Internet economies offer both savings and value. For example in many states "flat fee" real estate brokers will put a sellers home in the local multiple listing service (MLS) for a few hundred dollars. This provides instant exposure through hundreds of real estate broker websites and is a good value if the seller has the time and skills to conduct the other selling functions. Similarly some real estate brokers have recognized that buyers are doing more of the work, and offer commission rebates to those buyers. This also brings the value of the services closer in alignment to their real value.
Sadly many real estate broker organizations have passed state laws or regulations outlawing real estate commission rebates and/or flat fee listing arrangements. The Department of Justice and the FTC are opposing such anticompetitive laws.
This all said, an experienced real estate agent can offer real benefits to an inexperienced home buyer or seller who has neither the time nor sophistication to do most of the selling and buying functions without assistance. The caveat for those consumers is to select an experienced agent with outstanding references. The entry barriers for a real estate licenses are very low in many states - a GED and 30 hours of classroom time are all that's required. It would be a recipe for disaster for an unsophisticated home buyer or seller to pay a lot of money for the services of someone who they thought knew a lot about the process, but in reality had little more knowledge than those buyers or sellers could have picked up with a few weekends of self study.
Bruce Hahn
American Homeowners Foundation

Maggie

March 23, 2009 10:52 PM

What many people don't realize is the value that an experienced broker brings when things begin to unravel or when there are problems. Brokers get loans handled properly, make sure repairs are completed, interpret the market for the buyer or seller, advise on marketing & negotiations.

My agent set the price about $10,000 higher than I had planned, and sold it for full price in 5 days.

Martin Dayton

March 26, 2009 10:04 AM

Europe has long been considered a premier destination for culture, history, and excitement. Nowhere else in the world can one find such diverse offerings, such beautiful scenery, and so many things to do. Real estate and homes for sale in Europe are located in vastly different and diverse environments, ranging from forest to oceanfront and coastal to mountainous. We have started a website for people to sell and buy property without commision. Direct from seller to buyer. www.PropertyMarket.eu is where you should have a look. Wherever you go in Europe, you can find something that fits your needs and wants. The most famous destinations on the planet can be found on this continent, scattered across countries such as France, Britain, Germany, Italy, Hungary, Russia, Greece, Spain, Portugal, Switzerland, Belgium, Ireland, and the Netherlands.

gabriel Ferrari

March 26, 2009 05:54 PM

With online companies, like findbuyers.com, I could see why real estate brokers don't create real value. The company uses its database to find matches between what each buyer values in a property and what each seller has to offer. Then the buyer and seller can choose to transact directly or if needed hire an agent through the site. And while brokers need to be paid, using findbuyers.com is absolutely free.

Jim Casey

April 7, 2009 01:16 PM

I used a broker to sell my house and it worked better than selling myself, if the broker is good enough he will add value as mine did. But I was given some suggestions to clean, move and paint in some areas to make more space and make the house more appealing. I own property in the Caribbean too and homes there have kept their value better. I have a puerto plata lot and a Sosua beach villa for sale listed in the Dominican Republic at www.goldenkeymanagement.com, a local Dominican real estate broker that I trust. It takes effort but if you find a good broker that knows the area and the local market, you can definitely make more profits and sell sooner.

Broker Bob

June 18, 2009 02:27 AM

It's no wonder people don't understand the value of using a broker. Most comments are people pushing a product or idea. The value of a broker is two fold. Most people and I mean MOST PEOPLE are dual income families that don't have the time or expertise to handle the complexities of real estate LAW. That said, there are many less than qualified people in the industry looking for a quick buck. Just as there are many greedy sellers that don't realize that it's supply and demand that sets the selling price not what they want to get for their property. So Stanford university which churned out the "internet start-ups" which took all the venture capital only to go bust in the late 90's should evaluate the "value" they provide. With the price that Stanford charges for an education, I would charge 8% commission to deal with their pompous ignorance...

DMd

September 15, 2009 10:23 AM

Real estate agents actually add negative value to a house by inflating price to cover their commissions. My wife and I sold our last two houses on our own, saving about $25K in unnecessary commissions. In both cases, the sales process was simple: you do NOT need to be a lawyer to sell your home. Besides, anyone who's been through the sales process realizes that, even if you retain an agent, you still need to pay an attorney to ink the deal. Also, we were able to sell for significantly less than market (no agent overhead), greatly shortening the sales times.

Kathy Magliochetti

September 20, 2009 02:38 PM

RE: DMd Sept. 15 2009 comment
Wow DMd..how nice of you to pass that savings on to your buyer....and the advantage to you would be....? I would much rather hsve had my interests protected by a qualified real estate agent and let the buyer worry about themselves..but that's just me.

Carlos

January 21, 2010 03:45 PM

This study is dead on. Most realtors think they have value because went to a 4 week course and think they can now market and sell. The reality is over 90% of all sales come from MLS, realtors just list the house on MLS. Most try to control the sale when in fact it's just a mere function of supply and demand. If you're in an area where houses are selling high and competition is high....guess what, the houses sell for a high price. If you have a piece of crap, that realtor can do nothing to increase the value, especially when no one is knocking on the door.

tom

April 2, 2010 01:03 PM

I am a first time buyer. After initial discussions with some realtors, we decided that it wasn't worth paying 3% to use a "buyer's" realtor.

If the only value they add is finding me the right house, I can do that online. Then there is setting the price right. One can research the County appraisal district #s for 30 years and get a good estimate of fair value based on historical data.

Rest of the stuff, just pay an attorney if you are concerned about Real estate law.

Realtors are not worth 3% for the buyer's side. Might be worth considering a realtor if one is selling as it might involve more work. Though still not worth 3% of the value of the home price. I would negotiate a fixed price.

Thank you for your interest. This blog is no longer active.

 

About

BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

BW Mall - Sponsored Links

Buy a link now!