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Questionable Real Estate Broker Practices

PinkieAndBrainSome questionable real estate practices are being exposed by the information now widely available on the Internet.

More reason than ever to work with someone you can trust, and to investigate alternative brokerage models such as flat fee listings.

One study  found that real estate agents got better prices for their own homes than for their clients' homes, on the order of 3.7 percent. The reason is that real estate agents don't have an incentive to push for a few thousand dollars more for their clients' homes since six percent , the typical commission, of that extra amount isn't all that much. (see details in next section below)

Then another study comparing homes sold through the Multiple Listing Service which could only be accessed by agents found that homes didn't sell for any more when they had representation. The best thing that the study's authors could say about realtors was that they "can save sellers time and generally help through a stressful and maybe difficult period."

Another study by B. Douglas Bernheim and Jonathan Meer of Stanford University looked at six services, typically bundled, that real estate brokers offer and tried figure out if the typical commission was worth it.

The six services they identified:

  1. Preparing homes for sales, circulating flyers, placing advertisements, holding open houses, and recommending the house to buyers
  2. Assisting with negotiations
  3. Matching buyers and sellers
  4. Providing access to the Multiple Listing Service
  5. Providing market information and recommendations on the asking price
  6. Assisting with paperwork and legal documentation

How much do these cost on their own? Access to MLS can be had for about $500, market information from professional appraisals usually costs a few hundred dollars, and legal fees cost about $700. So, half of the services real estate agents provide cost about $1,500. That would suggest that the first three services must be very valuable or are sometimes overpriced.

University of Chicago study found that real estate agents got better prices for their own homes than for their clients' homes
by Steven D. Levitt, University of Chicago and American Bar Foundation and Chad Syverson, University of Chicago and NBER

Agents are often better informed than the clients who hire them and may exploit this informational advantage. Real-estate agents, who know much more about the housing market than the typical homeowner, are one example. Because real estate agents receive only a small share of the incremental profit when a house sells for a higher value, there is an incentive for them to convince their clients to sell their houses too cheaply and too quickly.

We tested these predictions by comparing home sales in which real estate agents are hired by others to sell a home to instances in which a real estate agent sells his or her own home.

Consistent with the theory, we find homes owned by real estate agents sell for about 3.7 percent more than other houses and stay on the market about 9.5 days longer.

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