Thursday, August 10, 2017

Non-Standard Real Estate Commissions

The relationship between home sellers and their realtors represents a classic principal/agent problem. Realtors are engaged in many activities related to selling the property such as photographing it, listing it, coordinating with home buyers' agents, holding open houses, and so on. Since realtors have traditionally earned a 6% commission on sales they have an incentive to engage in these costly activities. But realtors know much more about how the market is likely to shake out than do their clients. All else equal, they would recommend dropping the price so that the house will sell faster and without all that effort since 94% of the lower sales price is born by their clients. What happens when they bear the full 100%? Levitt and Syverson showed that when realtors sell their own homes, on average, they keep them on the market longer and sell them for higher prices.

So maybe a 6% commission is not enough to eliminate shirking. How do you provide stronger incentives without giving away too much? Alina Dizik at the WSJ reports that owners of high priced houses are getting creative.
[Mr. Mahller's] agent would earn a 2% commission, and the buyer's agent would get a 2.5% commission on the home's sale price. The sweetener: Mr. Mahller's agent also pocketed an extra 5% commission on the difference between the asking price of $2.7 million and the final sale price, which was $2.85 million.

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