A Realtor and an Economist Walk into a Bar.
A Realtor walks into a bar and sits down. He turns to the gentleman to his right and strikes up a conversation. A few minutes into the conversation, the Realtor feels enough time has passed to start asking the questions that make the most out of a networking opportunity; “Where are you from?” “How long have you been there?” Success! The stranger informs the Realtor that he is getting ready to move and put the house on the market. “Fancy that, I’m actually a Realtor. I’d love to help you out.” The seller, who also happens to be an economist, decided to have some fun at the Realtor’s expense.
“My house is completely updated and upgraded, and I’m willing to price it right. How long do you think it would take to sell in this market? Neighboring property is consistently selling in under a week.”
“Yes, it will very likely sell in under a week in this market.”
“That’d be great. You know I read that agents spend between ten and fifteen hours on a property. Is that about right?”
“Yeah, that sounds about right, give our take a few hours.”
“So, what do you charge?”
“I charge the going rate, three percent to list.”
“Okay, so you’d take nine thousand?”
The Realtor does some quick mental math. Okay, nine grand is three percent of three hundred thousand. This guy’s house is worth about three hundred thousand. Awesome.
“Yes, that’s exactly right.” The Realtor says.
“And you’d be very happy with that?”
“Yes, of course.”
The Realtor gives him his business card while a batter on the TV mounted on the wall behind the bar hits another foul ball.
“So I live in the Hills off Sunset Road. Are you familiar with that neighborhood?”
The Realtor is confused. “Yes, those are high-end homes.”
“Yes, I should be able to clear about six hundred thousand for my home.”
“Oh, I’m confused because you said I’d take nine thousand, so I assumed you had a three hundred thousand dollar house.”
“I was asking if you’d take nine grand for ten to fifteen hours worth of work.”
“Oh, well no, if your house sells for six hundred thousand, I would get eighteen thousand.”
“Why should you get that?” The economist asks.
“Because I get three percent of the selling price.” The Realtor replies.
“But why should you get it. Before you knew the selling price, you were totally content to receive nine thousand for ten to fifteen hours’ worth of work, that’s about six hundred dollars an hour. Nothing but the selling price has changed and you want another six hundred dollars an hour, for what exactly? What specifically merits a whole nother nine grand?”
The Realtor is flustered and is getting a little annoyed.
“What’s fair is fair. That is the going rate. I charge three percent because I’m worth three percent and I don’t discount my commission.”
“How does saying what’s fair is fair, or that you don’t discount, in any way address my question? A minute ago you were willing to receive a lesser amount. It seems you want more money, just because. I also happen to know that properties in my neighborhood spend less days on market than the median priced property. So it will likely take less time and effort to sell my home. Why exactly should you get paid twice as much? The doors aren’t twice as hard to open, there isn’t twice the paperwork, there isn’t twice the marketing cost. I’ve seen your listings, you hire the same professional photographer everyone else does for two hundred dollars. Why should I double my payment if the effort and cost isn’t doubling? While we are on the topic, why is nine thousand even the right fee? At six hundred bucks an hour you’re making three times a cardiothoracic surgeon. For eighteen thousand I could hire a production studio, the vice president of Marketing for Apple, and an attorney with an MBA to sell the home, and I’d still have money left over. I have a PhD in economics, we’d be a dream team. You spent three months and three hundred bucks on your education.”
The Realtor had never heard any of this before. Most people try to negotiate six percent down to five percent, but they don’t question the percentage fee in its entirety. He leaned on his sales training and brought forward the luxury vehicle objection handler. “Um, because it’s a premium product. If you want a luxury vehicle you have to pay more.”
The economist stared back incredulously. “To use your analogy, if it takes ten hours to assemble a four cylinder engine, and thirty hours to assemble a twelve cylinder engine for a luxury car, you want to charge me for thirty hours when you only worked ten.”
The Realtor tried again. “If a Realtor is not willing to fight for their commission, imagine how quickly they will give up fighting to get you the best price negotiating on your behalf!”
The economist is even more bewildered than before. “Do you negotiate twice as hard for your clients selling five hundred thousand dollar homes than the ones selling two hundred fifty thousand dollar homes? What in the world are you talking about? You haven’t addressed why you should receive additional commission without additional effort.”
“I know what I’m worth. I work incredibly hard and bring a lot of experience and expertise to each transaction.” The Realtor says.
“That was beautiful.” The economist clapped twice. “I get you bring value to the table, but you still haven’t addressed the issue that you want to suddenly be paid twice as much for said value. You haven’t acknowledged or addressed how a higher priced property requires more of your value. Are the contracts of sale different or more complicated? No. What justifies the huge commission increase? Can you break it down for me?”
“It looks like we don’t see eye-to-eye.” The Realtor says.
“That’s one way of putting it. I think I will go ahead and hire a flat fee firm for five thousand dollars.”
“You pay for what you get, they are a discount broker.” The Realtor says.
“You’d accept five thousand dollars just so long as it was three percent of the selling price. Are you suddenly a discount agent if you take that commission? Do you not see that percentage fees are completely arbitrary? How can you be worth eighteen thousand and nine thousand simultaneously?”
The economist continued.
“Flat fee firms are full service, hire the same professional photographers you do, and are selling homes just as quickly and getting top dollar. It’s a seller’s market. Their work is identical to the work you do. What do you mean, you get what you pay for? I don’t think I’m getting what I pay for if I give you nine grand, let alone eighteen grand.”
The Realtor repeated himself again, “I know what I’m worth.” He stood up from his chair, plopped a ten on the counter and walked out. The bartender wiping the inside of a glass made eye contact with the economist and smiled.
“He didn’t have anything to say.” The bartender said.
“Percentage commissions are robbing people of their equity on a massive scale.” The economist said. “Homeowners spend about a hundred billion a year on commissions. Most of that amount is in excess of the actual economic value Realtors provide. It’s a financial tragedy.”
Academic papers:
1. A Critical Assessment of the Traditional Residential Real Estate Agent
2. Commissions and Social Waste in the Real Estate Industry
3. How Much Value do Real Estate Brokers Add? A Case Study
4. The Costs of Free Entry. An Empirical Study of Real Estate Agents in Greater Boston
5. The Impact of Commissions on Home Sales in Greater Boston
6. The Relative Performance of Real Estate Marketing Platforms
