High Real Estate Broker Commissions May Help Sellers

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A new study shows that real estate brokers who charge lower commissions are treated badly by other brokers in their industry. Brokers who get paid higher commissions sell homes at higher prices, as well as more quickly. In other words, it is often better to have a broker who charges a higher rate.

According to the study, “Conflicts of Interest and the Realtor Commission Puzzle” published by the National Bureau of Economic Research:

This paper documents uniformity in real estate commission rates across markets and time using a dataset on realtor commissions for 653,475 residential listings in eastern Massachusetts from 1998-2011. Newly established real estate brokerage offices charging low commissions grow more slowly than comparable entrants with higher commissions. Properties listed with lower commission rates experience less favorable transaction outcomes: they are 5% less likely to sell and take 12% longer to sell. These adverse outcomes reflect decreased willingness of buyers’ agents to intermediate low commission properties (steering) rather than heterogeneous seller preferences or reduced effort of listing agents. While all agents and offices prefer properties with high commissions, firms and agents with large market shares purchase a disproportionately small fraction of low commission properties. The negative outcomes for low commissions provide empirical support for regulatory concerns that steering reinforces the uniformity of commissions.

The information can be taken two ways. Brokers charge higher rates, which may increase what buyers pay and lower what sellers get. On the other hand, full-commission brokers do a better job of selling homes and selling them more quickly.

It is a hard trend to measure when it comes to seller advantages. Among the factors are the price of the home; what the seller paid for the property and, thus, what the profit is; whether sellers need to unload properties quickly; and ultimately whether comparable homes sell more quickly.

At first blush, an analysis shows that high-commission brokers hurt low-commission broker success, and low-commission brokers save sellers money. But the current system is in place until laws are changed, and that may take years, or it may never happen. For the time being, sellers who want any significant advantages in the market are often better off paying full rates.

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