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The answer, I’m confident, will be less than 6 percent.
Arguably, the value of brokerage services has been dropping since NAR was founded in 1908. Just imagine how hard it would have been to buy or sell a house without an agent when buyers and sellers had no easy way to know which properties were available, which neighborhoods might be appealing, how much houses usually sold for or whether a place you saw advertised was something you’d actually be interested in.
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Since then, the MLS has made the market more transparent and efficient, and agents deserve credit for creating it. But the advent of automobiles made it easier for buyers to zip from open house to open house, and photographs enable them to rule out properties before visiting them — without needing an agent to help narrow their choices. And now the internet has changed the game entirely. Today, home buyers go online to see detailed photos, virtual tours and every home’s past sales history. The internet also instantly delivers other data that brokers might once have offered: neighborhood crime rates, schools, problem residents, coming local developments, what nearby houses have sold for.
This is not to say buyers’ agents are useless — they can let buyers into houses, help them fill out paperwork, make sure the termite inspection happens and hold people’s hands through the biggest transactions of their lives. But if I imagine how much I’d personally be willing to pay for these services, it’s somewhere between $500 and $2,000. Today, an agent who finds a buyer a $500,000 home typically collects many times that amount.
Sellers’ agents potentially add much more value than that through expert staging, price setting, marketing and negotiation. But that potential is not always realized.
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Many sellers find their brokers by getting recommendations from friends, which probably selects for amiability, rather than skill. Research suggests that brokers often underprice homes, either by mistake or because it’s in their interest to sell houses quickly and move on to the next deal instead of waiting for top dollar. When real estate agents sell their own homes, they take a few more days to sell, but for 3.7 percent more, a 2005 study from economists Steven D. Levitt and Chad Syverson found. According to a study from 2012, which looked at a market where the listing service was unbundled from other services such as marketing and negotiation, and many sellers didn’t use agents, adding a broker to the transaction reduced the selling price by 5.9 to 7.7 percent, suggesting that without the value of MLS access, those brokers were worse than useless.
These studies are a bit dated, and of course there’s a lot of variance in agent performance; the best might add value for their clients, and the worst might subtract it. If this settlement shakes the lower-performing agents out of the market, this could be good for customers and the better realtors — and maybe even justify some sizeable fees.
Still, it’s hard to believe that brokers have on average grown vastly more useful or skilled since then. Rather, the internet keeps giving sellers more data and better tools to perform the functions that brokers once did. So it’s probably still true that the greatest value most agents offer is access to the MLS and the buyers who come through it. And it is also undoubtedly true that this service could be provided for considerably less than 6 percent of the sale price of your home.
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How much do you value the services of a real estate agent?
This might be a question you’ve never bothered to ask. According to the National Association of Realtors (NAR), about 90 percent of buyers and sellers used an agent last year, and mostly, that decision was probably automatic. Sellers needed them to get their homes on the Multiple Listing Service (MLS), a database of properties for sale that brokerages operate jointly. And buyers — well, maybe they haven’t needed agents in these days of Zillow and Redfin, but why not use them? After all, it costs them nothing, because the seller pays the fee.
But this arrangement has long been riddled with conflicts of interest and opportunities for collusion — which is one reason that Americans have been paying some of the highest real estate commissions in the world, typically about 6 percent split between the buyer’s and seller’s agents. Eventually, this invited lawsuits, and last year a Missouri jury thwacked NAR with a $1.8 billion verdict. Last week, apparently fearing more and worse to come, NAR announced a $418 million settlement that theoretically could radically change the way this market operates — by making it easier for sellers to negotiate fees and forcing buyers’ agents to work for their own clients, rather than for the sellers.
I say “theoretically” because, although for decades regulators and courts have been cracking down on too-cozy arrangements between real estate agents, the agents, with the enterprising spirit for which American business is so justly famed, kept finding new ways to maintain high fees. This could happen again. Yet the changes are substantial enough that it seems possible that this settlement will fundamentally alter how things are done. In which case Americans will have to ask themselves something they should have asked decades ago: How much is a real estate agent worth to you?
The answer, I’m confident, will be less than 6 percent.
Arguably, the value of brokerage services has been dropping since NAR was founded in 1908. Just imagine how hard it would have been to buy or sell a house without an agent when buyers and sellers had no easy way to know which properties were available, which neighborhoods might be appealing, how much houses usually sold for or whether a place you saw advertised was something you’d actually be interested in.
Since then, the MLS has made the market more transparent and efficient, and agents deserve credit for creating it. But the advent of automobiles made it easier for buyers to zip from open house to open house, and photographs enable them to rule out properties before visiting them — without needing an agent to help narrow their choices. And now the internet has changed the game entirely. Today, home buyers go online to see detailed photos, virtual tours and every home’s past sales history. The internet also instantly delivers other data that brokers might once have offered: neighborhood crime rates, schools, problem residents, coming local developments, what nearby houses have sold for.
This is not to say buyers’ agents are useless — they can let buyers into houses, help them fill out paperwork, make sure the termite inspection happens and hold people’s hands through the biggest transactions of their lives. But if I imagine how much I’d personally be willing to pay for these services, it’s somewhere between $500 and $2,000. Today, an agent who finds a buyer a $500,000 home typically collects many times that amount.
Sellers’ agents potentially add much more value than that through expert staging, price setting, marketing and negotiation. But that potential is not always realized.
Many sellers find their brokers by getting recommendations from friends, which probably selects for amiability, rather than skill. Research suggests that brokers often underprice homes, either by mistake or because it’s in their interest to sell houses quickly and move on to the next deal instead of waiting for top dollar. When real estate agents sell their own homes, they take a few more days to sell, but for 3.7 percent more, a 2005 study from economists Steven D. Levitt and Chad Syverson found. According to a study from 2012, which looked at a market where the listing service was unbundled from other services such as marketing and negotiation, and many sellers didn’t use agents, adding a broker to the transaction reduced the selling price by 5.9 to 7.7 percent, suggesting that without the value of MLS access, those brokers were worse than useless.
These studies are a bit dated, and of course there’s a lot of variance in agent performance; the best might add value for their clients, and the worst might subtract it. If this settlement shakes the lower-performing agents out of the market, this could be good for customers and the better realtors — and maybe even justify some sizeable fees.
Still, it’s hard to believe that brokers have on average grown vastly more useful or skilled since then. Rather, the internet keeps giving sellers more data and better tools to perform the functions that brokers once did. So it’s probably still true that the greatest value most agents offer is access to the MLS and the buyers who come through it. And it is also undoubtedly true that this service could be provided for considerably less than 6 percent of the sale price of your home.
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