Excerpt from:
Super Freakonomics

By Stephen D. Levitt and Stephen J. Dubner
Publisher: HarperCollins (2009)

Page 39:

The homes sold on FSBOMadison.com typically fetched about the same price as the homes sold by Realtors... (Another recent study, meanwhile, found that flat-fee real-estate agents, who typically charge about $500 to list a house, also get about the same price as full-fee Realtors.)

See full study here.

Excerpts from:

Freakonomics – A Rogue Economist Explores the Hidden Side of Everything

By Stephen D. Levitt and Stephen J. Dubner
Publisher: William Morrow (October 17, 2006)

The book is online at Google Book Search. To locate the excerpts below enter "commission" in the "Search in this book" box.

Pages 8-9:

Real-estate sales, however, are a matter of public record. And real-estate agents often do sell their own homes. A recent set of data covering the sale of nearly 100,000 houses in suburban Chicago shows that more than 3,000 of those houses were owned by the agents themselves.

Before plunging into the data, it helps to ask a question: what is the real-estate agent's incentive when she is selling her own home? Simple: to make the best deal possible. Presumably this is also your incentive when selling your own home. And so your incentive and the real-estate agent's incentive would seem to be nicely aligned. Her commission, after all, is based on the sale price.

But as incentives go, commissions are tricky. First of all, a 6 percent real-estate commission is typically split between the seller's agent and the buyer's. Each agent then kicks back half of her take to the agency. Which means that only 1.5 percent of the purchase price goes directly into your agent's pocket.

So on the sale of your $300,000 house, her personal take of the $18,000 commission is $4,500. Still not bad, you say. But what if the house was actually worth more than $300,000? What if, with a little more effort and patience and a few more newspaper ads, she could have sold it for $310,000? After the commission, that puts an additional $9,400 in your pocket. But the agent's additional share – her personal 1.5 percent of the extra $10,000 – is a mere $150. If you earn $9,400 while she earns only $150, maybe your incentives aren't aligned after all. (Especially when she's the one paying for the ads and doing all the work.) Is the agent willing to put out all that extra time, money, and energy for just $150?

There's one way to find out: measure the differences between sales data for houses that belong to real-estate agents themselves and the houses they sold on behalf of clients. Using the data from the sales of those 100,000 Chicago homes, and controlling for any number of variables – location, age and quality of the house, aesthetics and so on – it turns out that a real-estate agent keeps her own home on the market an average of ten days longer and sells it for an extra 3-plus percent, or $10,000 on a $300,000 house. When she sells her own house, an agent holds out for the best offer; when she sells yours, she pushes you to take the first decent offer that comes along. Like a stockbroker churning out commissions, she wants to make deals and make them fast. Why not? Her share of the better offer – $150 – is too puny an incentive to encourage her to do otherwise.

Pages 72-73:

Consider now another true story of a real-estate agent's information abuse. The tale involves K., a close friend of one of this book's authors. K. wanted to buy a house that was listed at $469,000. He was prepared to offer $450,000 but he first called the seller's agent and asked her to name the lowest price that she thought the homeowner might accept. The agent promptly scolded K. "You ought to be ashamed of yourself," she said. "That is clearly a violation of real estate ethics."

K. apologized. The conversation turned to other, more mundane issues. After ten minutes, as the conversation was ending, the agent told K., "Let me say one last thing. My client is willing to sell this house for a lot less than you might think."

Based on this conversation, K. then offered $425,000 for the house instead of the $450,000 he had planned to offer. In the end, the seller accepted $430,000. Thanks to his own agent's intervention, the seller lost at least $20,000. The agent, meanwhile, only lost $300 – a small price to pay to ensure that she would quickly and easily lock up the sale, which netted her a commission of $6,450.

So a big part of a real-estate agent's job, it would seem, is to persuade the homeowner to sell for less than he would like while at the same time letting potential buyers know that a house can be bought for less than its listing price. To be sure, there are more subtle means of doing so than coming right out and telling the buyer to bid low.

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