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What is the Value of a Real Estate Agent?

Every spring, the earth comes to life. The flowers start blooming. The trees grow buds. And the ‘For Sale’ signs spring from front yards all around the neighborhood.

And every year it gets me thinking about Lean and the real estate purchasing process. First of all, it is far, far, far too complicated. But that is a topic for a different day. The topic today is about value. It has always been interesting to me that there is a fairly standardized rate for commissions on the sale of a home.  I cannot fathom that every agent provides the same value. Why then should they each get the same pay? You would think that at some point, lesser agents would start trying to compete on price. I am surprised that this has never been looked at as collusion.

The biggest problem that I’ve heard-unconfirmed-is that agents are reluctant to show houses with lower commissions being offered to buyers’ agents. If true, this presents a significant conflict of interest. As I understand it, commissions are paid by the seller. A better system would be that the buyer pays his or her agent, and the seller pays his. That would eliminate any perception of conflict. It would also allow for more creative pricing arrangements between the buyer and his agent.

That leads to the second question. With the advent of internet listings, buyers presumably do more of the legwork than ever. When I bought my first condo years ago, my agent had to sift through listings and bring me a handful that we then had to visit to see. Now, I suspect most purchases are a matter of a buyer giving a list of houses that have been pre-screened to an agent. So, the question becomes what is the real value a buyer’s agent provides at that point. They may be able to point out a few things that are issues with a house, but the fact remains that it is their job to convince you to buy or they don’t get paid. And does that value change whether they are facilitating the purchase of a $300,000 home or a $600,000 one? Of course, a buyer’s agent can’t push a client too far into the wrong house, or their reputation will suffer. But their motivation is not entirely aligned with the purchaser. In fact, it is actually the opposite in one important aspect. The pay model rewards the buyer’s agent more if the home sells for more! That seems entirely backwards. You would think that bigger pay would come with helping the buyer find a deal.

As for the seller, the agent and the homeowner are more closely aligned, but there is the question of timing. A seller’s agent might prefer to have a quick sale, while a homeowner might want to hold out for an extra 10 or 20 thousand. For the homeowner it is a significant marginal increase. For the seller’s agent, not so much. The incremental pay that goes into a few extra months of work is a negative incentive. But at least in this case, the direction of the pricing is aligned, if not the weighting of the speed of a sale.

Any thoughts? How do you think real estate agents should be paid?

 

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