8 ms·

And there's more. Whereas most professionals work on a flat rate by the job or by the hour, real estate agents work on a percentage, which is especially shady

by imglorp 10y ago

And there's more. Whereas most professionals work on a flat rate by the job or by the hour, real estate agents work on a percentage, which is especially shady because it takes about the same work regardless of the value of the property. So it works out to be more of a "piece of the action" like extorting, or gate keeping, than a service. There's other barriers to non-agents playing as well. For example, registering on the MLS has to be done by an agent. There are services that list for you, but they're agents. Bloody hell, it's just a database entry. I'm not saying the agents don't perform a valuable service--it's nice to have sometimes--but the system should be more open and the pay scheme more fair.

rayiner 10y ago
There is nothing wrong with being compensated proportionally to the value of a deal. A real-estate agent who sells a $10 million property more quickly has created more value for her customer than one who sells a $1 million property more quickly.
- akiselev 10y ago
  Yeah except the same real estate agent will try to push you to sell that property for $9 million, against your interest, if they think that the extra commission on that $1 million is not worth their effort for several extra months or years, often using manipulative tactics. This is a very perverse incentive and should be replaced with regular time based billing, perhaps with bonuses for certain milestones based on the final sale price of the property, especially given the information assymetry between realtors and owners. Until realtors have a legal duty to their clients, like lawyers or doctors, predatory behavior in the industry will remain.
  - cwilkes 10y ago
    so if the agent is more incentivized to sell at $9m and make guaranteed money rather than $10m and making a little more at the risk of losing the deal, but it gains you ~$1m in income in selling it, doesn't that mean the agent should get a higher percentage of the sale? I can see this going either way where the seller is annoyed the you are making a lot more money for not that much more work or that the seller realizes that if he can make an extra $900k by paying someone $100k it would be worth a 10% commission.
    - akiselev 10y ago
      Who said anything about losing the deal? It just takes longer to sell the house when the seller is looking for a better deal. Studies have shown that when a realtor sells their own home, they have better returns and keep the property on the market longer because of information asymmetry [1][2][3] while also displaying the opposite behavior when they sell their own property in competition with their own clients, which is in and of itself a huge conflict of interest [4]. It's not about annoyance. If the realtor gets more money for the client they deserve more money themselves. Before that sale takes place, however, the commission creates a perverse incentive which combines with information asymmetry, resulting in shady behavior. If realtors were bound by law, like other professions or fiduciaries are, this wouldn't be a problem. [1] http://www.mitpressjournals.org/doi/abs/10.1162/rest.90.4.599 http://www.mitpressjournals.org/doi/abs/10.1162/rest.90.4.59... [2] http://www.sciencedirect.com/science/article/pii/105113779290012F http://www.sciencedirect.com/science/article/pii/10511377929... [3] http://www.sciencedirect.com/science/article/pii/S0304405X05000218 http://www.sciencedirect.com/science/article/pii/S0304405X05... [4] http://link.springer.com/article/10.1007%2Fs11146-015-9543-y http://link.springer.com/article/10.1007%2Fs11146-015-9543-y
- rgbrgb 10y ago
  Your grandparent is talking about buy-side agents though -- as a buyer-only brokerage, our experience is that high priced transactions are usually easier to deal with because finances are more buttoned up and the deal is less emotional. The thing that is genuinely harder and more expensive with the higher priced sales is customer acquisition. At Open Listings we started with a flat-fee model but quickly realized that we were excluding lower priced transactions and not able to make the margins work for acquiring buyers at the higher end. Instead, we now refund 50% of the commission, so while it's not as good a deal for the uber rich, we think we're able to grow faster with more marketing dollars in the system. A deal is only good if people know about it and we've been able to refund a ton of money back to buyers this way. When we've reached a critical mass my hunch is that CAC will drop and we'll be able to drastically lower our commission or go back to working for a flat fee that's more reflective of the costs to do the transaction.
- barrkel 10y ago
  Being compensated proportional to value created is a not a free-market position. It may be philosophically justified, but in a free market, the value created has no bearing in the price of the service: just supply and demand. Talking about value created sounds quite odd when taken out of a business relationship. E.g. how much should cleaners be paid, given that without them properties could degrade into public health hazards? The "value created" model of a fair wage gets short shrift.
- SilasX 10y ago
  That's just not true; it's a variant of thinking that "Janitors at a $10B market cap company should make 10x more than those at a $1B company". Just because they were attached to a more valuable project doesn't mean that their specific value contribution was greater. In the case of the janitor, we can clearly see why it's wrong: if you pay 10x much, your applicant pool will be flooded, and you will not be able to sell the resultant product[1] for more than you paid. Likewise, when a $10 million property is sold, more value is created than with a $1M. But it doesn't mean the 10x difference was due to the agent; usually, the same price can be achieved without paying 10x as much, but various factors keep the market out of equilibrium. [1] You have to be careful in defining the relevant market here. In this case, the "buyer" is the worker, who pays in the size of the "compensating differential" they accept. (You will have to pay a lot to get employees at disgusting, unmaintained office.) You know that you're paying too much for the janitor when their cost is higher than the induced reduction in compensating differential. Edit: To be sure, REAs for big properties do legitimately contribute more value because of all the other ways that they can eke out a higher sales price, and janitors at prestigious offices can contribute more value than those at Walmart stores; it's just that the value contribution is not, as you implied, and was being contested by the GP, proportional to the value of the attached capital.
  - rayiner 10y ago
    > But it doesn't mean the 10x difference was due to the agent The value added by the real estate agent is not selling the property, but selling it quickly at the highest possible price. The opportunity cost to the seller of a $10 million property sitting on the market an extra month is 10x higher than for a $1 million property. So it's not unreasonable to pay the agent more. It's certainly not "shady." Of course, if you think you can sell the property in the same time frame with a less-qualified agent, nothing is stopping you from negotiating a lower percentage fee. > usually, the same price can be achieved without paying 10x as much, but various factors keep the market out of equilibrium. Those being? The real estate industry is incredibly competitive, especially now with Redfin, etc.
    - SilasX 10y ago
      >The value added by the real estate agent is not selling the property, but selling it quickly at the highest possible price. No one's disputing that they added more value, only that it shouldn't be directly proportional to the property. (See the "edit" remark.) >Those being? The real estate industry is incredibly competitive, especially now with Redfin, etc. I don't have insider knowledge, but "inertia" is a big one in real estate -- no one wants to be the one that starts doing things differently. And I don't think that counts as "competitive"; in a competitive industry, you can't rest on your laurels, but the top home REAs basically live off the monopoly returns from having already sold properties, whether or not they actually pass rigorous tests of their value contribution. >Of course, if you think you can sell the property in the same time frame with a less-qualified agent, nothing is stopping you from negotiating a lower percentage fee. It's not like everyone wanted to invest in every venture that ever proposed a better way of doing things, or that all value opportunities are immediately obvious to everyone and they come beating down your door to take advantage of them, even and especially when there are numerous st(ake|ock)holders with veto power. Edit: Toned down.
em3rgent0rdr 10y ago
My understanding from a friend that works in the real estate business in US, is that especially in the post-crash world, there are so many complex laws that require a certain amount of specific education, simply to legally engage in a trade. Basically it is a scam.
- brbsix 10y ago
  It has to be this. Otherwise newcomers would come in and compete the shit out of them. I can think of few other scenarios that would result in such a racket.

by imglorp 10y ago

rayiner 10y ago

There is nothing wrong with being compensated proportionally to the value of a deal. A real-estate agent who sells a $10 million property more quickly has created more value for her customer than one who sells a $1 million property more quickly.

akiselev 10y ago
Yeah except the same real estate agent will try to push you to sell that property for $9 million, against your interest, if they think that the extra commission on that $1 million is not worth their effort for several extra months or years, often using manipulative tactics. This is a very perverse incentive and should be replaced with regular time based billing, perhaps with bonuses for certain milestones based on the final sale price of the property, especially given the information assymetry between realtors and owners. Until realtors have a legal duty to their clients, like lawyers or doctors, predatory behavior in the industry will remain.
- cwilkes 10y ago
  so if the agent is more incentivized to sell at $9m and make guaranteed money rather than $10m and making a little more at the risk of losing the deal, but it gains you ~$1m in income in selling it, doesn't that mean the agent should get a higher percentage of the sale? I can see this going either way where the seller is annoyed the you are making a lot more money for not that much more work or that the seller realizes that if he can make an extra $900k by paying someone $100k it would be worth a 10% commission.
  - akiselev 10y ago
    Who said anything about losing the deal? It just takes longer to sell the house when the seller is looking for a better deal. Studies have shown that when a realtor sells their own home, they have better returns and keep the property on the market longer because of information asymmetry [1][2][3] while also displaying the opposite behavior when they sell their own property in competition with their own clients, which is in and of itself a huge conflict of interest [4]. It's not about annoyance. If the realtor gets more money for the client they deserve more money themselves. Before that sale takes place, however, the commission creates a perverse incentive which combines with information asymmetry, resulting in shady behavior. If realtors were bound by law, like other professions or fiduciaries are, this wouldn't be a problem. [1] http://www.mitpressjournals.org/doi/abs/10.1162/rest.90.4.599 http://www.mitpressjournals.org/doi/abs/10.1162/rest.90.4.59... [2] http://www.sciencedirect.com/science/article/pii/105113779290012F http://www.sciencedirect.com/science/article/pii/10511377929... [3] http://www.sciencedirect.com/science/article/pii/S0304405X05000218 http://www.sciencedirect.com/science/article/pii/S0304405X05... [4] http://link.springer.com/article/10.1007%2Fs11146-015-9543-y http://link.springer.com/article/10.1007%2Fs11146-015-9543-y
rgbrgb 10y ago
Your grandparent is talking about buy-side agents though -- as a buyer-only brokerage, our experience is that high priced transactions are usually easier to deal with because finances are more buttoned up and the deal is less emotional. The thing that is genuinely harder and more expensive with the higher priced sales is customer acquisition. At Open Listings we started with a flat-fee model but quickly realized that we were excluding lower priced transactions and not able to make the margins work for acquiring buyers at the higher end. Instead, we now refund 50% of the commission, so while it's not as good a deal for the uber rich, we think we're able to grow faster with more marketing dollars in the system. A deal is only good if people know about it and we've been able to refund a ton of money back to buyers this way. When we've reached a critical mass my hunch is that CAC will drop and we'll be able to drastically lower our commission or go back to working for a flat fee that's more reflective of the costs to do the transaction.
barrkel 10y ago
Being compensated proportional to value created is a not a free-market position. It may be philosophically justified, but in a free market, the value created has no bearing in the price of the service: just supply and demand. Talking about value created sounds quite odd when taken out of a business relationship. E.g. how much should cleaners be paid, given that without them properties could degrade into public health hazards? The "value created" model of a fair wage gets short shrift.
SilasX 10y ago
That's just not true; it's a variant of thinking that "Janitors at a $10B market cap company should make 10x more than those at a $1B company". Just because they were attached to a more valuable project doesn't mean that their specific value contribution was greater. In the case of the janitor, we can clearly see why it's wrong: if you pay 10x much, your applicant pool will be flooded, and you will not be able to sell the resultant product[1] for more than you paid. Likewise, when a $10 million property is sold, more value is created than with a $1M. But it doesn't mean the 10x difference was due to the agent; usually, the same price can be achieved without paying 10x as much, but various factors keep the market out of equilibrium. [1] You have to be careful in defining the relevant market here. In this case, the "buyer" is the worker, who pays in the size of the "compensating differential" they accept. (You will have to pay a lot to get employees at disgusting, unmaintained office.) You know that you're paying too much for the janitor when their cost is higher than the induced reduction in compensating differential. Edit: To be sure, REAs for big properties do legitimately contribute more value because of all the other ways that they can eke out a higher sales price, and janitors at prestigious offices can contribute more value than those at Walmart stores; it's just that the value contribution is not, as you implied, and was being contested by the GP, proportional to the value of the attached capital.
- rayiner 10y ago
  > But it doesn't mean the 10x difference was due to the agent The value added by the real estate agent is not selling the property, but selling it quickly at the highest possible price. The opportunity cost to the seller of a $10 million property sitting on the market an extra month is 10x higher than for a $1 million property. So it's not unreasonable to pay the agent more. It's certainly not "shady." Of course, if you think you can sell the property in the same time frame with a less-qualified agent, nothing is stopping you from negotiating a lower percentage fee. > usually, the same price can be achieved without paying 10x as much, but various factors keep the market out of equilibrium. Those being? The real estate industry is incredibly competitive, especially now with Redfin, etc.
  - SilasX 10y ago
    >The value added by the real estate agent is not selling the property, but selling it quickly at the highest possible price. No one's disputing that they added more value, only that it shouldn't be directly proportional to the property. (See the "edit" remark.) >Those being? The real estate industry is incredibly competitive, especially now with Redfin, etc. I don't have insider knowledge, but "inertia" is a big one in real estate -- no one wants to be the one that starts doing things differently. And I don't think that counts as "competitive"; in a competitive industry, you can't rest on your laurels, but the top home REAs basically live off the monopoly returns from having already sold properties, whether or not they actually pass rigorous tests of their value contribution. >Of course, if you think you can sell the property in the same time frame with a less-qualified agent, nothing is stopping you from negotiating a lower percentage fee. It's not like everyone wanted to invest in every venture that ever proposed a better way of doing things, or that all value opportunities are immediately obvious to everyone and they come beating down your door to take advantage of them, even and especially when there are numerous st(ake|ock)holders with veto power. Edit: Toned down.

em3rgent0rdr 10y ago

My understanding from a friend that works in the real estate business in US, is that especially in the post-crash world, there are so many complex laws that require a certain amount of specific education, simply to legally engage in a trade. Basically it is a scam.

brbsix 10y ago
It has to be this. Otherwise newcomers would come in and compete the shit out of them. I can think of few other scenarios that would result in such a racket.