The Fed's 2 Cents on 6 Percent Agents

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Yesterday, Housing Watch's Brett Widness and Ana Maria Sencovici went head-to-head in a debate about the value of the standard 6 percent commission for real estate agents (or 3-and-3 for the common situation in which both buyer and seller retain an agent, and the two split the commission).

Let's bring in a referee: economist Oz Shy, senior economist at the Federal Reserve Bank of Boston. In an analysis published this fall, he set out to calculate the magic number, the exact commission rate at which both seller and agent get the best possible outcome – for the seller, the highest sale price, and for the agent the top commission.

Shy confirms what many sellers already suspect about the 6 percent fee, which is that if the entire fee goes to the seller's agent, the seller is not getting the best possible value.
Why? Because to snag that commission, brokers have an incentive to push sellers to settle for a lower price for a faster sale.

"Brokers often have an incentive to "convince" sellers that waiting for a higher-paying buyer would be risky. Lower prices increase the probability of a sale and hence yield a faster sale. Faster sales often reduce brokers' costs by more than the extra commission they might receive from trying to sell at higher prices," Shy writes.

In Shy's analysis, the agent has a strong motive to close a sale quickly, and that motive sticks no matter what commission the seller pays the broker; raising the commission limits the pressure on the agents to reduce prices, but doesn't eliminate it. Shy finds that sellers actually end up with higher sales prices when they lower their commissions, because the agent has more of an incentive to hold out for a higher price. The trade-off is you may have to wait a while to make that sale.

And the ideal commission rate? It depends. Variables impacting the optimal commission include how much buyers are willing to pay in your market, how much the agent stands to lose if she has to wait to close a sale, and how long you're willing and able to wait. But 3 to 5 percent gets a decent mix of good price and quick sale in Shy's scenarios.

The Fed is not the only government authority to raise questions about the 6 percent standard. In 2007 Department of Justice and Federal Trade Commission issued a study asking whether consumers get the benefits of competition in the real estate industry, and it highlighted the 6 percent commission as an example of a practice that needs another look. "Some consumers of brokerage services," the report finds, "are not necessarily aware that commission rates are negotiable."
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