The Freakonomics of commission

In their fascinating book Freakonomics, (subtitled “The hidden side of everything”) Levitt and Dubner explore the issue of estate agents’ commissions.  They propose that one way of discovering whether an estate agent is doing their best for their client, is to measure the difference in the results achieved for their clients, and those of their own personal home sales.

The results were not particularly surprising, at least, not to me.  (Incidentally, the best property brochure I’ve ever seen was produced by an estate agent to sell his own house.) It turns out that an estate agent keeps their own home on the market an average of ten days longer, and sells it for an extra 3%.  (On a £500,000 home, that’s £15,000.)  The book goes on to explain, “when he sells his own house, an agent holds out for the best offer; when he sells yours, he pushes you to take the first decent offer to come along”.

The authors believe that the difference in the agent’s commission between an asking price offer, and one say, 10% below the asking price, is so little that they will recommend the offer is accepted.

Let’s look at some figures: assuming a sales commission of 1.5% on a house worth £500,000, the seller will pay the agency £7,500, about 5% of which will go to the sales negotiator, or £375.  If an offer is received of £450,000, the negotiator’s commission will plummet to £337.50.  So he stands to lose £37.50 against the seller’s loss of £50,000.  Now imagine that this particular house has been on the market for a few months, it’s two more weeks until payday, and his girlfriend’s birthday is looming.  What is he going to do?

When the seller asks him for his advice on whether or not to take the offer, what is he going to say?  The negotiator would much prefer a certain £337.50 than a possible £375, and who can blame him?

Either we need better-trained, highly-motivated, somewhat altruistic negotiators with the integrity of a nun, or else we need a better system.  And for me, and all those sellers out there, it can’t come soon enough.

If you’d like my help to sell your home more effectively, please answer a few short questions here and if I think I can help you, I’ll be in touch.

Candle and books at the top of the table Estate agent commission

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