Home Brokers & Agents Update on NBER's REALTOR Commission Study

Update on NBER's REALTOR Commission Study

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A few weeks ago, I put up a post about a working paper study from the National Bureau of Economic Research that researched the question of real estate commissions. The authors basically concluded that the reason why real estate commissions are so high is because buyer agents steer clients to properties that are paying higher cooperating commissions. If you haven’t read that post, go back and read it. It’s a fascinating study, and one that I’m not mathematically equipped to critique.

Now, a few days ago, when I was researching videos for the “Should Real Estate Marketing Change” post, I ran across a video that was really excellent in a lot of ways. But there was something contained in it that… well, take a look, after the jump.

Randy Ora’s Listing Presentation Video

This is the video I ran across.

(I tried to have it start right at the point, but if there’s technical flaw, go to 33:58.)

Now, this is a “live listing presentation” at a Tom Ferry conference. Just in case you’re not from the real estate industry, and have no idea who Tom Ferry is… well, he’s the #1 ranked real estate coach as per Swanepoel Power 200 (which I have something to do with…), and a major, major influencer, trainer, and coach of real estate agents across the country.

Randy Ora is more than a little qualified to speak on the topic. According to his bio on BHHS California:

Randy Ora heads one of the premiere real estate groups at Berkshire Hathaway HomeServices in Laguna Niguel, Orange County, California. For the past 17 consecutive years, The Ora Group has been recognized as one of the leading and top producing real estate teams in all of Orange County.

Randy Ora began his career in 1997 and sold a staggering 36 properties his first year in the business earning him “Rookie of the Year”. At this time the average Agent in Orange County sold just 4 homes a year so Randy obviously showed that he was going to be a top agent. Randy continued his impressive track record growing his business based on success with his clients and his culture of client care.

With career sales topping $400 Million and over 800 properties sold, Randy has earned the unique distinction of the only Realtor in South Orange County to be awarded the “Triple Legends Award” for the company for 17 consecutive years of impressive sales.

My friends from the Orange County area tell me that Randy Ora is indeed one of the highest producers in the business in their market.

So right at 34 minute mark or so, Randy starts to discuss the issue of commissions with the homeowners. This is a live listing presentation, so he’s actually trying to list their home.

The next 11 minutes or so of video is pure gold right on point of the NBER study.

The Randy Ora Commission Strategy

The basics are as follows:

  • Commission amount does incentivize buyer agents to bring (i.e., steer) their buyers to that home.
  • Doing a $10K price reduction is less effective for selling the home than is offering a 4.5% cooperating commission.
  • A lot of people use this incentive strategy right out of the box because they need to sell the home quickly.
  • The average agent in Orange County sells three homes a year. They’re not willing to take a hit on 1/3 of their annual income if they can avoid it.
  • Therefore, cooperating commissions should be high to incentivize agents to bring their buyers to that home.

Randy actually says this: “I’ve been around the water cooler in my office enough to know that some agents aren’t gonna show the 2.5% [listings], everybody is gonna show the 3%, and everybody is going to go out of their way to show the 3.5%.”

The husband actually asks Randy if he thought agents really wouldn’t show the 2.5% homes. His response is, “Could you afford to give up a third of your income with a lower price commission?”

Randy makes it clear that to be in the 2.5% stack is a “tough road”, while being in the 3.5% or higher stack is “the best”. At one point, he calls the lower-price stack “the kiss of death.” He then crumples up the listing with the 2.5% and says, “That’s what agents do.”

This live listing presentation is happening in front of hundreds, if not thousands, of real estate agents who are Tom Ferry coaching clients, or thinking about signing up with Tom Ferry’s admittedly excellent coaching program. The comments below the video, all from practicing Realtors, are glowing and positive.

The industry smells what Randy is cooking.  They completely understand his strategy, his points, his insights on this. And they love it and embrace it. After that presentation, and now that it’s on video, I have to imagine that hundreds or thousands of top producing agents have gone forth to have that exact commission strategy conversation with their clients.

Now Then…

In the comments to my original NBER post, many of you — the best informed real estate professionals in the industry — criticized the study on a lot of points. But the main criticisms were:

  • Correlation does not equal causation — just because higher-commission homes were more likely to sell and sell faster doesn’t mean that buyer agents were steering people away from them.
  • Higher commission homes are marketed better.

This video pretty much neutralizes both of those critiques.

Obviously, Randy Ora — and he says this directly — would spend the same amount of effort marketing this couple’s home whatever the commission. Even if they chose the 7.5% commission rate, Randy would only charge 3% and offer 4.5% to the buyer agent. He makes it patently clear that as the listing agent, he would do everything he can to market and promote their homes, even if they were to choose the lower commission route.

And of course, the entire “incentivize the buyer agent” strategy depends upon the effect of higher cooperating commission being causation, not merely correlation. I realize he’s probably being a bit dramatic, but if agents really do crumple up the listings with lower commissions, if being in the “below-average” commission bucket is the “kiss of death,” then that’s about as causative as causation can get.

So we arrive at a place where I can’t make sense of things.

Brokers and agents I respect, like my girl Linsey, say that the amount of cooperating commission makes absolutely no difference in whether they show a house or not. They’re working for the buyer, and genuinely want the buyer to find their perfect dream home, and get it. Even an extra 0.5% (which came to $5,000 for Randy and the husband in the video) is not a big deal, when the baseline 3% is $30K, or the lower 2.5% is $25K.

On the other hand, we have the NBER paper which does a whole lot of statistical analysis, and then we have a bona fide expert, who isn’t an academic egghead but a top producing live-in-the-flesh, walking-the-trenches Realtor, who plainly recommends bribing incentivizing buyer agents to bring their buyers to his clients’ homes. And the assembled audience of real estate agents clap and cheer.

What the hell is going on?

If you have a take on this, please comment, or email me privately. I’m really curious about how to think about this direct contradiction within the real estate industry.

-rsh

7 COMMENTS

  1. It seems commission based pay is problematic in any large industry. I remember retail brokers (those that served individual consumers) in the financial business saying they read the day’s bond inventory from right-to-left. Why? The commission the firm was paying the broker to sell the bond was on the right. That industry now works on a fee basis….. commission per transaction is dead.
    IMO, based on where we are in the real estate industry, developing a sales strategy based on commission splits is probably not a good use of time. That is if we believe the Internet and all its cool abilities will be an integral part of our industries’ future…..which I think is indisputable. I’ve been wrong many times before, but I’d bet five years from now no one will be talking about splitting commissions….we’ll see 🙂

  2. “Maam, the goin rate is 6% don’t ya know. That’s what everybody charges.” So which way to regulate? Gonna regulate those evil 7.5% commission rates, or gonna regulate the horror of price fixin! Dear Uncle can come up with something that puts a stop to both I’m sure, and then we will all be so happy in utopia. Puke 🙂

    • This video makes me ill. I would walk away from a sales pitch like this. This seems like a snake oil salesman. In today’s market, a buyer will know those 2 properties (at 2.5%) are listed and they may want to see those homes. An agent that wouldn’t show the homes (at 2.5%) should be brought before the Real Estate Commission. I never show a home based on commission. If a buyer wants a home, they want it. Ridiculous. Consumers, don’t listen to this crap..

  3. How little credit we give today’s buyers. You mean to tell me, that in today’s day in age, with all the technology that a buyer has at their finger tips, that the agent is still choosing which homes that buyer is going to be previewing? If a buyer wants to see a particular home and the agent doesn’t show it based upon their commission, that buyer will buy it through another agent. Consumers aren’t idiots. They will find a way and worse, in our litigious society, if they find out that you withheld a listing from them, they could possibly sue or at the very least, report you to your real estate commission. Plus, if an agent is only selling 3 homes a year like the gentleman in the video states, wouldn’t they be happy to just be selling something? Holy Crap!!! This is exactly why realtors are considered worse than used car salesmen. Our job is to work for the buyer.

  4. I had trouble stomaching this whole listing presentation. Randy talks of agents only selling 3 homes a year, but at the same time ignoring homes offering less than a 3 percent commission….. Let’s assume that agents are only selling his quoted 3 homes per year. Then we should also assume that those lower volume agents aren’t very busy. Any agent who is going to crumble up a 2.5% listing either isn’t very busy or very hungry, nor one that any buyer would knowingly hire. An agent who ignores listings at a lower commission is not looking out for the interest of the buyers.
    This ignoring properties argument although unethical, would have more teeth 5 years ago before the syndication of MLS listings all over the net.
    What is an agent to tell their buyer when the buyer saw a home on Zillow which is ignored due to a commission amount?
    Buyers could care less if the agent makes 1, 2, or 3%, they just want to buy the right home for themselves.

  5. I won’t bother repeating the obvious about the video or the live listing presentation because other brokers have already made most of the remarks I would have said.

    But I’ll mention a possible flaw in the commission report that fails to take into consideration factors that influence “4 sales per year” average agent production:

    – how many were part time vs full time agents
    – how many licensees during period studied
    – how much inventory was available to sell per agent in territories studied
    – what local economic factors existed during.period studied
    – what regulatory changes went into effect during period studied

    Tom Ferry is a master showman/motivator and he’s a master salesman in that he can exploit a vague market stastic to close hundreds of agents to hire his firm for real estate coaching.

    Seems all an agent would need to know on “how to close a prospect” for the commission they want to earn is to watch how he convinced them to hire him.

    That way you won’t need to lie about something as silly as “a higher commission split offered a selling broker is the only way to get them to show their buyers your home”

  6. NBER knows the truth: making the buyer pay for their own agent makes this problem go away. Unfortunately, making the buyer pay for their own agent will also make most real estate agents go away. What we know from places like Australia, where it is not customary for the seller to pay for the buyer’s agent, is that there are almost no buyer’s agents. Meaning when asked to pay for it, most buyers place the buyer’s agent’s value a zero dollars. And absent buyer steering, opps I mean incentivizing the buyer’s agent, there will be tremendous downward price pressure on listing agents with their dramatic oversupply. You can bet NAR will have their lobbiests fighting to the death on this one, because that’s what it is.

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