Freaky explanation for broker effort

How much work is too much work for a real estate agent? Stephen J. Dubner and Steven D. Levitt tackled the question in their new bestselling book Freakonomics: A Rogue Economist Explores the Hidden Side of Everything (256 pages; William Morrow). Agents might not like the answer.

Levitt, a University of Chicago economist, and Dubner, a New York Times contributor, posited this scenario: “A recent set of data covering the sale of nearly 100,000 houses in suburban Chicago shows that more than 3,000 of those homes were owned by agents themselves.” From there, the authors extrapolated the obvious question–what prices were the agents getting for their own homes and what prices were they getting on behalf of their clients?

Controlling for several variables, including location, age and quality of the house, the authors answered the question.

“It turns out that a real estate agent keeps her own home on the market an average of ten days longer and sells it for an extra 3-plus percent, or $10,000 on a $300,000 house,” Levitt and Dubner write. “When she sells her own house, an agent holds out for the best offer; when she sells yours, she pushes you to take the first decent offer that comes along.”

The authors traced this motivation to commissions. A 6-percent broker commission on a purchase is split between the seller’s agent and the buyer’s agent. Then, the agent kicks back half of that take to his or her agency. That means an agent keeps only 1.5 percent of the purchase.

“So on the sale of your $300,000 house, [the agent’s] personal take of the $18,000 commission is $4,500,” according to Freakonomics. “[But] what if she could have sold it for $310,000? After the commission, that puts an additional $9,400 in your pocket. But the agent’s additional share her personal 1.5 percent share of the extra $10,000 is a mere $150.”

Perhaps, then, the authors concluded, a broker may work hard – but not too hard – on an unsuspecting client’s behalf.