Lynne and I are selling our home and are about to select an agent. As I see it, the current commission pay structure is piecewise linear in sale price: 4% up to $400k 2% above $400k is common.
But really it’s a flat fee $16,000 plus a 2% commission! How so? With out house it’s virtually impossible it will seek for less than $600,000 k but on a good day could be 750k or even 800k. Note the miniscule incentive pay: a minuscule bonus, 2% for anything over 400k . EG even if they get an extra $100k for a house they only take $2k!! and for an extra 10k at the hard bargaining end they get only $200!!
SO the usual economists’ answer is – don’t expect them to expend much effort at the hard bargaining end – or as the Consumer article on real estate agent’s said, referring to Levitt , agents in the US a get about 4% more on average and search longer (9 days or so more on the market) when selling their own home compared to selling someone else’s.
SO Lynne and I decided to suggest a contract where the agent’s risk share – i.e. 10% commission for anything above a threshold X (X is around our joint expectation of the selling price of our house) with a lower fixed fee component (actually has a stop loss built in ). So….we shall see. Will this help us inceltivize and agent to get a higher price for us.
Interesting, when interviewing the agents I mentioned this low powered incentive problem. Two replied that it was intrinsic motivation , the reward of playing he game well, that motivated them and auctioneers, to achieve a high price. But th third agent had a bit of dynamic game theory insight – although she wouldn’t have seen it that way. Look she said, the reason I want to get $1million for your house is John, is that we distribute 1000 fliers in the local area afterwards telling all the residents in the bay that we got a great price for your house. That way I get more listings…and that’s where I earn my money. So, no reason to shirk in the one shot game because the repeated game (against different players) for her provides plenty of incentives. Notice the institutional mechanism there to facilitate the spread of public knowledge about sales prices.
My guess though is that post sale prices are NOT advertised unless they happen to be exceptionally good sales prices.