| Critique of Traditional Real Estate Brokerage | | | | internet and disaggregated real estate service |
| Compensation Model | | | | providers reveals a fundamental truth: for-sale |
| Given the apparent paradox between real world | | | | property listings information in and of itself has little |
| endurance and academic/political criticism the current | | | | economic value; access to information was used as |
| real estate brokerage compensation model, a review | | | | an inducement to enter into a formal agency |
| of recent literature on the topic provides a structure | | | | relationship, during which value added services were |
| for parsing out the relative merits of the current | | | | provided. It follows from this, that use of traditional |
| percentage-based split commission model as well | | | | brokerage service would remain steady and no |
| insights as to how it may evolve in the future. | | | | reduction in broker compensation would be seen |
| In their 2007 paper, "Is the Compensation Model for | | | | when such information is made freely available. And in |
| Real Estate Brokers Obsolete?" authors Miceli, Pancak | | | | fact, this has been the case, as is demonstrated in |
| and Sirmans (2007) argue the traditional | | | | the reduction in the rate of FISBO's seen since 1987 |
| percentage-based split commission model for brokers | | | | and persistence of brokerage commission rates over |
| has become obsolete, given contemporary legal | | | | the same period. "Between 1998 and 2005, the real |
| agency relationships and technology-driven | | | | median real estate broker commission per transaction |
| information availability. As a result, they conclude | | | | grew by 25.5%. However, commission rates remained |
| buyers and sellers experience substantial transactional | | | | relatively stable during that time irrespective of |
| inefficiencies during the two primary phases of the | | | | market conditions, home prices, or effort to sell a |
| real estate transaction, matching and bargaining. They | | | | home (US Government Accountability Office (GAO), |
| then proceeds to mathematically model the existing | | | | 2006)." |
| compensation model and identify alterations, which | | | | Perhaps the most instructive oversight in the Miceli et |
| would mitigate the inefficiencies he describes. Finally, | | | | al. (2007) argument is in their lack of treatment of |
| Miceli et al. (2007), proposes a list of policy actions, | | | | the true economic justification of the current |
| which if undertaken, could facilitate the emergence of | | | | compensation model, which is based on risk and |
| the compensation model they propose. This paper | | | | reward. Currently, in real estate brokerage, agents |
| reaches some useful conclusions in terms of policy | | | | and brokers assume 100% risk in the transaction |
| actions, however some of the assumptions upon | | | | purchase sale and sale process. They incur tangible |
| which the supporting argument is made, may neglect | | | | and intangible expenses throughout the entire |
| certain functional roles of real estate brokerage. In | | | | process without guarantee of payment. Buyers and |
| addition, the proposed the compensation model, while | | | | sellers on the other hand assume no risk and only |
| elegant, does not address the fundamental basis for | | | | make payment upon successful consummation of a |
| why real estate brokerage services, have, up until | | | | transaction. In this respect, the real estate brokerage |
| this point in time, been delivered wholesale. Never the | | | | model exhibits attributes of an insurance model, with |
| less, Miteceli at al. (2007) is an useful in formulating a | | | | wholesale payment for services rendered upon |
| vision of how compensation in real estate brokerage | | | | successful transactions required to compensate for |
| may evolve. | | | | expected losses on unsuccessful transactions. In |
| The main assumption Miceli et al. (2007) make upon | | | | order to justify his compensation model, Miceli et al. |
| which their central argument is made, is in | | | | (2007) make the leap to a future point in time when |
| oversimplifying real estate brokerage services into | | | | the provision of disaggregated brokerage services |
| two all encompassing functions: matching and | | | | are proven to be independently economically feasible |
| bargaining. While doing so allows Miceli et al. (2007) to | | | | and more importantly, to when the provision of such |
| formulate an economic model of broker | | | | services does not undermine the structural |
| compensation, it excludes many of the functions | | | | "insurance" dimension of real estate brokerage; the |
| brokers perform, which have economic value, but | | | | attribute which allows buyers and sellers to incur no |
| which have here to fore lacked independent pricing | | | | upfront expense in the purchase and sale of real |
| due to the existing bundled service model. | | | | estate. |
| As discussed previously, the agent provides a range | | | | The traditional percentage-based, split commission |
| of services, not only subsequent to the matching and | | | | compensation model in real estate brokerage is still |
| bargaining phases, but within these phases as well, | | | | prevalent today because it crudely, yet none the less |
| which are omitted by Miceli et al. (2007) in the | | | | effectively, compensates brokers and agents for |
| interest of modeling broker compensation. For | | | | their direct and indirect expenses. While there is |
| example, decisions regarding pre-listing activities such | | | | evidence the industry has engaged in anticompetitive |
| as level of property fix-up (requiring monetary | | | | behavior on an institutional level, these actions are a |
| investment) and home staging decisions are often | | | | rational given the potential unintended consequences |
| critical in the matching phase and can have substantial | | | | associated with undermining the economic |
| impact on the final sales price. Alternatively, decisions | | | | underpinnings the industry. However, while anti-trust |
| involving choice of appraisal company can influence | | | | proceedings continue to move forward, the very |
| property valuation, thereby influencing the probability | | | | same trends the industry has sought to curtail, such |
| of a successful a bargaining phase. In the Miceli et al. | | | | as unfettered access to MLS listings by the public and |
| (2007) model, these types of services are essentially | | | | the emergence of limited service discount |
| considered to have zero economic value, as Miceli et | | | | brokerages, have taken place none-the-less. And yet, |
| al. (2007) advocate for a collective listings | | | | wholesale real estate brokerage remains the |
| aggregations model in lieu of the process by which | | | | dominant business model and the percentage-based, |
| brokers search for listings: "we will argue however, | | | | split commission compensation model continues to |
| that unlike an unimpeded search for buyers, | | | | endure. The main conclusion which can be drawn |
| competition for listings is unproductive in that it does | | | | from these circumstances is that the primary value |
| not increase the likelihood of a sale..." Miceli et al. | | | | agents and brokers bring to the real estate value |
| (2007). It is precisely within this process that brokers | | | | chain is not associated with information control but |
| and agents market their skills (compete) in the | | | | rather, with information management. In the long and |
| aforementioned examples and affect sale price. The | | | | complex real estate transaction, agents and brokers |
| underlying supposition in the Miceli et al. (2007) | | | | collect, analyze, interpret, and transmit data. Given |
| analysis is that all seller brokerage services are | | | | the relative infrequency of sales transactions, the |
| commodities. | | | | public at large does not attain the collective skills to |
| Another potential weakness in the Miceli et al. (2007) | | | | engage in these activities, wholly or partially. The risks |
| broker compensation model, is in their economic | | | | and costs associated with engaging in these activities |
| overvaluation of the role of the broker during the | | | | motivate the public to contract with traditional |
| matching phase as associated with property search. | | | | wholesale brokers and agents as opposed to |
| Miceli et al. (2007), argue the emergence of | | | | experimenting with alternative models. |
| information technologies has allowed buyers to | | | | However, the information intensive nature of real |
| search through property listings information | | | | estate makes the industry particularly susceptible to |
| independently of the real estate agent, which they | | | | advances in information technology. The efficiencies |
| juxtapose to the era when agents controlled access | | | | to be gained from technologically enabled agents and |
| to such information. Their argument posits that free | | | | brokers will result in competitive advantages, which |
| and unfettered public access to listings information | | | | will magnify over time (to be discussed in Section 2). |
| should have resulted in a reduction in broker | | | | Ultimately, disaggregated service offerings will be |
| compensation, to reflect the reduced value add of | | | | available to the public on a per fee basis, but the bulk |
| the broker: "The traditional compensation model for | | | | of these services will be offered by traditional |
| brokers has not evolved to reflect their diminished | | | | wholesale service brokers and agents, who have |
| role in the matching stage" Miceli et al. (2007). In | | | | developed economically-feasible |
| reality, the persistence (growth) of the traditional | | | | technologically-enabled partial service models within |
| percentage-based split commission compensation | | | | the context of their full service practices. |
| model in the face free listings information on the | | | | |