I was at a party the other night, speaking with someone I just met about the North Berkeley real estate market, and whether houses were still selling quickly and with multiple offers. I stated that while general headlines are reporting on a market decline, North Berkeley is, with some exceptions, still doing very well. When the conversation came to the prospect of selling his house, he casually stated that if he did sell, he’d keep his house on the market longer and would get 10% more than everyone else. I had to chuckle-I immediately recognized this as a reference to the book Freakanomics, by Steven Levitt and Stephen Dubner, where the authors state that research shows that when a Realtor sells her own home, it stays on the market longer and sells for 10% more than her client’s homes.

I don’t have the book in front of me so I can’t check what “research” actually shows this. But I most certainly take exception. I’ve sold a few of my own homes and can not brag any such thing.

A house will sell over its asking price if the asking price is artificially low and it is sufficiently marketed. Deliberate underpricing is a very easy way to warp statistics to benefit the agent. Up until recently, this practice was practically epidemic (see “The Underpricing Epidemic”). It allows the agent to brag “my marketing efforts and negotiating skill produced multiple offers and a sales price 25% over asking.” Most people don’t seem to realize that, on its face, this is completely meaningless. Any idiot who underprices a house when demand is high will get the same result. The more interesting question is what would have happened if the agent priced the house at the number she really thought it was worth.

The authors big beef with Realtors seems to be around the notion of information asymmetry. We know more than the buyers/sellers and use this information solely to enrich ourselves, not our clients. They see the ever increasing availability of information on the internet as the beginning of the end of real estate brokerage as we know it. They even go as far as to equate the demise of the Ku Klux Clan with what will happen to Realtors.

Back to the party I was attending. My new friend was clearly impressed that I knew to what he was referring. It then gave me a chance to talk about how my real estate brokerage practice was different from most, and that I would not only sell his house for the absolute highest price the market would bear, but also charge him many thousands of dollars less in commissions.

He asked for my business card, but alas, after searching around in my wallet, I told him I’d have to got out to my car to get one. He said no problem-he’d take a walk with me. I guess I made a good impression.

It’s a fact: a growing number of agents rebate some part of their commission to the buyer. Combine this with another fact: many agents pay a hefty referral fee for new business, whether to other agents or through a relo company, of usually between 20-35% of any commission eventually earned from the referral.  Now with all this money being given away, it begs the question: where is this money coming from, and why is it being away?

The money, of course, comes from the seller, who signs a listing agreement, agreeing to pay a commission and authorizing/instructing the listing agent to offer, usually half, of the total fee to buyer’s agents as an incentive for them to bring buyers to the house.

But at some point, sellers are going to realize that this is a pretty crazy system. Take a million dollar listing, with a total commission of 5%, or $50,000.  The buyer’s agent share would be $25,000. Now, if the buyer’s agent has to pay a 30% referral fee, that equals $7,500. So the seller is paying $7,500 to someone who has nothing really to do with the sale of his house.  That’s a lot of “fat” in the system, so it shouldn’t come as a surprise that new business models are emerging to make the process more “lean.”

But its not all so new.  Agents like to complain when a listing offers them “only” 2% , from a total commission of 4%. But these are crocodile tears—they routinely accept this much when a referral or relo is involved. The bottom line: few agents can make a living from just a couple of transactions a year. Sometimes you take a listing at 6% and also represent the buyer, keeping the whole 6%. Sometimes you do both ends and gross 5%. Sometimes, you do one side and get 3%. Or 2.5%. And sometimes its 2%, or even less. It all evens out in the end.

And I, as a 20+ year veteran, won’t exactly be sad if the some of these complaining agents drop out of the business. It another place where there is way too much fat in the system.