Fixed-percentage commissions and moral hazard in residential real estate brokerage

Carroll, Wayne

doi:10.1007/bf00177953

Cited by 15 publications

(3 citation statements)

References 16 publications

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“…Schroeter (1987) and Carroll (1989) have argued that sellers of higherpriced houses are typically wealthier and place a higher value on time. In a similar vein, Knoll (1988) pointed out that the interest cost on a slow sale is twice as much on a $100,000 house as on a $50,000 house.…”

Section: Literature Reviewmentioning

confidence: 99%

Residential real estate brokerage as a principal-agent problem

Anglin

Arnott

1991

J Real Estate Finan Econ

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We analyze the terms of the brokerage contract between a house seller and his agent, using the established literature on the principal-agent problem. Considering the influence of moral hazard and adverse selection, we predict a number of features of the contract. Many of these features are not present in observed contracts. To account for this discrepancy, we discuss certain aspects of the real estate market which are not included in the standard principal-agent model but may explain the difference. Standard principal-agent theory neglects important contract design considerations, namely robustness and costs of complexity. In general, the commission contract performs poorly by failing to allocate risk efficiently or to provide agent incentives. It favors established agents and precludes contractual diversity. Finally, we contrast the brokerage contract for real estate with the dealership contract for used cars, but find no compelling answer as to why there are few used house dealers.

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Section: Literature Reviewmentioning

confidence: 99%

Residential real estate brokerage as a principal-agent problem

Anglin

Arnott

1991

J Real Estate Finan Econ

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“…This study will also focus on how the incentives offered to a buyer's broker can impact the duration. Carroll (1989) examined the brokerage industry and showed how a competitive broker might choose to optimally allocate efforts across clients who pay different commissions. More specifically, those clients that value brokerage services more will offer to pay a larger commission and receive more selling effort as a result.…”

Section: Introductionmentioning

confidence: 99%

Examining potential biases related to brokers' cooperative commission in multi-unit residential investments

Rodriguez

2022

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PurposeInvestors often utilize brokers to assist them in property acquisitions. These brokers are compensated through a cooperative commission, or bonus, that is publicized on the listing service. The purpose of this paper is to determine the relationship between advertised compensation packages and selling price, time-on-market and listing characteristics.Design/methodology/approachTo examine variables likely to influence earnings of the buyers' broker, this study utilizes multiple and logistic regressions. Given the range of prices found in the 196,276 listings, the data was sorted on listing price and then split into ten, approximately equal, deciles.FindingsThe explanatory power of models with cooperative commission as the dependent variable was highest in the lowest deciles with type of financing, size and distressed status being highly significant. When comparing list- to selling price the average was 96.1%. As cooperative commission increased, the higher priced parcels sold at a higher price relative to list price. This potentially justifies higher cooperative commissions or exemplifies the principal-agent problem where effort is based on potential earnings. Fixed bonuses were used predominately for parcels under $62,234, likely to provide a minimum earnings amount. However, surrounding the median, it seems they may differentiate a property.Practical implicationsThis research provides insight for practitioners on the impact of different variables, including cooperative commissions, on sale price and time-on-market. For example, cooperative commission increased for properties in the outer deciles implying that agents may be compensating for suspected difficulty. Additionally, the seasonality findings imply that agents can determine when to list and when to provide a fixed bonus to solicit attention. Results also suggest that practitioners will find it beneficial to market at an appropriate price rather than list high to create negotiating room.Originality/valueThis paper follows only one paper that covered a similar topic. However, this paper uses twenty years of multi-unit property listings from a major US city from 1996 to 2015. The focus on multi-unit properties is an effort to focus on a more sophisticated group of buyers that may be more experienced and make decisions more rationally.

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“…Rubinstein and Wolinsky (1987) and Yavaş (1994) describe the role of middlemen as shortening the time it takes to match sellers with buyers in bilateral search markets. Zorn and Larsen (1986), Schroeter (1987), Knoll (1988), andCarroll (1989) analyze the relative efficiency of a fixed-percentage commission over a fixed fee. The basic idea is that brokers exert more effort on high-priced houses under a percentage commission arrangement than under a fixed fee contract.…”

Section: Introductionmentioning

confidence: 99%

Real Estate Brokers and Commission: Theory and Calibrations

Shy

2009

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. The author constructs a theoretical model to examine the effects of an inherent conflict of interest between a seller of a house and the real estate broker hired by the seller. The model is then used to calibrate the broker's commission rates that would maximize the seller's expected gain. The findings suggest that while the pressure brokers exert on sellers to reduce prices generates faster sales and hence improves social welfare, the usual commission rate of 6 percent exceeds the seller's value-maximizing rate if the sale is handled by a single agent. On the other hand, if several agents (such as the buyer's and seller's brokers and the agencies that employ these realtors) split the commission, then a 6 percent commission rate may be required to motivate the broker to sell at a high price. Terms of use: Documents in EconStor may

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Fixed-percentage commissions and moral hazard in residential real estate brokerage

Cited by 15 publications

References 16 publications

Residential real estate brokerage as a principal-agent problem

Residential real estate brokerage as a principal-agent problem

Examining potential biases related to brokers' cooperative commission in multi-unit residential investments

Real Estate Brokers and Commission: Theory and Calibrations

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