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If a monkey can sell a $1M home for $950K, does he deserve 3%?

Kevin Boer, Broker Owner, 3 Oceans Real Estate, Inc. ()

October 17th, 2006 · 3 Comments

Mark Nadel’s recent paper has certainly provided a lot of blogger fodder!
While much of the excitement generated by his paper has been about buyers’ agents’monkey-and-house.jpg commissions, there’s a hidden nugget on the listing agents’ side. Nadel suggests that instead of the traditional 3%-of-price-per-side fee, how about using a base-plus-incentive model?

It would work something like this…a seller and her agent would agree on what the baseline value of the home is — say, $1M — and what the baseline commission will be — say, $10,000 — if the agent sells the home for that $1M. For every dollar above $1M that the agent gets, she pockets a large percentage, like 50%.

So if the agent is particularly talented (or lucky!) (or both!) and sells the home for $1,050,000, she would get a total commission of $35,000: the $10,000 base plus 50% of the additional $50,000.

Now the incentives are indeed truly aligned. Should the agent spend $2000 to stage the property? Only if she thinks that will increased its value by more than $4000. Should the agent recommend her client accept an offer of $1,005,000 on day 3? Only if she really thinks there’s nothing she can do to increase the offer.

Nadel acknowledges one very sticky point: how to get the seller and her agent to agree on what the baseline is. Get an independent appraisal? Zillow the property?

There’s one other sticky point he doesn’t mention: there isn’t a large broker in the country that would allow any of its agents to try something like this…which doesn’t at all mean somebody shouldn’t try it!

I propose a further twist to really align the incentives: let’s make the 50% deal go in both directions, up and down. So if the agent only gets $990,000 for the $1M home, her total commission would only be $5000: the $10,000 base less 50% of the $10,000 below $1M.

Any takers?

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Tags: Disintermediation · For sellers · Freakonomics · Mark Nadel · Real estate

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