The Real Cost of Using a Real Estate Agent

I knew something was amiss when my wife and I bought our first home way back in 1993. We had a “buyer’s agent” represent us. That means in theory that the agent was representing us, not the sellers. But when a problem with the inspection surfaced, our agent wanted us to eat the cost of repairs.

It wasn’t much, about $500 as I recall. But for us (read, my wife) it was the principle of the matter. So we held our ground. Eventually, the real estate agent took the $500 out of her commission. But she made it abundantly clear that she thought we were being ridiculous. What become clear to us, however, was that the real estate agent was first and foremost looking out for herself.

Fast forward almost 20 years and the folks at Freakonomics have reached the same conclusion, as you can see in this most excellent video:

The folks at Freakonomics also point to a study by Stanford economist B. Douglas Bernheim, who reached the following conclusion:

Sales commissions for residential real estate brokers historically average nearly six percent of a home’s closing price. Do brokers add sufficient value to justify those commissions? We address this question using a unique data set pertaining to sales of faculty and staff homes on the Stanford University campus. We find no evidence that the use of a broker leads to higher average selling prices, or that it significantly alters average initial asking prices. However, those who use brokers sell their houses more quickly.

And that brings me to a great business idea if you are so inclined – Start an FSBO (for sale by owner) website in your area. That’s exactly what Christie Miller and Mary Clare Murphy did as reported by Jeff Bailey of the New York Times. Their site,, brings home buyers and sellers together without the cost of a real estate agent. For just $150, a home owner can list his or her home, and FSBO Madison even throws in a for sale sign.

Once again, we see an example of the Internet cutting out the costly middleman. Power to the people!

Topics: Mortgages

6 Responses to “The Real Cost of Using a Real Estate Agent”

  1. Full disclosure: I’m a licensed real estate agent in Maine.

    I don’t believe that you can make the generalization that using a broker is not worth it based upon data from the staff of a well-regarded institute of higher education in one of the best, most steady markets in the nation. In my market, which is decidedly more rural and decidedly lower-end than Palo Alto, the average seller is unlikely to be able to effectively use a digital camera and computer, unlikely to have the educational background to be able to educate themselves on the process, and unlikely to succeed.

    Additionally, I work with people on a regular basis who are on the verge of making a terrible decision that has the potential to financially cripple them for a decade or more, who need only a little information and a little more education to make the right choice. I spoke with one couple just two days ago who thought they had things figured out, but hadn’t figured in the cost of heating a home or paying taxes on it, and are now looking in a price range that was half of what they were previously pursing. Will my input, once they decide on a home, be worth the 3% that my agency will end up being paid? Absolutely.

    As I said, I don’t feel that a datapoint from one transaction added to datapoints from an atypical population living in an atypical market are sufficient reason to throw an entire industry under the bus.

  2. And my full disclosure: I’m a HUD-certified housing counselor.

    I’ve seen deals go well and deals go badly with and without real estate agents involved.

    I think the bigger issue is that most buyers and sellers know a lot less than they think they do. And both make costly mistakes. A good agent, lender, attorney, etc. can prevent big errors. But so can getting more education. And the internet is not always the best place to find it. There’s lots of bad information out there.

    The other issue in doing it yourself is that you don’t always realize how your emotions are affecting your decisions. In your own post, your wife’s desire to not pay for a $500 repair sounds like it came from emotion. Sometimes that works out; sometimes it doesn’t.

    Although my husband is an architect, I wouldn’t buy a house without a home inspection. Why? Because the home inspector doesn’t care if I buy the house or not. My husband brings his own baggage.

    Want to have a successful real estate transaction without involving an agent or other professionals? Take advantage of home buyer education and maybe enter therapy. 🙂

  3. we used a real estate agent to help us buy our first home. They were very good on educating us on the finer points of buying a home, which we would not have known without their help. However, we were “picky” buyers who knew exactly what we wanted, in a sellers market. At some point our realtors “checked out” and sat on the couch as we looked at more homes (sure, we knew what we wanted, but they were still representing us). Then, as we got closer to the sale they were so anxious to get us to buy that “we” missed several things with the house that should have been negotiated and cost us at least a couple thousand dollars.

  4. We’ve moved several times cross country and overseas. Real estate agents have been crucial to our success in these moves. I believe the Freakonomics theory is much more applicable to local moves where the buyers are more educated about the local business, real estate and “intangibles” environment.

  5. It is amazing to me as a professional how some people believe that they are superman. They believe that they can do everything themselves. When you have a health issue you would find the very best doctor to feel better. When it is time for your taxes you would use a good CPA. When you have legal issues, you find a lawyer. Well, real estate is no different. A good realtor will save you time, money and effort by guiding you in the right direction. Are there realtors out there that should not be practicing? Maybe, but for the most part, realtors are professional people who are helping buyers and sellers close a transaction with the minimum amount of stress. Most transactions do have problems and that is where a good realtor comes in and minimizes issues.

    I own a real estate office and have been investing in real estate since 1994. I’ve managed to buy over 15 million in real estate and I use professionals when I am in need of services such as plumbers, electricians, CPA;s, and even though they seem expensive, it is the only successful people become successful.

    Some people think they can do it all and are jack of all trades and master of none. You certainly seem like one of those people. If you keep an open eye and find the right team to surround yourself, you too will be successful.


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