The real estate industry is a critical part of any economy, and the performance of the real estate market usually gives a glimpse on the performance of the economy as a whole. In the real estate industry, there are many players, ranging from huge commercial banks which provide financing for purchases of homes and properties to the real estate agents who are involved in the process of finding suitable buyers for the properties which are offered for sale. The relationship between sellers of properties and real estate agents is an essential one that thrives on mutual benefit from the transactions that take place (Levitt & Dubner, 2005).
The Problem
An argument has been fronted that real estate agents will not always act in the best interests of the seller when it comes to negotiating the selling price of real estate properties. This is because of the manner in which commissions that sellers pay to real estate companies are distributed to their agents. The method used is usually very simple; a particular percentage of the sale value of a house is paid to the agent as commission. This, on the upfront may seem the most realistic and logical way to carry out the payment of the commission to the agent, since calculations as to what amount an agent will receive will be easy and rather straightforward (Coy, 2005).
However, this method of determining the amount paid as real estate agent commission may actually be detrimental to the seller of a property if examined against the market value of the property being disposed of in the market. This is because if the market value of the property is determined, the real estate agent will not have very little incentive to bargain for a better price for the property; a selling price higher than the market value of the property. This is because the marginal increase in the commission earned from a sale higher in price than the market value of the property is very low and may not actually be a big difference from what the agent would have earned had he/ she sold the property at the market value. The extra amount that the agent will earn from the higher price will not be incentive enough to motivate the agent to bargain for a price higher than the market value and this implies that in the end, it is the seller who bears the brunt of this decision because it represents lost opportunity in terms of lost profits in the sale of a property, profits which could have been realised had the agent made more effort to get a price more improved from the set market value of a property(Coy, 2005).
The same rule of paying agents a fixed percentage of the sale price of a property as the commission also has another major detriment, closely related to the one previously explained. Since the commission paid to the agent is based on the sale value obtained, the marginal loss in revenue for the agent in the case of a sale below the market value of a property is so little to the extent that the agent may not even be motivated to actually sell the property at its set market value. This is because the amount that the agent will forgo as a result of a sale that is below the market value is not significant to prevent such as decision. This means that the agent may not even be motivated to get the market price for the property since the difference in the amount of commission earned when the property is sold at market value and when it is sold at a an amount lower than the market value is very little to be an enough incentive to motivate the agent not to sell at the lower of the two values (Coy, 2005).
An example to this concept is to assume that for a certain property, the determined market sale value is 300,000 dollars. The agent will earn a fixed rate of commission for the sale of 3 percent of the sale value. This implies that if the agent sells the property at the designated market value, a commission of 9000 dollars will be paid to him/her. On the other hand, if the agent bargains well and manages to get 10,000 dollars more for the property, then his/her commission will increase by 3 percent of that; 300 dollars. This amount, compared to the 9000 dollars received from a sale at the market value, is very little and will therefore not be a sufficient motivation for the agent to bargain for an increase in price.
The same principle goes for the reduction in price; if the agent agrees to sell for a value less than the market price by 10,000 dollars, the amount forgone as commission receivable by the agent will only be 300 dollars, which in itself will not be a significant dent in the total amount of commission receivable. The implication of this is that the real estate agent may actually not have the incentive to sell a property at the market value and may actually take a lower price simply because the effect of such a reduction in price will have marginal effect on the commission received.
This situation thus poses a problem. It implies that many real estate agents will actually not go the extra mile to get the best bargains for their clients. In the end, the clients, who in this case are the sellers of the properties, end up losing more in forgone profits as a result of poor negotiations by the real estate agents.
Solution
A solution to this dilemma has been proposed; a method that when used, can act as a motivation for real estate agents to get higher prices for their clients on sale of properties and also act as a disincentive for real estate agents from selling properties at prices lower than the market values. The proposition is based on the assumption that it is possible to determine, within a reasonable margin of error, the market value for any given property. This is actually possible since there are methods of carrying out objective valuations for real estate properties (Fallis, 1985).
The method proposes that a rate higher than the normal commission payable to the real estate agent be established for any sale higher than the normal market rate. This rate should be substantial, for example, 20 percent of any amount received from sales above the market price. This would give the real estate agents a real incentive to always try to get the best possible price for the property. The same concept would be applied on the sales below the market price; a reduction of the same rate for the amount below the market value would be applied on the commission earned. This would give the real estate agents an incentive to always avoid selling at any price below the market price since the lower the selling price, the higher the amount that will be lost in commission (Coy, 2005).
Conclusion
Though it is evident that real estate agents may not actually be working towards the best interest of the seller in most cases in the currently applied method of paying commissions, the same method continues to be used without any consideration in the losses that sellers bear as a result. There is therefore a dire need for authorities in charge of real estate transactions to implement the suggested solution to ensure that efficiency for the benefit of the sellers of properties. In the end, it will be a win-win situation for both the agents and sellers; increased commissions for the real estate agents and better prices for the sellers of properties.
References
Fallis, G. (1985) Housing Economics, Butterworth, Toronto
http://www.youtube.com/watch?v=xThcFhsRJyE Retrieved 22 October 2012
Mishler, Lon; Cole, Robert E. (1995). Consumer and business credit management. Homewood: Irwin.
Peter Coy,"Home Buyer, Beware: Desperate sellers are paying brokers super-sized commissions, which get incorporated into the price ultimately paid by buyers", Business Week online, 14 December 2006 Retrieved 28 April 2008
Steven Levitt and Stephen J. Dubner (2005). Freakonomics: A Rogue Economist Explores the Hidden Side of Everything. William Morrow/HarperCollins.
