As far as professionals are concerned, real estate agents have had a remarkable history. Despite being a major part of one of the nation’s largest industries, constant economic, legislative, and technological changes, licensed real estate agents have managed to maintain a fairly constant industry structure related to their services.

In a day and age when technology is reducing transaction costs across nearly every industry from stocks and securities to purchasing a car, real estate agent commissions have remained steadfast since the advent of the modern real estate transactional structure in the 1950s. The traditional real estate agent fee totals 6%, split 3% equally between the agents for the buyer and seller. While there are real estate agents who lower their commissions in various circumstances, the industry standard commissions have persisted. But should it?

Figure 1 – Sources: Chris Cunningham, Kristopher Gerardi and Lily Shen; data from the CoreLogic Multiple Listing Service database

Measuring real estate agent value

A recent study set out to answer two key questions related to the value that real estate agents bring to a transaction. First, what fraction of real estate agents have enough skill to add value beyond the cost in terms of commissions? Second, the researchers looked at how real estate agents add value in the first place.

In a working paper for the Federal Reserve Bank of Atlanta, researchers Chris Cunningham, Kristopher Gerardi and Lily Shen^[1] examined Multiple Listing Service (MLS) data across three major core-based statistical areas: Minneapolis; Houston; and Charlotte, North Carolina. Specifically, the study used transaction-level data for single-family home sales from 2000 to 2019.

To explore whether real estate agents add value, the researchers examined two variables related to real estate transactions: Sales price and time on the market. By comparing the results of these key metrics between transactions that used a full-service real estate agent and those that did not, they ascertained the value agents bring to their clients. The baseline transactions used only a “flat-fee” broker. These agents take a flat-fee, and provide sellers with access to the MLS, but do not traditionally provide any other services. The proportion of sellers using flat-fee brokers, while very small, has been on the rise over the past two decades (Figure 1). In the study sample, an average of 1.2% (in Charlotte), 1% (Minneapolis) and 0.4% (Houston) of the transactions were based on flat-fee broker arrangements.

Descriptive statistics, broken out for transactions that were based on a flat-fee arrangement compared with those that had a full-service agent, for each metropolitan area, are in Figure 2. The study included over 2.3 million single-family transactions.

Do seller’s agents increase sales price?

The findings are striking. As might be expected the “value” of having a real estate agent varies widely depending on the agent. This, in and of itself, is not surprising. Some agents are better than others. Experience, skills, motivation and access to resources all affect the ability of an agent to help clients. What is interesting is the data suggests the average full-service listing agent garners a sales price that is 1% to 4.4% lower compared with homeowners who sell only with the assistance of a flat-fee broker. In other words, when left to manage and negotiate their own sale, sellers did a better job of obtaining maximum value than real estate agents working on a seller’s behalf.

Taking the Charlotte market, for example, where the average price of houses sold through a flat-fee arrangement was $286,000, the savings to the seller homeowner was $19,740. This assumes that the flat-fee brokered transaction paid a fee of $400 to access the MLS system (i.e., the flat-fee brokerage) and paid the buyer’s agent a 3% commission, then sold the house for a 4.3% premium as indicated from the results of the study (Figure 3). In contrast, a seller of the same hypothetical house who used a full-service agent would have sold for $273,702 (4.3% less), plus paid a higher 6% commission (minus the $400 fee to access MLS). Looking at the same hypothetical scenario in Houston and Minneapolis would yield a savings to the seller of $21,489 and $19,494, respectively.

Did the study conclude that all real estate agents “hurt” their selling clients? No. Rather the data suggests selling prices varied widely among real estate agents, with a large proportion of them producing undesirable results. What this means is there are good agents bringing value to their clients in terms of the ultimate sale price of the property. But a large proportion of agents do not add enough value, beyond the cost of having the representation.

What proportion of agents added enough value to justify their commission? Assuming the selling agent earns a 3% commission, the data suggests that a property seller would have to hire an agent in the top 79th to 90th percentile to obtain a selling price high enough to justify the commission. In other words, if the seller had an agent not among the top-tier agents, they were unlikely to bring enough value to justify their cost.

Do listings agents decrease the time on the market?

The study also examined the days properties remain on the market before sold. Here a full-service real estate agent was found to assist in completing a quicker sale, as compared with a flat-fee broker. The study suggests median full-service listing agents complete transactions six to 10 days quicker than if the property sold via a flat-fee broker arrangement. More specifically, flat-fee brokered properties in Minneapolis took, on average, 6.4 days longer to sell, while it took five days longer in Houston. In Charlotte, the time to sale was just roughly one-third of a day longer for flat-fee arrangements compared with full-service agent transactions.

Again, the researchers found a high degree of variability across agents. For example, on average, 25% of the agents in the sample sold properties more than two weeks quicker than the properties handled in a flat-fee arrangement. But just 5% of the agents were able to sell the property a month quicker.

Do agents contribute to sales success?

The results did find that full-service real estate agents provided value in terms of sales “success.” Looking at the success rate for the listings, the research found that flat-fee listings in the three cities studied were an average of 6.2% to 10.6% less likely to sell within a year compared with traditional agent listings. So, it appears real estate agents may not, on average, assist in selling houses for a price that justifies their commission but they appear to greatly increase the likelihood the house will sell at all.

How do agents add value?

Since the study found such wide variation in the value real estate agents add, the researchers turned to why some agents performed so much better than others. They considered a number of possible answers.

One logical conclusion might be a trade-off between speed of sale and selling price. In fact, studies have looked at such a trade-off (Levitt and Syverson, 2008 and Anglin et al., 2003). The theory is the longer the property is on the market, the higher the selling price. However, the research found only limited evidence that agents focus on speed of sale at the expense of selling price. Surprisingly, agents who tend to sell homes at a great premium do not, on average, take significantly longer to sell the property.

Another reason agent performance varies so widely is the possibility that some agents are simply better negotiators. Comparing agent performance when representing sellers vs. buyers, the researchers found little evidence of superior negotiation ability. On average selling agents who secured high sale prices, did not also secure low purchase prices when representing the buyer of property. Thus, the negotiating and bargaining ability of agents did not appear to explain the performance of the top agents.

The study concluded that more experienced agents, on average, sell properties more quickly. But they also sold for lower prices. This suggests that experience may help agents navigate the sales system, but doesn’t help improve their negotiating ability. Or maybe more experienced agents simply recognize that the incentive to hold out for a higher price is small. Finally, the research examined whether the size of a real estate firm matters. The results suggest agents who work at larger firms tend to sell faster, but buyer’s agents at large firms pay slightly higher prices, on average. Therefore, the size of the firm had a mixed impact on agent performance and did not appear to explain the performance variation.

Real estate agent functions

While the research is enlightening, it doesn’t account for all possible benefits of using a real estate agent. Primarily the researchers focused on the metrics of sales price and days on market. But are there other benefits to using a full-service real estate agent? If agents don’t provide enough value from an increased selling price to justify their cost, they must offer other benefits.

The functions a full-service real estate agent provide:

The researchers looked at agents’ ability to price and negotiate by examining sales price differences between a traditional agent vs. a flat-fee broker. While clearly not as quantifiable, real estate agents provide the important function of “shepherding” the parties through the tedious process of closing the sale. Once a contract is entered into on a property, a myriad of tasks must be completed. Real estate agents often assist in inspection, appraisal and closing tasks. While these functions are fairly standardized, it still takes time and expertise to navigate this system and bring the transaction to closing.

So, do real estate agents add value? The answer depends on how you define “value.” The researchers found that flat-fee broker arrangements provide higher sales prices but take longer to sell compared with full-service agent arrangements. This suggests that agents, on average, may not provide superior negotiating and bargaining skills. Further, interestingly, the research indicates that a large proportion of the agents are unable to sell a property for a price that compensates for the added cost of their commission. They, however, do appear to assist in getting the property sold.

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Footnotes:

1. “The Good, the Bad, and the Ordinary: Estimating Agent Value-Added Using Real Estate Transactions,” by Chris Cunningham and Kristopher Gerard, Federal Reserve Bank of Atlanta; Lily Shen, Clemson University. The views expressed are those of the authors and not necessarily of the Federal Reserve. Back to content