Economist's Commentary: February 22, 2008

Consumer Royalty

By Lawrence Yun, Chief Economist

There is a new academic study by two Stanford University professors looking at the value of services provided by real estate professionals and whether they add up to the commission paid by consumers.  Every year or two there is a study implying that real estate commissions are high.  A few years back, the authors of a widely popular book Freakonomics also contended that REALTORS® may not serve their clients best interest.

One thing to note about nearly all empirical economic research is that many studies get disputed at a later time for a variety of reasons, including:

• Further data collection sheds new light
• Re-specifying of structural estimated equation (e.g., cubic or logarithmic specifications)
• Inclusion of key variables
• Exclusion of superfluous variables
• Using different frequency of data (month, quarterly, or annual)
• Inclusion of new geographic area

For me, I like to see the market sort things through.  I go by the theory that consumers are kings and queens and they know what is best for them. And what consumers are saying is that they want to work with real estate professionals. The For-Sale-by-Owners (FSBO) trend has nearly always been at or below 15% and has been falling in recent years.  

The complexity involved in the real estate transaction is immense and many consumers like to simply turn over the transaction to trusted advisors – that is, to their REALTORS®. It is interesting that many consumers are suspicious of other REALTORS® but they hold dear their own REALTOR®. 

Imagine overlooking a matter that is later found to be of critical importance on a home purchased involving several hundred thousand dollars. Imagine having to suffer a significant financial loss due to a poor oversight. There are innumerable tangible and intangible value-added services that REALTORS® provide. 

It is also the case that FSBO activity is most prevalent in neighborhoods with lower home prices. In the upper-end neighborhoods there are far less FSBO sales. Time is evidently money, and many well-to-do people prefer not wasting their valuable time trying to sell a home – even though some may actually have the skills to do so. 

I met a REALTOR® recently who says that he refuses to help a client for only one home sales transaction. But if the client wants to purchase multiple properties then this REALTOR® would help.  The REALTOR® was not referring to multiple home purchases now and more commissions now. Instead he was referring to multiple home purchases spread over many years. In the U.S. people move rather frequently and this REALTOR® wanted to assure the client that his business is built upon repeat and referral business. He refuses to be a fly-by-night one time commission collector. Simply, he believes treating clients as kings and queens is the most effective method of building a successful business.

Academics can and will continue to conduct research on the value of REALTOR® worth. Some will get some satisfaction in knowing that they have “proved” their theory. But in the end, the same researchers will scratch their head as to why consumers continue to prefer to work with REALTORS®. More than two-thirds (68%) of recent REALTOR® clients indicated they definitely would use the same REALTOR® again. An additional 19% indicated they would probably use the same REALTOR® again. There is really no need to be perplexed. The answer is clear cut.  Treat customers like royalty and they will come back. Be a sloppy or short-term interested REALTOR® and don't expect to be in the business for long. The Market is a powerful force in bringing about efficient outcomes.  As George Stigler – a Nobel Laureate – pointed out, the ultimate market test is the Survivor Test.

This is one in a series of commentaries by the Research staff of the National Association of REALTORS®.