New data quantifies just how much the experience of a real estate agent matters when buying and selling a home. OLEKSANDRA KLESTOVA VIA GETTY IMAGES

Austin Business Journal shares, "real estate agent experience levels — and how they are paid — can make a huge difference in the housing market.

A new working paper from the National Bureau of Economic Research by Sophia Gilbukh, an assistant professor of real estate at Baruch College, and Paul Goldsmith-Pinkham, assistant professor of finance at Yale University, studied 8.5 million transactions from 2001 to 2014. The study found homes listed by inexperienced agents were less likely to sell — and the current flat commission structure created a large number of inexperienced agents that drag down home sellers and stunt the housing market, in good times and bad.

Overall, the working paper found, listings with agents within the bottom 10% of experience are 10% less likely to sell a home than agents within the top 10% of experience.

A lack of experience can have big repercussions for homeowners, too, the authors of the study said.

During the Great Recession, they found, the probability of a house selling within a year of listing fell from 66% in 2005 to 47% in 2008. And for households behind on their payments, those that did not sell had a 5.5% chance of going into foreclosure compared to a 0% chance for sold properties.

Houses listed with inexperienced agents during those “bust” years were 0.9% more likely to foreclose compared to those with experienced agents.

In short: The paper focuses on "housing liquidity," or the average sale probability of a listed house, and how real estate agents can play a crucial role in the overall liquidity of the housing market, for better or for worse.

While every industry has both experienced professionals and those with little to no experience, it’s particularly acute in real estate, where low entry costs and a fixed commission rate contribute to a large population of inexperienced agents. Often, the barrier to entry can be as low as 30 hours of training, an exam and licensing fees, the study points out. 

“While these classes familiarize agents with essential terminology and state laws, they provide little insight into local real estate markets or into the most effective ways to create transactions. Hence, agents have a substantial room for improvement after entry," the paper stated.

But there is no reward built into the commission structure agents charged, with the compensation paid by buyers and sellers to agents not varying much across the industry, according to the study — regardless of the quality of the agent.

Inexperienced agents are often hired by homebuyers and sellers, as 74% of sellers and 70% of buyers signed a contract with the first agent they interviewed.

Even agents themselves see the lack of experience as a problem in the industry, with 77% responding “low-quality agents" to industry news outlet Inman’s question about what challenges are facing the industry. The authors crunched the numbers and found creating a flexible and competitive commission structure would improve the probability of a house selling by 3.7%.

"First, not only are inexperienced agents worse at selling listings, but they are especially bad during housing busts," the working paper stated. "Second, due to low barriers to entry andfixed commission rates, the housing boom attracts many new agents into the profession, intensifying competition for clients and thus hindering experience accumulation. These new agents remain in the market for the onset of the downturn, resulting in a distribution skewed toward lower experience."

Real estate commission structures under the microscope

Fixed commissions are currently the target of several class-action lawsuits. RE/MAX Holdings Inc. and Anywhere Real Estate Inc., formerly known as Realogy Holdings Corp. (the parent company of Coldwell Banker and others), have each agreed to settlements in those cases.

Moehrl v. National Association of Realtors was certified as a class action at the end of March. In addition to RE/MAX and Anywhere, other defendants included the National Association of Realtors, BHH Affiliates LLC, HSF Affiliates LLC, The Long & Foster Cos. Inc. and Keller Williams Realty Inc. The suit is currently in the discovery phase — no trial date has been set and no other settlements have been announced or confirmed at this time.

At the heart of the lawsuit, filed in 2019 by a group of people who have sold their homes since 2015, are claims that sellers paid more than they should have in commissions. The allegation is based in a complex web of rules and policies that requires those selling a home to pay the buyer-broker through a commission. Plaintiffs claim the setup keeps commissions higher than necessary because of the risk of losing potential buyers.

Plaintiffs are asking for damages estimated at $13.7 billion for anyone who paid a commission to the defendants between March 6, 2015, and Dec. 31, 2020. They also are demanding a significant overhaul of industry practices they argue would lower commissions for buyer and seller agents.

Rachel King, one of the founding agents of Ryan Serhant’s New York-based Serhant Agency, said experienced agents can bring to clients an understanding of the market, superior negotiation abilities and an expansive network.

“Real estate is distinct in that it has minimal barriers to entry, yet it offers unlimited earning potential. This has resulted in a diverse array of agents, encompassing varying backgrounds and experience levels, all vying for the same clientele,” King said. “That said, I've observed that top-tier agents often possess solid educational and career backgrounds."

King stressed while the real estate industry diverges from experience- and performance-based pay models that define other industries, there is still plenty of reward for those with experience.

“In practice, the most adept and successful agents tend to earn higher commissions, reinforcing the value of experience and expertise,” King said."


Source: Austin Business Journal 

Written by: Andy Medici

Published: September 22, 2023


Posted by Grossman & Jones Group on


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