8/27/2005 -  New York Post

Climbing Commissions

Lisa Keys

Back in May, David Shebiro was looking to sell a one-bedroom Upper East Side apartment, fast. Did he drop the $649,000 asking price, in hopes of attracting a buyer looking to nab a deal?

Not at all. Instead, Shebiro agreed to pay his agent, Mickey Roth of Prudential Douglas Elliman, an 8 percent commission - substantially higher than the typical Manhattan commission of 6 percent. The apartment sold in two days - and closed within 30 - for $660,000.

In this market, with sellers poised to earn dream-making windfalls with each sale, why would anyone agree to fork over extra cash to their broker?

"It actually makes sense," says Shebiro, who owns numerous businesses, including a locksmith company. "If you give more commission on an apartment, brokers are more motivated to sell it." The theory goes like this: Brokers, in addition to advertising their listings to consumers, market their listings to one another - after all, most transactions are co-broke, meaning brokers rely upon other brokers to bring buyers to the table, and they split the commission from the sale. A property that offers a distinct edge - say, an additional $10,000 in brokers' pockets - stands out among the crowd, creating clamor over an otherwise unremarkable listing. The result? A faster, higher-priced sale that puts more money in everyone's pockets. "Selling brokers use incentives of various kinds to draw in their counterparts, who, in turn, draw in the buyers," says Prudential Douglas Elliman broker Harry DiOrio. And lately, he notes, he's seen an increasing number of incentives offered. Today, some brokers are fetching higher commissions, plasma TVs, airline tickets, hotel rooms, and, in the case of a multimillion-dollar mansion, a brand-new luxury car. The tactic of higher commissions, says Diane Ramirez, president of Halstead Property, "is definitely starting to get out there." In the world of real estate, commissions are a verboten topic. While they are noted on properties' listing sheet - and anything less than a 6 percent commission is flagged in many firms' systems - most brokers are loathe to discuss with one another how much they've made on a sale. And yet, with the whispers of brokers' incentives growing louder each day, some are wondering: Does it work? And can I charge more, too? And sellers are asking, is it worth it? "It's risky," says Armanda Squadrilli of Coldwell Banker Hunt Kennedy, who has recently sold apartments with 7 percent and 8 percent commissions, and currently has a listing at 9 percent. "People look at you like you're nuts, or like you're trying to pull something. But really it's to the seller's benefit." "The theory is that it will sell for more money," she adds. "On a hypothetical $100,000 apartment, a 6 percent commission would be $6,000, and an 8 percent would be $8,000. But the apartment will sell for more than that $2,000 difference in commission. There is more demand and less supply of 8 percent apartments, so brokers are going to be more excited to sell it." This is not a new phenomenon. Back in the soft market of the early- to mid-1990s, "it was absolutely not unusual for a seller to be more than happy to pay 8 percent," says Ramirez, who adds that commissions as high as 10 percent were not uncommon then. But most observers say that the rise in incentives for brokers says nothing about a softening of the market. Instead, it's seen as a creative way to drum up business in a traditionally slow season. Adds Ramirez: "We're still in a very low-inventory marketplace." Larry Carty, an agent at William B. May, started experimenting with 7 percent commissions this summer, a time, he notes, when the market ebbs. "It tells the client you're doing everything possible to get as many people into their apartment as possible," he says. "Generally, they go for it." "What happened is I started attracting seasoned brokers who close deals," Carty says. "Maybe they say, 'That guy's getting 7 percent commission, he must be a closer, too.'" Dawanna Williams, owner of Dabar Development Partners, is currently listing her four-story Clinton Hill brownstone with Carty, who will receive a 7 percent commission when (if?) the deal closes. The $1.765 million price tag, slightly higher than market, reflects the increased commission, she notes. Though Carty was the one who requested the increase, Williams says she didn't bristle at it. "I practice law, and I know that large law firms charge a premium for their services; something that costs $150 at a small firm will cost $400 at a large one," Williams says. "If you're the type of person who wants quality done quickly, you'll call a large firm. I think of the commission as something like that." And for some sellers, time is crucial. "Another percentage here or there is not going to make a lot of difference if the deal goes through fast," says Shebiro, an investor who has done 10 deals with Prudential Douglas Elliman's Roth. The quicker the deal closes, the quicker he can reinvest the money, he says. Most recently, the pair sold a $1.75 million converted three-bedroom in two weeks. Shebiro gave the buyer's broker a $1,500 plasma TV to sweeten the deal. "It's a numbers game," Roth says. "It depends on how fast the seller wants to sell it, and how much the seller needs for the property. I tell them that sometimes we need an incentive to get the deals done quickly." Should such incentives wave a red flag for buyers, who remain in the dark as to how much their broker stands to make, yet may find themselves backed into a corner by a commission-hungry broker? Nonsense, says Carty. "Brokers are not going to sell out their clients for an extra 1 percent of commission," he says. "We all work on referrals." Still, some insiders remain skeptical. "I don't really know if it sells apartments," says Prudential Douglas Elliman's DiOrio. "What it does, if you're a broker and you have all these things coming across your plate, it gets your eye and causes you to look at the listing longer. Perhaps then you'll decide to show it." That's the entire point, according to Coldwell Banker Hunt Kennedy's Squadrilli. "Brokers, when they're working with buyers, say, 'Let me do a search and see what two, three, five apartments I can show this buyer,'" she says. "But when they see an apartment with a higher commission, they think, 'Who can I sell this apartment to?'"

Cracking the Real Estate Code - Wired Magazine

It's one of the biggest bets you can place on another person: You hire a real estate agent to sell your home.

She sizes up its charms, snaps some pictures, sets the price, writes a seductive ad, shows the house aggressively, negotiates the offers, and sees the deal through to the end. Sure, it's a lot of work, but she's getting a nice cut. On the sale of a $300,000 house, you'll typically pay a 6 percent agent fee of $18,000. That's a lot of money. But you tell yourself that you never could have sold the house for $300,000 on your own. The agent knew how to - what's that phrase she used? - "maximize the house's value." She got you top dollar, right?

A real estate agent is every bit the expert. She is better informed than you about your home's worth, the state of the housing market, even the buyer's frame of mind. You depend on her for this information.

As the world has grown more specialized, countless such experts have made themselves similarly indispensable. Doctors, lawyers, contractors, auto mechanics: They all enjoy informational advantage. And they use that advantage to help you.

Right?

Information can be a beacon, or information can be a cudgel; it depends on who wields it and how. In any transaction, it's common for one party to have better information than the other. In the parlance of economists, this is information asymmetry. There's value in asymmetry; it's the reason why someone, such as a consumer, will pay someone else, an expert, for his knowledge.

Of course, sometimes an expert might manipulate his advantage for his own benefit. If your doctor suggests that you have an angioplasty - even though current research suggests that angioplasty often does little to prevent heart attacks - your first thought won't likely be that the doctor is using his informational advantage to make a few thousand dollars for himself or his buddy. But as David Hillis, an interventional cardiologist at the University of Texas Southwestern Medical Center in Dallas, explained to The New York Times, a doctor may have the same economic incentives as a car salesman or a funeral director or a mutual fund manager: "If you're an invasive cardiologist and Joe Smith, the local internist, is sending you patients, and if you tell them they don't need the procedure, pretty soon Joe Smith doesn't send patients anymore."

Or consider these findings of a 1996 medical study: Obstetricians in areas with declining birthrates are much more likely to perform cesarean section deliveries than obstetricians in growing areas - suggesting that when business is tough, doctors may try to ring up more expensive procedures.

The Internet, of course, is all about smoothing over these asymmetries; in one industry after another, from life insurance to used cars, the Web has eliminated the expert's upper hand by giving once-exclusive information to the online masses. But some industries have been slow to change - real estate among them.

The best way to observe information asymmetry at work is to measure how an expert treats you versus how he performs the same service for himself. Real estate provides the perfect opportunity, since housing sales are a matter of public record, and real estate agents often do sell their own homes. Recent data covering the sale of nearly 100,000 houses in suburban Chicago show that more than 3,000 of those houses were owned by agents.

Before plunging into the data, a question: What is the agent's incentive when selling her own home? Simple: to make the best deal possible. Presumably, this is also her incentive when selling your home; after all, her commission is based on the sale price. And so your incentive and the agent's incentive would seem to be nicely aligned. But commissions aren't as simple as they seem. First of all, a 6 percent commission is typically split between the seller's agent and the buyer's. Each agent then kicks back half of her take to her agency. Which means that only 1.5 percent of the purchase price goes directly into your agent's pocket.

So on the sale of your $300,000 house, her personal take of the $18,000 commission is $4,500. Still not bad, you say. But what if the house was worth more than $300,000? What if, with a little more effort and patience, she could have sold it for $310,000? After the commission, that puts an additional $9,400 in your pocket. Yet the agent's additional share - her personal 1.5 percent - is a mere $150. So maybe your incentives aren't aligned after all. Is the agent willing to put out all that extra time and energy for just $150?

There's one way to find out: measure the difference between the sales data for houses that belong to real estate agents themselves and the houses they sold on behalf of clients. Using the information from those 100,000 Chicago homes, and controlling for any number of variables - location, age and quality of the house, aesthetics, and so on - it turns out an agent keeps her own home on the market an average of 10 days longer and sells it for an extra 3-plus percent, or $10,000 on a $300,000 house. When she sells her own house, an agent holds out for the best offer; when she sells yours, she pushes you to take the first decent offer that comes along. Like a stockbroker churning commissions, she wants to make deals and make them fast. Why not? Her share of a better offer - $150 - is too puny an incentive to encourage her to do otherwise. So her job is to convince you that a $300,000 offer is in fact very good, even generous, and one that only a fool would refuse.

This can be tricky. The agent doesn't want to come right out and call you a fool. So she merely implies it - perhaps by telling you about the bigger, nicer, newer house down the block that has sat unsold for six months. This is the agent's main weapon: the conversion of information into fear. Consider this true story, related by John Donohue, a law professor who in 2001 was teaching at Stanford University: "I was just about to buy a house on the Stanford campus, and the seller's agent kept telling me what a good deal I was getting because the market was about to zoom. As soon as I signed the purchase contract, he asked me if I would need an agent to sell my previous Stanford house. I told him that I would probably try to sell without an agent, and he replied, 'John, that might work under normal conditions, but with the market tanking now, you really need the help of a broker.'"