A little over a month ago a Tampa, Florida real estate agent published a blog post wherein he "proved" that home sellers are better off paying a high commission to their real estate agent: How Commissions Effect [sic] Sales. About a week later the story was picked up by Inman, a real estate industry news publication, that happily reported that an experiment reveals how commission-cutting benefits no one.
The author of both stories, Nico Hohman, analyzed thousands of transactions and concluded that when home sellers paid a higher real estate commission their home sold for a higher price. Gee. Don't you think that conclusion is just a wee bit convenient? Let's dissect his analysis to uncover where he went off track.
First, you can't even begin to explore a topic like this without coming up with some kind of theory as to why this would be true and, frankly, I can't come up with a single explanation. Not even in Bizzaro World. The closest theory would be what I've occasionally heard consumers speculate about: "if the agent doesn't get a high enough commission they won't work as hard." It's the you-get-what-you-pay-for fallacy.
Once the commission is agreed to, whether it's high or low, the agent is going to get paid regardless of what price is paid. And the impact of the higher price on their commission is minuscule regardless of whether the listing side gets 2% or 3%. I guess if the agent reluctantly agrees to a commission cut there might be some resentment at play but most realtors that offer a discounted real estate commission embrace it as their business model.
And suppose we did believe that paying a higher commission would result in a higher sales price? Does that mean that we should pay a 50% commission because, boy, we would really get a high sales price then!
The whole concept just doesn't hold water.
I only know enough statistics to be dangerous but I think that Nico's conclusion is based upon blatantly ignoring basic statistics. He didn't even bother to calculate the statistical significance, though he did provide the data to do so. And just eyeballing it I can tell you his results are not even remotely close to being statistically significant. The difference in the means between the 3% commission group and the less than 3% commission group is a mere .064%, which is only 0.9% of the standard deviation of the 3% group and only 1% of the standard deviation of the less than 3% group. I think you need that difference to be like 2 standard deviations. Not even close and the difference with the greater than 3% group is in the same ballpark.
Looking At The Wrong Data
But the problems with Nico's analysis go much deeper. He is basing his price difference conclusion on the bogus close to list ratio, which he erroneously refers to as the list to close ratio. As I pointed out about a month ago differences in that ratio tell you nothing about relative price realization: Real Estate Agents Who Claim To Sell Homes At Higher Prices: The Bogus Sale To List Ratio.
So, there really is no basis for concluding that discount commissions are bad for home sellers. The conclusion of these articles makes no sense and was derived from bad data, incorrectly analyzed. I guess you really have to be leery of any real estate agent with a blog who thinks he knows how to analyze data and then publishes his analyses. Yeah, the irony of that statement is not lost on me.
Gary Lucido is the President of Lucid Realty, the Chicago area's full service discount real estate brokerage. If you want to keep up to date on the Chicago real estate market, get an insider's view of the seamy underbelly of the real estate industry, or you just think he's the next Kurt Vonnegut you can Subscribe to Getting Real by Email using the form below. Please be sure to verify your email address when you receive the verification notice.