A Critical Assessment of the Traditional Residential Real Estate Broker Commission Rate Structure

While real estate brokers have long set their fee as a straight percentage of a home's sale price, this formula is an anomaly and a primary reason why such fees may be inflated by more than $30 billion annually. Although competitive pressures ordinarily produce a fee structure reflecting costs, real estate broker commissions are strangely unrelated to either the quantity or quality of the service rendered or even to the value provided. Rather, this fee has been based solely on the price of the home. (It is as if divorce lawyers set their fee as a flat percentage of a client's net value, irrespective of whether the divorce was amicable without kids or involved bitterly contested custody and other issues . Oddly, not only is there no evidence that it is any more costly to sell higher-priced homes than median-priced properties, but it is possible that the opposite may be true! Furthermore, the straight percentage fee formula creates little incentive for real estate agents to provide home buyers or sellers with additional value. The article analyzes five elements of the traditional residential real estate broker rate structure, the most important of which are: 1) setting fees as a percentage-of-sale-price, 2) letting the seller's broker set the fee received by the buyer's broker, and 3) refusing to unbundle the price of a full package of services. After explaining the conditions under which such rate elements would be justified, this article finds that those conditions do not generally exist in the real estate brokerage market. Moreover, it identifies more than a half dozen harms that the rate elements cause to home buyers and sellers. For example, buyers are often not alerted to attractive homes because the rate structure leads traditional agents to intentionally avoid showing them. Meanwhile, many buyers do not even consider negotiating the fee paid to their broker because the rate structure causes them to believe their brokers' services cost them nothing. After this criticism, the article suggests that consumers would benefit most from a fee-for-service approach, combining flat fees, hourly fees, and bonuses, including percentages of extra value created, and it identifies currently available examples of some of these options. After reviewing eight reasons why incumbents are able to protect the current structure, the article suggests four questions that consumer media should teach consumers to ask to help undermine the industry's protectionist practices.Other Topics

A Critical Assessment of the Traditional Residential Real Estate Broker Commission Rate Structure (Abridged)

Competitive pressures ordinarily force providers’ prices to reflect their cost structures. Standard, traditional real estate broker commissions, however, are strangely unrelated to either the quality of the service rendered or the value provided. This article analyzes five separate elements of the traditional residential real estate broker rate structure and reveals why the traditional percentage-of-sale-price fee formula does not serve the interests of home buyers and sellers. The article concludes by suggesting four short questions that home buyers and sellers should be encouraged to ask about broker fees and services. These should help brokers offering the flat or hourly fees and performancebased bonuses, which best serve consumers, to overcome the anticompetitive obstacles that traditional brokers have maintained to protect themselves. The author would like to thank Aaron Bennett, Peter Bingham, Norm Hawker, Maureen Glasheen, Philip Henderson, James Hsu, Barry Miller, Carolina Nadel, Eugene Nadel, Pat Rioux, Bill Wendel, Larry White, Patrick Woodall, and participants at a January 2006 FTC Bureau of Economics seminar for their helpful comments on earlier drafts. This Article constitutes an abridged version of Mark Nadel’s paper on “A Critical Assessment of the Traditional Residential Real Estate Broker Commission Rate Structure” which is published in its entirety on the CRER website (www.crer.realestate.cornell.edu)

Rings of Privacy: Unsolicited Telephone Calls and the Right of Privacy

So that is the telephone. It rings and you run. This early description of the telephone by the artist Degas still rings true today. So strong is this Pavlovian response that, reportedly, a person standing on a building ledge, ready to jump to his death, returned to his building to answer his telephone. As one court has remarked, A ringing telephone is an imperative which, in the minds of many, must be obeyed with a prompt answer. \u2

Editorial Freedom: Editors, Retailers, and Access to the Mass Media

When confronted with regulations which permit others to have access to their media, cable television system owners, among others, have challenged such rules as abridging their first amendment right to editorial freedom. The author analyzes this defense by examining exactly what editorial freedom is, and why it is protected. He argues that editorial freedom is best understood as the right of consumers to receive information effectively, and thus to employ editors to provide so called editorial functions. After noting that these services are analogous to those generally provided by retailers, the author discusses the editorial functions performed by cable operators. The author then evaluates whether, according to this framework, various media access rules interfere with editorial freedom

Computer Code vs. Legal Code: Setting the Rules in Cyberspace

Book Review: Code and Other Laws of Cyberspace, by Lawrence Lessig, Basic Books, 1999, 230 pages

How Current Copyright Law Discourages Creative Output: The Overlooked Impact of Marketing

This Article explores how copyright law's prohibition against unauthorized copying and sales may, counter to the law's purported goal, have an overall negative impact on the production and dissemination of creative content. The Article contends that in the current lottery-like environment of many media markets, copyright law disproportionately inflates the revenues of the most popular creations, which leads publishers to spend increasing amounts on promotional campaigns, which, intentionally or not, drowns out economically marginal creations. This discourages, rather than encourages, investment in many new creations. Consequently, current copyright law may actually reduce the overall production of new creations. As an alternative to the current strict limits copyright law imposes on copying, this Article explains how new technologies, social norms, and much weaker prohibitions against unauthorized copying may be combined to create viable business models for financing new creations. These business models appear capable of ensuring creators and publishers a sufficient profit to stimulate creation and distribution but without the significant harms produced by broad prohibitions against unauthorized copying.

Control and modeling of a CELSS (Controlled Ecological Life Support System)

Research topics that arise from the conceptualization of control for closed life support systems which are life support systems in which all or most of the mass is recycled are discussed. Modeling and control of uncertain and poorly defined systems, resource allocation in closed life support systems, and control structures or systems with delay and closure are emphasized