Do Real Estate Brokers Add Value When Listing Services Are Unbundled

I. INTRODUCTION Real estate brokers typically provide sellers with bundles of services, most of which are ostensibly aimed at improving the terms at which homes are sold and helping homeowners find buyers more quickly. (1) Traditionally, access to the multiple listing service (MLS), a pooled database of homes for sale that is owned and operated by an association of local real estate brokers, has been an important component of that bundle. Other components of the traditional brokerage bundle that potentially affect the terms and timing of a sale include market information and recommendations pertaining to the appropriate asking price, (2) promotional services (preparing a home for sale, circulating flyers, placing advertisements, holding open houses, and recommending the home to individual buyers), the screening of prospective buyers, the facilitation and acceleration of matches between buyers and sellers, (3) and assistance with negotiations. (4) The object of this paper is to measure the effects of real estate brokerage services provided to sellers, other than MLS listings, on the terms and timing of home sales. It is not obvious that sellers benefit from those services. On the one hand, brokers offer potentially useful knowledge and expertise. On the other hand, because the relationship between the homeowner and the broker resembles a classical principal-agent problem, the broker may not deploy services in ways that promote the seller's interests. While appropriately structured compensation schemes may alleviate the principal-agent problem to some degree (see, e.g., the recent survey by Miceli, Pancak, and Sirmans, 2007), significant conflicts remain. As Levitt and Syverson (2008) emphasize, an agent "has strong incentives to sell the house quickly, even at a substantially lower price." Their empirical analysis shows that homes owned by agents sell for nearly 4% more and stay on the market roughly 9 days longer than other comparable houses. Similarly, Rutherford, Springer, and Yavas (2005) find that "real estate agents receive a premium of 3.0%-7.0% when selling their own condominiums in comparison to similar client owned condominiums" by waiting longer to sell. (5) While those studies shed light on the magnitude of agency costs (i.e., the extent to which the deployment of brokerage services departs from the first-best), they do not tell us how those costs compare to the benefits flowing from a broker's knowledge and expertise. Consequently, they do not answer the question posed at the outset of this paragraph. The importance of the question addressed in this paper is most readily apparent within the context of the recent policy debate over service bundling in real estate brokerage. As long as valuable MLS listings are bundled with brokerage services, homeowners may use brokers even if the agency costs exceed the benefits of brokers' knowledge and expertise. In that case, unbundling would benefit homeowners and promote efficiency. In practice, a small but growing number of brokers now offer to place clients' homes in the MLS for a fixed fee. (6) Yet in many jurisdictions established brokers have resisted pressures to unbundle MLS listings from other services. In some cases, they have pressed for "minimum service" laws that prevent agents from offering MLS-only options. As of 2007, eight states had such laws in place. (7) Some states have also adopted licensing requirements that impede the entry of non-traditional real estate brokers. Where such laws are not in force, some MLSs have adopted their own rules and procedures to prevent or at least discourage unbundling. (8) Though the Internet increasingly provides alternatives to MLS databases (at least in some jurisdictions), the U.S. Federal Trade Commission observed as recently as November 2009 that "[t]he MLS is generally acknowledged to be a superior platform for matching home buyers and sellers." (9) Thus, the practice of bundling MLS listings with other real estate brokerage services handicaps homeowners who wish to sell their homes either completely independently ("for sale by owner" or FSBO transactions) or without the ancillary services of a listing broker. …