The stanford study

Figuring out the ‘truth’ for what makes homes sell is hard.  One reason is that it is nearly impossible to test anything resembling a double blind trial in residential real estate.  You can't split time, create space, and replicate matter to enable a situation for selling the same house, two different ways - and therefore we can’t measure the result.  Causation is hard to establish in residential real estate property sales (e.g. ‘my marketing was what sold the house’ or that given broker ‘got you the highest price') and correlation claims run rampant in traditional industry marketing (i.e., ‘I sold that home so I am the best to sell your home’ or ‘my brand and network of buyers has generated results’).  Opportunities to learn something about the true governing dynamics of various effects in real estate are therefore rare. But in the rare cases when they are found, they can demonstrate substantial and surprising effects, and the Stanford study does just that. Review the startling conclusions in “Do real estate brokers add value when listing services are unbundled?” by B. Douglas Bernheim & Jonathan Meer from the NBER in 2008.  


The Stanford study is an interesting piece of residential real estate research due to its stark conclusions and ingenuity in finding and measuring an effect.  Stark by finding a clear cut microeconomic incentive misalignment between principals and agents when real estate agents talk homeowners down on price during a sale process.  And ingenious by studying a unique situation on the Stanford campus to measure the effect of broker involvement in a home sale, independently of the effects of also using a multiple listing service (MLS) to find a buyer.  

Most traditional real estate agents will tell you that their knowledge of the local market and expertise in marketing and transaction management justify their high price tag. But data collected in this paper suggest that, other than the MLS listing insertion, such services do not drive the selling price of a house up; they may actually be driving it down. Sellers should have a choice when it comes to what level of service they want to pay for. Both the Federal Trade Commission and the Department of Justice have challenged the practice of bundling as stifling competition and not serving customers on multiple occasions.

What the Stanford study found was that homeowners may be losing significant amounts of money when they let the wrong motivation sit at the pricing table.   In the vast majority of markets across the United States, consumers have limited choice when it comes to “unbundling” a broker’s services from listing in the MLS; in some states the industry lobby has even made this illegal. But houses built on Stanford University land can be listed for free without a broker, which allows it to study the value add of brokers beyond inserting a listing in the MLS. When adjusting for the house’s characteristics, the study found that a seller’s use of a broker actually reduced the selling price by 5.9% to 7.7%. After such findings were circulated amongst Stanford faculty, the proportion using a traditional broker halved from about 60% to less than 30% the next year.

 Proportion of homes sold using a broker

Proportion of homes sold using a broker









There is a commonly espoused maxim that ‘you pay for quality’ when it comes to residential real estate services, especially when agents won’t discount their fees.  But actually, the Stanford study finds that the involvement of a high priced, commissioned real estate agent may actually lead you to literally sell your home for less than it is worth.  Extrapolating the authors’ findings to the $1 trillion in annual sales for the US housing market, homeowners may be losing as much as $77 billion a year, without factoring in any other losses associated with high commissions.  


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