The AEI-Brookings Joint Center For Regulatory Studies has just issued a "critique" on the traditional real estate commission structure called, "A Critical Assessment of the Standard, Traditional, Residential Real Estate Broker Commission Rate Structure."

Among the points made in the critique, "commissions are strangely unrelated to either the quantity or quality of the service rendered ..." and that the "fee-for-service approach -- combining flat fees, hourly fees, and bonuses, including percentages of extra value created ... ."

Written by Mark S. Nadel, a public policy critic, the article is intended for publication in a law journal. While the report is scathing, Nadel claims to have no agenda. "No one commissioned it or paid me anything for it. I write public policy articles as a hobby," he says.

Nadel took it upon himself to examine real estate commissions because his "research has focused on intermediaries: the editors, retailers, and professionals who help buyers make wise purchase or selection decisions."

In fact, back in 1983, Nadel says he wrote an op-ed in the Wall Street Journal on "how travel agent commissions should be set by travel agents, not airlines, and in 1998-2000, when I was writing a piece on how the Internet might change the functions of intermediaries (published in Harvard Law School's Journal of Law & Technology), I was struck by the similarity between travel agent commissions and real estate agent/broker commissions. I started work on it in 2000, put it away for a while, and then returned to it in spring 2005."

When experienced agents don't crack six figures and first-years barely subsist on $12,000 annually, and those in the middle earn what an average teacher makes, it's a mystery why real estate agent commissions seem to be such an issue with consumer and policy groups that a study like this is necessary. For example, if protecting the public is the goal, why not concentrate on executive pay? CEO pay is egregious at nearly 500 times that of the average workers' salaries. When times are tough, CEOs rake in the cash and double-harness their golden parachutes, as was illustrated by American Airlines CEO Don Carty after negotiating lay-offs and pay cuts for flight attendants and pilots. He lost his job when it was found out that he had negotiated egregious sums for himself and his executives while crying "we're near bankruptcy" to get the workers to agree to pay cuts.

"I don't know if any AEI/Brookings scholars have focused on executive pay, but I agree with your position," says Nadel. "I believe that the problem is caused by the way corporate boards of directors (the ones who set CEO pay) are selected. If boards of directors felt accountable to shareholders, rather than to management, they would negotiate for lower pay. I wrote an op-ed piece in the Wall Street Journal in 1989 arguing for reform of the elections of boards of directors. Still, since Harvard Law Prof. Lucian Bebchuk (Pay Without Performance (2003) etc.), Graef Crystal, and Pulitzer Prize winning NY Times journalist Gretchen Morgenson are among the many who are already addressing the issues I find most intriguing, I looked for a topic where I thought I might have something to say that was not already being said well by others."

Did Nadel consider the independent contractor component and that cooperative fees are based on getting homes sold for the seller?

"I don't believe this aspect of the relationship affects what I say about the fee structure," says Nadel. "My understanding is that both buyers and sellers benefit from the sale of a home, just as both buyers and sellers benefit from most wise purchases. I think that the buyers should and would be willing to pay a fair price for an expert in real estate who could consider their interests and help them make an excellent choice and smooth closing."

How would Nadel recommend getting independents to work together on behalf of sellers and buyers without shared fees, or the MLS?

"First, let me say that having a single searchable entity where sellers can place their listings knowing that buyers will be able to easily find those meeting their search criteria is tremendously valuable," replies Nadel. "I am not aware of anyone who does not believe that such entities, whether called MLSs or some more generic term, should continue to be maintained and financed by some combination of fees to sellers and buyers. As the article states, however, I generally agree that MLS listings should not include a co-op fee."

"I don't see any problem getting independent representatives for buyers and sellers to work together even though they are paid by their respective parties," he continues. "My grandfather was a purchasing agent for Paramount Pictures and he was paid by Paramount to make wise purchase decisions for them by negotiating with the salespeople of his suppliers. My understanding is that almost all retailers pay individuals (their "buyers") to negotiate with the salespeople of their suppliers."

Fee-for-service, a system Nadel recommends to be paid to service providers on the back end like commissions, has been available for years, but is not widely in use because sellers don't like paying upfront for real estate services.

"As you note, fee-for-service can be on the backend, so I don't see this as a significant reason," says Nadel. "I believe that fee-for-service is not widely used due to all of the obstacles I discuss in Section VIII of the article."

Published: October 10, 2006

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Blanche is a renowned author of five real estate books. Her newest, Bubbles, Booms and Busts: Make Money In Any Real Estate Market, McGraw-Hill, was rave-reviewed by The New York Times. She was also selected from hundreds of real estate experts to contribute to Donald Trump's book, Trump: The Best Real Estate Advice I Ever Received: 100 Top Experts Share Their Strategies, Rutledge Hill Press, and is featured on page 68. Order Now Review - Honors In 2006, Blanche was selected among scores of candidates to author two consumer real estate guidebooks for the National Association of Realtors: The NAR Guide to Home Buying, and The NAR Guide to Home Selling, Wiley & Sons. She is currently planning two new books for the NAR and its members.       Known for her keen insight into real estate industry issues and for her ability to make complex subjects easy to understand, Blanche is a sought-after keynote and continuing education speaker. Real estate organizations from MLSs, to brokerages, to franchisors, to associations hire her to provide up-to-the-minute analysis of real estate industry news and advice on how to improve revenues. Her passionate delivery, peppered with stinging wit, is a huge hit with audiences and fans. Don Klein, CEO Greater Nashville Association of Realtors, Blanche Evans, Richard Courtney, president 2007, GRAR "The GNAR membership meeting last week featured Blanche Evans as the keynote speaker. Her comments and insights resonated extremely well with those in attendance and we have had many requests for copies of her PowerPoint Presentation. She was a terrific part of the membership meeting and convention program!" - Don Klein, CEO Greater Nashville Association of Realtors Coverage from WSMV, Nashville - 8-14-2007 That Interview Guy - Get Inside The Head Of Today's Generation 2007 AE Institute Session - To purchase 2006 AE Institute Session - Parts 1 2 3 4 5 6 7 8 9 HouseValues Mastermind call - Parts 1 2 Blanche's fireside chat with Jeremy Conaway, HAR - Click here. For more articles by Blanche, click here.