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The Journal of Real Estate Finance and Economics

Erschienen in:

01.10.2011

The Limited-Service Brokerage Decision: Theory and Evidence

verfasst von: Jonathan A. Wiley, Leonard V. Zumpano, Justin D. Benefield

Erschienen in: The Journal of Real Estate Finance and Economics | Ausgabe 3/2011

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Abstract

This study examines the home seller’s brokerage services decision, comparing full-service brokerage and limited-service arrangements. A model is developed which considers seller motivation and availability of effort, along with the cost of brokerage services, broker productivity and market dynamics as factors of influence in this decision. Limited-service arrangements are found to have a significant impact on price and marketing time. The popularity of limited-service arrangements is strongly influenced by the total dollar cost of brokerage services, which, in turn, is determined by housing market conditions.

Vorheriger Artikel Development Value: A Real Options Approach Using Empirical Data

Nächster Artikel An Analysis of Lockups in REIT IPOs

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At full price, the broker’s revenue is (Sale price)*(.06). At a 10% reduction in price, the broker’s revenue is (Sale price)*(.9)*(.06). The seller’s loss is (Sale price)*(.1). The broker’s loss is (Sale price)*(.06) - (Sale price)*(.9)*(.06) = [(Sale price)*(.1)]*(.0638), or 6.38% of the amount of the seller’s loss.

What generally distinguishes limited-service brokers from their full-service counterparts is that limited-service brokers provide no affirmative marketing services other than listing properties on the MLS. Limited-service brokers usually do not assist sellers in determining asking price or act as advocates of the seller.

For the empirical section of the paper we rely on an extensive body of literature dedicated to selling price and marketing duration starting with papers by Cubbin (1974) and Miller (1978). Sirmans et al. (2005) provide a review of research examining the simultaneous estimation of price and time-on-market. Research to directly consider the impact of brokerage on price and marketing time includes Jud et al. (1996), Zumpano et al. (1996), and Elder et al. (2000). Pricing strategies are covered by Benjamin and Chinloy (2000), Knight (2002), and Anglin et al. (2003). Three literature reviews summarize existing literature on brokerage contracts and commission structures: Megbolugbe et al. (1991); Yavaş (1994); and Benjamin et al. (2000).

This is the solution to the bargaining game proposed by Nash (1950) and initially applied to the real estate transaction by Yavaş (1992).

To see this, suppose that z is the probability of sale in the first period, with probability of sale in period t being z(1 – z)^t-1. If δ is the discount factor, then the expected value of one future dollar in sale proceeds discounted to the present period can be written as a geometric series \( E\left( {{\delta^t}} \right) = \sum\limits_{t = 1}^\infty {{\delta^t}z{{\left( {1 - z} \right)}^{t - 1}} = \delta z\sum\limits_{t = 0}^\infty {{\delta^t}} {{\left( {1 - z} \right)}^t} = \delta z\left( {1/\left( {1 - \delta \left( {1 - z} \right)} \right)} \right)} \).

HS₃ is the school district with the largest number of transactions during the sample and suppressed in Eqs. (6) and (8). Q₁ is suppressed so that all time controls are measured relative to the first quarter of data, Q3 2005. The indicator variables for two bathrooms and two bedrooms are omitted, so that the results for the Three_bath and Half_bath as well as Three_bed and Four_bed should be interpreted relative to properties with two bathrooms and two bedrooms, respectively.

There are several ways to measure the effects of multiple bathrooms. One method is to create incremental indicator variables for each category (e.g., 2-baths, 2.5-baths, 3-baths, etc.). However, the incremental value of a half-bathroom also potentially signals a modern construction style (this is especially true in the subject market). Although, the Age variable absorbs much of the variance in property values related to depreciation, even residential properties built in the same year are subject to differences in construction quality and modern style. The method used here is to consider half-bathrooms separately as a proxy for these effects.

Although transaction prices eventually become public record in many jurisdictions, quantitative results for marketing time are particularly difficult to measure accurately in non-MLS transactions.

Instruments for the first-stage estimation of ln(Market_time) include ln(SqFt), ln(Age), Three_bed, Four_bed, Three_bath, Half_bath, Vacant, Motivated, HS _i, Q _j, NoMkt, Longitude and Latitude. Longitude and Latitude are geographic coordinates; including these variables allows for second-stage coefficients with non-zero degrees of freedom. Instruments for the first-stage estimation of ln(Sale_price) include the same set of variables, excluding NoMkt.

Anglin, P. M. & Arnott, R. (1991). Residential real estate brokerage as a principal-agent problem. Journal of Real Estate Finance and Economics, 4, 99–125.CrossRef

Anglin, P. M., Rutherford, R. C., & Springer, T. M. (2003). The trade-off between selling price of residential properties and time-on-the-market: the impact of price setting. Journal of Real Estate Finance and Economics, 26, 95–111.CrossRef

Arnold, M. A. (1992). The principal-agent relationship in real estate brokerage services. Real Estate Economics, 20, 89–106.CrossRef

Benjamin, J. D. & Chinloy, P. T. (2000). Pricing, exposure, and residential listing strategies. Journal of Real Estate Research, 20, 61–74.

Benjamin, J. D., Jud, G. D., & Sirmans, G. S. (2000). What do we know about real estate brokerage? Journal of Real Estate Research, 20, 5–30.

Cubbin, J. S. (1974). Price, quality, and selling time in the housing market. Applied Economics, 6, 171–187.CrossRef

Elder, H. W., Zumpano, L. V., & Baryla, E. A. (2000). Buyer brokers: do they make a difference? their influence on selling price and search duration. Real Estate Economics, 28, 337–362.CrossRef

Fisher, L. M. & Yavaş, A. (2009). A case for percentage commission contracts: the impact of a “race” among agents. Journal of Real Estate Finance and Economics, doi:10.1007/s11146-008-9139-x.

Han, L., Hong, S. (2009). Testing cost inefficiency under free entry in the real estate brokerage industry. Working paper, November 9, 2008. Available at SSRN: http://ssrn.com/abstract=1205678.

Hsieh, C. & Moretti, E. (2003). Can free entry be inefficient? fixed commissions and social waste in the real estate industry. Journal of Political Economy, 111, 1076–1122.CrossRef

Johnson, K. H., Springer, T. M., & Brockman, C. M. (2005). Price effects of non-traditionally broker-marketed properties. Journal of Real Estate Finance and Economics, 31, 331–343.CrossRef

Jud, G. D., Seeks, T. G., & Winkler, D. T. (1996). Time-on-the-market: the impact of residential brokerage. Journal of Real Estate Research, 12, 447–458.

Knight, J. R. (2002). Listing price, time on market, and ultimate selling price: causes and effects. Real Estate Economics, 30, 213–237.CrossRef

Megbolugbe, I. F., Marks, A. P., & Schwartz, M. B. (1991). The economic theory of housing demand: a critical review. Journal of Real Estate Research, 6, 381–393.

Miller, N. G. (1978). Time on the market and selling price. Real Estate Economics, 6, 164–174.CrossRef

Munneke, H. J. & Yavaş, A. (2001). Incentives and performance in real estate brokerage. Journal of Real Estate Finance and Economics, 22, 5–21.CrossRef

Nash, J. (1950). The bargaining problem. Econometrica, 18, 151–162.CrossRef

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Rutherford, R. C., Springer, T. M., & Yavaş, A. (2005). Conflicts between principals and agents: evidence from residential brokerage. Journal of Financial Economics, 76, 627–665.CrossRef

Sirmans, G. S., Macpherson, D. A., & Zietz, E. N. (2005). The composition of hedonic price models. Journal of Real Estate Literature, 13, 1–44.

Williams, J. T. (1998). Agency and brokerage of real assets in competitive equilibrium. Review of Financial Studies, 11, 239–280.

Yavaş, A. (1992). A simple search and bargaining model of real estate markets. Real Estate Economics, 20, 533–548.CrossRef

Yavaş, A. (1994). Economics of brokerage: an overview. Journal of Real Estate Literature, 2, 169–195.

Zorn, T. S. & Larsen, J. E. (1986). The incentive effects of flat-fee and percentage commissions for real estate brokers. Real Estate Economics, 14, 24–47.CrossRef

Zumpano, L. V., Elder, H. W., & Baryla, E. A. (1996). Buying a home and the decision to use a real estate broker. Journal of Real Estate Finance and Economics, 13, 169–181.CrossRef

Titel: The Limited-Service Brokerage Decision: Theory and Evidence
verfasst von: Jonathan A. Wiley
Leonard V. Zumpano
Justin D. Benefield
Publikationsdatum: 01.10.2011
Verlag: Springer US
Erschienen in: The Journal of Real Estate Finance and Economics / Ausgabe 3/2011
Print ISSN: 0895-5638
Elektronische ISSN: 1573-045X
DOI: https://doi.org/10.1007/s11146-009-9217-8

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