The Role of Commission Rates and Specialization in the Determination of Real Estate Agent Income

Article excerpt

Abstract

This paper explores the performance of residential real estate agents and the commission structure under which they operate. This study reveals the interrelationship among the number of properties sold by an agent, the dollar volume of sales, and real estate agent income. This research shows that the ability to generate listings is essential to generating higher levels of income in residential real estate sales. The listings become the platform from which agents leverage their human capital in the generation of income. However, the ability to generate listings is a skill related to experience, as well as to the firm and market environment.

The real estate brokerage industry is a major employer in the United States. The National Association of Realtors® (NAR) estimates there are approximately 2.5 million real estate professionals licensed by the various states. These agents are employed in 236,000 real estate broker office locations across the county. About 1.2 million real estate professionals are NAR members. In 2004, the sale of new and existing homes amounted to approximately $1.9 trillion. The NAR estimates that the housing sector directly accounts for 15% of U.S. gross domestic product (GDP).

This paper explores the performance of residential real estate agents and the commission structure under which they operate. While numerous studies have examined broker earnings and commission rates, the current study develops a testable model that relates the number of housing transactions, sales, and commissions to the source of the listing.1 In the model, agents choose to focus their efforts on developing listings, selling other agents' houses, or selling their own listings. Since these activities require specific and distinct skills, agents who perform these three activities have differing demographic characteristics, and the characteristics of firms with which the agents are affiliated differ as well. Empirical evidence from the 2005 NAR Membership Survey supports the testable model and shows that agent and firm characteristics are related to the source of the listing sale.

The Market for Brokerage Services

Agents act on the behalf of clients in the sale and purchase of their clients' houses. In a world of perfect information where sellers know the potential buyers and maximum prices they are willing to pay, home sellers and buyers would not need agents. In reality, however, information is far from perfect, and agents provide information to sellers and buyers in exchange for a commission rate based on the sales price of the property.

Firm Output, Revenue, and Listing Specialization

A number of studies have examined production and revenue at the brokerage-firm level. Jud, Rogers, and Crellin (1994) find that the number of homes sold by residential real estate firms increases with the size of the metropolitan area, firm size and age, and MLS affiliation. For the average firm, net revenue increases 9.0% because of franchise affiliation. Operating efficiency studies of real estate firms have been undertaken by Zumpano, Elder, and Crellin (1993), Zumpano and Elder (1994), and Anderson, Fok, Zumpano, and Elder (1998) among others. Zumpano, Elder, and Crellin find a U-shaped cost curve with modest economies of scale. Zumpano and Elder report that a balanced mix of listings and sales are optimal at the firm level and minimize cost. Their study, however, does not examine specialization at the agent level. Anderson et al. find that real estate brokerage firms operate inefficiently because of suboptimal input allocations and failure to operate at constant returns to scale, and firm size is positively related to efficiency levels.

Richins, Black, and Sirmans (1987) utilize cluster analysis to explore the operations of brokerage firms. They find that firms tend to self-select one of three strategic orientations for the generation of revenue: (1) obtaining listings that are sold by other firms; (2) selling properties that are listed by other firms; and (3) selling the firm's own listings. …