Game-Changer: Game Theory and the Art of Transforming Strategic Situations by David McAdams

Author:David McAdams
Language: eng
Format: mobi, epub
Publisher: W. W. Norton & Company
Published: 2014-01-26T18:30:00+00:00

Changing the Game with Sellers’ Agents

There are several ways to alter the standard agency contract in order to better align the financial incentives of homeowners and their agents. For example, consider a cost-plus contract, in which the seller pays the agent for time and expenses during the home sale process plus a bonus if the house is sold. With a cost-plus contract, your agent faces no risk of loss from taking on your business, and has less financial incentive to rush you to sell.

Further, under a cost-plus contract, the agent has an incentive to provide more of the “ancillary services” associated with selling a house, whenever it’s more efficient for the agent to do so. Under the current system, the best agents routinely advise homeowners to hire painters and home contractors, rent furniture, hire landscapers and gardeners, buy fresh-cut flowers, and the rest. The homeowner then typically manages the contractor and pays for the furniture, flowers, and so on. However, it could be much more convenient and cost-effective for agencies to manage and pay for such services.7 Indeed, since agencies represent many clients and can credibly promise repeat business in exchange for great work at a good price, agencies can exploit their scale and relationships with service providers in ways that individual homeowners cannot.8

In this way, cost-plus contracting could actually transform the real estate business itself, adding even more high-value services to the long list that agents already provide. Moreover, providing such services would allow the largest agencies to leverage their scale to offer a “product” that smaller agencies could not hope to match. This would allow large agencies to entrench their market power (legitimately, without any concern of violating antitrust law)9 and deter entry by scrappy smaller players.

The threat of such entry is a serious concern for most large real estate agencies today since, ultimately, the benefits that they enjoy from having a large network are tenuous and mainly based on homeowners’ perception that they offer higher-value service. For instance, RE/MAX can claim that “Nobody in the world sells more real estate than RE/MAX,”10 but how does that help sell your house? One reason might be that RE/MAX’s success reflects its “respect for the entrepreneurial spirit,” which attracts only the most hardworking agents into its fold.

Indeed, RE/MAX burst onto the real estate scene in the 1970s with a completely new “autonomous” business model, in which agents pay all of their marketing expenses, keep all of their commissions, and just pay RE/MAX a “desk fee” for office space and the privilege of being associated with the RE/MAX brand. Joining RE/MAX is therefore truly a sink-or-swim decision that only the most gutsy and hardworking agents are willing to make. However, if you’re looking for gutsy entrepreneurs, why not consider a small startup agency that’s unencumbered by desk fees? Such a startup could be even more effective at poaching the best and brightest agents from the mainline agencies.11

For these reasons and more, big agencies’ hold on the real estate market is much less secure than it seems.

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