In his book “Freakonomics,” University of Chicago economist Steven Levitt and journalist Stephen J. Dubner explain the economics of residential real estate transactions, which may come as a surprise.
Because most real estate agents who work with sellers are paid a percentage of a house purchase price, most sellers believe those agents have an incentive to sell their houses for the highest price they can get.
But Levitt explains that because most seller’s commissions are a small portion of the selling price — typically 3-4% — the increase in an agent’s commission on a higher sale is relatively small, and therefore doesn’t provide much incentive.
Knowing what I know about building incentive and compensation structures and also human behavior, I believe he’s right. Levitt says agents get a much larger jump in earnings when they sell more houses. Therefore, selling agents’ real incentive is to sell houses as fast as they can, which usually translates into selling them for less rather than more.
What Your Peers Are Reading
Levitt’s book had an impact on me because it offered this and many other examples of how economics affects financial transactions in unexpected ways. I thought of this book recently as I was analyzing the current market for independent advisory firms.
Market for Advisors
Conventional wisdom is that the buying and selling of advisory firms is slowing down. But from what I can see, it’s actually speeding up .
The transactions are being handled in a different way, though, which means they fly under the radar of those collecting this type of data.
The experts who keep tabs on M&A activity in the independent advisory space are either M&A brokers or industry players who get their information from these brokers. And like real estate agents in Levitt’s research, M&A brokers can make more money by selling firms quickly, so they can move on to the next sale.
Yet wouldn’t a quick sale be best for the selling advisor(s), too? Not really, because advisory firms sell most quickly when you sell them to one buyer.