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Cornell Real Estate Review

Abstract

Competitive pressures ordinarily force providers’ prices to reflect their cost structures. Standard, traditional real estate broker commissions, however, are strangely unrelated to either the quality of the service rendered or the value provided. This article analyzes five separate elements of the traditional residential real estate broker rate structure and reveals why the traditional percentage-of-sale-price fee formula does not serve the interests of home buyers and sellers. The article concludes by suggesting four short questions that home buyers and sellers should be encouraged to ask about broker fees and services. These should help brokers offering the flat or hourly fees and performancebased bonuses, which best serve consumers, to overcome the anticompetitive obstacles that traditional brokers have maintained to protect themselves.

The author would like to thank Aaron Bennett, Peter Bingham, Norm Hawker, Maureen Glasheen, Philip Henderson, James Hsu, Barry Miller, Carolina Nadel, Eugene Nadel, Pat Rioux, Bill Wendel, Larry White, Patrick Woodall, and participants at a January 2006 FTC Bureau of Economics seminar for their helpful comments on earlier drafts. This Article constitutes an abridged version of Mark Nadel’s paper on “A Critical Assessment of the Traditional Residential Real Estate Broker Commission Rate Structure” which is published in its entirety on the CRER website (www.crer.realestate.cornell.edu).

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