Real estate agents tend to charge a flat percent of the sale price of a home, typically about 6%. This figure is the same regardless of the agent's talent or experience, and regardless of how much work the agent does or the results he or she achieves. Instead, the agent's compensation is largely determined by the prevailing property prices in the area (compare the median home prices in St. Louis of $180k versus here in Boston of $370k). Double pay for the same work?

Mark Nadel recently posted this smart critique of the realtor industry (including more than 400 footnotes, wow), arguing that this typical fee structure is senseless. As Mark writes,

Oddly, not only is there no evidence that it is any more costly to sell higher-priced homes than median-priced properties, but it is possible that the opposite may be true! Furthermore, the straight percentage fee formula creates little incentive for real estate agents to provide home buyers or sellers with additional value.

For buyers, this fee structure is particularly senseless, since it incentivizes the agent to get the highest possible sale price, which is directly contrary to her customer's interests. (Kind of like the way the Bush Administration paid Halliburton in Iraq, it seems.) Even for sellers, a fixed percentage of the total sale price makes little sense. Selling agents will generally not be incentivized to work hard to get the highest price, since they'll instead only get 6% of the marginal increase. Instead, they will be quite happy to spend their time getting additional customers. Would you rather spend 10 hours that yield 6% of a $10,000 increase in sale price, or spend 10 hours finding another customer that will give you 6% of the entire new sale, at $200,000?

The most obvious solution to this problem is the market itself -- more competition. In the last few decades, "discount" real estate agents have arisen and tried to compete, offering ala carte services at cut rates. (The toughest thing for sellers is just to get listed in the MLS.) However, Mark presents evidence that old school relators have done everything in their power to stop the infidels -- from blackballing sellers who rely on such independent agents to enlisting state legislatures to outlaw the competitors. (See this statement from Congressman Mark Oxley, which also includes the $100B figure I used in the title above, and this Wall Street Journal peice explaining how mainstream realtors are making it easier for themselves to blackball properties listed with discount brokers.)

As Mark notes, with 1.3 million members, the Association of Realtors is the largest industry group in America, and they are nicely distributed with hundreds of members in every Congressional district. (Here, by the way, is their rebuttal.) So I wouldn't expect the legislatures to leap to the rescue of consumers.

So, you tell me -- what's the solution? Is there a role for the courts? If the legislative branch has been coopted by the special interests, then perhaps this is the only route. But what's the theory? The basic fees are set by contract, which at least in theory, are unassailable. So how about a breach of fiduciary duty? Deceptive trade practices?