Evolution of Real Estate Brokerage and why the role of the broker is central

Real estate brokerage has its origins in the 19th century, when land transactions were made between countries (Montgomery, 2012; Morris, 2010; Kastor, 2004). A notable example would be the purchase of Alaska, when Secretary of State William H. Seward, representing the United States, successfully acquired 586,412 square miles of land for $7.2 million from Russia (Saul, 2018; Sexton, 2014). 

Since then, brokerage has considerably changed. Nowadays, brokerage represents a core vertical in the real estate industry (Ba and Yang, 2018), with a global revenue of approximately $235,000 billion in 2018 and over 210,000 companies operating worldwide (Statista, 2019). A conventional real estate brokerage is defined as a firm that employs brokers who offer their ability to bring together buyers and sellers in facilitating a property exchange (Wiley and Zumpano, 2008; Hornstein, 2002; Richins et al., 1987). 

Guttery et al. (2000) determined that brokerage ?rms exist because of the information scarcity. This suggests that buyers and sellers depend on brokers to guide them in the property search as gaining housing market information is time-consuming and pricey (Zietz and Sirmans, 2011). However, the rise of technology and internet, has brought a change that made property search much cheaper and easier (Barwick and Wong, 2019; Edelstein and Green, 2018; Veuger, 2018; Baum, 2017; Wu and Xie, 2015). Moreover, the modern software allows buyers and sellers connect with each other virtually and eliminate the middlemen, brokers as such (Rider and Samila, 2019; McLaughlin, 2018; Baum, 2017;).

The role of a traditional real estate broker  

The role of a real estate broker has been critically reviewed by a large number of scholars (Benefield et al., 2019; Larceneux et al., 2015; Bernheim and Meer, 2008; Levitt and Syverson, 2005; Hendel et al., 2007; Fain, 1995; Fisher and Sirmans, 1994). Yavas (2007) considers that brokers play a major role and are involved in almost every phase of a real estate transaction. Seilers’ et al. (2008) study on the impact of service on real estate brokerage shows that buyers and sellers appreciate the human touch, such as brokers’ reliability, responsiveness to their needs, and empathy.  

Furthermore, Larceneux et al. (2015), Bernheim and Meer (2008) evidenced that brokers have two key functions, to provide market information and improve coordination between parties. These services are rewarded in a form of a professional fee, that globally varies from 1 to 6 per cent from the selling price and is conventionally paid by the engaging party (Swanson and Gurke, 2017; Gautier et al., 2018; Edelstein and Green, 2018; Delcoure and Miller, 2002). Generally, a real estate broker shall be engaged by only one party, either the seller or the buyer. Dual representation, as per the Red Book (RICS, 2017), is considered a conflict of interest and should be avoided. Further, this academic paper will review the real estate brokers’ added value from seller’s and buyer’s perspectives. 

How sellers benefit from engaging a real estate broker?

Sellers theoretically profit from brokers’ services in a variety of ways (Benefield et al., 2019). The major service provided by the broker is the promotional activity i.e. open houses, outdoor and online advertisements, circulation of flyers and personalized recommendation of the property to individual buyers. Furthermore, brokers support sellers in the negotiation process and advise on the paperwork and legal documentation (Bernheim and Meer, 2008).  

Frequently, brokers provide seller with market information and recommend the appropriate asking price. However, the views of scholars around the value of real estate broker are dispersed. A study performed by Bernheim and Meer (2013) revealed that brokers’ advice on the initial asking price had a negative impact, as properties sold by brokers achieved prices lower up to 7.7 per cent than the properties sold without brokers’ involvement. Contrarily, Sklarz et al. (2017) argued that the lesser price achieved is mainly due to the urgency of the seller and not the fault of the broker. Lastly, Levitt and Syverson, (2005) and Hendel et al. (2007) suggested that the use of a broker did not affect significantly either the selling or the asking prices and led to an accelerated sale. 

How buyers benefit from adhering to real estate broker services?

Scholars have studied the impact of the real estate brokers, who represent the buyer, on the property transactions; and, just like the academics who studied the impact of the real estate brokers, who represent the seller, on the property transactions – could not find a sound consensus. Although, Baryla and Zumpano (1995) indicate that buyers have an improved marginal efficiency of search and higher chances for satisfactory match if the broker is engaged. Hendel et al. (2009) and Jud (1980) have also mentioned that buyers conducted quicker searches and had an improved possibility of a positive outcome when assisted by a broker. Further, buying through a broker improves the variety of properties available and confers buyers with evidence on the quality of properties and the localities in which they are situated (Hendel et al., 2009). Moreover, brokers often advise buyers on the sources of mortgage financing and property insurance, in addition to the assistance with legal documentation (Seiler et al., 2008). 

On the opposite side of the spectrum, Zumpano et al. (1996) had proved that buyers who use brokers do pay more for the purchased property unlike to those who do not buy through a broker. But their results also indicate that this cohort have higher incomes and also more likely to use a broker in purchasing their home. 

To summarize, brokers have an important role in real estate brokerage as they facilitate transactions. By eliminating the broker, sellers and buyers have a potential to minimize the cost, but would not benefit from a professional advice as well as the search and sale of a property may take longer. Moreover, sellers and buyers regard positively the human touch.  

How do you consider will brokers become redundant in future? Or their services will still be in demand? Please share your opinions in the comments below.

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