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Adversarial Brokerage in Residential Real Estate Transactions: The Impact of Separate Buyer Representation

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    Abstract

    Although substantial research effort has been directed to the examination of optimal search and pricing behavior under traditional brokerage arrangements, market outcomes under conditions of undisclosed subagency and buyer representation have not been fully explored. This study applies the legal and economic theory of agency to real estate markets with cooperating brokers. The existence of cooperating brokers acting as subagents of the seller with the buyer’s full knowledge does not change the buyer’s and seller’s net payoffs relative to the single-agent case. However, when the buyer mistakenly believes that the cooperating broker/subagent is acting as his agent in negotiations, there may be informational gains that result in a higher selling price and a higher payoff to the seller at the expense of the buyer. The analysis indicates that buyer brokers may be a potential solution to this agency problem. When both parties to a real estate transaction have separate representation, their net payoffs are shown to be higher and the sales price lower than under traditional brokerage arrangements. The result is dependent on several factors, including: market conditions, relative bargaining power of the parties, method of broker compensation, and disclosure of the status of the buyer broker.

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    File URL: http://aux.zicklin.baruch.cuny.edu/jrer/papers/pdf/past/vol14n01/v14p065.pdf
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    Bibliographic Info

    Article provided by American Real Estate Society in its journal Journal of Real Estate Research.

    Volume (Year): 14 (1997)
    Issue (Month): 1 ()
    Pages: 65-76

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    Handle: RePEc:jre:issued:v:14:n:1:1997:p:65-76

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    Postal: American Real Estate Society Clemson University School of Business & Behavioral Science Department of Finance 401 Sirrine Hall Clemson, SC 29634-1323
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    Web page: http://www.aresnet.org/

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    Postal: Diane Quarles American Real Estate Society Manager of Member Services Clemson University Box 341323 Clemson, SC 29634-1323
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    Web: http://aux.zicklin.baruch.cuny.edu/jrer/about/get.htm

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    1. Abdullah Yavaş, 1992. "A Simple Search and Bargaining Model of Real Estate Markets," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 20(4), pages 533-548.
    2. David Geltner & Brian D. Kluger & Norman G. Miller, 1991. "Optimal Price and Selling Effort from the Perspectives of the Broker and Seller," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 19(1), pages 1-24.
    3. Michael A. Arnold, 1992. "The Principal-Agent Relationship in Real Estate Brokerage Services," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 20(1), pages 89-106.
    4. Thomas S. Zorn & James E. Larsen, 1986. "The Incentive Effects of Flat-Fee and Percentage Commissions for Real Estate Brokers," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 14(1), pages 24-47.
    5. Salant, Stephen W, 1991. "For Sale by Owner: When to Use a Broker and How to Price the House," The Journal of Real Estate Finance and Economics, Springer, vol. 4(2), pages 157-73, June.
    6. Levmore, Saul, 1993. "Commissions and Conflicts in Agency Arrangements: Lawyers, Real Estate Brokers, Underwriters, and Other Agents' Rewards," Journal of Law and Economics, University of Chicago Press, vol. 36(1), pages 503-39, April.
    7. Sykes, Alan O, 1993. "Some Thoughts on the Real Estate Puzzle: Comment [Commissions and Conflicts in Agency Arrangements: Lawyers, Real Estate Brokers, Underwriters, and Other Agents' Rewards]," Journal of Law and Economics, University of Chicago Press, vol. 36(1), pages 541-51, April.
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    Cited by:
    1. J’Noel Gardiner & Jeffrey Heisler & Jarl Kallberg & Crocker Liu, 2007. "The Impact of Dual Agency," The Journal of Real Estate Finance and Economics, Springer, vol. 35(1), pages 39-55, July.
    2. Violand, Wendy & Simon, Arnaud, 2011. "Real estate brokers: do they inflate housing prices? The case of France," Economics Papers from University Paris Dauphine 123456789/515, Paris Dauphine University.

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