Research On Commission And Contracts For Brokerage Services In Secondary Housing Market

The real estate brokerage industry is becoming more and more important withthe development of the secondary housing market in China. Research on theprinciple-agent relationship between the seller and the broker can be helpful todetermine commission and contracts in the market. The research will show how tostimulate the broker to further efforts and improve the market efficiency. It is usefulto the development of real estate brokerage industry and the secondary housingmarket.Two concepts of "nominal commission" and "actual commission" are broughtforward in the research. It is first proved that the nominal commission assumed bybuyers and sellers is different to their actual commission and is inverse ratio of theirprice elasticity. This conclusion can ensure the result be applied to different markets.The incentive effects to sellers and brokers by commission and contracts aretheoretically analyzed in three aspects of commission structure, contract durationand contract type. Appropriate contracts for the market in China are proposed in theend.There are many kinds of commission structures, such as fixed percentage (FP)commission, flat-fee (FF), net listing (NL) and fixed percentage of base price plus aproportion from access (FPP). Additionally, FP and FF can be with or without aminimum acceptable price (MAP) in two different types. In statically analysis, ①only NL can achieve the first-best result. ② FP with no MAP can only partiallyalign the interests of brokers with those of sellers. ③ FP with a MAP should set areasonable MAP. ④ FF can't induce brokers to work hard. ⑤ FPP is dominant toFP in some condition. In dynamic analysis, only FP and FPP can align the interestsof brokers and sellers in some situation.Limited contract duration can stimulate the brokers to make greater efforts. Italso provides the seller a chance to renegotiate a lower commission as the end of thecontract approaches. The renegotiation can lead to improvement if the transactioncosts between brokers and sellers are ordinarily low.There are three kinds of contract types of open listing (OL), exclusive agency(EA) and exclusive right to sell (ERTS). Contract type has no influence on theselling price. Houses are sold out the most quickly in OL and the most slowly inERTS. It is found in the article that market competition will weaken the influence ofthe contract type to the interests of brokers and sellers.Based on the conclusions and the market conditions, the appropriatecommission and contracts for the markets in China are proposed. Contract that is FPwith a MAP, EA and with a limit on the duration should be considerable in thecurrent phase. Contract of FPP, EA and with a limit on the duration will be suitablein the future.