Archive for December, 2006
Critical Assessment of The Traditional Real Estate Commission Model II
December 27th, 2006 Categories: Real Estate News, alternative real estate commission models
This is a further dissection for discourse of Mark Nadels (who is not an FTC attorney, he is an attorney and works for the federal government, and has presented his work at a 2006 FTC Bureau of Economics seminar..sorry Mark) critical assessment regarding traditional real estate brokerages revenue and subsequent disclosure models.
‘Marketing Your Competitions Weakness’ outlined the problem and opportunity that lies within the current state of Realtor/Consumer affairs:
- The NAR has control over the passage of most any state level legislation.
- They wield this power to protect the traditional Realtor, prohibiting alternative model practices such as rebates and ‘unbundled’ services.
- Localized MLS access rules may discipline non-traditional brokers and restrict the exposure of a consumers listing.
- Consumers have relatively little objective content and are surprisingly ignorant of their rights about how to negotiate with an agent. Or they are browbeaten by Realtors for attempting to do so.
- Traditional brokers have been successful in suggesting alternative models are ‘discounted’ or ‘inferior’, with little justification except the ‘you get what you pay for…’ cliché.
Six Disclosures that Might Stimulate Price Competition doesn’t so much outline alternative commission models, but rather describes the type of information consumers will gain increased access to, and could cause a $30 billion dollar decrease in broker revenues according to Mr. Nadel.
As an agent, considering the alternative channels consumers now get more and more information from, outside of the influence of the NAR’s raw marketing power, how would you address the following disclosures if they became mandatory in some shape or form? You will notice most of the disclosures are heavily weighted towards buyers’ agents. This will be a 3 part post.
Home Buyers Should Require an Estimate of the Dollar Amount of the Fee That Their Broker Expects to Receive for Serving Them if a Sale Occurs.
Furthermore, to help buyers compare that fee to an hourly fee, they should also be told how their broker’s fee would translate into an hourly rate. Although the time spent by an agent may vary widely and the estimate of 20 to 69 hours as the average374 appears to be on the high side, agents should provide buyers with an estimate of their hourly rate based on their previous sales. They should also inform buyers of what that figure would be if the effort required only 10 hours (exceptionally short) or 100 hours (on the longer side). These figures should encourage buyers who chose to handle some of the tasks themselves to discuss a lower fee or an hourly rate with brokers.
The idea would be to create an easy, consumer friendly comparison method based on an hourly rate. How much is an hour of your time worth?Buyers Should Be Told Whether Their Broker’s Agent May Refuse to Inform Them About Homes That Become Available and that Meet Their Criteria, Even if They Are Not Represented By Traditional Brokers.
As a consumer I would ask a broker to sign a document requiring them to disclose all listings that meet my criteria, regardless of commission offering or broker type, traditional or otherwise.
It is debated whether not showing a listing to a client based on commission offerings officially breaks the ‘code of ethics’, regardless, it doesn’t appeal to the consumers code of finding the best all around home available.
I’ve written many posts regarding the lack of disclosure in the mortgage industry and the resulting harms, primarily do the fact consumers are not typically afforded a transparent look at how much the mortgage is truly costing them.
The real estate industry is a far different animal. While costs/fees are fully disclosed, very few consumers understand that they are able to negotiate, let alone how to negotiate, commissions with a Realtor.
‘Disclosure’ typically means additional paperwork. The RESPA docs that every mortgage lender must (should) send out within 3 days of pulling credit, is a small book. Some similar disclosure docs should be required of Realtors, although not through some act of legislation (that’s obviously futile), rather through community acceptance and consumer fostered demand. A Realtor who pro-actively accepts and performs under some format of these disclosures has an opportunity to significantly differentiate themselves from their competition.
As stated, these disclosures (and the 4 others to come) could result in a $30 billion dollar fall in annual broker revenues. Who suffers? IMHO the agents who part-time it, the ‘coat tail’ riders, and buyers agents who attempt to collect 3% for relatively little value provided. Listing agents could actually be better served with such disclosures. The top producers would continue to succeed with less ‘fat’ in the industry.
Remember, Im wearing my marketing hat, looking for ways to identify weaknesses and leverage knowledge for future Realtor success (call it Realtor 2.0).
These posts aren’t meant to cast stones, rather to discuss through community discourse regarding the practicality and feasibility of implementing some well thought principles and disclosures.
I write these posts out of personal and professional interest for the comments they induce, which are invaluable. Do I think Mark Nadels discourse and proposals are the end-all discussion? No. But his research can’t be ignored and deserves to be debated by those it proposes to effect the most.
Sphere: Related Content| Comments
The Traditional Real Estate Commission Model. A Critical Assessment
December 20th, 2006 Categories: Real Estate News, alternative real estate commission models
Prelude: I’ve read, and expanded on (mostly mortgage related) a critical assessment originated by Mark Nadel, a 15 year FTC attorney, regarding alternative commission models for real estate agents. It’s a very well thought piece, 75 pages long, with the research you’d expect from, well, a 15 year FTC attorney.Since I was enrolled in The Swap just yesterday, some quick research has turned up:
- Kevin at 3Oceans tackles the economics of implementing some of the changes for the Realtor Assessment
- The guys at Sellsius gave their futuristic outlook.
- Greg Swann chimed in with his usual condescending tone
- Ardell, always there to keep Greg in check, gives her $.02 on The Rain City Guide
- Steven Levitt, The Freak of Economics himself, even had time to weigh in, since Mark dutifully cited his accomplished work.
So…I’ll keep to addressing some of the madness that causes these alternative methods to the current and antiquated 6% split model to be hypothesized. I prefer to dig up the psychological and otherwise less apparent underpinnings of such calls for blood in the streets.
Part 1
Why Has the Standard Realtor Rate Structure (and Rate Levels) Remained Dominant?
Big Business Flexing it’s Muscles. Brokers Recognize the Power of the NAR
With about 1.3 million members, 326 the NAR is the largest trade association in the nation.327 Its members’ presence in every voting district of every state legislature and large campaign contributions make it one of the most powerful lobbyists in the nation,328 and led one state official to note “virtually no proposed legislation relating to real estate has a chance of passage unless it is approved by the state association of realtors.”329
In other words, any significant change would have to come from inside out, an organic virus, etc
1) State Real Estate Commissions Protect Traditional Business Models
Most regulation of real estate brokerage is a result of state law and state real estate commissions created by state legislatures. Although the laws and commissions are presumed to be intended to protect consumers, a 2006 Consumer Federation of America (CFA) survey of real estate regulatory agencies in 47 of the 50 states found that more than 70 percent of commissioners were real estate brokers or salespeople.334
Given the presence of real estate agents in every state legislative district and the availability of state affiliates of the NAR to manage industry lobbying and campaign contributions, it is not surprising that states have generally protected traditional brokers from entrants with new business models.
Many state bodies enforce prohibitions against rebates to home buyers and many require sellers to purchase a minimum bundle of services that many sellers do not desire.335
Self-Government usually isn’t fertile ground for progressive business practices to grow.
2) MLS Access Rules and Local Boards Can Discipline Non-Traditional Brokers
One way that traditional brokers have discouraged entry by brokers with business models that threatened to introduce price competition is to limit their ability to use the critically important MLSs. 3rd Party access to the fragmented MLS’s is vehemently opposed by the NAR. They place restrictions on the display of MLS listings online, which triggered the 2005 DOJ antitrust lawsuit…which has dutifully progressed, and not on the NAR’s favor.
MLS listings are required to include the fee offered to the buyer’s broker, which may facilitate the practice where agents working with buyers may intentionally fail to inform a client of an attractive offering, because other listings will yield the agent a much higher commission.
Of course, the power of traditional brokers to use the MLS to discriminate against non-traditional firms will disappear if Google, Zillow or others offer an MLS-like online, easily-searchable database that displaces current MLSs or MLSs change to compete with Google, Zillow et al.347
3)Consumers are Ignorant of the Many Options That They Could Reasonably Demand
Propaganda at it’s finest:
Around 1980, undoubtedly due to the long history of fixed rates in the industry, about half of all sellers believed that commission rates were fixed and non-negotiable and that the fixing was done either by law or by “the Board of Realtors.”348
The 1996 Kiplinger’s “Guide to Buying & Selling a Home” stated that commissions run typically at 6 to 7 percent and that “[a]s a practical matter, you won’t get very far negotiating a lower rate unless you have special circumstances that make your property more economical to sell than others.”349
In 2006, a columnist for Inman Real Estate News continues to recommend that sellers not try to negotiate a listing broker’s commission before signing a contract.
The Bloodhound Blog offers a compelling solution on how to negotiate with buyers agents here.
4)Traditional Brokers Have Successfully Portrayed Discount Brokers as Inferior
To defend themselves against lower priced new entrants, traditional brokers have heralded the old adage: “you get what you pay for.”353 They imply that brokers with lower prices must be skimping on quality and/or services354 compared to the “full service” offered by traditional brokers, although conveniently they fail to define full service.355
Although there is a simple refutation to this insinuation, few buyers or sellers hear it, because there is no entity with the funding and mandate to effectively counter the NAR’s marketing. If there was, it could point out that if a listing broker who charges $18,000 on a $300,000 home can afford to provide full service, then a broker charging only a 4.5 percent commission on a $1 million home ($45,000) can too. Yet when media firms criticize protectionist tactics of traditional brokers or praise new firms, vocal brokers accuse the media of being misinformed and biased.356
The purchase or sale of a home is such a major transaction to most home buyers’ and sellers’, merely planting seeds of doubt about the quality of non-traditional brokers is often enough for traditional firms to scare buyers and sellers from using such new entrants and sticking with traditional brokers.
I have been browbeat with this tactic almost daily. Offering someone a better value for relative services, gets one stereotyped as ‘cheap’ by competitors, even if my net bottom line is better than theirs…
FINALLY:
Three conditions indicate many Realtors overcharge for their services:
- First, many former employees of traditional brokers are now willing to provide full-service for flat fees of less than $5,000. 321
- Second, traditional brokers are willing to provide full service for the sale of a $150,000 home for $4500 (half of the six percent) in fee. The costs to agents of handling the sale of a home priced at $500,000 for their half appear be very similar although the commissions they charge would = $15,000
- Third, brokers in other nations now charge much lower fees for providing similar services.323 The commissions paid on the purchase and sale of the highest-priced homes are particularly vulnerable. Vigorous price competition could very possibly reduce total revenues for brokers precipitously, by $30 billion or more annually.324
This gives traditional brokers a strong interest in resisting this result. As an agent for a large, national, traditional brokerage firm explained in a September 2006 email to a friend who had just listed her home with a flat rate broker:325
I love you guys but why would I want to sell your property? Most full-service agents in ___ County want to remain full-service agents and I am one of them. Why would any full-service agent want to help a flat rate broker? None of us do. We don’t want to become flat rate agents and if flat-rate agents become successful then we would all have to become flat-rate agents. They have a VERY small % of the business out there. We want to keep it that way. If I can avoid showing Help U Sell properties or Assist to Sell properties I also will not show them. When you list with a full-service agency then you have the co-operation of most of the agents in ___ County. A 3% commission with a bonus is not enough incentive to put a nail in the coffin of our industry. . .
Now, she’s got an interesting outlook…
I wrote this post to essentially demonstrate what many of the early movers in Real Estate 2.0 are up against, no small task to say the least, as well as point out some distinct marketing angles that some may (and do) choose to ‘exploit’. I’m not an objective expert like Mark, but I do know opportunity when I see it.
It’s a bold but effective way to differentiate oneself from the maligned and stigmatized industry…from the teachings of Seth Godin, to not be different is to be dead…moo.
Next Week:
The How….Six Disclosures that Might Stimulate Price Competition….
Many thanks to Mark Nadel, all citations are located here originally from his core piece
Sphere: Related Content| Comments
I Was Meme’d About Me Too
December 19th, 2006 Categories: Random
Tagged by Brian Brady.…Thanks Brian, I was looking for something else to do
I also got meme’d by Ola over at Realtio this morning…meme-ing moves fast!
If you dont know what a meme is, click here. I learn something new everyday…
Basically there has been this game of ‘blog tag’ going around started by Mary McKnight and of her buddies. Literally as I was reading her post, I got tagged. The topic is 5 things most people don’t know about me.
Sphere: Related Content| Comments
Yankee Swap Time….
December 19th, 2006 Categories: Mortgage News, Real Estate News
Ahhh, Yankee blog swap time. Muahaha!!!
Time to move over Jeff, I’ll take it from here. To be honest, being a Boston guy, I was hoping to be able to get someone from New York city so I could put up some sort of Yankees Suck reference on their blog (because it’s both slightly relevant, and Romney recently passed a law that all Bostonians have to do it whenever we get the opportunity).
Fortunately for me, I don’t have the opportunity to look like even more of a Mass-hole, and got paired up with the X-Broker himself. It’s an honor to be matched with someone who made quite a name for himself so quickly in Blogistan (blogtopia?). And I’m thrilled that it makes it fairly easy for to do my take on a topic relevant to the host blog, the mortgage world. Unfortunately for Jeff, many of his readers will officially become much much stupider after reading the drivel I’m about to spit out.
Sphere: Related Content| Comments
The Yankee Blog Swap
December 18th, 2006 Categories: Mortgage News, Real Estate News
This oughta be interesting. It works like this:
34 Bloggers from around the real estate related blogosphere have teamed up for a festival of permissioned blog hijacking. Tomorrow morning, we all post on selected others blogsites. And it just so happens to involve some of the best damn bloggers in the real estate related space.
What happens when 34 Type-A personalities and self described know-it-alls get together? I dunno, but it ought to be a heck of a show.
Jon Ernest from The Property Monger is my ‘Swapee’…the other pairings are as follows:
Sphere: Related Content| Comments
