Archive for the 'alternative real estate commission models' Category
Redfin Isn’t Going Away, They Are Shaping The Business of Tomorrows Real Estate Brokerage
March 27th, 2008 Categories: Redfin, Social Networking, alternative real estate commission models
Redfin published their 2nd annual business findings on March 24th, The Redfin Advantage: Year Two A Comprehensive Analysis of Redfin’s Second Year of Real Estate E-Commerce. From 50,000 feet, the fact that a real estate brokerage puts out these statistics for all to see is unheard of. Diving in for a closer look reveals how this much maligned industry player is laying the ground work for tomorrows real estate broker and brokerage business model and motivations.
Redfin uses technology to address the inefficiencies of the traditional real estate model and works the industry like a business, using proven business strategies, better than any other major brokerage I know of. Maybe there are brokerages out there who focus on (and reward) customer satisfaction while implementing technology to improve efficiency, but none get as naked as Redfin. As far as I can see everyone else is playing catch up, attending the swelling sea of industry conferences and seminars trying to wrap their heads around (or sell) what players like Redfin are doing. Say it ain’t so, but it is.Real estate professionals on all levels ought to pay attention to what is a well funded experimentation in Web 2.0 real estate business strategy. Granted, they’re VC funded so they can afford to experiment with their ‘ideas’. Redfin -The Business Plan must have been pretty compelling or people smarter than you or me wouldn’t have thrown Other Peoples Millions behind it 
Regardless, they are blazing a path to redefine the brokerage level business and commission model the way Zillow and Trulia have blazed the mucho-million dollar path toward ‘open-listing distribution’. There will be many people who try to dismiss and mitigate the numbers and statistics into irrelevance but the writing is on the wall, two years running now. A computer doesn’t beat an agent nearly as much as it augments their abilities to the point where they can afford to charge a fee more in tune with practical economics.
I’m purposely not getting into the specific statistics in their report, since they will be analyzed and interpreted on many levels and called everything from self-serving to Arringtons tongue in cheek suggestion that a Computer can replace an Agent. However, you cannot ignore what is the most comprehensive work of it’s kind. IMO Redfin obviously uses these reports to self-serve, but they are what they are, I don’t think they’re lying. If the numbers weren’t so good, you may have had to ‘request a copy’ (based on their promise to deliver the annual report).
In todays soft market Redfin posseses what most real estate professionals do not, good positioning. Redfin may be serving a niche market today but I don’t think it’s too much longer before that niche grows out of being called so. Consumers, especially ‘new’ ones, definitively like what Redfin has to offer.
Their model isn’t perfect nor is it meant for everyone (one size does not fit all) but I have to believe that aspects can be gleaned from this body of work and implemented for the betterment of the individual agent as well as the consumer on a broader scale. It’s only a matter of time before the defection from tradition becomes highly sought after. Many agents are already walking down this road using media rich blogs, highly augmented blog-sites (Incredible Agent, Realivent and Blueroof360) and a host of other social networking strategies. Will you have the tools to satisfy the ever discerning, enlightened consumer? How long is it before your business looks more and more like Redfins? How long is it before retaining a client requires you to do so?
Also See:
Sphere: Related ContentREALonomics Nails Traditional Real Estate Economics
March 19th, 2008 Categories: Real estate economics, alternative real estate commission models
REALonomics is a bit edgy…we ride the rim of the business model discussion orb, hoping to pull owners out of the spinning vortex of financial destruction to the edge of new thinking that tells them, you can make a lot of money in this business but not the old way. We deliberately drag owners into a new universe of thinking, hoping they will jettison the old in favor of the new.
Also See:
The Traditional Real Estate Commission Model. A Critical Assessment
Real Estate Professionals Need a Better Compensation Model, One As Local As They Are
Sphere: Related ContentReal Estate Professionals Need a Better Compensation Model, One as Local as They Are
March 4th, 2008 Categories: Business Models, Real Estate News, alternative real estate commission models
I’ve been an advocate of trashing ‘The Traditional 6% Real Estate Commission Model’ for almost 10 years. When I owned a brokerage I offered alternative commission models to clients and was nearly hung, tarred and feathered (definitely blackballed) at the bequest of numerous other Realtors and NAR’s local chapter.
In spirit of my experiences, any time a chance arises to take a swipe at NAR’s antiquated ways and membership, I’ll oblige.
Part 1 Freakonomics
A New York Times best seller (and blog) written by Steven Levitt and Stephen Dunbar pointed out that a real estate professionals traditional compensation methodology is (way) out of sync with buyers and sellers economic interests and incentives.
Levitt writes that incentives are tricky when it comes to real estate commissions. The traditional 6% is typically split between sellers and buyers agents and split again between the agent and their agency, so the agent may only end up with 1.5% of the sales price, not 6%. At a $300,000 sales price, this would yield $4500 to the (buyers and/or sellers) agent. Drilling down quickly here, the basis of the argument is:
What is the agents incentive to sell the house for more than $300,000? What if they were a little more patient, put in a little more effort and could have secured a $310,000 sales price?
That would put $9400 net more in the sellers pocket, a good chunk of change. How much more would the agent receive?
$150.00
The same happens in reverse. You list the home at $300,000 but a buyers agent brings an offer of $290,000. You stand to eat ~$10,000 while the agent only stands to lose $150.00, but puts money in their pocket much quicker.
Long and short of it: The home seller and listing agents incentives are no where close to aligned.
*Pow* A black eye to the real estate commission model from a highly respected economist.
Part 2 Mark Nadel
Mark penned the following blistering expose for the FTC:
A Critical Assessment of the Traditional Residential Real Estate Broker Commission Rate Structure
To which I compartmentalized a bit here:
The Traditional Real Estate Commission Model. A Critical Assessment
Critical Assessment of The Traditional Real Estate Commission Model II
*Ugh* Gut punch from the Ivory Tower
Part 3
B. Douglas Bernheim and Jonathan Meer from the Department of Economics at Stanford University released the following case study last month:
HOW MUCH VALUE DO REAL ESTATE BROKERS ADD? A CASE STUDY
From the Introduction section of their study:
Historically, sales commissions for residential real estate brokers have averaged between five and six percent of sales prices. In 2004, commissions paid to brokers in the U.S. totaled roughly $61 billion (Hagerty, 2005). Do brokers provide commensurate value?
Sellers potentially benefit from brokers’ services in a variety of ways:
First, brokers provide promotional services. They help prepare a house for sales, circulate flyer’s, place advertisements, hold open houses, and recommend the house to individual buyers.
Second, they often assist with negotiations.1
Third, they screen prospective buyers, facilitating and potentially accelerating the process of matching buyers and sellers (Salant, 1991).
Fourth, they provide access to the Multiple Listing Service (MLS), which lists all homes available for sale.
Fifth, they provide market information and recommendations pertaining to the appropriate asking price.2
Sixth, they of-ten assist with paperwork and legal documentation.
How much is this bundle of services worth? Because the component services are some-times unbundled, we can judge their value by examining market prices.
Discount brokers provide access to the MLS for as little as $300 (Darlin, 2003).
Market information and forecasts of selling prices are available through professional appraisals, which cost a few hundred dollars. 3
In Illinois, where sellers are required to retain real estate attorneys to prepare and review sales contracts, legal fees average roughly $700.4
Thus, the total market value of the fourth, fifth, and sixth benefits listed in the previous paragraph is roughly $1400 – enough to justify a 6% commission on only the first $23,000 of proceeds from the sale of a home.
To justify brokers’ commissions, the value of the first three benefits must be substantial.
Berheim and Meer test pool consists of homes sold on Stanford Universities campus over a 26 year period. It’s an interesting microcosm to study since it allows the authors to hone in the first three perceived benefits of a real estate agent:
Several features of this data make it particularly useful for our purposes. First, since the eligible buyer population is limited, the MLS plays no role in the campus housing market. Instead, the Faculty Staff Housing (FSH) Office maintains a free listing service for eligible buyers and sellers. Consequently, there is no risk of confounding the value of broker services with the value of access to multiple listing services. In addition, access to free listings has historically enhanced the willingness of homeowners to sell their homes without brokers. Indeed, during the 1980s, brokered transactions were rare. Second, our data sample spans a major regime shift. Brokered transactions became increasingly common during the 1990s, and have accounted for roughly half of all sales in recent years.
The value of real estate brokers for Stanford campus transactions is likely confined to promotional services, negotiations (the first and second roles listed above), and the interpretation of market data (an aspect of the fifth role). Given the small numbers of available houses and active eligible buyers as well as the physical proximity of all the homes, the costs of comprehensive search, and hence the value of pre-screening by brokers (the third role) is small for both buyers and sellers.
As we have mentioned, the value of MLS listings (the fourth role) is zero. The FSH Office also makes comprehensive market information (home characteristics, listing prices, listing dates, selling prices, and closing dates) for all transactions available to all buyers and sellers. Because market participants are generally familiar with the campus neighborhoods, and because the number of comparable transactions is limited, sellers can acquire and review virtually all pertinent market information at low cost. Thus, the value of brokers as providers (rather than interpreters) of market information (another aspect of the fifth role) is likely negligible. Finally, the FSH Office assists with paperwork, largely eliminating the value of the sixth role. Therefore, an analysis of the Stanford campus housing transactions permits us to hone in on the value of brokers as promoters, negotiators, and interpreters of market data.
Berheim and Meer use a series of coefficients and variables to create complex but proven statistical models, as well as reference Levitts (and others) data to substantiate their work. It’s not an easy read but the results are predictable, even though they don’t come right out and say it. The 6% Realtor commission model is economically and practically retarded.
The study draws two primary conclusions:
First, using a real estate broker does not significantly affect either the average initial asking price or the average selling price of a home. This dispels the theory that brokers have negotiation power, thus diminishing their second perceived value above.
Second, using a broker does lead to a quicker sale. An added value, unless you consider Levitt’s work stating that agents are incentiveized to move a home quicker simply to turn inventory over. Holding out for a higher price, even $10,000 higher, is economically insignificant for an agent. We’re all driven by motive, ‘altruistic business practice’ is an oxymoron.
Even more interesting, an agents ability to sell a home quicker apparently is only prevalent during the first 60 days on market, after which homes represented by agents sell slower in months three and four, slightly higher in month 5, with no difference in month six. It would seem to make sense to fire your Realtor if they haven’t sold your home in 60 days…or at least not sign an agency agreement that binds you for longer than that.
Dialing back to a paragraph from the study’s Introduction:
Thus, the total market value of the fourth, fifth, and sixth benefits listed in the previous paragraph is roughly $1400 – enough to justify a 6% commission on only the first $23,000 of proceeds from the sale of a home.
To justify brokers’ commissions, the value of the first three benefits must be substantial.
Refresher:
First, brokers provide promotional services. They help prepare a house for sales, circulate flyer’s, place advertisements, hold open houses, and recommend the house to individual buyers.
Second, they often assist with negotiations.1
Third, they screen prospective buyers, facilitating and potentially accelerating the process of matching buyers and sellers (Salant, 1991).
The second benefit appears to be negligible according to this case study. The third is effectively the job of a mortgage professional or disintermediated by the advent of better information online which allows prospective buyers and sellers to quickly disseminate through and find each other, sans agent.
All of ‘this’ would lead someone like me (and many many more people) to summarize that a Realtor will sell your home fast and cheap for 6% of the sales price.
Granted, Berheim and Meer ’s case study isn’t the final word and may be off on more than one account, there are many debatable points and the same holds for Levitt and Nadel’s work. But when you start to add up the cumulative work from hundreds of hours of comprehensive study and research by highly intelligent people and institutions, you don’t have to posses a masters degree in Business Economics from an Ivy League school to understand that the traditional real estate commission model is (has been) broken.
Maybe one day the NAR will use it’s collective wisdom (and money from it’s million person army) to offer their membership some worthy advice and strategy instead of trying to protect some antiquated legacy.
Disclaimer: I believe real estate professionals provide a valuable service and aren’t the scourge of the earth. I also happen to like attorneys and claim members of both groups as friends.
Sphere: Related ContentLack of ‘Make Sense’ Business Models In Real Estate and Mortgage Still a Cause for Concern
February 15th, 2008 Categories: Mortgage News, Real Estate News, Real Estate Technology, XBanker, alternative real estate commission models
When the real estate and mortgage industries realize their traditional business models are now broken, the world will be a better place for all.
Words of advice: Pay more attention to the Loss side of a P&L and the right side of the balance sheet. Too much attention toward generating more revenue and not enough consideration to stopping the internal bleeding is the core of the overall problem…akin to emptying the water from a boat with a hole in the bottom using a (small) bucket.
This problem’s solution is routed in the fact that most professionals within these communities are not astute at running a business. A testament to this statement lies in that many RE and MoPro’s operate as ’sole proprietors’ (or submit as W-2 employee’s) when they should choose a corporate structure more in tune to maximizing income via benefits afforded other corporate structures. Just because one can sell doesn’t mean one can run a business.
The 6% real estate commission model is a horrid example of sound business practice. Economists routinely wonder aloud how this model has stood the test of time (answer: The omnipotent NAR ether/kool-aid). The commission ’split’ model commonly found in the mortgage broker industry (coupled with serious lack of disclosure issues), is far less discussed in open forums, yet just as fundamentally challenged.
It’s evidently apparent what happens in the down part of what are cyclical marketplaces…a mass exodus from the small business world, and thats not good.
I’d like to explore alternative business models that could work for both real estate and mortgage professionals by laying out some succinct recommendations and strategies for 2008, going forward…
I’ll be recruiting some seasoned experience from the world of business to opine via future posts regarding this topic. One of them is an XBanker
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
