In the spirit of taking action to reverse the negative stigma around the industry, there has been a spike in conversation recently around the cause of ‘Raising The Bar’ (#RTB) by real estate professionals, including an REBarcamp session before Inman Connect NYC, Twitter-speak, blog posts, podcasts and blog talk radio shows.

With lots of conversation comes lots of ideas, including:

• Raise the barrier to entry (Keep out the stupid, poor agents)
• Kill the barrier to entry (Increase competition)
• Increase continuing education requirements and ethics standards (Create smarter, more ethical agents)
• Only hire honest, empathetic, generally good people who have a strong work ethic (Make the consumer LIKE me into doing business)
• Acquire pretty technologies and engage in Social Media best practices (Apply the Laws of Attraction)

All of these ideas focus on the top of the industry funnel – marketing, messaging, advertising, massaging, allure, the ‘easy to manipulate’ aspect of reputation management…they are too far removed from solving the real issues at hand.

The common thread I’ve heard is that the industry must increase its ‘Professionalism.”

My Notorious partner posed ‘The Single Question to Rule Them All‘, all Lord of The Rings style:

“Is professionalism a competitive advantage in real estate or not?”

In short, Rob says if this is the case, the riff-raff will eventually be driven out.  If it isn’t the whole RTB exercise is anti-competitive in nature and generally deceptive.

Robs logic is sound, but there is very little context to the question, so it’s just that…logically correct with alot of ambiguous conjecture and talking heads spewing esoteric, self-serving opinion around the definition of professionalism and how to raise That.

Rewind— REBarCamp San Francisco 2009.  Sitting in a group of well respected real estate ‘thinkers’, Rob Hahn asks:  ’What is the next big thing in real estate?’  With my head focused on the cornucopia of tech related products and services, I didn’t have an answer and admitted to such.

Today–- My answer is pulling the veil back around performance related metrics relative to market baselines for practicing real estate agents.  Establish a Bar, establish accountability, demand greater transparency and Raise The Bar along the way.

So, I propose ‘The Single Question To Rule Them All’ then becomes:

‘Is Performance a competitive advantage in real estate or not?’

Rob’s logic applies to this question and fits like a rubber glove.

If Performance is a competitive advantage, the riff-raff will eventually be driven out.  If its not, then the whole RTB exercise is anti-competitive in nature and generally deceptive.

Performance is a competitive advantage.  I trust I don’t have to write 400 words to explain why.

I’m not sure that the greater industry is ready to RTB…it can be done in pretty straight forward fashion but there are substantial ramifications.

Lets begin…

Social Media Can Help Raise The Bar.

Generally speaking, Social Media provides a two-way conversation medium that ideally compels some level of engagement between two parties.  There is an emotional connection that Social Media taps into for people and it works (very well) when implemented thoughtfully and engaged consistently…a good strategy here will drive potential clients.

Social Media should not be postured as a chronic popularity contest where thou with the most ‘friends’ wins.  The term friend has a diminished meaning in the world of  5000 Twitter and FaceBook ‘followers’. Being named to ‘influential’ lists and the such amounts to little more than superficial ‘pat on the back’ contests amongst inter-industry professionals and is of little value to a consumer…I digress.

Where Social Media really stands to help RTB is rooted in the caveat of the medium:   If you don’t follow up your dynamic online persona with performance driven results, consumers are likely to wield Social Media against you…As stated, its a two way street and bad news travels fast.

Set The Bar With Transparent Access to Relative Performance Metrics.

Open the MLS data vaults to establish a baseline (or bar) around local market performance metrics such as:

• What is the average Days on Market for a $Xk to $Xk house in my market?
• What is the average List to Sales Price difference for similar homes in my market?
• How many sides did an average agent close in the last 6 mos, 12 mos, 24 mos?
• What is the average # times a listing re-priced or re-listed in a given market?
• What is the average final Sales to List price ratio?
• What is the average commission charged on a property within my search criteria?
• How do REO’s and Foreclosures affect a property in a given area?

Once I have a flavor for how my market is performing on average and a Bar has been set, the second and more important question is:

Which Agents/Offices/Brokerages/Franchises Outperform These Averages and by How Much?

You can’t argue with real, empirical data.  You can’t fake the grades on your bell curved report card.

Allowing consumers to evaluate which real estate professionals outperform local averages (Baselines or Bars) that are important to the specific consumer would go a long way toward increasing the likelihood of a positive experience, as well as aid in improving consumer perceptions and expectations.

In addition, consumer access to performance based information (currently locked under MLS data use Rules and Regulations) would:

• Drive out the under-performers or force them to do what it takes to raise themselves above the Bar
• Spur innovation in the sector of commission reform <–A big deal to consumers
• Increase good competition

I can hear the arguments:

‘Just because Sally transacted more sides, doesn’t mean she’s a better agent.’    Very true.  Johnny could have sold 4 properties to Sally’s 20 over the past 12 months, but Johnny sold each one in far less time than the market average.

‘Billy took, on average, 30 more days to sell a property.’  Yes, but he did so at a List to Sales price that was well above market averages.

‘My consumer wouldn’t listen to me and insisted I list the price way above market value, thats why I had to reduce the price 3x and it sat on the market for 462 days.’   Well, you should have passed on taking that consumer as a client.

There are many such what if scenarios.  Performance based data isn’t of much value when analyzed in a vacuum.  It becomes very valuable when compared and contrasted against market averages and considered in conjunction with a unique consumers wants and needs.  Throw in consumer ratings, other forms of feedback on some level and now you’re serving steak instead of sizzle.

Evolve The Traditional Real Estate Commission Model

I know, its not supposed to exist, ‘there is no set commission model’- humor me.

The fundamental issue in the ongoing consumer vs. real estate professional beef is the gross misalignment of performance for consideration.  Consumers generally have a negative opinion of real estate professionals because they believe they overpaid for services compared to the value received.  This is likely because the agent they ended up retaining had poor performance metrics or their positive metrics didn’t align with the consumers wants/needs.

Access to such transparent performance metrics relative to a baseline would blow a hole in the bow of the traditional real estate commission model. Underperforming, inexperienced agents could no longer ride the coat tails of top performing seasoned agents.  Top performing agents could set new pricing models, justify a retainer for services, charge for services using a ‘cost plus’ model…they could make MORE money instead of subsidizing Ron the part time Realtor who botched his last three listings, yet scored a listing that would have otherwise been yours because his college friend Bill said something about needing a real estate professional on FaceBook.

I can’t think of another industry that pays entry level employees on the same scale as long standing executives.  Consumer confidence and perception could rise substantially if they knew who they were paying for up front rather than after the transaction closed, didn’t or worse.

If you’ve followed along to this point I’m sure many are screaming that something like this will never happen, because…:

MLS’s are funded by and thus beholden to the agents they serve.

If an MLS decided to adopt some crazy cavalier attitude and turn this performance based data consumer facing, many agents would likely get upset…read: violent rebellion amongst natives, loss of revenue, mass firings at Cowboy MLS.

Since MLS’s are generally for profit enterprises and the people that run them probably like the fact they have a job, this type of a mass public outing is a non-starter.

So, what about a version that displays all the pertinent individual performance metrics and how they rank against the given baseline/bar, but leaves the agents personal information anonymous?  The only time an agents personal information becomes available is when a consumer pays for the privilege.  Unlimited access to all agent profiles wouldn’t be prudent for obvious reasons…rather a set amount, say 5 profiles per subscription. Those below The Bar remain anonymous and left to think about how to raise their Bar.

In the alternative, Stan finds a real estate professional on Facebook, Blogsite, Zilow, Trulia, IDX, ActiveRain…pick your Social Media outlet.  They like the personality and now want to check how deep the beauty runs.  Dial up the agents performance related data and get a holistic view of who you might retain to handle the largest transaction of your life.  Think Carfax for real estate professionals.

Shame on the agent or broker that would threaten to pull out of an MLS for offering this anonymous data for public consumption, that would be like saying you want the industry to remain in the gallows of consumer perception, deceptive beasts of no prestige.  And if shame isn’t enough, I’m sure there are other incentives to keep everyone submitting their data…

In the ugly and very likely circumstance that agents and/or brokers still balk at the idea, make it opt-in only.  No personal information available unless you as an agent give the MLS the express right to do so.  Pay agents to opt-in, every time their personal profile is requested.  Share the wealth a little.

The big question is always:  Where is the money?  I’d be willing to bet that (ALOT of) consumers would pay for access to such information presented in an intuitive UI-sortable and searchable by what metrics are important to their situation (much like Diverse Solutions did).

This isn’t some pipe dream that would take millions of dollars in development or years to implement.  It could be done quickly and at relatively little expense.  In fact, the primary reason this data isn’t already available is due to simple economics and complex politics…there is alot of money in keeping the data under lock and key…economics rules politics, so where there’s a bigger dollar there is a way.

There are Agent ranking systems out there.  Most allow the agent control over what information is displayed and/or claimed…rendering the system and information skewed at best.  This type of agent rating system must have a very complete set of market data and be maintained by 3rd party providers that simply maintain its purity and integrity.

Diverse Solutions has created the closest product I’ve seen to a tangible, working model using MLS direct data.  Agent Scouting Report was the result of a 48-hour developer competition at the Inman Connect conference in San Francisco last summer.  In its current edition Agent Scouting Report doesn’t work because it shows every agents stats…effectively ostracizing those that happen to fall below the Bar.  I don’t think they’re far off, their product was well thought out given the limited time they had to develop it..a few turns of the dial and some thoughtful considerations in how the data is displayed (see above), and..?

As an agent or broker would you be adverse to this?  Why?  :)

The Broker/Franchise Perspective.

I own a brokerage or franchise and want to fill my office with agents who exceed certain performance metrics for certain property types in certain areas of town.  My brokerage is conducive for these types of agents to excel.  As a broker/owner, I would pay to know who these agents are.  This would be an immensely valuable tool in analyzing my own brokerage as well as my competition on key performance indicators.  I could derive all sorts of actionable data to use as a recruitment and retention tool.

So is everyone ready to Raise The Bar?

It depends on if those who talk the talk about Raising The Bar are indeed serious about doing so and walk the talk.  It will take open minded professionals from MLS directors, their boards as well as the brokers and agents they serve.  I’ve laid out some top level ideas on how economics could cut through the politics, there are more.

The upside for the industry is huge from customer service, commission model and perception standpoints.  It risks shaking the long standing economic model right down to its core, which is a good thing.  In the right hands this very well could and should be the next big thing in real estate.

Comments, opinions, thoughts, flames?

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Is The Real Estate Industry Really Ready To Raise The Bar?

The industry of real estate doesn’t quite lend itself to those conditions.  Its generally a loose, revolving door, part-time hobbyist infected environment that yields a highly uncontrollable and thus poor product.  As a result the biggest Brand in the space, ‘Realtor’, is currently in epic fail mode.  Corporate Brands like Coldwell Banker, Re/Max, Keller Williams etc. mean far more to agents (favorable commission schedules, franchise fees, tools provided) than they do consumers.

A Brands persona will not change (or continue to mean anything) in the consumers eyes until the underlying business model, day to day practices and purveyors of such are commanded/committed to such.  For too many traditional Brands, this is just not possible without the risk of alienating a majority of their contingency.  To which I’d say:  Good riddance.

With this in mind, a more relative comparison between Brands in the real estate space would be between the traditional names and Redfin, the Great Satan of real estate Brands. Redfin does what few others in this space do, they define their Brand through Business Strategy:

• Focus (and follow up) on exemplary customer service.  Hold agents accountable for their actions, or lack thereof.
• Provide rich, relative, intuitive data. Consumers fundamentally are searching for listings first, all of them.  Redfin provides many types:  Traditional, For Sale By Owner, MLS and Bank listed foreclosures as well as Sold data.
• Employ consumer centric business and revenue models based in logic rather than antiquity.
• Remain unusually nimble and open to change, as opposed to standing still and posturing into irrelevancy.

Any agent that flies under their flag is bound by these principles…The Fin tightly controls this environment, developing  an overwhelming positive experience for professionals and consumers along the way.

Can any other traditional Brand represent a 97% consumer satisfaction level?  Do they even know how to measure such?  Are they willing to try?  Me thinks no.  Is there great opportunity for those that dare?  Absolutely.

While there are individual agents and brokers that practice and achieve success employing similar business ideals, they are far more the exception than the rule and are often lost amongst the ‘rest of the crowd’ in such a way that Corporate Brand actually diminishes their efforts, having to instead build and rely on Personal Brand.

When Redfin launched, many industry folk quickly dismissed the company as ‘another discount brokerage’ doomed to failure.  Others have made it their personal vendetta to see that they stumble and fall…spooking, steering and slandering the Company as an impostor, a heretic…which must cause Mr. Kelman to smile more than just a little bit.  Despite all the mud-slinging Redfin apparently is turning a profit (in a ‘down market’ nonetheless), coupled with their high consumer satisfaction ratings, they’ve become a testament to building a Brand via business strategy and the greater industry can’t stand it.

The real estate industry would be well served to study and implement the major aspects of what Redfin is proving out, as opposed to perpetually denying their validity.  I’m not suggesting everyone breakout the Redfin blueprint and copy it verbatim, rather study their successes in comparison to the consumer voice which generally says that Realtors Suck.  Too idealistic?  Probably.  Why?  As suggested above, it would banish ~80% of actively licensed ‘real estate professionals’ to another industry because the bar would be raised off the floor.  Not to mention that too much coin would be left on the table in the near term for many short sighted C-Suite traditionalists to stomach, though continuing down the current road is a proven path to irrelevancy and ultimately insolvency.  Alas, suggesting that a business be run like a business is apparently crazy-talk…

While all the current rage resides with selling strategies that permeate the landscape with noisy propositions using ‘Social Media’ as some magic bullet to more business, what’s really broke and needs to be fixed first is The Business.  Dumping time and dollars into Social Media, SEO, a new website or the next cool shiny thing to (re)define Brand in hopes of more business without refining the core to become more in-line with the changing, demanding, educated marketplace is just plain ignorant.  They are utilities in the marketing tool belt, not long term solutions.

My 13 year old cousin could be a Social Media pundit.  Wordpress (many a blogsite platform actually) provides 85% of the SEO, design elements and disparate data portability one will ever need…the rest is pimping out your ride…accessorizing, if you will (which is fine).  Consistently refining fundamental business strategies, setting the bar higher with regards to agent acumen level, transparency and accountability will positively define a business, a Brand and an industry with an identity crisis.

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Defining a Brand Through Business Strategy

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:

FoREM

BHB

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Redfin Isn’t Going Away, They Are Shaping The Business of Tomorrows Real Estate Brokerage

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

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REALonomics Nails Traditional Real Estate Economics

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.

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Real Estate Professionals Need a Better Compensation Model, One as Local as They Are

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

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Lack of ‘Make Sense’ Business Models In Real Estate and Mortgage Still a Cause for Concern

‘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.

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Critical Assessment of The Traditional Real Estate Commission Model II

• 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

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The Traditional Real Estate Commission Model. A Critical Assessment

Comparison based on the following factors: 5-yr ARM, Single Family, Primary Residence, Rate/Term Refinance, Full Income & Asset Verification, Loan Amount: $410,000, LTV: 80%, Middle FICO: 675, Debt to Income Ratio: 39%, Property Zip Code: 92618, Date: July 11, 2006.

The Net Savings column should be interpreted as a general loan cost comparison if the YSP was disclosed, used, and credited as it is intended, to assist a borrower in financing closing costs. The actual savings (or expense, whichever way you choose to look at it) is really a multiple of this column, once you extrapolate the extra interest paid over the term of the loan for choosing the corresponding higher rate.

That said, if you were to retain a transparent broker or banker who negotiated a $3000 fixed fee with you (a fair value for services…ill call this type of mortgage professional ‘X’), the money swing is appallingly HUGE. What is the difference between the two charts? It’s simple: If you select an interest rate where the YSP exceeds a flat fee, the X broker/banker should credit YOU the difference. Apply it towards closing costs, take it in cash—Whose Money is it Anyways? Despite what many in the mortgage industry believe they are entitled to, the Lender kick-backs should go in YOUR pocket, not the broker/banker’s. It’s YOUR MONEY.

On with further dissection….

6.375% THIS IS THE WHOLESALE PAR RATE FOR THIS MORTGAGE. It is a true ‘0 Point’ interest rate, meaning it costs the broker NOTHING to obtain it for you. Do you understand? Good. No? Look at it again. If that’s the case, why is DiTech™ charging $9,697 for the same rate? We hope it’s because you don’t know it’s happening.

6.875% The broker/banker is pulling $6,355.00 in back-end YSP from the lender plus the $5,096.30 in front-end costs from you, this is actually an $11,451.30 “rip,” to use the proper industry-term. Drinks are on the house—someone’s celebrating, and you’re footing the bill. Cynical? This half-point bump could cost you as much as five times the damage in overpaid interest charges. Obtain the same rate from an X broker, and you would be CREDITED $3355…..

7.125% Here, DiTech’s™ pitching 7.125% as a “No-Points Loan,” which leads you to believe it’s the lowest rate you can get without having to pay any points. We already know that’s a lie, since 7.125% is paying over $9,800 in Yield Spread at a wholesale level—and they’re still clipping you for $1,400 up-front. Hope you like clipping coupons. Obtain the same rate from an X type broker, and you would be CREDITED $6803

7.500% The $395 Flat Fee? The way we see it, this is the poster-child for deceptive marketing. Let’s peel this rotten onion together, shall we? On 7.5%, there’s over $12,000 in Yield Spread dangled in front of any broker who cajoles you into swallowing this rate. Since this represents a commission above and beyond the value of services provided….and may soon be deemed an illegal ‘kickback’.

Obtain the same rate from an X type broker, and you would be CREDITED $9821 How do they get away with all this? It’s simple:

• FACT: Retail lenders ARE NOT required to disclose YSP. The law leaves them free to “set their own pricing”—which, as you can see, is more than a little higher than the wholesale cost at which they buy the rates. This isn’t just the DiTech’s™ of the world—your friendly local banker’s in on the act, too.

• FACT: Brokers ARE required to disclose YSP, but do they? Rarely. The reality is, brokers can easily mask YSP rebates and carry on as if 7.125% is your “qualifying rate.” And should you happen to notice the YSP rebate on your closing documents, they’ll tell you it’s a “fee” paid by the lender at no cost to you (a dirty lie we’ve already exposed here).

When it comes to YSP, the banks turn a blind eye to why you “decided” to accept a higher rate than you actually qualify for. They don’t care that the only reason is because some liar duped you into thinking it was a “PAR RATE.”

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Mortgage Interest Rate Pricing, The Disturbing Truth