Archive for the 'alternative real estate commission models' Category
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
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Mortgage Interest Rate Pricing, The Disturbing Truth
November 5th, 2006 Categories: Mortgage News, alternative real estate commission models
DiTech™ was arbitrarily chosen for this comparison, but it could have been any other retail lender, since they don’t have to disclose YIELD SPREAD PREMIUM (YSP): Cash incentives (typically) paid to the broker in exchange for selling you a higher interest rate than you actually qualify for.
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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