The XBroker: December 2006

• 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 (just recently learned what this meant) 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.

This was posted Tuesday as part of the Yankee Blog Swap....I have pull the identical article over here..I want to thank Jon Earnest, The Property Monger and his off center sense of humor...and the fact he's a Yankee basher ;)

In honor of my fist Yankee Blog Swap, and considering The Property Mongers audience, I felt like a post addressing the real estate sales community would be in order.  There’s nothing like a little debate to spur blog traffic!  No worries Jon, you can always point the fanatic to me as the source of such socialist banter ;)  I just hope I didn’t overextend the nature of the YBS by writing about a ‘serious’ topic.  Keep the title of this post in the back of your mind whenever you feel some emotional response to the words you read…

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

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'.

Encompassing all facets to appropriately address this topic would result in a 14 page thesis, so I’m going to break it up into a few parts, published weekly.  Part 1 appears here on the Property Monger via the Yankeeblogswap.com and will continue on my X blog for a few weeks hereafter.  Jon has my permission to post them here as well  Anywhoo, on with part 1, the Why….

Part 1

Why Has the Standard Realtor Rate Structure (and Rate Levels) Remained Dominant?

It's 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, organic, virally, etc

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. 

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

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. 

As disintermediating technologies continue to displace traditional Realtor tasks, consumers will begin to gravitate toward alternative models.  Which one?  Can't tell yet, but be assured, it will reach a tipping point.   

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 and measured service 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 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.

Thanks to Mary McKnight who somehow has found a way to extract more than 24 hours from a day...Proper recognition to all YBS participants are here .

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

By Brian Brady....Thanks Brian, I was looking for something else to do ;)

OK, 5 things most people (on this stage) probably don't know about me:

1) Im typically very quiet and 'soft-spoken' or 'hard to hear', quite the contrast to my 'online voice'.  Some call me shy, others mistake it for being aloof.  I think it's partially due to the crazy thoughts that go through my head,  It's not hard for me to get in a detailed discussion with myself ;)  My dad told me its ok to talk softly, just carry a big stick (Teddy Roosevelt, I believe)

2) I have ADD...BAD.   Wasn't diagnosed until I was 30..my doctor thought it to be quite amazing that I made it through grammar school school, let alone college based on my test score.  I was one of those kids who made an A in whatever I was interested in (math and science, especially the Biology's), there were many classes I didn't even need take notes in.  On the other hand, Art, History of the Bronze Age, Literature, and Poetry were not my strong points..I managed quite a few 'suspect' C minuses.  I had perfect attendance, just couldn't pay attention long enough to retain anything.  Anywhoo, Im better at paying attention to 'boring' stuff now :)

3)  I played semi-pro soccer, as a keeper (goalie), and managed to:  Blow both my knees out, break my collarbone, break my ankles (a few times), dislocated my 9 fingers (never my thumb) about 10 times each, and suffered concussions on 2 occasions that were severe enough that I didn't remember the 12 or so hours post impact.  I still feel good enough to play basketball, baseball, tennis, and golf though; top notch doctors I guess.  Oh yeah, I was timed at 4.38 in a 40 yard dash when I was 27...and for some reason I am very proud of that?  There's never an opportunity to tell people that without sounding like that pathetic dude who still talks about high-school glory days...

4) I traveled around Europe by myself for two weeks while in college and never told my parents.  They still don't know ;)

5)  Im afraid of heights (although Ive bungied in the Swiss Alps, and jumped out of a flying plane) and hate driving over long bridges....

I wont pay this forward, as I see most everyone I know has already been tagged :( 

I’ve been popping around the web this morning to see what has been shaking in the mortgage world.

Weak west coast employment numbers, $266 Billion in ARM’s getting ready to reset, and recent (past-tense) liberalization in underwriting requirements have Sub-Prime lenders concerned about future survival.  In a tightening market only the strong and/or innovative survive.  Liberal underwriting is proving to be expensive, not profitable. Expect to see many Sub-Prime and Alt-A lenders fold in 2007.  Real contraction is upon the industry, which is probably isn’t a bad thing…too much fat isn’t good for anyone.

What does this mean?  Bulls and Bears make money, Pigs get slaughtered.   

J.D. Power and Associates released their 2006 Lender Quality Rankings today. The three primary factor areas that drove client satisfaction were the application and approval process, the actual mortgage professional, and the actual closing of the loan.   Some interesting numbers:

• 28% of the over 4000 borrowers surveyed were dissatisfied with their experience due to financial errors, miscommunication, and unresponsiveness of the mortgage professional.
• Borrowers heavily base lender service quality ratings on quick and accurate time frames to close and closing costs.
• Asking for similar documentation on multiple occasions was a big problem for consumers.
• 70% of borrowers chose their current lender for refinancing.
• Surprisingly, the larger Lenders received the best scores…dismissing somewhat the perception that smaller outfits necessarily provide ‘better service’.
• Ratings were based on a 1000 point system, the industry average was 750:
• SunTrust topped out the survey with a score of 782, followed closely by Bank of America (781), Wachovia (774), Wells Fargo (766), and Chase (762).

What does this mean? Accuracy + Speed = Good Service. 

Fannie Mae (FNMA) filed a $2 Billion dollar lawsuit a few days ago against it’s accounting firm of KPMG, for the $6.3 Billion in earnings mistakes that were uncovered.  FNMA fired the firm in 12/04 for a allegedly ‘rubber stamping’ their internal accounting, which is not the job an independent auditor is supposed to do.

This may seem rather trivial, but if the FNMA was publishing their own numbers as representation to the company's financial strength, it begins to take on similar facets of other mega companies that were found to have ‘cooked books’. 

What does this mean?  Remember Enron?*

40 & 50 Year Interest Only Loans are on the rise and receiving the blessing of mortgage insurers.  Viewed as ‘less risky’ than some other exotic mortgage programs, because after the initial 10 year interest-only period the loans may still be amortized over 30+ years, reducing potential payment shock.  As with any mortgage program, ask questions and understand what the ramifications are.  They afford a lower payment but not without some inherent future risk. 

What does this mean?  You're essentially leasing your home from the bank.  

Outstanding mortgage debt has topped $12,000,000,000,000.00.   I had to spell out the zeros to see what 12 Trillion looked like.  Interestingly mortgage fraud is growing at a slower pace…although I suspect this to quickly turn the other way with all the pending rate adjustments and the subsequent dirt they will certainly dig up, followed by some market-centric house value ‘corrections’.

I choose to use the term correction rather than recession because the ridiculous appreciation padded by the refi-boom simply couldn’t be maintained.  Home values in the big markets are simply adjusting to much more practical levels, further fueled by the steady increase in interest rates and greater consumer awareness.  

It’s interesting to watch the residential real estate sector begin to act more and more like it’s stock counterpart.  The increased velocity of information, and thus capital, will only continue to increase volatility in this traditionally stable sector of the economy…

**Thanks to Mortgage Daily. a mortgage industry insiders best friend for the latest objective news.

*Read this news independently, but the ‘Enron’ analogy deserves to be credited to Christopher Farrell over on Active Rain.

They added a nice Wikipedia link to research relative real estate articles too, but the free listing feature embedded in such rich 3rd party content is now the early mover towards Real Estate 2.0 dominance. What are the future ramifications of such a service?

The NAR and their local cooperative MLS’s have to be mortified. Zillows audience reach capacity has been within range of Realtor.com, and this new feature is sure to narrow, if not close the gap.

By offering agents and consumers the ability to list their properties on a superior interface, Zillow immediately offers a far more intuitive and rich alternative to the local and traditional MLS’s and (Realtor.com). Some may say the accuracy of the listings will suffer due to lack of stringent listing criteria, but ive been in more than one MLS where the information was anything but accurate or helpful.

MLS’s have always been very private independent listing aggregators for hire. Their policies are more often about protecting the data within, than its actual quality or exposure. So in their own short sightedness, the NAR and MLS, and their privacy policies, created this ‘Day of the free listing’.

Some questions that are running through my head: 

How long will it take for the other early movers to adopt similar policies? Redfin, Trulia, Google and a host of other mash-ups are well positioned to do do something similar, which can only catalyze and improve the paradigm shift. 

What does this ultimately do to the traditional commission model?  'Proprietary & exclusive listing services', and the ability to charge for them, have been the cornerstone of a traditional Realtors revenue model since day one. 

No doubt, this will all take a little time to sink in, and the clear repercussions are still a ways away from being seen...id like to analogize it to a deep ocean Tsunami, the initial tremor has been measured, now its just a matter of time before the monster wave hits home and revamps the entire landscape.      

As consumer benefit awareness and the resulting professional migration begins to swell, are the days of the ‘pay to list’ MLS’s numbered?

The writing is more than just on the wall…its the end of the MLS as we know it...and thats not such a bad thing :)

Related Articles:

Zillow Crows, Redfin Stews The Future of Real Estate Marketing…

Zillow Coverage, Day 2 Drew Myers…

Zillow Redux: A post-diluvian retrospective… The BloodHound Blog…

Zillow Wants Your Listings    Active Rain