The XBroker: March 2008

Show your love for TXB, voting ends Sunday at 11:59 est.   Time to pull out all the stops and leave it all on the cyber-court.  I’m going deep for votes, no-holds barred…

Show your love for TXB, voting ends Sunday at 11:59 est.   Time to pull out all the stops and leave it all on the cyber-court.  I’m going deep for votes, no-holds barred…

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 that better articulate my less than novel statement:

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.

Real Time Paradigm Shifting in The Real Estate and Mortgage Industries

Very few will argue that we are in the midst of an historical era of change, largely leaving the Industrial Age heading steadfast and firmly into The Age of Information.

Transitions between era’s have traditionally taken anywhere from 100,000,000,000 to 100 years, with each succeeding ‘period’, ‘time, or ‘age’ shrinking rapidly compared to the prior by a factor of ~10.

If the above is true then it’s not contrived to think that we may be passing through multiple periods of relative historical significance during our own life, whereas prior such ‘times’ have lasted for >10 generations.   This is a remarkable reflection if you really consider it. Change is happening at a far faster pace than any of us are used to because it can.

‘The Times’ change so fast they now call it Real Time (as in the time before real time was fake time, or something like that).

Change is also something that does not feel natural thus most don’t adapt to it well, especially over very short periods of time.  Over 10,000 years?  Sure.  Over 5 years?  Maybe.  6 Months?  What just happened..?

People within a society affected by change can be generally classified as:

•    Innovators
•    Adapters
•    Adopters
•    Laggards
•    Haters

The Moral:  Business is moving, evolving, changing faster than ever.  Real estate and mortgage used to resist such rapid change, today embracement is necessary for survival.

It’s pretty well accepted that in the Information Age, withholding information for money has diminishing value.
It took real estate and mortgage (to a greater degree) longer to understand this, which is evidenced by the initial industry aversion to sites like Zillow et al (Innovators).  Many agents understand that wider distribution of their inventory is in fact a good thing (Adapters and Adopters); placing ones product in a place where there are a lot of potential buyers is likely to increases the chances of selling that product.  Other agents are just now realizing and acting on the same (Laggards).

New technologies start big then get smaller and better.
Zillow launched in February of 2006 offering tools and services that draw in consumers and feed participating professionals using intuitive user interfaces (UI’s).  Trulia evokes similar qualities; single site with all the tools (and the list goes on).  To one extent or another Zillow, Trulia et al have exponentially improved the real estate Search experience over the past two years.  They’ve blazed a wonderful path.

They’ve also raised and spent capital that exceeds some Nations GDP to foster a technological paradigm shift towards information transparency coupled with uber-intuitive UI’s with regards to real estate listings, a map and other relevant local data (also called a mash-up).

Today the same tech driven mash-up UI’s that drive gobs of traffic to the Zillows and Trulias of the world are available and affordable to individual real estate professionals (rePros) at pennies on the dollar.

Different Agenda’s
Zillow and Trulia are advertising/media websites.  Their business models depend primarily on traffic so advertising may be sold for a premium and each have numerous vehicles for an agent to spend their money on.

They’re kind enough to offer tools (widgets) that add a coolness factor to an agents individual site and create social conversation forums to leverage participating agents experience/knowledge for the community as a whole.  But make no mistake; they depend on the traffic a rePros personal knowledge and information draws to embolden their respective brands.  Every tool provided is inherently designed to increase their traffic first, yours second.

Other real estate Search sites like Roost will re-skin, redisplay and replace your current ugly IDX then charge you for the privilege of the traffic they direct back to your site. This is certainly a better alternative to what’s been available in the IDX market and more importantly another step towards blending technology seamlessly with an individual rePro’s Brand…yet not quite ‘there’.

In most every case, a top level domain real estate Search portal seeks to profit from advertising and by building their Brand first, yours second.
Roost claims that they ‘Support Your Brand’:

1. Your brand is prominently displayed at the top of the search results
2. You receive a virtual card with your contact information and links to your listings
3. You receive your own URL on Roost

Claim #3, receiving your own URL on Roost, isn’t the highest and best way to support your brand.  This also leads to a similar experience outlined above where a consumer is bedazzled with one slick UI, only to eventually fall into a foreign place called your website.

Roosts business model message:

• Performance-based and transparent
• Pay only for the clicks you receive to your own site
• Target people in specific geography (town, zip code, etc)
• Buy only as much traffic as you want in any given month.
• Your Roost dashboard will make it easy to manage your spend and track performance.

Very Googleicious…carefull, if you don’t keep the traffic tank monetized, it’s possible to be the Star one minute and invisible the next.

Where is there?
When consumers begin their quest for a home, they’re after one thing: listings—all of them.  Trulia, Zillow, Roost et al face a perpetual problem with the ‘available to in-house listings ratio’.  Big players in this space like Realogy and Prudential are picking sides, contributing listings to one site or another.   Some agents choose to contribute their listings while the vast majority do not.  This leaves consumers with a choice between bad and worse: Try and search all the listings with inferior tools, or perform cutting-edge searches on ~20-30% of the listings available in a given area.  Thats not an acceptable ratio in my book.  Pretty soon we’ll have an aggregator of the aggregators, and so on.

From Joel at FoREM:

It seems ironic though, with all these brokers now lining up in different camps to feed their listings to the big consumer search destinations on the Internet, that it’s ultimately the consumer that suffers from these alliances being formed.

If I’m trying to search for a house in Portland, I still have to have to go to multiple destinations (Frontdoor has X, Zillow has Y, Trulia has X & Y but no Z) just to get an accurate picture of the complete inventory available on the market.

and Dustin:

Either way and any way, this would be another big win for Trulia, but as Joel notes, Michael agrees, (and I’ve said before), it is note self-evident that at the end of the day, the consumer wins with broker-fed listing sites.

While penning and researching this post, I came across the above snippets and couldn’t agree more:  A viable solution could be a website that hosts robust Search UI’s and engages social networking as well as SEO strategies under a rePros personally owned and controlled domain.

BlueRoof360.com is about as close to ‘there’ as I’ve seen.  The only aspect that I question (and this is being very nit-picky) is the platform that they are using…is it proprietary or open source?  In other words, can I snap pieces in and out?  If I don’t like the property search UI, can I swap it out with a better one?  Can I add plug-ins and other features vis-à-vis Wordpress?  Realivent and Incredible Agent deserve mentions here as well.  

As a rePro on the Listing side of the relationship, if you are going to ‘give’ your listings to the Zillows of the world, your personal website had better be on par with the site that the link came from, otherwise that ‘link’ will likely leave your site and go back to more beautiful and userfriendly pastures.

As a rePro on the Buyers side of a potential relationship, a website with real time information and a solid property Search UI is mandatory for future survival.

RePro’s can offer consumers via their personal websites a vital claim that the big players will always chase:  100% of the information located within a local MLS’ database.  Days on market, sold data, and a glut of other valuable information to consumers that currently is not available on the big players sites can be displayed on a licensed pro’s site.  Regardless if one person (consumer or professional) thinks that such info is important or not is irrelevant.  Someone does, it’s the long tail consumerism that dominates the current and future markets terrain.  In any case, the more information you make accessible the larger your potential audience.  Redfin gets this, they offer their agents and consumers best of breed technology and information.

In case it’s not evident i’ll point out that consumers are getting smarter about how the real estate industry internally works due to this new real time access to information phenomenon thingy.  Better to be deemed transparent and open rather than a shifty salesperson.

To keep in line with change in real time, the best strategy is a likely mash-up of all of the above, sprinkled with a little bit of this and that.

1. License great looking, highly functional, scalable technology to display your products through, and seamlessly build your brand.  Keep in mind that you get what you pay for, don’t go for the cheapest solution by any means.
2. Push and maintain your listings with the big aggregators: Trulia, Zillow, Google Base etc for the exposure.
3. Blog incessantly about topics that are local to your listings.  Need a blog and the proper education to go along with one? Check out The Tomato.
4. Participate in Social Networks, optimize your Social Networking Optimization.  Participate in conversations on ActiveRain, update your professional profile on LinkedIn, create a group on Facebook.
5. Seek to learn: Knowledge speaks, wisdom listens…Attend some of the current seminars like 4RealzED, BHBU, and if you’ve got some extra coin, Inman Connect.  I’ve personally been to three Connects, registered for Dustins preso in Orange County on April 17th, and plan to attend BHBU schedule permitting.
6. Prepare to change, upgrade and sharpen your tools often.  Today’s rage is tomorrow’s fizzle, stay razor while you shine.

Also See:

DarWidgetry…

New Marketing Strategies…

The Effect of Transparency…