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Big Box vs. Independents

Though I speculate in this video that buyer agents will get phased out, it’s not the best alternative – buyers should have representation, it is just a matter of cost/quality.

In this futuristic scenario, the listing agent will only be representing the seller, and will likely want to process your order at the seller’s price.

Buyers may prefer to get their own representation.

There will likely be real estate consultants available to assist buyers with pricing, and to help address the major deal points.

If you were buying, would you be willing to pay for good help?

Robot Real Estate

kdryden

Here’s another company who intends to disrupt traditional real estate:

http://techcrunch.com/2014/09/08/allre-lets-you-buy-and-sell-your-house-online-without-a-real-estate-agent/

A few thoughts:

1. They have launched their transaction management business in San Diego.  But they’ve been having trouble with their website this week, and you have to register just to take a look.  With Zillow and others giving you free and anonymous access, consumers expect to roam around before committing their email address.  Specifically, buyers and sellers will want to see the homes-for-sale inventory.

2.  Timing is everything.  If they could have caught the early frenzy when there wasn’t as much scrutiny of pricing, consumers would have been more willing to take a chance on a new-fangled system.  People will still be curious, but pricing is the issue with all for-sale-by-owners.  They aren’t as motivated, and without any guidance, they will price high.  But buyers today don’t know if prices are going up or down, and they will want to be conservative about price – creating a significant gap from the start.  The chances of buyers and sellers coming together on price today – even with an agent – aren’t that good.

3.  Her first pitch is for participants to save the commission.  But only one party can save the commission, not both.  For sellers to save the commission, their price has to be so attractive that buyers pay the full price.  But buyers want to save the commission too, so they subtract 6% from the seller’s price just to get started.

4.  She dwells on the fact that her service is free to get around RESPA.  Two points: A) They are appealing to the money-savers, who aren’t going to tolerate paying higher fees for the other services provided.  B) When a customer has a problem or concern, and they can’t get help from her – who is going to make the deal?

5. She does concede that consumers may need an agent, and if so, they can find one and work out a pay structure on the side.  But she is missing the big game-changer that a new-fangled company could provide: realtor help if/when needed, at a reasonable cost.  Consumers don’t mind paying a reasonable fee to get adequate help, and if she just provided that one last step she might pull it off.  But instead, she chides the industry with her snarky comments like she is a ‘recovering realtor’, which alienates realtors everywhere.

6. She said that she was a realtor for ten years, but the BRE says that she obtained her California real estate salesperson’s license in 2007 – who knows, maybe she had a license in another state?  According to the San Diego MLS, she has sold 40 homes in her life, which means she hasn’t handled a big sales pipeline.  A company built on skimming fees needs to generate a large volume of sales, and they are trusting that a computer can do the job that they have never done themselves.

7. The ‘scorched-earth’ mentality means game-on.  Note that she wouldn’t name the title and escrow company yet – why?  Because that title and escrow company already has a book of business with traditional realtors, and they are probably concerned about alienating them.  The mortgage company, Prime Lending, is crazy to think that being associated with this effort won’t affect their normal realtor business, and likewise for whoever the other affiliates are.

Other attempts to disintermediate the real estate business have stumbled.  The old IPayOne was probably the best combination, because they did provide realtor help when needed but they skimped on quality and eventually closed down.  Redfin has been around for years now; has name recognition, a great website, discounted commissions, and 44 team members in SD – yet according to the MLS, they only have a 1.6% market share this year.  Why?

Because the consumers’ perception of realtors tells them to go with someone else 98.4% of the time.

The company that will bust the real estate cartel is the one that provides great-quality help for less cost.  But if that happened, traditional realtors could adjust their commissions accordingly, and then it’s a nothing-burger.

Life Goes On

Tragedy helps us better appreciate the good things in life.

One great thing is the challenge of selling real estate, which is undergoing an evolution right before our eyes.  Agents themselves are contributing, and we could end up undermining –  or imploding – the current system ourselves.

A reader brought up the $100 listing model, where the agent accepts $100 as his fee to advertise a home on the MLS – and then the seller has to fend for himself to figure our the rest.

This week I’ve seen two other twists, and both were a hybrid commission model where the home’s listing is inputted into the MLS, but no commission offered to the buyer’s agent.

This is single-agency in disguise.

While it is possible that outside buyer’s agents will negotiate a commission with the seller and/or buyer, it’s more likely that they will be discouraged.

Meanwhile, the MLS exposure populates all the real estate portals – and these listing agents are hoping that internet buyers will contact them directly.  The agent gets paid their pre-arranged fee, and buyer is, in effect, unrepresented.

It sounds like a great new way to save on the commission.  But if buyer agents are discouraged, how do you know if you got top dollar?

The highly motivated buyers – the ones who pay top dollar – want and need the help of a buyer’s agent.  When a new listing pops up, some buyers aren’t going to burn their agent.  The resulting pool of motivated buyers is diminished.

Offering to pay all agents a specific commission amount (bounty) to sell the home is the most effective way to cause a top-dollar sale.  Listing agents who offer zero commission are NOT doing their sellers a favor.

The MLS rules prevent a listing agent from offering zero commission, unless it is an open listing.  My friend at Sandicor sent me this five years ago:

Entry Only, Open Listings. The law supersedes the rules for Open Listings and commissions in the MLS. The California Civil Code Section 1087 states the following:

1087.  A multiple listing service is a facility of cooperation of agents and appraisers, operating through an intermediary which does not itself act as an agent or appraiser, through which agents establish express or implied legal relationships with respect to listed properties, or which may be used by agents and appraisers, pursuant to the rules of the service, to prepare market evaluations and appraisals of real property.

If an open listing is placed in the multiple listing service, the total compensation that the owner is to pay shall go to the selling agent who procures an enforceable offer from a ready, able, and willing buyer on the terms accepted by the owner.  An open listing need specify no compensation to the selling agent, but may state that the compensation is to be negotiated between the selling agent and the owner.

This only applies to Open Listings and is not relevant for Exclusive Right and Exclusive Agency Listing contracts.

But do these listing agents disclose to their seller that it is in their best interest to appeal to all buyers and agents? It’s on the form now, but nobody reads it.  Will sellers see past the ‘commission-saving’ pitch and notice that the plan discourages the very buyer-agents you want selling the home – the ones with highly motivated buyers who pay top dollar.

Don’t get me wrong, I still think we are heading towards single agency.  But it should be one of the commission options, not the only.  We really need an auction format to weed out the agent-shenanigans, and enforce transparency.

In the meantime, maybe it will go the other way? See below:

giving bentley to buyers agent

The commission war will continue, but one thing won’t change.

If the price isn’t right, it’s not going to sell!

SD Realtor Population

The new MLS has its faults, but one new benefit is a ‘Count’ button, which allows it to search larger sets of data and give us a total number.

According to the SDAR website, in 1985 there were 3,251 agents in the San Diego Association of Realtors (the largest of 3 associations in the county today).

Today’s counts:

17,955 licensed agents paying dues for MLS access (you can specify the members when searching, and non-MLS agents and affiliates were omitted).

13,521 houses, condos, and mobile homes sold in San Diego County in the first five months of 2014!

If 20% of the agents are doing 80% of the sales, that’s a lot of realtors not selling!  The public should be aware, and investigate their choices carefully.

With no obvious attempts being made from within the industry to change anything, it’s just a matter of time before an outsider gets a foothold, and possibly change the business forever.

It makes you wonder who it will be.  Any big retailer could bundle up a package of services and include real estate sales too – this was an interesting article:

http://techcrunch.com/2014/06/10/amazon-said-to-start-selling-babysitting-and-other-home-services-later-this-year/

Get good help!

Advertising War For All the Marbles

The NAR and realtor.com aren’t likely to keep up with the spending, so the future of home-selling will probably be determined by who wins the war below.  Zillow has already shown the killer instinct that Redfin lacks, and if they succeed in getting the most eyeballs, then agents will be forced to buy their advertising.

From geekwire.com:

Everyone loves a good rivalry, and perhaps none have been quite as fun to watch as the matchup between Seattle-based Zillow and San Francisco-based Trulia.

zillowceoThese two online real estate companies have been at each other’s throats for years, a fight that has resulted in litigation and plenty of bombshells back-and-forth. In many regards, Trulia has followed on the heels of Zillow, whether it has been around launching apps, new features or going public.

Now, it’s going to be fascinating to watch this play out in the advertising sphere. On Wednesday, Zillow CEO Spencer Rascoff announced a bold plan to spend up to $65 million on national advertising in 2014, a huge uptick from the $40 million in spent in 2013 (the first year it advertised).

Read full article here:

http://www.geekwire.com/2014/zillow-vs-trulia-get-ready-advertising-battle-epic-proportions/

Pocket Listings

JtR: Pocket listings are mostly mythical around here, because sellers hear that the market is hot and want to test it with open market exposure.

A good article on the subject is here:

http://www.realestateeconomywatch.com/2013/04/cb-previews-international-draws-the-line-on-pocket-listings/

An excerpt:

“If the seller is fully informed and provides written consent not to place their home on the MLS, then I’m not concerned,” said Betty Graham, president of Coldwell Banker Previews International/NRT, the Realogy franchise’s luxury brand.  “But I’m not sure that’s the case in many of the pocket listings I have seen.  The fact is that our first responsibility is a fiduciary responsibility to act in the seller’s best interest and with a pocket listing there is a great potential to violate that fiduciary responsibility.”

Realtor Worth The Commission?

I was asked, “How can you explain that a realtor in Detroit gets paid 5% to sell a $12,000 dump, and you get paid the same 5% to sell an $800,000 house?”

I can explain it in one word.

BOUNTY

You are offering a reward for an agent to bring you a top-dollar sale.

The commission dollars look ridiculous if you try to justify the pay as a regular hourly wage or salary job.

Consider it as offering an incentive.

If you offer $400, it won’t raise an eyebrow.  If you offer $4,000, a couple of agents might start looking around for their flip-flops.

But if you offer $40,000, every agent will drop everything, go pick up their buyer and coming running over – and that’s the type of response that causes a top-dollar sale.

Then I added, “Recently I sold a house for more than 10% over list price in a carefully-orchestrated bidding war – do you think I earned the 5%?”

I will pay for myself – promise!

bountyhunter

Traditional Realtors And The 6%

Bloomberg has an article on the traditional real-estate-agent model, and the upstarts trying to change it.

http://www.businessweek.com/articles/2013-03-07/why-redfin-zillow-and-trulia-havent-killed-off-real-estate-brokers#p1

Why has the traditional-agent model been so resilient?

It’s because the upstarts won’t pay the money to attract great agents.  A new model could work if the upstart company would hire the great realtors to implement it.

Redfin has an opportunity primarily because they offer the only alternative (no offense to the zippers), and none of the big corporate realty firms seem to mind (you don’t see Prudential or Coldwell Banker going for mega VC money to build a slick website, etc.). 

But the Redfin method of having part-timers show houses to the buyers is flawed, and when the market is so intense like it is now, it seems unlikely that enough clients would endure. 

They might get away with it though, in a rising market – if they can win the bidding wars, and/or adopt the old Century 21 model and just hire every licensee who can fog a mirror, and hope to make it on sheer numbers.  The article points out that Redfin may IPO in 2014, which should put the squeeze on profitability.

Regardless of which upstart poses the threat, traditional agents can always cut a similar commission deal, if necessary, to stay in the game. 

The agent’s competency should play a bigger role in who gets hired – these are huge transactions for the consumer, and they want quality help.

An excerpt from the article:

So far, Redfin hasn’t convinced many people that brokers, or their 6 percent take on most deals, are in any real danger. Last October, at a Seattle technology conference, an audience member asked Spencer Rascoff, Zillow’s CEO, if sales commissions were ever going to decline. “There are other startups that are trying to break down those agent commissions, and I think most of them will fail,” he said. Rascoff said later in an interview that “consumers don’t really care about commissions. They say they care, and they talk a big game in the off-season. But when push comes to shove and it comes time to sell their home, the transaction is so infrequent and so highly emotional and expensive—and consumers are so prone to error—that they turn to a professional.”

Economists, like the University of Chicago’s Syverson, watch and wait for a real change in the market. “The Chicagoan in me says there is so much money on the table that someone will figure it out eventually,” he says. “But I will admit, I’ve been impressed with the resilience of the old model.”

buyerschart

More on Berky

Sent in from a reader:

Ah, but there is one thing a company like Berkshire Hathaway can do if it develops dominance in the market.

It can decide not to participate in the MLS by setting up its own in-house version.

Suppose it can get more than half the listings for itself. It will get both sides of each commission, and with BH having more than half the house listings, sellers and buyers will prefer to deal with it rather than with the all the little fish who work through MLS.

If BH became dominant, it would also attract the best agents and many of the weaker companies outside BH would fall  by the wayside. There are other advantages, too; less oversight of BH’s operations; freedom from the restrictions imposed by MLS.

I have seen this situation with commercial property. I have lived in communities where one real estate firm was so dominant it simply didn’t  participate in the MLS, glommed up the best listings and sales and starved the  competitors for business.

David Amkraut, Los Angeles attorney and investor

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Thanks for the thought, David, and I agree, BH HomeServices could dominate the real estate selling business.  They already had 16,000 agents before partnering with the 53,000 Prudential Real Estate and Real Living agents – 69,000 total!

They have to compete with NRT though, who operates 13,800 offices with 241,000 sales associates doing business in 103 countries and territories around the world under the Century 21, Coldwell Banker, ERA, Sotheby’s International Realty, Coldwell Banker Commercial, and Better Homes and Gardens Real Estate brands.

Don’t forget Keller Williams, Redfin, and the Independents – it is a big playing field!

The most important part of the Berkshire move is the management team – and they are going to stick with the existing folks, many who come from the relocation side of the business.  The CEO said that it would take five years to build a nationwide brand from scratch, and merging and partnering is more efficient.

Maybe, but it could also be a scramble to survive.

This low-inventory environment is disasterous for realtors – especially for those with low skill sets.  The big franchises who make the bulk of their profit from the low- and medium-grade agents have to be feeling it.  The stats in the previous post here showed it – most realtors aren’t selling anything these days, and there is little reason to think it will change in the near future.

The higher-producing agents control the future – where will they choose to work?

The big franchises don’t have any more money to offer them – the commission splits are already favorable to the good agents, and the franchises can’t depend on less-productive agents.  The existing top-producers are going to stay put, just because it is a hassle to change companies, and they are hoping to get out of the business shortly anyway.  Realtors new to the business aren’t going to feel enough loyalty to stick around these revolving-door franchises, so the attrition of young and old agents has to be high already.

Can the big stodgy corporations, who have only gobbled up independent companies in the past, suddenly become innovators, and offer their agents something they can’t get elsewhere?  Doubt it.

Yet I think it is possible for a revolutionary company to take over the industry, and attract any type of realtor to work there.

I wouldn’t be surprised if BH or NRT takes a run at Redfin, just to get their website and eyeballs.  The Redfin VC money probably wouldn’t mind being repaid right about now, and it would enable the buyer to appeal to younger and more savvy consumers.  There would be the little problem with dissolving the Redfin kickbacks, but that’s why they have PR people.

The real estate market is ripe for a big player to dominate, but it’s not going to come from within.  There are 1,000,000+ realtors across the country, and the existing system is too ingrained to be turned upside down.

It’s going to take an outsider to blow it up.

What Berky Could Do

Berkshire Hathaway HomeServices – or any other “premium franchise brand” – could change the game of real estate….but they won’t.  Why?  Because the existing model is very profitable, and there is no threat from outside.

An example of how the existing model works:

A review of the sales history of one of the local “premium franchise brand” offices for the summer selling season, June 1st to September 30th, 2012:

MLS dues-paying members: 310

Transaction sides: 223 (109 sellers, 114 buyers).

“Round-trips”, where both buyer and seller was represented by an agent in this office: 18

Number of properties sold: 205

We know that almost a third of the agents (223/310 = 28%) in the office didn’t make a sale during the four-month selling season when mortgages rates were in the 3s – and that’s only if every other agent only sold one.  But the common rule-of-thumb is that the vast majority of the sales are done by the top 10% of the agents….so it’s probably more likely that two-thirds of the agents didn’t sell a lick this summer.

Bottom line strategy:  Hire every licensee you can and give them lousy commission splits, conduct a ‘mentor-training program’ (trained by fellow agents), and hope that the brand name helps them to sell at least a couple of properties before they drop out of the business.  Meanwhile, have a manager conduct an office meeting every Tuesday morning to promote the new office listings, which is a very common practice, and every office does it.  This promotes selling the listings “in-house” before they hit the MLS – in hopes that giving the agents an insider-preview might help them get a sale.

This program is run by every real estate franchise in America, and it works great, if you can get thousands of agents on board.  Yes, there are expenses with having the brick-and-mortar offices, but agents rent space in them, which minimizes the cost to just a manager and receptionist.  The unproductive two-thirds just work out of their house, to save money.

What Could Berky, or Any Other Franchise Do?

1.  Promote video tours of houses.

Why don’t they?  It’s because of the audio – it would expose how little the agents have to offer.

2.  Implore the MLS to better serve the sellers, and minimize fraud.

There are simple solutions – for starters: A) allow video tours to be seen by the public, B) insist on high-quality photos only, C) require every data point on the listing must be completed before it can go active, D) showings must begin the day of listing input, E) once a listing is inputted, it has to stay active for a minimum of four days.

3. Promote consumer education.

In the era of transparency, consumers are craving education.  Yet none of the big franchise companies have capitalized on the opportunity to provide a constant stream of consumer-education videos or articles.  When you check their websites and blogs, all you see is the usual self-promotion.

4.  Provide effective sales training for agents.

Instead of allowing the old has-beens to mentor, send the new licensees to Dale Carnegie to teach them how to be salespeople, not realtors.  Then send the old realtors there too!

5.  Develop new innovations, or at least promote the best ones available.

They will tell you that it is up to their agents to utilize the best internet gadgets for their own individual business.  But anybody could develop a hot-shot public-MLS and take over the industry – and the field is wide-open.  Redfin doesn’t have the killer instinct to dominate, so they will just slowly nibble away at the edges.  Or if you don’t have the ambition or thirst for a public-MLS project, at least help coordinate and promote the other more minor innovations.  There are new real estate apps and ideas being developed every day by people outside of the industry – and one day they will find the right mix, and then the old guard will be toast.

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I said in the beginning that there is no outside threat, which keeps the old-style franchise fat and happy.  But there will come a day when real estate as we know it will become obsolete – which will be a shame because the old-fashioned personal touch is by far the best method for agents to assist people with buying and selling houses.

The internet has caused consumers to be as educated, or more educated than the agents.  The franchises could re-vamp their packages and give agents a better set of tools in order to excel, but it seems they are destined to repeat the same tired old ways, and gobble up more agents instead.

These big companies could throw their weight around, and cause real disruption if they wanted to – but they don’t.  Why?  The current system is working great for them, so they don’t see any reason to change.  But change is coming, and either you adapt and hopefully lead, or get run over.

Links of interest:

http://www.prudentialcalblog.com/blog/

http://www.inman.com/news/2012/10/30/prudential-real-living-brands-be-berkshire-hathaway-homeservices

http://www.vendoralley.com/2012/10/30/warren-buffet-bets-big-on-real-estate/

http://www.inman.com/buyers-sellers/columnists/roberthahn/buyer-agency-in-information-age

 

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