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

 

Berky’s RE = Status Quo

Berkshire Hathaway has partnered with Brookfield to create Berkshire Hathaway HomeServices, a “new premium franchise brand”, according to their blog’s announcement.

They and others are claiming that it will be a real game-changer, with Prudential California Realty’s COO Leeann Iacino saying, “Berkshire Hathaway HomeServices passion for our industry will redefine the future of real estate and the American Dream”.

My thoughts:

  • Prudential Real Estate had agreed to quit using the Prudential name in a previous agreement, so they had to come up with something.  Berkshire had invested in PCR years ago, so they were already committed, and apparently the name ‘Berkshire Hathaway HomeServices’ was the best they could do.
  • The management team for Berkshire Hathaway HomeServices is the same group of guys from Prudential – all long-timers who are used to the status quo.  You can’t say that Prudential Real Estate has brought any new ground-breakers to the industry since their inception, and check their website here – it looks like every other real estate website.  In the ‘about’ section they are still touting “the Rock”, with no mention of Berkshire.  They, like other big franchises, enjoy the current system, and won’t rock the boat.
  • The partner Brookfield is in it for the relocation business, and while that sounds promising, all it means for agents is paying out a 30% referral fee to a faceless corporate behemoth in exchange for leads – and great agents don’t need the business bad enough to pay that much vig.
  • Warren Buffett is 82, and Charlie Munger is 88 – what happens when they are gone?  BH will still be a successful enterprise, but with significantly less star power.  Bershire Hathaway hasn’t brought a single innovation to the real estate business, so name recognition is their sole contribution…at least so far.

This isn’t a game-changer – it is a commitment to keeping the game the same.

In the end, the big loser is the consumer, whose only want and need is transparency and a fair balance of cost-for-services.  Instead, the franchise companies – all of them – will be peddling their name-brand recognition and hype to sucker in more consumers (and agents too) into believing that their company image helps to sell homes.

But selling real estate is an individual sport, and the quality of your agent is all that matters.

Haven’t you seen great agents that don’t work for a franchise, and lousy agents who do?  There is no guarantee or promise that you will get a great agent just because you called a big-name company.

The big franchises don’t make much money, if any, from their great agents – but they make a killing on the agents who only sell a handful of homes (or less) per year.   Why do you think they employ 53,000 agents?

Why do you think Buffett got into this racket?  It’s not to change it, it is to exploit it further.

http://lansner.ocregister.com/2012/10/30/irvine-to-be-buffetts-new-real-estate-hq/167446/?utm_source=rss&utm_medium=rss&utm_campaign=irvine-to-be-buffetts-new-real-estate-hq

Real Estate IPOs

When the commission war starts, how will these guys survive?  They are heavily in debt, and now that they are slaves to the shareholders they won’t be able to adjust.  Why do you think they IPO’d?

Hat tip to daytrip for sending this in:

Realogy  (NYSE: RLGY  ) dared to challenge the choppy IPO waters by going public today.

It’s winning.

Realogy may not ring a bell, but you may be familiar with many of its real estate services. This is the company behind Coldwell Banker, ERA, Century 21, Sotheby’s International Realty, and several other providers of real estate franchising, brokerage, relocation, and title services.

It’s been a well-received debut. Realogy was expecting to sell a whopping 40 million shares between $23 and $27 apiece. Underwriters were able to price the deal at the high end of that range last night, and that’s good news for Apollo Global Management, which took the company private in a leveraged buyout five years ago.

However, even $27 for Realogy wasn’t enough. The stock opened 22% higher at $32.85 this morning, moving even higher later in the day.

Realogy’s financials aren’t befitting of a hot IPO. Revenue clocked in flat last year at $4.1 billion and adjusted EBITDA declined by 11%.

For a company that generated 72% of its revenue last year from gross commission income, one would think that home prices inching higher this year and an inviting mortgage market given dirt cheap borrowing rates would be major growth catalysts.

Well, that is starting to play out this year, but perhaps not as vividly as housing bulls would expect. Revenue climbed 9% through the first six months of 2012, and adjusted EBITDA climbed 14%. However, Realogy is still posting losses, weighed down by the heavy interest expenses incurred given its highly leveraged ways. Today’s IPO will help Realogy pay down some of that burdensome debt, but this is still an offering that can quickly sour if interest rates start heading higher and the real estate resale market cools down.

Naturally, the market doesn’t see it that way. It has seen shares of leading homebuilders soar. It also only helps that dot-com real estate debutantes have also been scorching hot. Last month’s IPO of Trulia and last year’s public debut of Zillow have been winning deals at a time when many prolific Internet companies in areas outside of real estate have suffered. As a bonus, one of this year’s hottest stocks has been Ellie Mae. The mortgage industry software provider has seen its stock pop nearly fivefold this year on a boost in mortgage originations.

Realogy will bear watching, especially if the resale market stays hot. However, the market’s euphoric reaction to a company that has so much to prove — and so much red ink to shake — seems to suggest that the exuberance for fresh real estate plays may be problematically misplaced.

http://msn.fool.com/investing/general/2012/10/11/1-sign-that-real-estate-is-getting-frothy.aspx?logvisit=y&source=eedmsnlnk0010001&published=2012-10-11

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