More Bad News for Real Estate Agents

Jeff Bailey reports in the The New York Times today about how an internet site that cuts out real estate agents has grabbed 20% of the market in Madison, Wisconsin. (I think you may need a NY Times password to read the article.)

For $150, this site lists your home. The article suggests that real estate agents have missed out on $17 million in commissions because of transactions done through this site.

My impression is that most “for sale by owner” websites haven’t been very successful. They struggle with the fact that for the buyer, there is no obvious cost to hooking up with a real estate agent since the buyer’s agent gets paid by the seller, not the buyer. But once you have a buyer’s agent, they usually aren’t very interested in showing the buyer “for sale by owner” properties. Perhaps the key is simply for this kind of “for sale by owner” website reaching a critical mass that makes it worth a buyer’s while not to enlist an agent. According to the NY Times article, there are more hits on this “for sale by owner” website than on the official MLS website that the agent-listed properties are on. So that critical mass has been reached.

It will be interesting to see what follows. One might expect that real estate agents in Madison would start to compete on price, cutting their six percent commission. Or, maybe there will be no response at all, just a steady flow of more and more properties towards “for sale by owner.”

Personally, I don’t actually think this is the wave of the future. I think real-estate agents provide a valuable service. What I think will happen is that most transactions will be brokered by real estate agents, but more and more the pricing structure will move to a flat fee for listing properties and then an hourly rate for services provided like open houses and showings. The total fees collected by real-estate agents will fall dramatically and consequently there will be a shakeout with many people leaving the profession and the ones who remain doing much more volume at a much lower payment rate per transaction.


Dr. Funk

Of course, there is a fairly significant non-obvious cost. If you buy from a seller who doesn't have to pay two agents, the sale price will be lower.

A friend of mine is shopping for a home in Chicago and plans to do all his own research then bring along a friend with a real estate agent license so that the agent can collect the 3% and then return it to him.

acs

the pending federal antitrust actions against the NAR and other real estate agent trade associations may also have an effect on the final structure of the business.

HMLP

What valuable service do real estate agents provide, other than the MLS? They're not lawyers, and most of them cannot understand simple addendums to a purchase and sale agreement. They often do not spend any time with sellers other than telling them to get the house in shape for the open house. Appraisals are easily searched online, as are comps. So what is the valuable service?

jn

You have to consider the real possibility that web success might lead to protectionist legislation.

Consider that when new car shopping got started on the internet, dealers lobbied to regulate the sites so that now web purchases MUST go through a local auto dealer in most states. No more internet advantage.

I doubt that real estate agents will simply roll over.

chubin

As a consumer first and real estate agent second, I'm not surprised many in the public have a negative view of real estate agents. If an MLS listed property sells quickly, the seller naturally feels the price might have been too low. If the listed property doesn't sell, the agent is not doing the job. It's very difficult to "prove" you've done your job.
I've always felt properties sell primarily on the basis of having a competitive price. After all, buyers compete to have first opportunity to buy, and sellers compete with similar properties in the neighborhood. The value provided by real estate agents is help with pricing, (You should always get at least three opinions), day to day management of the selling process, (returning phone calls, scheduling showings, being there for trades people),help with making the property look as good as it can, (Sell this House! and other TV shows), and providing access to a stream of well screened buyers, (the MLS).
Since most real estate agents will provide free help with pricing (a CMA) in hopes of landing the (lucrative) listing, a consumer would be foolish not to get that information, arrive at a price, and try to sell their property on their own first. If that fails, then consider listing with an agent. It's possible the property didn't sell FSBO because it didn't get enough exposure, the pricing wasn't competitive, (yes, agents often make misjudgements), seasonal factors, or bad luck.
Lastly, the 6% commision model is little incentive for agents to get the highest price for the seller or lowest price for the buyer. I continue to think an hourly fee, based upon actual work provided, is the fairest of all. I just don't think the public is ready to accept that model.

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StCheryl

The article struck a nerve. It is the most-emailed NY Times article in the last 24 hours, and the third-most emailed article in the last week.

Seattle’s Rain City Real Estate Guide » FSBO will not take over the world

[...] First - commission avoidance scheme!? That’s like saying the classifieds are a low trade-in value avoidance scheme for cars. This looks much more like a agents-aren’t-worth-six-percent scheme. The problem seems to be that even the discount brokers aren’t doing a good job at covering the market; Madison effectively has a (usually) 6% commission market and a no commission market. The future is probably somewhere between, with most agents working on a flat fee model (Steven Levitt agrees). [...]

Stephen J. Dubner

By the way, there is another burgeoning FSBO market out there, one much much broader than the Madison site, one that I am waiting for some economist to tackle. It's called Craig's List.

StCheryl

There's too much noise in Craig's List. It would take too long to clean up the data.

jon

I think the real value for a real estate agent is in the long distance move. More as a person that is familiar with the area, schools, shopping, traffic, and so forth. Things that can't be readily found out, or truly understood without being in the area. I think real estate agents for the average home will change, they will become more of a clearing house system, where their main functions are housekeeping type things, especially for people that move before their house sells, or those with busy work schedules. They also allow sellers to still have a life while trying to sell a house. They are free on weekends when people normally have open-houses/looking at houses.

One last point, you shouldn't use your real estate agent to do the actual negotiations. When my parents bought their last house, it was a home that was redone by a contractor that bought it from the previous owners. My mother wanted to have gas appliances, they had installed electric appliances in the house. If it was up to the agent, we would have paid the same price for the home, but would have had to pay and contract to get the new heavy appliances installed. My parents said that was unacceptable, and on their own negotiated with the contractor to credit us for the cost of the electric towards the total cost of purchasing and installing the gas appliances. It wound up costing my parents about $100 total instead of the $2000+ it would cost to install everything.

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Seattle’s Rain City Real Estate Guide » Good comments on the NYT For Sale By Owner article

[...] I found some more interesting thoughts on the New York Times article over on the Freakonomics blog. “Chubin,” one of economist Steven Levitt’s readers proposed a novel approach - the hourly realtor. Lastly, the 6% commision model is little incentive for agents to get the highest price for the seller or lowest price for the buyer. I continue to think an hourly fee, based upon actual work provided, is the fairest of all. I just don't think the public is ready to accept that model. [...]

Zak

compare the RE agent shakeout to the travel agent shakeout. Once travelocity came on the scene (circa 96) and debunked all the codes from indecipherable scribble to easy to use GUI travel agents started dying off like flies.

BTW, I agree with the Craig's List comments. While it is a valuable resource, by its disorganized nature it has too much noise to be a long term player in the field.

jimkimmons

There are probably almost as many lazy jounalists as there are lazy real estate practitioners. I'm a real estate broker and have no problem with any pricing structure that shakes out for my services. I provide value, and I'll always make out OK.

For the resulting shakeout to be beneficial though, it should be based on complete and accurate information When journalists write articles and omit important information, either intentionally or through lazy research, the public doesn't have what it needs to make good decisions.

I believe that it's highly probable that the readers were left with a big misconception when the article equated the listings at $150 each x 2000 = $300,000 to the web site. With only that information, it appears that $300k is all that was spent by sellers/buyers in 2000 transactions. I bet that a significant number of those sellers offered a buyer representative commission and paid it. I'm not a journalist, but it seems a very large piece of important information was left out....intentionally??? The comparison of $150 to x% is misleading, IMHO.

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sophistry

Ok so at the very worst it's $150+3% which is essentially half of the normal 6%. An house selling for $150K would translate into a savings of $4350 which is coincidentially how much a brand new top of the line 50 inch Panasonic plasma TV costs.

Ken D.

For anyone who is interested, the website for FSBO-Madison is http://www.fsbomadison.com/. I live in Madison but have no connection or direct experience with the operation. However, I think information would be readily available for a researcher who wanted to study the subject further, including actual cost comparisions as discussed by jimkimmons and sophistry. I would be happy to offer my suggestions for sources and general community background.

jimkimmons

sophistry:

I understand. My comment was intended more to question journalists who present incomplete data which could lead the reader to a conclusion or decision that may have been different if they had all the info. I wouldn't think of presenting a Comparative Market Analysis to a client with certain properties missing because I don't like the numbers.

I'm actually enjoying the changes in the real estate marketplace and had no intention of arguing one side or the other of the commission value discussion. With the industry's low barriers to entry, poor broker supervision and recent growth, anything that shakes out the chaff is fine with me.

Zippo

We are selling our home now over on craigslist and have gotten much more response than we had anticipated including this email from an agent who wrote:

"I am a real estate broker with [XYZ, Inc.] and my question is: do you work with real estate agents? Many FSBO welcome agents and offer a 3% commission for the buyer's side. Please let me know how you handle agents that come calling and I will pass on the information to my clients."

Innocuous enough and many real estate agents may think "yeah, so what?" The problem that she and other agents don't see is this... you want me to pay YOU, a complete stranger, $15,000 to represent another complete stranger, the BUYER, on the sale of MY house.

What's even more pathetic is that the buyers themselves found my house on craigslist, liked it, but felt compelled to call the agent they had been working with to inquire on their behalf. I'm sure they figured, "why not, the agent doesn't charge us anything?" Do you suppose that if the agent instead told them that she would be happy to inquire about the deal if they would just write her a check for $15,000 which would be refunded if they did not close?

That's like buying a stock and demanding that the company pay the stock broker's commission. The expectation that my home is the well from which commissions are drawn is economically bogus. In any RE transaction, the buyer trades property (dollars) for some else's property (building or land).

Suppose a buyer, working with a buyer's agent, offered to trade his house of equal value for mine, would his agent be entitled to my car, some of my furiture, jewelry or some other property I owned worth $15,000.

What sucks is that the buyers, who provided their own "valuable service" by finding the home which I marketed have now discovered that the home THEY found now costs $15,400 more than what THEY saw it advertised for. "That greedy seller," the buyers no doubt thought with nodding agreement of their friendly agent who is certainly looking out for the buyers' interests. Well on to the next prospect.

Clearly too many sellers agree to this pyschological extortion as it is much more common to ask the seller to fork over money but heaven forbid agents ask for money from the buyer like practically EVERY OTHER business does.

Yes, I understand that the money is coming out of the same pie. But agents don't deserve $15,000 for about 30 hours worth of work. If agents want to drive people around for free knowing that only a fraction of those people will actually close then go ahead. But don't expect sellers to pay for the time spent with non-closers.

Is their ANY agent out their that has the cojones to intellectually defend the current commission structure. ANYONE... Bueller... Bueller?

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maggyberns

There seems to be a lot of misinformation. First of all 15,000 to a buyers agent is well worth it for a seller. Perhaps you don't realize that most people don't have the resources or knowledge it requires to sell a house. You don't discuss all of the lawsuits that occur because the seller said or claimed something that wasn't true.
The price paid is never the price plus the commission. When sellers advertise by themselves it is 99% to save the commission and when buyers answer those ads it is 99% to save the commission. Buyers do not just pay the same amount if there is no broker, they want to save those dolllars. Finding a house on Craig's list? how is any buyer supposed to find out the worth or the house -from the seller? First time buyers need to be educated about a load of stuff who is supposed to do that? The seller? In New York the State believes that any one purchasing a house deserves to be represented by a professional who can guide and protect them in the process. When we drive people around for free we are educating them about areas, schools and showing them houses so that when you advertise they will know what they are seeing. I feel that you are stealing from me after all my hard work. We also don't know who will buy and who won't but we educate the consumer and are entitled to be paid for our services. Dr. Funk you are wrong. It is not obvious that if you don't have to pay two brokers the price will be lower - sellers feel they are entitled to the higher amount, after all they feel they are doing the work. Buying a house is not like buying a ticket to San Francisco. How uninformed!

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Ken D.

Here is a relevant detail that is little understood outside law and real estate. The "listing broker" hired by the seller is of course an agent who is paid by, and owes his/her loyalty to, the seller. The "selling broker" who is contacted by the buyers and helps them find the property is, absent explicit agreement to the contrary, a subcontractor of the selling broker and ALSO owes his/her loyalty to the seller. The relationship between sellers' and buyers' brokers is defined by their mutual membership in the Realtors' guild and the MLS. As to the buyer, the selling broker, however helpful, is much like a commission-paid store clerk; no denigration intended, but that is the legal relationship. (State law may well provide specific obligations of fairness to both sides on all brokers.) Buyers can employ for themselves whatever experts they want, including lawyers or true buyers' brokers. And finally, to maggyberns, FSBO buyers and sellers generally both know perfectly well what difference the absence of a commission makes, and are fully capable of taking that into account in their price negotiations, just like grown-ups.

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Zippo

Maggy, your first paragraph makes no sense. By stating that it would behoove the seller to pay a buyer's agent to avoid lawsuits or make up for a lack of information, you are mixing up the terms buyer's agent and seller's agent. If the seller requires professional consultation for selling their home, then by all means they can pay whatever is negotiated. But to expect a savvy seller to pay $15,000 for professional consultation for the buyer who may or may not be savvy is absurd.

The misguided notion that realtors don't seem to understand is that due to the broad access to online information, everyone is capable of and has adequate resources to make informed decisions. Tax records, school information, etc. is so ubiquitous these days, that anyone with online access (which is EVERYONE by the way since the internet is free at the library) can become well-informed. Realtors have been slow to adjust their pricing of these professional services in the face of such access to the same information once closely guarded by realters.

You couldn't be more wrong, the price paid IS the price plus the commission. In any negotiation, each party must decide what his/her bottom line price is before they sell or buy a house. Of course the seller wants to make as much as possible for a piece of property worth and OF COURSE the buyer wants it for free. Somewhere in the middle is where the exchange takes place. The commission doesn't just drop out of the sky, it comes out of BOTH the seller's and the buyer's pockets since the final bottom-line trade is what counts. Effectively, given a 6% commission the buyer pays $100,000 and the seller only gets $94,000 for a house worth $97,000 without the agent skimming the deal.

As a realtor you aren't driving buyers around to educate them on areas, schools, etc. for free, you are expecting to be paid, which you should but ONLY by from whom you represent. Realtors are just too cowardly to bill for the money for their consultation services from the party who benefits most from them, in this case the buyer.

If you actually think that sellers like me are "stealing" from you, it demonstrates your unwillingness to compete in an open-market which is not controlled by realtors and government insuring their monopoly through campaign contributions. It's open knowledge that the NAR is the SECOND largest campaign donor so naturally they are contributing to protect their monopoly.

The self-righteous notion that only benevolent realtors are capable of adequately informing buyers, as if they are incapable rubes going through life making other informed major purchases easily and without professional assistance but somehow can't seem to master a simple real estate transaction without getting screwed by the greedy band of sellers, is what is driving buyers and sellers to FSBO arrangements essentially laying off the truly greedy middle-man.

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