Those Poor Realtors

If I were a Realtor, I might feel right about now that the entire free world has turned against me, having decided I’m a sharp-elbowed, greed-driven hustler trying to preserve an advantage that I don’t deserve. And I’d probably be right. In today’s New York Times is yet another chronicle of how the National Association of Realtors has used its muscle to keep all kinds of competitors, including banks, from taking a dip in its 6% commission pool. The U.S. Justice Dept. has already sued the N.A.R.; now comes word that the Consumer Federation of America is coming after the N.A.R. Here’s the money quote, from the C.F.A.’s executive director, Stephen Brobeck: “Because the industry functions as a cartel, it is able to overcharge consumers tens of billions of dollars a year. Consumers are increasingly wondering why they are often charged more to sell a home than to purchase a new car.”

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  1. manorhouse says:

    My first post, so I’d like to begin by saying that I loved the book and read it in one sitting.

    However, I think there is a lot of disinformation about real estate agents and the service they perform. (I am not a real estate agent.) Because access to information reduces transaction costs, I am very much in favor of online real estate sources. In addition, providing this information to consumers shifts some of the burden of research from the agent to the consumer – a good thing for agents. Over time, we can expect that it becomes the norm for a home buyer to be self-educated, ble to identify and close on a property in far less time than a buyer who has not scoured the Web to compare properties.

    So what role will the agent play in the future? If the agent has less experience than the educated buyer, perhaps only a time-saving role. We CAN learn to perform car repairs, but is it worth our time? The commission rate for such service will adjust accordingly.

    But is there more that an agent has to offer? Maybe. Malcolm Gladwell, in Blink, discusses the concept of sub/un-conscious processing of information. Based on my experience, successful real estate agents have this quality when it comes to identifying good properties for their client/buyers. They also have this ability when seeing – perhaps with an inner eye – how to close the gap between what the seller wants and the buyer is willing to offer. Perhaps clients can tell this.

    Of course this theory is premised on the assumption that these agents are experienced. They must have more knowledge than their clients (and not just from the Internet) and must have weathered many transactions to begin to intuit the issues that are common when buying and selling real estate.

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  2. manorhouse says:

    My first post, so I’d like to begin by saying that I loved the book and read it in one sitting.

    However, I think there is a lot of disinformation about real estate agents and the service they perform. (I am not a real estate agent.) Because access to information reduces transaction costs, I am very much in favor of online real estate sources. In addition, providing this information to consumers shifts some of the burden of research from the agent to the consumer – a good thing for agents. Over time, we can expect that it becomes the norm for a home buyer to be self-educated, ble to identify and close on a property in far less time than a buyer who has not scoured the Web to compare properties.

    So what role will the agent play in the future? If the agent has less experience than the educated buyer, perhaps only a time-saving role. We CAN learn to perform car repairs, but is it worth our time? The commission rate for such service will adjust accordingly.

    But is there more that an agent has to offer? Maybe. Malcolm Gladwell, in Blink, discusses the concept of sub/un-conscious processing of information. Based on my experience, successful real estate agents have this quality when it comes to identifying good properties for their client/buyers. They also have this ability when seeing – perhaps with an inner eye – how to close the gap between what the seller wants and the buyer is willing to offer. Perhaps clients can tell this.

    Of course this theory is premised on the assumption that these agents are experienced. They must have more knowledge than their clients (and not just from the Internet) and must have weathered many transactions to begin to intuit the issues that are common when buying and selling real estate.

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  3. Zippo says:

    A couple of drastic unintended consequences with the immovable commission standard of 6% (in most areas) are that it creates contempt from its customers who may feel prices are too high and the temptation for individuals seeking new financial opportunities by becoming a real estate agent (easy to learn with very little time invested but difficult to master without years of experience).

    For traditional commission agency customers who previously sold a house 5 or more years ago are now feeling the pinch of high sales commissions caused by the housing boom and inflation of real property in many areas of the country due in part by high liquidity and creativity in the mortgage sector.

    Only sellers can appropriately be defined as customers since “customer” is defined as ‘one that buys goods or services’. Buyers who utilize the free services of a buyer’s agent will not pay for the service although the cost might seem inherently hidden in the transaction. Unfortunately, because these services are free to the buyer, they are less motivated to spend time educating themselves creating a dependancy on the buyer’s agent. In other words to use your analogy Manorhouse, why would anyone repair their own car when a professional mechanic will do it for free.

    Unlike consumers feeling the sting of high energy prices who otherwise have inadequate choices of alternative energy and must simply conserve, real estate customers (sellers) are becoming more astute by looking for alternatives for marketing their properties inexpensively. Fortunately, many a la carte businesses and discounters are stepping up to meet this demand.

    Simultaneously, many people who would otherwise work in many other different employment sectors have instead chosen to become real estate agents. With so many new agents in the field desperately trying to make such large amounts of cash this has created a downward shift in the knowledge base of the median agent.

    So while the median customer is more savvy, the median real estate agent is less experienced. Even agents with 10 years or more experience feel frustrated when working with a “green” agent on the other side of the transaction who became an agent just for the big bucks without any true passion for the field.

    Curiously, the commission setup has not changed. The National Association of Realtors is one of the most powerful lobbying organizations to congress and is under close scrutiny by the Justice Department to let go of its stranglehold of the central MLS databases.

    Hopefully, a better and more open marketing infrastructure will become dominant allowing more customers to forgo traditional commission arrangements before 2007 when the majority of the 5/1 ARMs come due.

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  4. Zippo says:

    A couple of drastic unintended consequences with the immovable commission standard of 6% (in most areas) are that it creates contempt from its customers who may feel prices are too high and the temptation for individuals seeking new financial opportunities by becoming a real estate agent (easy to learn with very little time invested but difficult to master without years of experience).

    For traditional commission agency customers who previously sold a house 5 or more years ago are now feeling the pinch of high sales commissions caused by the housing boom and inflation of real property in many areas of the country due in part by high liquidity and creativity in the mortgage sector.

    Only sellers can appropriately be defined as customers since “customer” is defined as ‘one that buys goods or services’. Buyers who utilize the free services of a buyer’s agent will not pay for the service although the cost might seem inherently hidden in the transaction. Unfortunately, because these services are free to the buyer, they are less motivated to spend time educating themselves creating a dependancy on the buyer’s agent. In other words to use your analogy Manorhouse, why would anyone repair their own car when a professional mechanic will do it for free.

    Unlike consumers feeling the sting of high energy prices who otherwise have inadequate choices of alternative energy and must simply conserve, real estate customers (sellers) are becoming more astute by looking for alternatives for marketing their properties inexpensively. Fortunately, many a la carte businesses and discounters are stepping up to meet this demand.

    Simultaneously, many people who would otherwise work in many other different employment sectors have instead chosen to become real estate agents. With so many new agents in the field desperately trying to make such large amounts of cash this has created a downward shift in the knowledge base of the median agent.

    So while the median customer is more savvy, the median real estate agent is less experienced. Even agents with 10 years or more experience feel frustrated when working with a “green” agent on the other side of the transaction who became an agent just for the big bucks without any true passion for the field.

    Curiously, the commission setup has not changed. The National Association of Realtors is one of the most powerful lobbying organizations to congress and is under close scrutiny by the Justice Department to let go of its stranglehold of the central MLS databases.

    Hopefully, a better and more open marketing infrastructure will become dominant allowing more customers to forgo traditional commission arrangements before 2007 when the majority of the 5/1 ARMs come due.

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  5. manorhouse says:

    A couple of thoughts. First, are we sure that NAR has control over MLS databases? I’ve seen cases in the past couple of years where competing MLS’s sued each other (in Ohio, for instance). No central control there, I think.

    Second, commissions HAVE changed over the years – dramatically – in both amount and in structure. At one point, all agents were either sellers’ agents or a “subagent” for the seller – their fiduciary duties, essentially, all ran to the seller. This is no longer the case, as I understand it, in any US jurisdiction. There are buyer’s agents, seller’s agents, and “dual” agents (or transactional brokers), where the broker of record (but usually not the agent) has the paperwork of both sides. These changes are worth investigating, but are cosmetic.

    The final result is that you should ask your agent who they represent, you or the
    seller? Will they keep your strategy and details confidential, so that the other side to the transaction is unaware of your financial drivers?

    So now to the current debate: are prices for real estate purchase/sale representation too high? The market for real estate services is also subject to supply and demand forces. Following the Internet bubble bust a few years ago, many smart people turned to real estate representation, which may have created competition and may be why the NY Times referred to a “6%” standard, when before this period, 7% might have been more common.

    Unfortunately, what’s driving the current debate probably isn’t market forces. As a result, consumers lose out. The lobby for access to MLS data probably comes from Internet marketing companies. They don’t really offer real estate services. They only purchase search engine placement (those “sponsored ads” that you see), then sell the leads they get on their sites to real estate agents. This actually functions as a tax on the transaction and is less economically efficient. So the NY Times didn’t quite get the story. The story is, who is behind the Dept. of Justice’s lawsuit? It’s not the consumer, who doesn’t stand to benefit. So who is it?

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  6. manorhouse says:

    A couple of thoughts. First, are we sure that NAR has control over MLS databases? I’ve seen cases in the past couple of years where competing MLS’s sued each other (in Ohio, for instance). No central control there, I think.

    Second, commissions HAVE changed over the years – dramatically – in both amount and in structure. At one point, all agents were either sellers’ agents or a “subagent” for the seller – their fiduciary duties, essentially, all ran to the seller. This is no longer the case, as I understand it, in any US jurisdiction. There are buyer’s agents, seller’s agents, and “dual” agents (or transactional brokers), where the broker of record (but usually not the agent) has the paperwork of both sides. These changes are worth investigating, but are cosmetic.

    The final result is that you should ask your agent who they represent, you or the
    seller? Will they keep your strategy and details confidential, so that the other side to the transaction is unaware of your financial drivers?

    So now to the current debate: are prices for real estate purchase/sale representation too high? The market for real estate services is also subject to supply and demand forces. Following the Internet bubble bust a few years ago, many smart people turned to real estate representation, which may have created competition and may be why the NY Times referred to a “6%” standard, when before this period, 7% might have been more common.

    Unfortunately, what’s driving the current debate probably isn’t market forces. As a result, consumers lose out. The lobby for access to MLS data probably comes from Internet marketing companies. They don’t really offer real estate services. They only purchase search engine placement (those “sponsored ads” that you see), then sell the leads they get on their sites to real estate agents. This actually functions as a tax on the transaction and is less economically efficient. So the NY Times didn’t quite get the story. The story is, who is behind the Dept. of Justice’s lawsuit? It’s not the consumer, who doesn’t stand to benefit. So who is it?

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  7. mateu says:

    Commissions appear in many sales transactions, so the fact that a 3% commission is larger for a $400,000 house than a $40,000 car doesn’t seem, um, quite novel enough to publish in an economics journal.

    What does seem worth asking, however, is whether it makes sense that a bad realtor receives the same commission as a good one. Or perhaps more objectively, put, why can’t a new realtor accept a lower commission to compensate for her lack of experience? I have seen this approach taken for mortgage loan officers, so there is precedent in the housing market.

    manorhouse argues that consumers will lose out if other companies have access to MLS data. While the sponsored ad scenario sounds like one likely–and unpleasant–outgrowth, the real story I think centers around control of information. Just as the SEC has forced companies to provide more information in their filings, Justice seems to want realtors to provide more information on listings. Greater access to information should ultimately benefit buyers and sellers.

    I suspect that if the NAR thwarts Justice on this effort, eventually we will see some kind of “Napster moment” where an outside party will circumvent the MLS entirely with a more open system.

    adéu,
    Mateu

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  8. mateu says:

    Commissions appear in many sales transactions, so the fact that a 3% commission is larger for a $400,000 house than a $40,000 car doesn’t seem, um, quite novel enough to publish in an economics journal.

    What does seem worth asking, however, is whether it makes sense that a bad realtor receives the same commission as a good one. Or perhaps more objectively, put, why can’t a new realtor accept a lower commission to compensate for her lack of experience? I have seen this approach taken for mortgage loan officers, so there is precedent in the housing market.

    manorhouse argues that consumers will lose out if other companies have access to MLS data. While the sponsored ad scenario sounds like one likely–and unpleasant–outgrowth, the real story I think centers around control of information. Just as the SEC has forced companies to provide more information in their filings, Justice seems to want realtors to provide more information on listings. Greater access to information should ultimately benefit buyers and sellers.

    I suspect that if the NAR thwarts Justice on this effort, eventually we will see some kind of “Napster moment” where an outside party will circumvent the MLS entirely with a more open system.

    adéu,
    Mateu

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