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.”


manorhouse

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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Zippo

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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manorhouse

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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mateu

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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Ken D.

That last Brobeck quote may have been clumsily worded. I suspect what he meant to convey was, "wondering why they are often charged more IN COMMISSION to sell a home than THE TOTAL PRICE OF . . . a new car."

SeansW

The real question is about effectiveness. A realtor shouldn't receive a smaller percentage simply because they are less experienced. The truth is that they are paid based on whether or not they got the job done. If they don't sell the house they aren't going to make any money. If they sell the house for less than what another agent might have been able to get they will receive less money. You aren't just paying for the abilities of the individual realtor, but also the resources that their firm is making available to sell or buy your home.

One area about real estate that I think was missing from the book was the historical role realtors have played as brokers between the classes. In the past realtors encouraged or pursuaded people of different social and ethnic backgrounds not to move into certain areas. A jewish or black family may not have been shown the homes in the nice wasp part of town. So realtors have not only played the role of financial agent but also ethnic segragation.

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JustinMcH

I have sold two houses by owner and used a realtor to buy two others. In both instances I sold the houses in less than two weeks, once in Chicago in a hot market, once in Cleveland in a not-so-hot market. I've used two different realtors to buy new homes and had to deal with the selling realtors, and each time I felt the realtor tried to bully me into completing sales when things weren't done to my satisfaction and also tried to get me to go up in price instead of taking my bids dutifully to the sellers. I have no use for real estate agents.

At one point I was checking into getting a real estate license so I could represent myself & not have to work with a buying agent -- but you can't get a real estate license in Ohio unless you are sponsored by an existing real estate company. I understand the need for standards for agents, but why would I be forced to work for a company I have no respect for, and by the state government no less. The real estate industry is a racket, and I'm glad more people are seeing it for what it is.

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JustMe

The issues I have seen in the hot market in southern California with real estate agents have been touched on in these comments for the most part.

Yes, everyone is trying to get in on the game. I actually know a delivery person for a package company that has a real estate license, and works to sell houses on weekends only. It's not about a career, it's only about the commissions.

We get mailers daily about selling your home from several area realtors. Many of them call themselves "local experts", but a look at a phone book from 4 years ago does not even have a listing for them. Some expertise. Generally, most "experts" that I have knowledge of will not represent you unless your house is "properly priced", which has meant $10-20,000 below similar area comps. It becomes more a question of how many houses they can sell vs. how they can properly represent the seller.

Finally, after all the hammering that commissioned sales people in the other industries have taken over the last 10 years, when will the real estate agents be targeted? People complain about paying anything over invoice on their new car purchase, or they complain about paying a money manager 2 percent to properly manage their investments, but they gladly hand over 6 percent when selling their house without thinking.

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SeansW

Here in Canada we are just ending a federal election that has been full of speculation regarding government corruption. Just yesterday the local newspaper reported a controversy regarding a real estate deal involving a high profile local politician. Tony Valeri, the Liberal Party Whip, purchased a house next door to his primary residence for $275,000 and sold it very quickly for $500,000. The controversy stems from the fact that he purchased and sold the home for a large profit wihtout it being listed or brokered by a realtor. Instead it was a private sale. It seems odd that a politician has been accused of wrong doing simply for brokering his own real estate deals. It's important to note that Valeri's position in the government is not a conflict of interest with the sale.

maggyberns

JustMe: name one seller who gladly hands over 6 percent without thinking. Is it your impression that sellers are stupid?

Manorhouse: I appreciate your knowledge.
Thank you.

JustMe: The delivery man is probably trying to improve his lot in life, but can't afford to not have an income for 6-12 months. Good luck to him, everyone deserves the opportunity.

JustinM: you have no use for agents so you were to become one?????

SeansW: The past is the past, what in the world was the point of your ethnic comment.

Yes, I am an agent, you should try it for a while and then comment some of you might then understand. None of you mention the liability, the costs we incur for co-broking, marketing, education, etc. Is the
average $40,000 that agents earn really bothering you all so much.

SeansW

The point was that realtors have done more than simply broker deals based on money. It wasn't very long ago that realtors kept minorities out of desireable neighbourhoods. The same neighbourhoods that would have better schools and provide children with better peers than the projects and slums!

SeansW

Please take a look at this link http://www.findarticles.com/p/articles/mi_m5072/is_29_27/ai_n14844384

What is interesting is that this story has a dateline that reads July 18, 2005. Not back in the 1950s or prior to the civil war. So the past isn't limited to the past.

maggyberns

Seans W: It was very long ago. The practice has been illegal for decades. Join us now. I read your link and again I would suggest that you try being an agent for just one day. We are steering but informing. people buying real estate have a right to know about the ethnic makeup of a community they are thinking of buying in the same way they need to know where the nearest supermarket is, where the local dinner is, it is information and the public
ie buyer makes their own decision as to whether and area is for them. We, the broker, have an obligation to inform. You make your own decisions. I for instance when buying property need to be comfortable. I would want to know the facts about a future neighborhood and i would then make my own deciions. It is a fine line. Sean - what do you do for a living and is everyone in that same profession perfect? Do you all do the right thing all the time? Are you all perfect that you are in a position to pick at another profession?, just curious. You seem to come from a perch of perfection.

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maggyberns

Seans W: It was very long ago. The practice has been illegal for decades. Join us now. I read your link and again I would suggest that you try being an agent for just one day. We are not steering but informing. people buying real estate have a right to know about the ethnic makeup of a community they are thinking of buying in the same way they need to know where the nearest supermarket is, where the local dinner is, it is information and the public
ie buyer makes their own decision as to whether and area is for them. We, the broker, have an obligation to inform. You make your own decisions. I for instance when buying property need to be comfortable. It is a fine line. Sean - what do you do for a living and is everyone in that same profession perfect? Do you all do the right thing all the time? Are you all perfect that you are in a position to pick at another profession?, just curious. You seem to come from a perch of perfection.

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Ken D.

Because Realtors (R) don't generally compete on price, that means their financial interest is heavily weighted to doing more deals, as opposed to doing them better for the sellers. A Realtor (R) who is trying to persuade a seller to list rather than go FSBO ideally should be offering a commission deal that rewards the broker mostly for obtaining a premium price and/or a quick sale. (That would admittedly be hard to do in the real world.) In fact, however, the additional direct benefit to the Realtor (R) for speed and/or a modestly higher sale price is proportionally modest. The incentives here are not what they should be.

JustMe

maggyberns seems to be a bit defensive. We must have hit a nerve here.

I know many sellers in so Cal in the last two years that have sold their houses for at least double what they paid for the house. The real estate agent did very little, mainly since the whole area has been overrun with buyers. Houses have been flipped here with ease, with many being on the market less than a month. A seller that I know personally was happy with clearing $300,000 over what they paid in 2000, so happy that when I pointed out the commissions paid to the agent, the comment back was along the lines of, "So what? I doubled my money. Who cares about the $30,000 fee?" So to answer your question, yes, some sellers are stupid. The attitude of "who cares about fees" will change as soon as the market softens.

And to defend your telling people about the makeup of the neighborhood, or where the nearest store is, or how the schools are, or educating the buyer in exchange for a 6% commission is just silly. Most buyers already know about the schools, the neighborhoods, and the stores, or they probably wouldn't be interested in that neighborhood. Most buyers have taken the time to investigate these things for themselves before looking for a house. As was stated before, as soon as the public has access to the information on the homes and different markets, real estate agents will cut their prices to compete with the do-it-yourself crowd. Enjoy it while you can, because it won't last. It's happened in other industries as well.

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SeansW

The article suggested very strongly that realtors have been defying the law! This is important when you have an industry that self-regulates, for the most part.

Of course there is corruption in every profession. However, let's not kid ourselves into thinking that a realtor doesn't yield real social power.

For the record, I work in television. Currently I am a freelancer at a multicultural station in Toronto. Prior to that I worked as a "Jack of All Trades" at a small community cable television station.

Broker

JustMe: I think you hit the nail on the head here. The fee issue really came up big after the decline in the markets in 2000 for stock brokers. You are right about the fees, and it can and does happen in other professions.

JustinMcH

maggyberns, your job may be hard, but that doesn't mean it's necessary.

The reason I have a problem with Realtors is that Realtors often try to keep people out of even looking at houses unless they are represented by a Realtor, a nice way to perpetuate Realtors (one of the reasons I looked into getting a real estate license was so I could actually enter homes I was interested in without having to have a Realtor represent me).

The fact that my state does not allow me to get a real estate license unless I am represented by an existing real estate company is ridiculous -- it shows that Realtors have set up a nice situation for themselves.

Whether you work hard for your money is not the point. Whether your service is worth the cost is -- and when Realtors try to force buyers into working with a Realtor to even look at houses, it shows you must know that an agent's service is not necessary for many halfway intelligent individuals. Some people like having Realtors to handle the paperwork, set up house visits, etc., the rest of us only do it because it often seems there's no other way.

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mateu

SeansW Says:
January 13th, 2006 at 2:00 pm

> The real question is about effectiveness.
> A realtor shouldn't receive a smaller
> percentage simply because they are less
> experienced. The truth is that they are
> paid based on whether or not they got the
> job done.

After the fact, yes, that's how they are paid, but when I agree to list my house with an agent I have no idea whether s/he is going to "get the job done." If a well-known agent and a new agent both offer to represent a sale, and both want a 6% commission, with 3.5% for the selling agent & 2.5% for the buying agent, which agent will the homeowner choose?

> You aren't just paying for the abilities of
> the individual realtor, but also the resources
> that their firm is making available to sell
> or buy your home.

Agreed, but that doesn't change the fact that Realtors, like everyone else, can be better or worse, and learn useful tricks with experience.

adéu,
Mateu

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