Will 2016 Bring Meaningful Change to the Real Estate Industry?

Every year at year’s end I ask the same question: Will next year be any different?

OLYMPUS DIGITAL CAMERA

Will 2016 be the year that home sellers are no longer expected to pay for their buyer’s agent in the US? Will it be the year home sellers grow up and set realistic pricing expectations for their home, and more importantly, stop expecting their agents to work on contingency? And will 2016 be the year NAR grows up and stops caring less about the quantity of dues-paying agents and more about the quality of those agents?

I would like to tell you that I am hopeful, but I’m not. There is just too much money to be made enabling the status quo.

So, in 2016 we will still have conflicts of interest, buyer steering, an abundance of poor agents and unprepared home buyers and sellers. And we will have one other thing; The Intelligent Home Seller course on Udemy.

For the price of a cheap pair of sneakers, home sellers will be able to educate themselves on the home selling process. They’ll be able to rise about the industry’s outdated customs, the conflicts of interest, the incompetence, the powerlessness and the frustration. They’ll learn to tell a good agent from a bad one before they hire one. And most important, they will learn to pay a commission that is fair for everyone.

Stay tuned. The Intelligent Home Seller course will be available right after the new year. And maybe next year at this time the answer to my yearly question above will be yes. This is the year all the BS in the real estate industry comes to an end. Here here.

Happy holidays to all.

To learn how to keep more or your hard-earned equity when you sell your home, check out The Intelligent Home Seller eBook and The Intelligent Home Seller eCourse.

How Many Realtors Does One Neighborhood Need?

I have a fun, quick test for you. Time to find out how many Realtors would love to sell your home.

Realtor

Go to the Find a Realtor page on Realtor.com, the official website of NAR (the National Association of Realtors). Enter your zip code in the Area Served box, leave the name box empty and click Search.

What comes back is a list of all the Realtors who would love to sell a home in your zip code. There is no need to look at the actual names that appear. Just look at the number  of Realtors found at the top of the page.

In my neighborhood the winning total is 867. You heard that right. There are 867 Realtors in my zip code. I don’t think my zip code sells 867 homes in a year.

So, when it comes time to sell your home and the Realtor you are interviewing tells you they do not negotiate commission, don’t worry. There are plenty other Realtors in your neighborhood. They know it and now you know it.

 

To learn how to keep more or your hard-earned equity when you sell your home, check out The Intelligent Home Seller eBook and The Intelligent Home Seller eCourse.

Why Zillow Has Less Homes But More Traffic

A recent study conducted by BuildZoom found that while the NAR (National Association of Realtors) operated website, Realtor.com has many more homes listed for sale, Zillow still gets most of the traffic. And I think I know why.

ZillowIt is no secret that a lot of consumers do not trust Realtors. The problem with the Realtor.com website is its name. It is a proxy for untrustworthiness. Conversely, consumers like, and more importantly, trust Zillow. Perhaps in part because Zillow is not operated by NAR.

I think Realtor.com would drive much more traffic to their website if they only changed the name, to anything else. How ironic. NAR has spent their lifetime trying to brand the term “Realtor” and now it has become their scarlet letter.

 

To learn how to keep more or your hard-earned equity when you sell your home, check out The Intelligent Home Seller eBook and The Intelligent Home Seller eCourse.

New Research Confirms Realtors Systematically Violate Their Fiduciary Duties – Hurting Buyers and Sellers

A survey by Google found that 67% of Americans do not trust real estate agents. Now, new research conducted by the National Bureau of Economic Research confirms they may be justified in their belief not to trust them.

eagle-trust-sign-limestone-stonecarving-american-eagle-south-bend-1211767-1279x789

How impressive was this research? It was conducted by PhDs from Cornell, MIT and the Wharton School of Business. And the National Bureau of Economic Research is one of the most respected think tanks in the US. And what did the research discover about Realtor behavior?

Properties listed with lower commission rates experience less favorable transaction outcomes: they are 5% less likely to sell and take 12% longer to sell. These adverse outcomes reflect decreased willingness of buyers’ agents to intermediate low commission properties (steering) rather than heterogeneous seller preferences or reduced effort of listing agents. While all agents and offices prefer properties with high commissions, firms and agents with large market shares purchase a disproportionately small fraction of low commission properties. The negative outcomes for low commissions provide empirical support for regulatory concerns that steering reinforces the uniformity of commissions

Our findings provide empirical support for regulators’ long-standing concern of steering behavior contributing to the lack of variation in commission rates, despite consumers’ increased access to information and lower search costs due to the internet.

Compared to other industrialized countries, commission fees in the United States are high. For example, commission rates average less than 2% in the United Kingdom and the Netherlands, compared to the typical rates of 5% and 6% in the United States (Delcoure and Miller, 2002). As highlighted by our model, unbundling commissions has the potential to eliminate steering and reduce commission fees.

Why are real estate commissions still so high in spite of all the new information freely available and an oversupply of Realtors? Because buyer’s agents punish sellers who try to save on commission by keeping their buyers from buying the home until the seller increases their commission to the acceptable rate. In other words, extortion.

Sellers get ripped off because they are forced to pay the extorted rate and buyers get ripped off because they do not get honest representation from their agent. That’s a problem.

And what is the solution these really smart people suggest to combat this problem? The same thing I have been screaming about for two years: stop expecting the seller to pay for the buyer’s agent. What I call Problem One in my book The Intelligent Home Seller.

Unbundling of commissions (making the buyer pay for their own agent) makes 90% of the problems in the real estate industry go away. Unfortunately for Realtors, it will probably make 90% of the Realtors go away. What we know from countries like Australia, where sellers do not pay for buyer’s agents, is that there are almost no buyer’s agents. And without buyer’s agents (and their steering buyers away from low commission homes), there will be tremendous downward price pressure on Realtor listing fees. The average commission would most likely fall from around 6% to less than 2%, instantly turning a $60 billion industry into a $20 billion industry and wiping out a lot of Realtors in the process.

I think it is fair to expect NAR (The National Association of Realtors) and their team of high-priced lobbyists to be out in full force to oppose any legislation that even hints at unbundling of Realtor commissions. After all, what’s more important, serving the interests of 85 million home owners or maintaining the revenue from a million dues-paying members? Fight on NAR.

 

 

To learn how to keep more or your hard-earned equity when you sell your home, check out The Intelligent Home Seller eBook and The Intelligent Home Seller eCourse.

Of What Use is the NAR Code of Ethics?

Realtors like to point out that when you hire a real estate agent to help you buy or sell a home, you shouldn’t just choose a real estate agent, you should pick a Realtor™. What is the difference? Realtors belong to the National Association of Realtors (NAR) and just plain real estate agents do not. And how does membership in NAR benefit buyers and sellers? The best I can tell, only one way: Realtors have a code of ethics.

angel2Go ahead. Ask any Realtor why it is so important to hire a Realtor and not just a real estate agent. Almost without exception they will tell you that they have a code of ethics. Of course a code of ethics is only effective if the people bound by it actually abide by it. So, do Realtors abide by their code of ethics? Not so much.

Based on a recent survey of more than 300 real estate agents by Consumer Reports, they found that about 86 percent said they have seen other real estate agents engage in poor business practices. That is code for violate their code of ethics. Of course none of the 300 real estate agents surveyed had ever done that. They were all angels.

What were some of the dirty little secrets agents confessed to? Here are quotes from the article:

“I sometimes steer clients toward houses that will bring me a higher commission, rather than the best house for them.”

“You can’t believe everything I say about myself in my marketing material.”

“I might persuade a client to sell a home for less than it is worth.”

“I might encourage buyers to make an offer that is too high.”

“I sometimes reveal information about the lowest price a seller will take or a potential buyer’s top price.”

“I might not disclose problems with the neighborhood to potential buyers.”

So you hire a Realtor for their expertise and you cannot trust what they tell you. Lovely. So what is the value of the NAR Code of Ethics? There isn’t any. The ONLY way to make sure your Realtor is doing right by you is to be an educated consumer. Everything else is just misdirection. To learn to be a more informed home seller, visit ReaListing.

To learn how to keep more or your hard-earned equity when you sell your home, check out The Intelligent Home Seller eBook and The Intelligent Home Seller eCourse.

Should Real Estate Agents Make More Than Engineers?

It depends who you ask: a real estate agent or an engineer. Perhaps a more objective questions is, do real estate agents make more money than engineers? Well, let’s do some math.

Engineer

Let’s pick a nice ordinary place like Atlanta, GA. In fact, lets get more specific and pick a particular zip code in Atlanta: 30331. This will make for a good example because it is a fairly low cost area for homes.

According to the National Association of Realtors (NAR), real estate agents have a median experience of 13 years. So, we will compare them to engineers with approximately 13 years of experience. According to Salary.com, an Electrical Engineer 5 (46% of which have over 15 years of experience) earn a median income of $113,570 in the zip code 30331. (NOTE: I chose electrical engineers because they are amongst the highest paid of all the engineering disciplines.) Assuming a 2,000 hour work year, that equates to approximately $57/hour wages.

Now, let’s see what a realtor makes in Atlanta, 30331. According to City Data, the median home price in 30331 is $120,000. I will assume the standard 6% commission (3% for the buyer side and 3% for the seller side) for this property using a full service real estate agent. I know there are discount brokers out there and some agents will take less than 3%, but rarely for such inexpensive homes. Percentage discounts are usually for much more expensive homes. I do not think the 6% assumption here is unrealistic.

Continuing, 3% (for each agent) of $120,000 is $3,600. What percentage of that $3,600 does the agent get to keep? It depends. Some agents pay a transaction fee and keep the whole thing. Some pay a monthly fee to the broker and split the commission. To be conservative, let’s assume the agent keeps two thirds of the commission and the broker gets one third. Now, we have just one last calculation to make.

How many hours does a real estate agent spend servicing their client, on average, from the start of the contract until the home closes? A 2002 survey by the California Association of Realtors (CAR) found that the time required to serve sellers is about 20 hours. But, I will give agents the benefit of the doubt and assume a sale, takes on average, 40 hours of their time.

I am sure you can talk to a real estate agent that swears they spend more than 40 hour per client on average, but why is that? Is it because their service goes above and beyond, or is it because they are disorganized, or is it because they consistently work with unmotivated buyers and sellers? My feeling is, that if a real estate agent is consistently spending more than 40 hours on a transaction, with today’s technology, they are doing something wrong.

If we go along with the 40 hour number, we come up with an hourly rate for a real estate agent of $60/hour, which is about 5% more per hour than an electrical engineer earns with equivalent experience in Atlanta.

Of course were I to choose a more expensive area code, the comparison difference would be much more dramatic. Let’s choose Irvine, CA 92612, where home prices are much higher than those in Atlanta. An Electrical Engineer 5 in 92612 makes $64/hour. The median home price in 92612 is $625,000. Assuming a 5% total commission (2.5% for the buyer side and 2.5% for the seller side) and the same agent/broker split, we come up with an hourly rate for the real estate agent in Irvine of $260/hour or a whopping 400% more than the engineer.

Agents will be quick to point out that they have expenses which engineers do not, which is true. But, being self employed, they also have tax advantages the engineer employees do not. And there is one expense agents do not have, at least not by necessity, that engineers do have: college tuition, that can easily exceed $60,000 for four years at even a state school. And that does not take into account the cost of an advanced degree (over 50% of Electrical Engineer 5 have advanced degrees).

Agents will also point out that unlike engineers, who collect their hourly salary for all 40 hours, agents have to spend some of their time trolling for new clients. Once again that is true, but irrelevant for this calculation, which compares engineering productive hours to real estate agent productive hours. And besides, it is the agent who has chosen to be a self employed entrepreneur with all its benefits (e.g., set your own hours) and determents (i.e., having to drum up new business).

The purpose of this analysis is to put into perspective that, from a productive hourly standpoint, real estate agents make a really good living, even if they only sell a few homes, and even if those homes are in Atlanta, GA. So, the next time you try to negotiate commission with a real estate agent and they claim that just cannot do it for a penny less, tell them they should become an engineer.

If you need help negotiating your commission with a real estate agent, visit ReaListing.

To learn how to keep more or your hard-earned equity when you sell your home, check out The Intelligent Home Seller eBook and The Intelligent Home Seller eCourse.

Zillow’s Last Act of a Desperate Business Model

If you are not buried deep inside the residential real estate industry, you probably do not know that there is a heated debate going on over Zillow’s new “Coming Soon” feature. This new feature allows an agent to advertise their seller’s home on Zillow before it can actually be purchased. The purpose, ostensibly, is to gauge buyer interest for the home and make price corrections, as necessary, before the home is marketed for real (including posting it on the local MLS). Of course the truth is far different.

buggy

Real estate agents will tell you that the real purpose of the “Coming Soon” feature is to generate pocket listings. Nothing in the real estate industry makes a broker happier than a pocket listing, because it enables the broker to get both sides of the commission (buyer’s agent and seller’s agent). These “dual agency” deals are so heinous, they are illegal in almost every industry except real estate. And almost without exception, pocket listings result in a lower price for the home seller. The good news for the brokers though is that most home sellers do not know that. Hell, even NAR (the National Association of Realtors own trade association) does not think it is such a good idea.

Zillow, the nations largest third-party real estate portal, makes most of its money from real estate agents advertising on its site. These agents advertise to attract new clients. In an effort to increase this advertising revenue, Zillow only offers this “Pocket Listing on Steroids” feature to, you guessed it, agents who advertise on its site. The message is clear: if you want both sides of the transaction, you are going to have to pay Zillow.

The idea of pre-marketing a home is not inherently bad, only the way it is being used by Zillow is it bad: to foster dual agency. The real problem though, for Zillow, is that the “Coming Soon” feature is the last act of a desperate business model.

The real estate advertising market is roughly $10 billion – $12 billion annually. Ironically, the information and marketing platform that Zillow (and others) make available to consumers will soon make home buying and selling an (almost) frictionless transaction. It follows then that this will ultimately reduce the number of agents, as well as drive down the average commission per transaction, just as it did in the travel industry and the stock brokerage industry. And the less the agents earn in commission, the less they can afford to spend on Zillow ads. In essence, Zillow’s success will eventually put them out of business, if they stick with their current business model. One real estate agent recently lamented that Zillow’s “Coming Soon” feature is so last year. So is trying to grow revenue through agent advertising. That number is going to go down over time, not up.

So, what will Zillow do? Will they continue to cling to their existing business model, desperately trying to squeeze dollars out of a shrinking pie, or will they do as Brad Inman suggests and become the company who fundamentally changes the old ways of doing business? Will they become “the company that controls the quality of the transaction from end to end, offering a connected, elegant and easy-to-use online place for buyers and sellers as they go through the rigorous 90-day workout.” Time will tell.

To learn how to keep more or your hard-earned equity when you sell your home, check out The Intelligent Home Seller eBook and The Intelligent Home Seller eCourse.