Can a Realtor Fix the Broken Real Estate Industry in the US?

“Real Estate, by far, is the most screwed-up industry in America.”
-Glenn Kelman, CEO of Redfin

Here’s a list of things that are broken with the real estate industry in the US:

  1. Commission is proportional to the price of the home, not the effort to sell it
  2. Realtors have to risk working for free
  3. Inexperienced agents charge the same fee as long-term super-stars
  4. Home buyers don’t pay for the person serving them
  5. Buyers get to see how long a home has been on the market
  6. Real estate agencies spend 90% of their time recruiting new agents and 10% helping their customers

The remarkable thing about this list is that it was complied by a real estate agent: Greg Hauge (the Muhammad Ali of real estate). Greg, among other things, is a realtor. And Greg gets it.

The only question I have is, if one realtor can see it, why can’t they 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.

What if Your Real Estate Start Up Already Exists?

There’s a new real estate start up called Bid For My Listing promising to save home sellers money by getting agents to compete for their business.

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There are only two problems with this new start up. First, the idea of getting agents to compete for a seller’s listing has been around for over a decade in the form of Hungry Agents. Of course it is hard to get PR for a 10 year-old company.

The other problem with this start up is that their business does not work. How do I know? Just head on over to Hungry Agents. They “brag” about the low commission the user’s of their site receive. With just a quick glance, 4.5% seems to be about the average commission.

That does not save anybody any real money. All a home seller has to do is head on over to Redfin. The agents there will be happy to take your listing all day long for 4.5%. No negotiating, no competition, just sign on the dotted line.

You don’t save serious money letting agents decide what you should pay them to sell your home. You save serious money by telling agents what you will pay them to sell your home and the let interested ones come to you. I cannot wait until I see that start up.

 

 

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.

If I Were Selling My Home, This Would Really Piss Me Off

If you have not heard, there is a new real estate service called OpenListings that helps buyers buy homes without paying any commission. But wait, I thought buyers do not pay commission to buy a home, so it is already free. How can a service save a buyer money on something they do not spend money on? You are really going to love this if you are getting ready to sell your home.

Unlike the rest of the planet, it is customary in the US (and Canada) for the seller to pay for the buyer’s agent. I know that does not seem fair. It is like having to pay for the lawyer of the person suing you. In any event, if you want to sell your home and you do not want to bring down the wrath of the entire real estate community, you will offer the customary 3% commission to pay for the buyer’s agent. So, for example, if you intend to sell a $500,000 home, you have to sacrifice $15,000 of your hard-earned equity so that the buyer of your home can receive a free service that benefits only them.

What this clever new company, OpenListings, discovered is that it does not require $15,000 to help a buyer buy a home today. Not with all this new technology stuff like computers, smart phones and the Internet. OpenListings thinks $5,000 is a fair price to pay to help a buyer buy a home. And what does OpenListings intend to do with the other $10,000 you set aside to help the buyer pay for their agent? They are giving it to the buyer. That’s right. Whether you know it or not, without your say so, you just lowered the sale price of your home to $490,000. How does that make you feel?

So, as a home seller, how do you combat this distasteful practice of involuntarily lowering the sale price of your home? The good news, if you are getting ready to sell your home, is that OpenListings is exactly right. Five thousand dollars is a fair price to pay to help a buyer buy a home—even if it is a million dollar home. And therein lies the solution.

When selling your home there is no law that says you have to offer 3% commission to the buyer’s agent. You can offer any amount you want (including offering nothing). And it does not have to be a percentage. You can offer a fixed amount, say for instance, $5,000.

The solution here is a simple: offer only $5,000 for buyer’s broker’s commission and then direct all the buyers to OpenListings (which is only available in California right now). You maybe forced against your will to have to pay for the buyer’s agent, but you sure as hell do not need to give any extra money directly to the buyer. Of course offering “only” $5,000 for the buyer’s commission will severely limit OpenListings ability to attract buyers, since they use the “extra” money as incentive to use their service. But that is their problem not yours.

At a time when everyone from Redfin to OpenListings to Help-U-Sell is screaming that a fair price for a seller to pay for the buyer’s agent is about $5,000, why would any home seller pay more than that? Just say no NO! overpaying for buyer’s agent’s commission. And if you are really courageous, you can just say NO to paying for it altogether. To lean how to be courageous when you sell your home, 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.

Is an Instant Sale an Instant Rip-off?

“Sold. The minute you’re ready,” declares the home page of upstart real estate company Opendoor. They certainly have a new take on selling your home. Rather than deal with real estate agents and months of hassles and stress, they will buy your home from you, right now, no questions asked. You can get your money in as little as three days. The only question is, should you?

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Generally speaking, anything that eliminates the middleman in a transaction, I am all for. Eliminating the middleman eliminates their expense, which should result in a cost savings for the consumer. Since Opendoor is eliminating real estate agents, I would expect some cost savings there. The only problem with Opendoor is that it is not clear there is any cost savings to the home seller. In fact, I suspect using their service is extremely expensive.

It is hard to know for sure if there is any net-benefit to using Opendoor. They have only been around for a few months and it appears as if they only operate in Phoenix, Arizona as of this writing.

Here is what we do know. Their transaction expense is very high. They charge the home seller 5.5% commission, which they brag about being less than the standard six percent charged by real estate agents. It is true that 5.5 is less than 6, but with a little shopping around, any home seller can sell their home for 4.5% total commission. That seems to be the new standard, especially in markets where Redfin is present. And in more expensive neighborhoods, with some negotiating prowess, a home seller can secure the services of a real estate agent for 3%, or less, total commission. So, using Opendoor is definitely going to cost you thousands (or tens of thousands) of dollars in transaction fees compared with using agents. But the more important questions is, what will they pay you for your home?

Like most venture-backed companies these days, Opendoor is a data analytics company. It is not a real estate brokerage. They operate by taking publicly available pricing information, plus information from the home seller, cranking it through some magical algorithm and coming up with an amount of money to offer you for your home. But is the amount fair?

Intelligent home sellers know that their objective is to sell their home for its appraised value. That is the best most home sellers can do. So, the big question for Opendoor is, will they offer you the appraised value (or something very near it) for your home, or will they build in “a little” profit for themselves by low-balling you? Time will tell. If I had to guess, I would speculate that the Opendoor business model includes paying less than the appraised value for your home. Anything else probably does not provide enough profit margin.

If that turns out to be true, using Opendoor will simply be a really fast, really expensive way to sell your home. Home sellers desperate for cash just may take them up on it. Unfortunately, those taking them up on it (i.e., desperate for cash) are probably those least able to sacrifice their hard-earned equity.

I have no idea what the future holds for Opendoor (and any imitators likely to pop up if they are successful). Who knows—maybe they are the future of residential real estate. What I do know is that the three companies touting the benefits of the Opendoor with testimonials on their website are fortune.com, venturebeat.com and techcrunch.com. You know what company I do not see? Consumer Reports. Hmmm.

 

 

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.

If a Listing Agent Can Work for 1%, Why Can’t the Buyer’s Agent?

I am not sure if Redfin understood the ramifications of trying to win market share as a new broker in Washington DC by offing to list a home for 1% commission. That is an awful dicey precedent to set. Sellers all over the country might get the idea that any broker should be able to list any home in any city for 1%. That is definitely NOT how the real estate industry grew to $60 billion. Bravo to Redfin for letting all us home sellers know what is possible.

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But, the Redfin salvo brings up an even more intriguing question: if a listing agent can list a home for a mere 1%, why can’t the buyer’s agent get by on 1%? As a home seller who is customarily expected to pay for the agent who represents my buyer, that is a question I would really like answered.

I think it would be fair to say that once a home is in escrow, both the listing agent and the buyer’s agent work about equally hard. Both have as a primary responsibility, navigating the escrow to a successful closing. They both make lots of phone calls (if they are doing their job) and send lots of documents back and forth. So, what it comes down to is, who works harder before a home gets into escrow?

The full service listing agent has a good deal of work to do to market a home, but it is pretty much a fixed-time effort. Their tasks include doing a CMA (Comparative Market Analysis), taking pictures, creating a flyer, posting information on the MLS, holding an open house, etc. A lot of work to be sure, but not much variability from home to home.

The buyer’s agent’s tasks are much more limited in scope, but with much greater variability. Their workload consist of two major tasks: doing a CMA and driving buyers around showing them homes. How many homes they show depends on the buyer, but we know from research that the average buyer visits ten homes before they find “the one.” If we assume an average showing time of one hour per home, that equates to roughly ten hours of showing time.

As an order of magnitude estimate, I think it is fair to say that a buyer’s agent works about the same number of hours, on average, as a listing agent for a typical home sale. So, if a listing agent can get by on 1%, why are sellers forced to pay 2.5% – 3% to the buyer’s agent? What is the justification? If both the buyer’s agent and seller’s agent do similar things and work a similar number of hours, why is there such a great disparity between the buyer’s agent’s compensation and the seller’s agent’s compensation? What gives?

The next time you go to sell your home, you think about the answer to that question when you cut a check two to three times larger for the buyer’s agent. If it aggravates you, good. That is the beginning of how we change the real estate industry for the better.

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 Redfin Will Be The Nation’s Biggest Brokerage

A recent article on Inman said Redfin may not be the nation’s biggest brokerage (yet). But it operates what’s by far the most popular real estate brokerage or franchise website. Why do so many consumers start with Redfin? CEO Glenn Kelman explains

Redfin

I remember not too long ago, when Trulia and Zillow were raising huge buckets of venture capital money, Redfin was struggling with cash flow. To the VC community, all Redfin was at that time was a discount broker with cool search capability. And discount brokers do not last. Boy were they wrong.

Redfin flat out gets it. Not only are they the absolute leader in technology and accuracy of real estate data for consumers, but they are taking the lead in the desperately needed area of transparency. While Trulia and Zillow (soon to be Zulia) serve agents as their customers, Redfin serves consumers. Why do consumers start with Redfin? Because it makes them the smartest home buyers and sellers.

Now, if that was the end of the story, Redfin would simply be a better version of Trulia and Zillow. But Redfin is not a marketing platform, it is brokerage. And in an industry where everyone is desperately trying to maintain the status quo, Redfin is doing something unheard of: passing the savings, that technology affords in real estate, onto the consumer. Their business model, which includes reduced seller’s agent’s commissions and treating their agents as employees (rather than contractors), is a glimpse of what the real estate industry will become. Today, Redfin is the irrational oddball. In the future, when most other brokerages are operating in a similar fashion, the industry will wonder why it ever operated any other way.

But Redfin’s transformation of an industry in desperate need of it is not yet complete. Offering discounted seller’s agent’s commissions and buyer rebates is a start, but it is not where the industry ultimately needs to go.

For the transformation to be complete, Redfin still has some work to do. First, it should establish a consumer’s bill of rights which eliminates all the dirty little secret behaviors in the real estate industry such as pocket listings, dual agency, minimum service requirements and controlled business arrangements. Even if Redfin itself does not condone these practices, a bill of rights can serve as an opportunity to educate consumers, who will see Redfin as being on their side.

Second, they need to further preserve home seller’s equity, not just from reduced seller’s agent’s commissions, but also from reduced buyer’s agent’s commissions. In the past, buyer steering, although highly unethical, was a real problem, which meant offering anything less than customary commission to the buyer’s agent risked a serve reduction in home buyer traffic. But today, Redfin has the ability to combat this using their own platform, to bypass the agents, and educate the buyers directly about this deceptive practice.

Finally, Redfin should become the industry leader in advocating a shift from seller pays for buyer’s agent to buyer pays for buyer’s agent. Sub agency legal relationships serve neither party particularly well. Ultimately, buyers will be better served by shopping around for, and paying for, their own agent to represent them. Only in the real estate industry is it considered a crazy idea for the person receiving the service to actually pay for it.

I like Redfin. I wish them luck. But, there is a $60 billion industry out there that is hoping they fail. After all, success for Redfin means that $60 billion number will go down (just like everything else technology benefits). But if it sticks to its guns, there is no doubt in my mind that someday Redfin will be the nation’s biggest brokerage. Fight on.

 

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.

Is Redfin Proof That Real Estate Agents Make Too Much?

Attempt to negotiate a commission lower than the standard 6% with any experienced real estate agent and they will try and convince you that there is no way they can do it for a penny less. Oh, and by the way, they are worth every penny.

Now if there were only a few real estate agents, we might have to take their word for it. But as things turn out, there are plenty of them. Some would say too many. And as with any industry where there are low barriers to entry, we would expect to see competition in the form of lower prices from more efficient providers. And that is exactly what we do see (finally).

If you have not already heard, there is a real estate agency called Redfin. It is small, but growing fast. It is the first significant real estate agency to take advantage of the efficiencies of web-based marketing and actually pass the savings on to the consumer. How much savings? For starters, they charge home sellers 50% less than traditional agents.


That’s right! Redfin charges the seller just 1.5% of the sale price, rather than the more traditional 3% (half of 6%) that other seller’s agents claim to deserve.  But wait—it gets better.

Redfin also rewards buyers. As buyer’s agents, they eagerly admit they are overpaid by offering to pass on to the buyer a not-insignificant chunk of their commission. Basically, what the Redfin agent in the ad below is saying, is that he is so grossly overpaid for what he does as your buyer’s agent, that he is willing to cut you a check for almost six grand just for choosing him.

Perhaps these Redfin agents are inferior to other agents? Not if  you judge by Orlando’s 76 customer reviews. They seem pretty satisfied with him. Maybe the more traditional (i.e., expensive) real estate agents have not learned to leverage the new online technology yet, and are therefore not as efficient as Redfin agents. I do not think so. But even if that is the case, economics 101 dictates that their higher prices should either force them to become more efficient or force them out of the market. But that has not happened.

Somehow these Redfin agents have figured out a way to do it for a “penny” less, and yet the market for the “full price” real estate agents is still very strong. Can anyone explain that? Why would anyone not want to save thousands, or tens of thousands of dollars when buying or sell a home?

The question is no longer, do the full price agents make too much? They do. The questions is why? I suppose it simply comes down to people wanting to exercise their right to get ripped off.

To see how ReaListing keeps home sellers from getting ripped off, click here.

 

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.