real estate brokerage Archives - Real Estate News and Commentary

July 16, 2022July 16, 2022

Back to the future for residential real estate

If you consider the roots of brokerage in residential real estate, you can imagine how much the business of selling homes has changed. Unlike today, the first real estate brokers were independent. Their “listings” were exclusive and proprietary. Buyer agents didn’t exist until well over one hundred years later. And at the beginning, there was no broker cooperation on listings and commissions.

Of course, everything changes over time. Brokerage cooperation began with loose networks of brokers who agreed to help sell each other’s listings. Early multiple listing services evolved out of those local networks. And as the real estate industry adopted emerging technologies, the MLS concept evolved into the listing service we know today.

The MLS framework promoted the evolution of real estate brokerage as well. Centralizing and standardizing listed homes made home searching easier for brokers and their respective buyers.

Brokerage cooperation allowed agents and brokers to sell others’ listings to buyers. Up until the early 1990’s, all agents and brokers represented the home seller. However, it’s likely technology and a robust MLS fostered buyer agency and dual agency.

It seems as if it wasn’t until the advent of buyer agency when people began questioning agency and compensation. Prior to buyer agency, the commission was negotiated between the listing broker and the home seller. Selling agents (those who brought the buyer) were a subagent of the seller, so it made sense that the commission would be shared with subagents.

The commission structure of today’s listing agreements seems to be an antiquated carryover, where commissions are “shared” with sub agents and exclusive buyer agents.

As an aside, it’s common, if not required, for a buyer agent to disclose to their clients their compensation amount. If the coop commission is less, they will likely collect it from their client.

Currently, real estate agent and broker compensation is undergoing a meticulous and exacting scrutiny inside and outside of the industry. During the last two decades, there have been legal challenges to the industry’s status quo on residential agent and broker compensation. However, recent legal proceedings have gained traction such that a growing number of real estate brokers are embracing a possible future with “decoupled” commission.

When change is afoot in the housing industry, there is a lot at stake for real estate brokerages. Although the outcome to the current challenges of real estate compensation is uncertain, the result may be that residential real estate brokerage comes full circle, where buyer and seller compensation are respectively exclusive.

By Dan Krell
Copyright © 2022

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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

May 24, 2019November 23, 2021

Buyer agent commission controversy

One of the hottest controversies in real estate that you have yet to hear about is who should pay buyer agent commissions. Agent commissions controversies have been around in one form or another for decades. The commissions issue typically becomes front and center when the housing market is doing well. This time, however, the buyer agent commission controversy is gaining steam and has the potential of changing (and possibly upending) residential real estate and online real estate platforms.

The debate is center in an anti-trust class action law suit filed against the National Association of Realtors and a number of major real estate brokerage brands. As I reported last month, the law suit alleges that the defendants engaged in “anticompetitive practices.” Among the alleged issues listed in the law suit, includes a “Buyer Broker Commission Rule” that requires buyer agent compensation for a home to be listed in the MLS.

Regardless of how a listing agreement “structures” broker commissions, the perception and general acknowledgement is that the (buyer broker) buyer agent commission is paid by the seller. The seller typically pays the listing broker a commission, which is shared if another broker represents the buyer. This commission “pass-through” is responsible for the growth of online platforms selling home buyer leads and contacts. It has also been responsible for the growth of real estate groups that act as “buyer mills,” which rely on high volume leads generated via online platforms and other means. It can be argued that because of Buyer Broker Commission Rules, the billions of dollars that are generated and spent on home buyer leads (as well as buyer rebates) can be traced back to the home seller.

Home sellers are not the only victims. A study (jstor.org/stable/24887258) conducted by Joachim Zietz and Bobby Newsome (A Note on Buyer’s Agent Commission and Sale Price; The Journal of Real Estate Research; 2001, Vol.21 No.3 p.245-254) revealed that buyer agent commissions had a positive effect on home sale price, but only on lower-priced homes. The conclusions suggested that buyer agents “do not act in the best interest of their clients because of the institutional structure of sales commissions.”

Is it possible that the MLS perpetuates steering and anticompetitive behavior? A recent study by Barwick, Pathak and Wong (Conflicts of Interest and Steering in Residential Brokerage; American Economic Journal; 2017, Vol.9 No.3 p.191-222) has shocking conclusions that resonates with those who are wary of the residential real estate industry. The study pointed out that real estate commissions are higher the US than other industrialized countries. The authors concluded, “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)…” They “provide empirical support for regulatory concerns” because the data indicates buyer agents will steer their clients towards homes paying higher commission.

Home sellers can learn from home builders about marketing and agent compensation. Home builders figured out buyer broker commissions a long time ago. They will not pay advertised compensation to buyer brokers who don’t show up with their clients. And during hot markets, they pay a modest referral fee in lieu of commission.

All things considered, the issue of buyer broker commission is a complex issue that depends on multiple factors, including market conditions. However, increasing awareness is inventing new business models and lower buyer broker compensation expectations.

Original located at https://dankrell.com/blog/2019/05/24/buyer-agent-commission-controversy

By Dan Krell
Copyright © 2019

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February 18, 2019November 23, 2021

Home sale choices

Having a choice is good. For many, have having a choice represents freedom. For others, choice creates angst out of fear of making the wrong selection. Dr. Barry Schwartz wrote about this phenomenon in his book The Paradox of Choice. Dr. Schwartz describes that having too much choice can create negative well-being. This phenomenon also exists in real estate. There are many home sale choices!

Consumers have more home sale choices today than ever before. However, choosing the best option for you can be confusing. Making the wrong selection can result in remorse. How do you choose between a full-service agent, a limited service broker, à la carte broker, private placement broker, or sell by owner? How do you know decide among your home sale choices?

Recently published research further supports the value of hiring a full-service real estate agent. A study conducted by Rutherford, Rutherford, Springer, and Mohr (Limited Service Brokerage: Positive Broker Intermediation?; Journal of Real Estate Research: 2018, Vol. 40, No. 4, pp. 551-595) compared the outcome of using a limited service brokerage to a full service real estate agent. The results indicate that although the limited service brokerage time on market is similar to the full-service agent, your home sale price is likely to be less with a limited service broker.

Although there have been conflicting studies in the past, Rutherford’s recent study confirms that using a limited service brokerage is likely to sell your home for less. The authors concede and discuss other factors that may influence results, such as housing market conditions. Studies that reported positive outcomes of limited service brokerages may have occurred during the go-go market prior to 2007.

How much commission should you pay?

Conventional wisdom says that full service agents are “full-price” (whatever that is) and expensive. However, that’s no longer true. Many full service, high quality agents charge as much (or as little) as discount brokers. A 2015 study by Barwick & Pathak (The costs of free entry: an empirical study of real estate agents in Greater Boston; The RAND Journal of Economics; Vol 46, No. 1, Spring 2015, p.103–145) indicated that increased Realtor competition has forced average commissions to decrease over the last few decades. Of course, they found that the decreased commission structure of the full-service agent good for consumers and the housing market. They also concluded that decreased commissions would increase quality by decreasing entry into the industry for the wrong reasons.

To make better home sale choices, educate yourself.

Understand what services are available and what it costs. You should ask yourself if the services can meet your expectations of helping you through the process of selling your home? And, how will it impact your sale, time on market, and price?

Unfortunately, the National Association of Realtors doesn’t do enough to educate consumers about their choices when buying and selling a home. Including negotiating reduced commissions and buyer rebates. And I wouldn’t expect they will any time soon because of their mission statement (posted on their website nar.realtor): “The core purpose of the National Association of REALTORS® is to help its members become more profitable and successful.”

So how do you choose among your home sale choices? Be a savvy home seller. Don’t stick to “conventional wisdom.” Explore your needs and expectations. Investigate your choices and ask questions. Don’t fall for sales tactics. And don’t be afraid to negotiate commission.

Be a savvy home seller

Don’t stick to conventional wisdom
Explore your options. There is no “one size fits all” home sale plan.
Search for an agent that meets your needs and expectations

What are your plans? How fast of a sale do you expect? In what condition is your home? Interview several agents with different approaches to your home sale.
Ask Questions
Every agent has their own process. Some are hands on and responsive, while others hand off your sale to their “team” and you never see them again. Can you call anytime, or are their limited times? How will the agent meet your expectations?
Don’t fall for sales tactics
Many real estate agents spend lots of time and money learning sales tactics to get the listing. Many have developed polished presentations that are very convincing. Call the agent’s past clients to find out if they over promise and under deliver.
Negotiate listing commission
It’s a very competitive market. Although some agents won’t negotiate their commission, many will. Some will limit their services when they reduce their commission, while others offer full service.

Original published at https://dankrell.com/blog/2019/02/18/home-sale-choices

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March 2, 2018November 23, 2021

Technology is the new real estate

I recently wrote about companies that are going through identity crises. Are they real estate companies or are they technology companies? Regardless, the big name real estate disruptors have changed the industry. They have given home buyers control of their home search. They have also given home sellers choices of real estate services and commissions. But the recent trend of real estate companies touting themselves as technology companies may be a signal that large real estate brokerages want more change. But are they mistaking the map for the territory?

Are real estate brokers still interested in selling homes?

technology and real estate — Technology (infographic from nar.realtor)

Last November, the real estate brokerage Compass made headlines because of its ability to raise massive capital investments. In a Compass press release, the company announced raising $100 million in capital (Compass Raises $100 Million in New Investment Round; prnewswire.com; November 8, 2017). The colossal investment comes one year after raising $75 million in capital. The capital is to be used for expanding brokerage offices in new markets as well as “building new technology.”

Compass’ vision is to be “the world’s largest real estate platform.” The press release quoted an investor saying:

“Compass has proven that its technologically advanced platform is incredibly attractive to the industry’s top agents…Their position at the intersection of technology and real estate gives them the unique opportunity to be the single largest holder of real estate data, ushering in a new realm of possibilities for agents and clients alike.”

In a similar move, RE/MAX announced this week of its purchase of booj, a technology company. In a February 26th RE/MAX press release, the acquisition is touted as means to “…deliver core technology solutions designed for and with RE/MAX affiliates. The objective: technology platforms that create a distinct competitive edge for RE/MAX brokerages and agents…” (RE/MAX Takes Bold Step to Provide Best-in-Class Technology; remax.com).

Is the shift to being a technology company about revenue?

It would seem that recent industry moves may indicate that real estate brokers would prefer to be technology companies. However, the latest trend may be more about generating revenue, raising capital and investor relations than it is about selling homes.

Lizette Chapman’s report on the matter is revealing (Tech Startup or Real-Estate Broker? Fidelity Values Compass at $2 Billion; bloomberg.com; November 8, 2017). Chapman likens Compass to Redfin saying that the company “is almost certainly unprofitable,” although generating massive revenue. In her reporting, Chapman quoted a seasoned real estate agent who was briefly with Compass, “The technology was mostly marketing tools…It was sleek, but I can’t say it was different from anything else out there.”

Although many home buyers and sellers turn to the internet for housing information, they don’t wholly rely on technology when choosing real estate services. According to the National Association of Realtors 2017 Profile of Home Buyers and Sellers (nar.realtor), a majority of home buyers and sellers hired agents with whom they worked in the past, or were referred by friends and family.

The problem with technology is that humans are the ghosts in the machine. The human element, contrary to technology, is erratic, messy, and highly subjective. The human element remains at the core of home buying and selling.

Many consumers recognize that tech and the internet are tools that are often used as gimmicks to get their business. Technology is not a substitute for an experienced real estate professional who can also empathize along the home buying/selling process. The turn to tech only underscores that residential real estate is still a personal business.

Choosing a real estate agent

Choosing a real estate agent is much like searching for a home. It is an objective and subjective process.

The real estate agent is supposed to be a fiduciary that is supposed to protect your rights and assets. A real estate agent is supposed to be honest and act with integrity. They should act in your best interest.

The quality of an agent is not dependent on the firm. Quality agents are affiliated with almost all brokers. If you haven’t already, ask friends and family for their recommendations.

Prepare questions to interview several agents. The purpose of the interview is to learn about the agent’s professionalism, training, and knowledge base. You get to hear about their experience, and get a feel how they interact with you. Besides asking about their experiences, ask how many years they have been selling homes, and if they full time agents.

If you live in an area where agents are licensed in multiple jurisdictions, ask about their experience in the area you plan to buy/sell. Just because they have a license to sell homes doesn’t mean they have extensive experience in that jurisdiction.

Original published at https://dankrell.com/blog/2018/03/02/technology-new-real-estate/

By Dan Krell
Copyright © 2018

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December 29, 2017October 20, 2020

Consumers are devolving real estate

Consumers directing real estate industry (infographic from househuntnetwork.com)

The National Association of Realtors annual Profile of Home Buyers and Sellers (nar.realtor) reveals insight into consumer real estate trends. It provides an understanding into home buyers’ and sellers’ experiences and what they want. One aspect of focus from the Profile is how consumers choose their real estate agent. The survey consistently indicates that a referral from a friend, neighbor or relative plays a big part in their choice. But how do buyers and sellers view real estate brands?

There are reams of research about the relationship between brands and consumers. However, recent data regarding millennials suggest that brand loyalty may be changing. Jeff Fromm’s article for Forbes (Why Label Transparency Matters When It Comes To Millennial Brand Loyalty; forbes.com; December 13, 2017) points out what consumers are looking for and what they deem important. Fromm states

“If the brand doesn’t provide the information they need, millennials will look elsewhere… when millennials make purchase decisions, they’re considering more than the traditional drivers of taste, price and convenience. They value authenticity, and make decisions based on the way they perceive brands to impact their quality of life, society as a whole, and how that brand may be contributing positively to the world.”

Real estate brokers and agents should pay close attention to the new consumer research.

This evolution of brand loyalty and how consumers perceive brands may explain the growth of independent brokers. A 2015 Special Report by Inman Select (inman.com) The Shift Toward Independent Brokerages indicates that the number of real estate agents affiliating with independent brokerages (not affiliated with corporate or franchise real estate companies) grew significantly over the last decade. The percentage of agents affiliating with independent brokers jumped from about 45 percent in 2006 to about 55 percent in 2015. About 80 percent of real estate brokerages are independent. And the trend is expected to continue.

According to the Special Report, the major advantage cited for affiliating with a brand name brokerage is brand awareness. However, there may be a limit to the influence of a real estate brand. Unlike retail brands, real estate brands do not have total control over the consistency and quality of the services provided. That is left to the individual agent. Independents, on the other hand, cite the ability to quickly adjust to consumers’ needs and being focused on the local real estate market as an advantage.

Yes, the real estate industry appears to be devolving. Another example of the devolution is a decreasing reliance on the MLS for home listings. It’s not to say that home sellers are not listing their homes with agents, because an increasing number of sellers are looking to agents for their expertise. However, brokers and agents are maintaining control over their inventories through alternative means of selling homes, such as pocket listings. An increasing number of brokers are also restricting their listings from internet syndication to increase the quality of information provided to consumers. Although it may sound counter-intuitive to not widely broadcast a home for sale on the MLS or internet, however, a lack of transparency remains a problem for some real estate aggregator portals.

Are real estate brokers and agents listening? The business of real estate is changing and devolving. Control over the industry has slowly been transferred to real estate consumers. Real estate consumers are savvy and intelligent. They know if a broker/agent is really focused on revenue streams, gimmicks and salesy techniques. Real estate consumers want agents and brokers who are authentic, transparent, and provide a quality service.

Original located at https://dankrell.com/blog/2017/12/29/consumers-devolving-real-estate/

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