Industry disruptors changing real estate

Reat estate industry disruptors
Reat estate industry disruptors (infographic from nar.realtor)

Buying and selling homes hasn’t really changed much over the years.  It still requires a buyer and a seller.  Getting them together often requires a real estate agent or broker.  Sure, technology has changed the brokerage relationship dramatically.  It has also forced players in the real estate industry to change or get out of the business.  A new trend of real estate brokers are embracing technology like never before.  Will these real estate industry disruptors change how real estate services will be provided in the future?  Will these industry disruptors drive a new enthusiasm for “real estate technology brokers“?

One the largest players in the real estate industry is Zillow.  Although Zillow has a number of services that can bring home buyers and sellers together, they are mostly a technology company that serves to provide consumers information.  The company generates revenue by selling services to real estate brokers and agents, as well as mortgage companies and loan officers.  Many consumers visit Zillow’s websites to view information about homes for sale or rent that are listed with brokers or the homes’ owners.  Consumers don’t pay Zillow a fee or commission for the service.

Over the years, many have talked about how Zillow’s technological influence will predict the real estate industry’s future.  Those real estate prophets foretold a time when home buyers and sellers will be able to do business on the internet without a real estate agent or broker.  But in reality, Zillow’s influence only cemented the necessity of a broker or agent to facilitate the transaction.  Zillow’s success has generated millions of dollars in revenue, but the company has struggled to post an annual net profit.

Redfin is another real estate company that has a significant internet presence.  Some think of Redfin as a technology firm offering real estate services.  But the reality is that it is a real estate brokerage built around technology.  Redfin has built its brand, and went public this year.  Although the company generates millions in revenue, the Seattle Times reported that Redfin’s IPO offering indicated that the company has yet to post an annual net profit and has accumulated losses of $613.3 million (Seattle real estate company Redfin files to go public; seattletimes.com; June 30, 2017).

Companies like Zillow and Redfin are not the only players in real estate know for technology, but they may be the most well-known.  These companies are part of a new generation of companies that strive for a huge internet footprint to drive business.  But Zillow and Redfin demonstrate that technology in and of itself is not a guarantee of profitability, nor has it been an absolute “game changer” for the real estate industry.  Instead, technology has been the catalyst for change.

Industry disruptors and real estate

Consumers probably don’t realize the subtleties, but the rapid changes in real estate technology has forced real estate agents and brokers to change how they engage their clients.  Since companies like Zillow and other real estate aggregator sites have propagated the internet, the role of the real estate agent and broker has shifted away from being the source of information to being the source of a meaningful analysis.  Agents and brokers have also shifted their roles from information keepers to transaction managers.

What better way to be a real estate change agent and industry disruptor than to build a business around technology.   Redfin is probably the most poised to make major impact to how consumers are served in the real estate industry.  With all of its tech goodness, Redfin’s contribution to the industry hasn’t been as much technological than financial.  The brand will likely be known for being instrumental in reducing real estate commissions.  In markets where Redfin has been successful in establishing its brand, agents have been under significant pressure to lower listing commissions and/or offer buyer rebates.

Copyright© Dan Krell
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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.

Listing agent secrets you need to know

Listing agent Secrets

There are a number of topics that your listing agent probably won’t discuss with you, or can’t properly explain.  Here are several listing agent secrets that you need to know:

Your agent won’t sell your home

home for saleYour home will likely sell to a home buyer who is represented by a buyer agent. This notion is supported the 2016 National Association of REALTORS® Profile of Home Buyers and Sellers (nar.realtor), which reported that 88 percent of home buyers used an agent to buy a home.  The remaining 12 percent of home buyers purchased through other means, including with the help of the listing agent, or even a FSBO.  Although your listing agent may claim to have sold the most homes in the neighborhood, the truth may actually be that they are only facilitators.  The buyer agent who actually “sells” the home is labelled the “selling agent” by the industry.

Buyers are not finding homes in print

listing agent secrets
Agent secrets (infographic from nar.realtor)

Print advertising no longer is the means of selling a home. More information from the 2016 National Association of REALTORS® Profile of Home Buyers and Sellers indicate that having a nice spread in a magazine, or posting open houses in the local paper is probably a sales ploy to get your listing.  The Profile reported that home buyers reported how they found their home as follows (nar.realtor):

  • Internet: 51%
  • Real estate agent: 34%
  • Yard sign/open house sign: 8%
  • Friend, relative or neighbor: 4%
  • Home builder or their agent: 2%
  • Directly from sellers/Knew the sellers: 1%
  • Print newspaper advertisement: 1%

Bigger is not better

Another one of your listing agent secrets is that the larger your agent’s brokerage or team, and having a high number of homes actively listed may actually be detrimental to your home sale!  An empirical study by Shiawee X. Yang and Abdullah Yavaş (Bigger is Not Better: Brokerage and Time on the Market; The Journal of Real Estate Research; 1995, Vol. 10, No. 1, pp. 23-33) reported the following results:

  1. The amount of agent’s commission is not indicative of your home’s time on market;
  2. The size of the listing firm does not affect your home’s time on market;
  3. Homes listed and sold by the same firm (i.e., dual agency) does not reduce time on market;
  4. The more active listings your agent has, the longer your home may sit on the market because they do not devote to the time to your sale.

Yang and Yavaş suggest that the larger the listing firm, the more incentive to “cheat” days on market by circulating new listings within the firm before entering it in the MLS, which also increases the chances of a dual agency situation.  “Private placement,” or pocket listings can have similar dual agency results.

Dual agency could cost you

Chances are that your listing agent doesn’t totally understand dual agency, and therefor may not be able to explain how it affects your sale and potentially your sale price.  The Maryland Real Estate Commission’s “Understanding Whom Real Estate Agents Represent” disclosure states:

The possibility of dual agency arises when the buyer’s agent and the seller’s agent both work for the same real estate company…The real estate broker or the broker’s designee, is called the “dual agent.” Dual agents do not act exclusively in the interests of either the seller or buyer, and therefore cannot give undivided loyalty to either party. There may be a conflict of interest because the interests of the seller and buyer may be different or adverse.

One of the listing agent secrets is that dual agency may not be beneficial to you, and can even lower your home sale price.  There are a number of empirical studies that indicate conflicts of interest and other issues that arise out of dual agency.  But a study by Joachim Zietz and Bobby Newsome (Agency Representation and the Sale Price of Houses; Journal of Real Estate Research; 2002, Vol 24, No 2 pp. 165-91) found that a home’s sale price drops about 3.7 percent when the listing and buyer agents are from the same firm.  They stated:

the fact that buyers may obtain a lower price by engaging a buyer’s agent from the same firm as the listing agent raises the issue of whether or not the listing firm is shortchanging the seller. The evidence appears to suggest that the agency relationship between seller and listing agent may be compromised.

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Transforming real estate – whom do agents really represent?

transforming real estate
Real estate transformation over time (infographic from movoto.com)

The continuously transforming real estate industry continues to change because of two forces, consumers and real estate professionals.  It would seem intuitive that the forces should be complimentary, but a deeper analysis might suggest conflicting interests between consumers and real estate agents. Whom do agents really represent?

Efficiency, although not openly stated, is a main goal of both home sellers and real estate agents.  Home sellers want to sell their homes efficiently (as quick as possible and for the most money); while the real estate agent may be focused on collecting the most commission in the least amount of time.  A.W. Jenkins’ ground breaking research looked into why consumers continued to use brokers in a transforming real estate environment as a means of buying and selling a home.  Jenkins determined that the only reason why consumers did not use a more efficient “used house dealer” is because they don’t exist (Home, Sweet Home: Real Estate Brokerage in Canada, Vancouver, Canada: The Fraser Institute, 1989).  Jenkins discussed the incentive for consumers to sign commission based broker agreements, even when there are more efficient means of buying and selling a home; including a used house dealer, sell the house on their own, or even pay a flat listing fee.

Anglin & Arnott furthered Jenkins’ line of questioning and came to the conclusion that although a used house dealership (like the used car dealership) may be the most efficient means of buying and selling a home for the consumer, it is not an efficient business model for residential real estate professionals (Residential real estate brokerage as a principal-agent problem; The Journal of Real Estate Finance and Economics; 1991, vol 4, no 2, pp 99–125).  The cost of maintaining a used house inventory for the dealer is prohibitive because home resale usually takes longer than reselling an automobile.  Another reason for non-existent used house dealers is government regulation: The sale of residential real estate by individuals other than the owner is highly regulated and sets standards for real estate brokerage.

Furthermore, they hypothesize that there may be broker “collusion” in maintaining existing business models:

…Collusion, we argued, is particularly easy to sustain and enforce in the residential real estate market because transactions require cooperation between the buying and selling broker…

As the transforming real estate industry continues its journey, the notion of efficiency has taken a substantial turn in favor of the real estate agent.  The advent of buyer agency and dual agency has allowed agents to leverage their name and reputation to other agents through a “team.”  Much like the medical office business model of luring patients through someone’s name and reputation, only to see the lower techs; the real estate team has become a popular business mode because an agent can leverage their time by having other agents do their work.  To further the confusion, in some cases there are teams within teams. But to understand the structure of the real estate team concept, think of a Russian nesting doll.  The team is a smaller nesting doll which is embedded in the larger nesting doll (the broker); and the team members are even smaller nesting dolls embedded within the team nesting doll.  To be fair, there are various team models in use today; some are better than others with respect to transparency.  The transforming real estate industry has moved towards real estate teams, which essentially operate as a brokerage within a brokerage.

Real estate team advertising and disclosure have become the focus of regulation in recent years, but has not entirely thwarted unscrupulous advertising that intends to mislead the consumer.  Furthermore, agents who are independent contractors and sub-contractors of brokers and other agents, can not only muddy the waters of agency, but can further distance the agent’s incentive and duty to their client.

In his article about the dual agency controversy (From subagency to non-agency: a history; inman.com; Feb 27, 2012), Matt Carter reminded us about a 1993 treatise by the former National Association of Realtors general counsel William North titled “Agency, Facilitation and the Realtor.”  The essay was written at a time when transforming real estate was about acknowledging buyer agency.  Agency relationships between Realtors and their clients were under scrutiny.  North was questioning whom agents really represent and if agents actually knew their role.  To make it easier for agents to know to whom they have a duty, North made an argument for eliminating the independent contractor status that prevails throughout the industry.  He stated:

An approach more difficult of acceptance by NAR membership would be the abandonment of the independent contractor status…The prevailing independent contractor relationship between broker and salesperson encourages “quantity” over “quality…It is clear from the letters which have been received by Realtor News on the Agency issue that far too many Realtors and Realtor Associations simply have no concept of what an agent is, does or cannot do or that their status as an “independent contractor” vis-à-vis their broker has nothing to do with their obligations, as an agent, to the seller or the buyer.  It only compounds the public confusion as to the status of a Realtor when Realtors themselves do not understand who and what they are.

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Retro-future of real estate – buyers like representation

For SaleWhen I wrote about the future of real estate brokerage seven years ago, I predicted that consumers would become increasingly reliant on the internet; while the process of selling homes would remain interpersonal. Once thought to free home buyers and sellers from real estate brokers, the internet has become ancillary to the home buying and selling process.

Some real estate experts point to home buyers’ perception of buyer agency as a reason for the integration of the internet into the buying process. The internet has become a prolific source of information that funnels buyers directly to listing agents. With information in hand, many buyers are seemingly ditching their agents when viewing homes; some thinking they can negotiate a sweat deal directly with the listing agent.

Consider this 2012 anonymous post from a popular real estate web site. The poster proclaimed to have fired their agent and on their own negotiated a $490,000 price, when a previous buyer backed out from a $515,000 contract. The poster stated that “it makes financial sense,” the rationale being that there is always a 6% commission built into the price. The post stated that the seller makes more money if there is no buyer agent to pay, even if the offer is lower; while also getting the listing agent to accept a lower commission.

The post’s rationale may seem ostensibly compelling; and if the tactic works, it most likely has nothing to do with commissions per se. The strategy of negotiating a better price based on commission falls flat when you understand how broker commissions are negotiated. Generally, commissions are negotiated between the listing broker and the seller before the home is listed; the negotiated commission is expressly stated in the listing contract. The commission belongs to the listing broker, not the agents. The listing contract is also specific to the amount of the commission to be split if the buyer is represented by a buyer broker. Trends in commissions vary; including variable commissions, which is an agreement to a reduced listing commission if the buyer is not represented.
(Continued below)

Of course this do-it-yourself (DIY) home buyer post (and many others like it) has garnered a lot of attention and unconfirmed corroboration. However, there is no additional information about this specific transaction; and two thoughts immediately come to mind, either: the home did not appraise at the higher price (this was 2012); or the buyer walked on the home inspection.

The truth is that many still value buyer broker representation, which goes beyond just finding a home and negotiating a sales price; and may include (among other responsibilities) identifying and guiding you through any obstacles that can arise during the transaction. Of course, not all agents are the same. If your agent is a strong negotiator, the probability on settling on a better price is higher; as well as other occasions during the transaction where negotiation is paramount – notably during the home inspection process.

What some experts proclaim to be evidence of a trend of home buyers purchasing sans a buyer agent, may actually be just a shift in buyer behavior. Sure, there will always be the “DYI” buyer trying to justify a price by reducing commissions. But the reality may be that, rather than ditching the buyer agent altogether, the internet has allowed many home buyers to put off signing a buyer agency agreement until they are ready to make an offer.

© Dan Krell
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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.

Trapped and Pigeon Holed

by Dan Krell

A May 13th 60 Minutes piece that aired nationally attempted to portray a balanced view of how online brokerages have been chipping away at “standard” Realtor commissions. If you missed the segment, it was a story about the success and battles of an online brokerage called Redfin. (Interestingly, there was a similar story in the Washington Post almost a week later).

The story appeared to be an underdog piece about how Redfin is pitted against a real estate industry that is against change. Everyone loves an underdog, right? Although the story attempted to offer both sides of the story, 60 Minutes decision to interview a top real estate agent in the Seattle area made for sensationalism but little for advancing the truth and facts.

The agent interviewed was clearly not representative in income or business methods of an average Realtor. It appeared that the agent’s comments fed into the stereotypes being portrayed by her comments when challenged to lower her commissions as well as comments about home buying not being high tech.

The facts are that according to the United States Department of Labor Bureau of Labor Statistics, the average licensed real estate agent income was $35,670 in 2004. The average agent earned between $23,500 and $58,110 a year. Only the top ten percent earned more than $92,770.

Additionally, the real estate industry has embraced technology to assist in change as can be witnessed by the explosion of internet listings and computer based real estate applications. Many home buyers search for homes online before going to see the home in person. In fact new technology has allowed much of the process to become remote and impersonal; contracts and mortgage applications can be completed and signed and delivered via email. The truth is that the industry is very high tech and the National Association of Realtors is committed to technological advancement (www.realtor.org/technology/index.html).

As a Realtor in the trenches, I can tell you that commission structures have been changing for a while, however not because of “discount” brokers, but as a necessity of survival in a saturated industry. The recent record sellers’ market assisted in the growth of real estate business models that are based on flat fees. Online brokerages, such as Zip Realty, as well as “full service” Realtors have been offering closing credits, rebates, and low commission structures for some time.

How do you get a full service Realtor for a “discount” price? The truth is that although some Realtors are not negotiable on commission, many are. All you have to do is ask and chances are that you can negotiate a lower listing commission or a closing credit on your home purchase.

I was once told by a professor in graduate school that once others’ perceptions have you pigeon holed, you can never get out. Although the 60 Minutes story may be good for ratings, the one sided treatment and depicted stereotype of wealthy Realtors who are steadfast for the status quo did nothing to promote the facts. The National Association of Realtors has posted depicted misrepresentations as well as the correct facts on their website: (www.realtor.org/about_nar/60_minutes/NARRespondsToSixtyMinutesMain.html).

To CBS’s credit, some facts and rebuttal comments from the National Association of Realtors, as well as others, have been posted on the story webpage:
www.cbsnews.com/stories/2007/05/11/60minutes/main2790865.shtml

This column is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of May 28, 2007. Copyright © 2007 Dan Krell.