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.

Confidential information

confidential information
Keeping your information confidential (infographic from larealtors.org)

A real estate agent, who allegedly represented Paul Manafort’s family, recently asserted his fiduciary privilege to avoid appearing in front of a grand jury.  However, as Politico reported, his efforts were thwarted by a judicial opinion, and subsequently reported to the grand jury.  But can confidential information be disclosed?

A fiduciary is generally described as someone who acts as a custodian of their client’s rights and/or assets.  The fiduciary has a responsibility to act with honesty and integrity, as well as act in their client’s best interest and not exert influence or pressure on their client for their own or others interests.

Both the National Association of Realtors and the Annotated Code of Maryland (COMAR) reference directly and indirectly a real estate agent’s fiduciary obligation and handling confidential information.  The NAR Code of Ethics Standard of Practice 11-2 states that a Realtor (when acting as an agent or subagent) has “the obligations of a fiduciary.”  COMAR states about the brokerage relationship (MD BUSINESS OCCUPATIONS AND PROFESSIONS Code Ann. § 17-534):

Except as otherwise provided by this title or another law, keep confidential all personal and financial information received from the client during the course of the brokerage relationship and any other information that the client requests during the brokerage relationship to be kept confidential, unless (i) the client consents in writing to the disclosure of the information; or (ii) ) the information becomes public from a source other than the licensee.

Of course, all jurisdictions are different, having their own laws and customs that govern the actions of real estate agents.  Manafort’s alleged real estate agent claimed a fiduciary privilege under the DC and VA real estate statutes, which is similar to Maryland’s.  However, in a recently unsealed Memorandum Opinion (www.dcd.uscourts.gov/unsealed-opinions-sealed-cases), Chief Judge Beryl A. Howell of the US District Court for DC believes that real estate agents don’t have an “absolute duty of confidentiality.”  She opined that a real estate agent is not excused from complying with an obligation to respond to a grand jury.  But what about confidential information?

Judge Howell wrote:

The respondents take the position that a court order compelling compliance with federal grand jury subpoena is required to overcome the confidentiality protection afforded to real estate brokerage records under District of Columbia and Virginia law. They rely on identical provisions of District of Columbia and Virginia statutes that require a real estate licensee engaged by a buyer, such as the Clients, to ‘[m]aintain confidentiality of all personal and financial information received from the client during the brokerage relationship and any other information that the client requests during the brokerage relationship be maintained confidential unless otherwise provided by law or the buyer consents in writing to the release of such information.’ D.C. Code § 42-1703(b)(1)(C); Va. Code § 54.1-2132(A)(3) (emphasis added). The government does not dispute that these statutes extend confidential treatment to the subpoenaed information, but argues that ‘the laws do not impose an absolute duty of confidentiality on real estate agents’ or excuse compliance with ‘a legal obligation—enforceable by a federal court—to respond to the grand jury’s request for documents, testimony, or both.’”

A real estate agent’s fiduciary obligation and handling confidential information is not taken lightly.  Thankfully, most real estate agents don’t face a grand jury subpoena.  However, during the course of daily business, a real estate agent does have an obligation (whether by NAR Code of Ethics, their local statute, or both) of keeping their client’s personal and financial information confidential.

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.

Real Estate Expert

Real estate expert
Real estate expert (infographic from infographicportal.com)

When I began my real estate career, every budding agent was taught that we should farm neighborhoods to become the local expert.  Agents would (and many still do) farm neighborhoods by spending a small fortune on mailings and other promotional marketing about themselves just to tell you how smart they are about your neighborhood.  The notion that only one agent is “the expert” on selling homes in your neighborhood has become antiquated.  The demise of  this long standing rite is approaching as consumers become increasingly savvy. Enter “The Real Estate Expert.”

Before the MLS, real estate was a local business, where real estate brokers set up their offices in neighborhoods and became the “local experts.”  The neighborhood broker guided home sales and prices because they were the expert.  Home buyers and sellers went directly to these agents if they wanted to buy or sell a home.

However, the advent of the MLS opened up the marketplace and created “market experts.”  Not having prior knowledge about a neighborhood was no longer a problem for real estate agents.  The MLS provided agents the data and home information to become the local housing trends expert.  The MLS essentially allowed agents to sell more homes in the broader regional area.

The internet changed all that, of course, by providing data and home information to anyone connected.  Everyone is a neighborhood expert thanks to the internet!  However, there is downside to having an unlimited stream of figures, statistics and trivia without a filter.  Home buyers are on information overload.  They are inundated with information about a home’s history, as well as advice about buying and selling.  Buyers and sellers have so much information, they are overthinking every aspect about the home buying and selling process.  They are getting in their own way and potentially sabotaging their own transactions.

The ever-improving technology and the proliferation of information has changed the business of real estate, which has made the “neighborhood real estate expert” a thing of the past.  Sure, there are many agents who still market themselves as the neighborhood expert, but does that make them more qualified to sell your home?  Agents hyping themselves to know more about your neighborhood can also potentially sabotage your transaction if they make it personal.  They may be able to tell you about what makes your neighborhood special, as well as share trivia.  But so can your neighbor.  Does that make your neighbor qualified to sell your home?

Enter “The Real Estate Expert.”  The Real Estate Expert is a professional who follows the housing market and can interpret the data about your neighborhood in a meaningful way.  They can compile information to provide you with a detailed and meaningful market analysis to assist you in deciding on a sale price without personal bias.  The Real Estate Expert knows how to market your home in the current economic environment.  They understand what home buyers want in a home, and they can prepare and present your home to promote it to grab home buyers’ attention.

Real Estate Experts are trending away from marketing themselves, and leaning towards being attentive to their clients.  Real Estate Experts also understand the nuances of negotiation, and are current on legislation that can affect their client’s rights and obligations.  They also know how to facilitate a transaction, so as to protect their client’s best interest without regard to their commission.

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.

Consumers changing real estate agent commissions

real estate agent commissions
Real estate agent commissions (infographic from visual.ly)

Consumers have most likely complained about real estate agent commissions since the advent of real estate brokerage.  However, before the turn of this century, most did not question the real estate agent commissions they paid because they chalked it up to the cost of selling a home.  Times have changed, such that having a conversation about commissions and compensation is a common topic when agents and consumers first meet.

Real estate agent compensation is evolving as fast as the industry.  The US Bureau of Labor Statistics (bls.gov) reports the median annual wage for real estate sales agents was $44,090 in May 2016 (The lowest 10 percent earned less than $22,230, and the highest 10 percent earned more than $112,570). The BLS states:

“An agent’s income, therefore, often depends on economic conditions, the agent’s individual motivation, and the types of property available. Income usually increases as agents become better and more experienced at sales. Earnings can be irregular, especially for beginners, and agents sometimes go weeks or months without a sale. “

Before the turn of this century, there was more conformity in real estate agent commissions because most agents were not negotiable in the compensation they charged.  However, modern agents have adjusted their business models and are open to negotiate how much they will be paid.

There are also many real estate broker compensation structures from which you can choose.  Some brokers offer limited services, and some offer fee-for services, which includes a MLS placement service.  Some fee for service brokers offer à la carte services, where you can choose specific services for which you want to pay.  Most “full service” agents still charge a percentage, but the percentage can vary from agent to agent.  Full service agents can also vary on the extent of the “full” service they provide; however, many will be open to negotiate their commission rate.  Regardless of model, get the agent’s services in writing and hold your agent accountable.

The increased market pressure on agent compensation is actually good for the consumer.  It doesn’t only lower the cost of the real estate transaction, but it also increases the quality of services.  This was the finding of an empirical study by Panle Jia Barwick and Parag A. 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).  Their study investigated three scenarios that are chipping away at the traditional real estate agent compensation models: lower commissions, commissions based on break-even costs, and improved information about agents’ past performance.

Barwick and Pathak found some interesting outcomes from their research.  Besides concluding that there are consequences for fixed real estate agent commissions, they also discovered that the easy entry into the industry (i.e., the ease of getting a real estate license) reduces the quality of service.  Furthermore, the increased competition among real estate agents caused by easy entry into the industry is not beneficial to a home selling or time on market.  They also concluded that

“…lower commissions reduce transaction costs, which might lead to a more liquid housing market, improved asset allocation, and better housing consumption. Flexible commissions also provide a channel for consumers to choose services tailored to their preferences.”

Their results suggest

“…that a 50% cut in commissions would result in 40% fewer agents, social savings that amount to 23% of industry revenue, and 73% more transactions for the average agent.”

Realtors should embrace the discussion about compensation and real estate agent commissions with their clients.  It offers the agent an opportunity to demonstrate their accountability.  It also promotes transparency and the services we Realtors provide, and builds the trust that is lacking in the industry.

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.

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.