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March 31, 2017July 14, 2019

Transforming real estate – whom do agents really represent?

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.

By Dan Krell
Copyright © 2017

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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.

March 23, 2017December 13, 2022

Violent crime effects home values

Last week’s alleged horrific and violent crime has propelled our Montgomery County MD community, specifically Rockville, into the national spotlight. And like other communities that have experienced violent crimes, residents will be asking questions long after the spotlight dims. Unfortunately, the aftermath of violent crimes not only leaves a psychological scar on the community, it also affects home values.

Of course, it’s intuitive to think that home values are affected by violent crime. You might ask, how can such a violent act that occurred last week not be in the minds of prospective home buyers? And as you will see in the research below, violent crime will also compel some home owners to move.

A 2009 study by John Hipp, George Tita and Robert Greenbaum sought to determine the interrelationship between crime and “residential mobility” (Drive-Bys and Trade-Ups: Examining the Directionality of the Crime and Residential Instability Relationship; Social Forces; 2009, Vol. 87, No. 4, pp.1777-1812). The findings revealed that although there is no evidence that a year with a high number of home sales increases violent crimes, they found direct evidence that a year with a high number of violent crimes will increase home sales during the ensuing year. The same holds true for property crimes, where a high number of home sales do not lead to increased property crimes, however a high number of property crimes will increase the number of home sales the following year. They also found evidence of a downward trend in home values following a year of high violent crime. The authors of the study concluded that households basically respond to crime by moving. Additionally, many home buyers not only take crime stats into account, but likely consider recent high profile crimes when deciding on a home.

They also found evidence of a downward trend in home values following a year of high violent crime.

There are decades of research on the effects of violent crime on property values. For example, an influential article by Sheila Little published in 1988 discussed an appraiser’s duty to consider violent crime when determining property value (Effects of Violent Crimes on Residential Property Values; Appraisal Journal; 1988, Vol. 56,No. 3, p341-343). She stated; “It is part of appraisers’ responsibilities to make an effort to ascertain the effects of violent crimes on market value of properties.”

Fortunately, communities heal. However, it’s not easy and certainly not immediate; as evidenced by the research of George Galster, Jackie Cutsingerm and Up Lim. They studied how five US cities responded to “exogenous shock,” such as violent crime (Are Neighbourhoods Self-stabilising? Exploring Endogenous Dynamics; Urban Studies; 2007, Vol 44, No.1, pp. 167-185). They concluded that communities have a “self-regulating adjustment” mechanism that help them adjust and stabilize after various external shocks. Although an increase in violent and property crime will elicit a community’s self-regulation mechanism; stabilization takes “considerably longer” than other external shocks, especially when the shock to the community is substantial.

Galster, Cutsingerm, and Lim rhetorically ask how the self-correcting mechanism functions; how does it adjust and stabilize a community? They propose that there are social, economic, and/or political reactions to shocks such as violent crime. They surmise these reactions are manifested as a “powerful momentum” within communities.

Our community’s self-regulating mechanism has already been deployed, as demonstrated by the intense parent and community involvement in Rockville, asking questions and seeking change. And you can expect a “powerful momentum,” as described above, for change. The resulting social, economic, and/or political change will limit the effects of such violent crimes on home values, and demonstrates why Montgomery County MD continues to be the residence of choice for many home buyers.

By Dan Krell
Copyright © 2017

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March 18, 2017October 20, 2020

Misguided house makeover

Do you really need to spend money to make money? Deciding what renovations and updates to make prior to your home sale can be tormenting. It’s easy enough to say that your home needs a facelift; but, the repairs, updates, and painting costs money – and usually lots of it. The suggestion of making renovations and updates to your home before you sell is everywhere, it’s on TV, the internet, and magazines. And if you ask friends and real estate agents, they will also give you a list of “must do’s.” Regardless of how you decide to do a house makeover before the sale, chances are that you’re not doing it right.

There is no doubt that many home buyers are looking for a turn-key home. If your home is not “out of the box brand new,” you probably need to freshen it up, as well as make some repairs and updates. But before you embark on the house makeover by making those renovations, you need to ask yourself two important questions: “How much money can I realistically allot for a makeover?” and “How much am I expecting to net from my home sale?”

Does a house makeover really get you top dollar? Spending money on renovations will certainly make the home sell faster, but not necessarily make you more money. And there is no guarantee that the house makeover renovations you make are to home buyers’ tastes. So if you’re goal is to get top dollar, don’t look at the sale price. Instead keep your eye on your estimated net (the amount you’re left with after the sale minus total renovation costs).

Of course, the best way to maintain your home’s value is to perform regular maintenance. It would certainly make the home prep easier too! But the reality is that many home owners defer maintenance until they feel it’s absolutely necessary. Deferring maintenance can actually cost more in repairs down the line, and lower your home sale price. Spending money to correct all the years of neglected repairs and updates prior to the home sale won’t necessarily get you top dollar.

Not all buyers are looking for renovated homes. One of Stephen B. Billings conclusions in his recent research (Hedonic Amenity Valuation and Housing Renovations; Real Estate Economics; Fall 2015, 43:652-82) was that during the past “healthy” housing market, there was a balance between renovated and non-renovated homes that sold. However, he also found there was an increase in renovated home sales during the housing downturn of 2007.

Selling your home “as-is” would certainly decrease your sale price, but could net you the same or even more if weighed against extensive renovations of the house makeover. Consider that you would only recoup a fraction of the cost of a minor kitchen and bathroom remodel; which averages about $20,122 and $17,908 respectively (according to 2016 Cost vs Value Report; remodeling.hw.net).

Concentrate on the basics of decluttering first. Decluttering can make your home look different and feel larger. Decluttering can set the stage for fo you decide on renovations, and maybe even home staging.

If you decide on freshening up your home before the sale, start with the basics. Focus on deferred maintenance, and make necessary repairs. Consider a fresh coat of paint, and maybe new carpets. Wood floors don’t necessarily have to be replaced or sanded; flooring professionals use state of the art processes to “renew” wood floors.

If you decide on a house makeover, focus first on making repairs and freshening your home. Work out a budget and get several quotes from licensed contractors. Don’t automatically go for the cheapest quote, even if you’re on a tight budget. Focus on quality, even if it means limiting the scope of work. Poor workmanship can sabotage your home sale by making your home look shabby and in need of additional repairs and updates.

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March 9, 2017December 13, 2022

NAR should promote Realtor Authenticity

Several years ago I told you about the National Association of Realtors’ attempt in shifting consumer attitude towards Realtors. They are pivoting away from selling Realtor integrity, to selling Realtor value. In 2014, the NAR voted on creating a Code of Excellence to demonstrate competency. It wasn’t until this past November that the NAR approved a framework of competencies for agents to achieve. The eagerly anticipated implementation will allow Realtors to assess and grow their skills and knowledge in many aspects of the business of real estate. But this Commitment to Excellence, as it is named, may help Realtors increase their competency; but in the end, just like being proficient in the Code of Ethics, it will likely fall short in building consumer trust. The NAR should promote on Realtor authenticity.

Having agents commit to more training is a good idea in building competency among real estate practitioners. However, research has demonstrated that showing off accolades and awards doesn’t instill value, nor does it increase sales (Valsesia, Nunes, & Ordanini: What Wins Awards Is Not Always What I Buy: How Creative Control Affects Authenticity and Thus Recognition (But Not Liking). Journal of Consumer Research. Apr2016, Vol. 42 Issue 6, p897-914).

Realtors have a trust gap. And a badge indicating competency and a Commitment to Excellence won’t bridge that gap. The business of residential real estate is likened to a game of smoke and mirrors. Instead of encouraging Realtor authenticity, agents are often taught techniques of persuasion to increase sales. Many agents devise gimmicks and expensive marketing materials to entice you to do business with them. Even before you meet with a real estate agent, they are likely scheming how to gain your trust. Whether or not they earn it is an entirely different matter.

Instead of creating another Realtor badge, designation or code, the NAR should consult with James Gilmour and Joseph Pine II (of the Strategic Horizons LLP). The title of their 2007 groundbreaking book sums it up nicely: “Authenticity: What Consumers Really Want.” Realtor authenticity is sorely lacking in the industry, and it’s not just the NAR; it stems from the brokers who train real estate agents as well. In order for Realtors to build trust, they need to be authentic.

A brief 2004 article by Michael Angier (Authenticity Matters: Are you the real McCoy; Sales & Service Excellence Essentials. Vol. 4 Issue 9, p10) highlighted the necessity for authenticity in the sales environment. He stated that “People like to do business with people they like. And they like people who are like themselves… Buyers today are savvy. They have more choices. And they can tell whether the company and the people in it are congruent. They seek out, resonate with and tend to be loyal to companies that are authentic. Your uniqueness and the things you’re best at doing are part of your differentiating position. It’s who you are—your identity. It’s what people can relate to. If there’s anything false, made up or covered over, your prospects will sense it. And they can’t even tell you why they didn’t buy…” Realtor authenticity would certainly positively affect client satisfaction.

Realtor authenticity will not only build trust but can also increase sales. And indeed, a 2006 research article by Allen Schaefer and Charles Pettijohn (The Relevance Of Authenticity In Personal Selling: Is Genuineness An Asset Or Liability? Journal of Marketing Theory & Practice. Vol. 14 Issue 1, p25-35) confirms that authenticity is related to sales performance. Their results indicated that salespeople who felt more authentic in their roles performed at higher levels and had a higher commitment to “personal selling.”

What do you think? Below is the framework of the Commitment to Excellence Program as adopted by the NAR is below (from nar.realtor/policy/commitment-to-excellence). It seems to me that Realtors should already be striving to be competent in these areas:

1) Being current and knowledgeable about the laws, regulations and legislation affecting the real estate disciplines the REALTOR® engages in, and about real estate in their community generally.

2) Understanding the Code of Ethics is a living document, and keeping themselves informed about its duties and obligations on an ongoing basis.

3) Providing equal professional services to all consistent with Article 10 of the Code of Ethics.

4) Advocating for property ownership rights in their community, state and nation.

5) Acknowledging and valuing that honesty and integrity are fundamental and essential to REALTORS® being known as consumers’ trusted advisors.

6) Becoming and remaining proficient in the use of technology tools to provide the highest levels of service to clients, customers and the public, and facilitating cooperation by sharing accurate, current information with consumers and with other real estate professionals.

7) Keeping up-to-date on laws and regulations governing data privacy and data security, and taking necessary and appropriate steps to safeguard the privacy and integrity of information entrusted to them.

8) Committing themselves to enhancing their knowledge and skills in the real estate areas of practice they engage in on an ongoing basis.

9) Providing superior customer service.

10) Appreciating that courtesy, timely communication and cooperation are fundamental to facilitating successful real estate transactions, and to building and maintaining an impeccable professional reputation.

11) As a broker-owner or principal of a real estate company, being committed to creating and maintaining an environment that promotes excellent customer service consistent with these standards.

Original published at https://dankrell.com/blog/2017/03/09/nar-promote-realtor-authenticity/

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March 3, 2017February 8, 2020

Housing market 2017

There’s no doubt that 2016 was an outstanding year for real estate and the housing market. In fact, National Association of Realtors chief economist Lawrence Yun was reported to say in a January NAR press release (www.nar.realtor) that the 2016 housing market was the best since the Great Recession. There were 5.45 million total existing home sales in 2016, which exceeded 5.25 million during 2015. What is necessary for a great housing market 2017, and how will it finish the year?

January’s sales were strong and Dr Yun stated in the press release that there is “resilience” in a “rising interest rate environment:”

“Much of the country saw robust sales activity last month as strong hiring and improved consumer confidence at the end of last year appear to have sparked considerable interest in buying a home…

Market challenges remain, but the housing market is off to a prosperous start as home buyers staved off inventory levels that are far from adequate and deteriorating affordability conditions.”

Home prices also surged during 2016. A February 28^th S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index press release (spindices.com) indicated a 30-month index high, increasing 5.8 percent during December. The Seattle, Portland and Denver regions were at the top during this period, posting gains of 10.8 percent, 10.0 percent and 8.9 percent respectively (the Washington DC region gained a respectable 4.2 percent). David M. Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices stated:

“Home prices continue to advance, with the national average rising faster than at any time in the last two-and-a-half years…One factor behind rising home prices is low inventory. While sales of existing single family homes passed five million units at annual rates in January, the highest since 2007, the inventory of homes for sales remains quite low with a 3.6 month supply. New home sales at 555,000 in 2016 are up from recent years but remain below the average pace of 700,000 per year since 1990. Another factor supporting rising home prices is mortgage rates. A 30-year fixed rate mortgage today is 4.2% compared to the 6.4% average since 1990. Another indicator that home price levels are normal can be seen in the charts of Seattle and Portland OR. In the boom-bust of 2005-2009, prices of low, medium, and high-tier homes moved together, while in other periods, including now, the tiers experienced different patterns.”

Of course, the record year was nowhere near the peak market pace of 6.48 million existing home sales during 2006. However, the economics of the market during that time was different; being influenced by outside forces such as uber-easy money policies and overzealous speculation in the housing market.

The peak market sales records may be a benchmark of a sort. But in retrospect, those numbers are a reflection of a distorted market where speculators bought and sold homes in record numbers taking advantage of the easy money and a seemingly guaranteed big money payoff (which was a factor in the steep home appreciation spike at that time). It was a crazy time for housing, when homes were flipped in a matter of days. Many investors were even making money on homes they never owned by selling their interest in their purchase contracts. The result was that home buyers found themselves either priced out of the market, or borrowing more than they could realistically afford because of the fierce buyer competition.

After posting impressive housing stats for 2016, the expectations for housing market 2017 are high. And not surprisingly home sales started the year on the same pace, as the NAR reported January’s existing home sales (homes that settled during January) increased 3.3 percent. However, the pending home sale index (homes under contract and described by NAR as a forward looking number) showed a different picture with 2.8 percent decrease during January. Of course in the absence of bad weather, some economists explain that the decrease in pending home sales are due to low inventory and rising interest rates.

Housing Market 2017

Some are concerned about the decreased prospects of future home sales, suggesting that there won’t be a repeat performance of record home sales during 2017. The recent pending home sale index release is reminiscent of the index reported for January 2014, where the NAR reported that the pending home sale index dropped 9 percent following post-recession record year of home sales during 2013. At the end of 2014, it was revealed that existing home sales dropped 3 percent from the previous year. Reasons given for the decrease were low inventory and tight lending.

Many, like myself, remain optimistic for housing market 2017 because interest rates remain historically low, even with recent rate hikes; and mortgage lending has been the easiest since the financial crisis. The sentiment for housing market 2017 is also shared by consumers; who conveyed increased optimism about the housing market in Fannie Mae’s 2017 Home Purchase Sentiment Index (HPSI). The February 17^th News release (fanniemae.com) indicated that the January’s HPSI increased 2 percent, which is 1.2 percent higher than the same time last year. Doug Duncan, senior vice president and chief economist at Fannie Mae, stated:

“Three months after the presidential election, measures of consumer optimism regarding personal financial prospects and the economy are at or near the highest levels we’ve seen in the nearly seven-year history of the National Housing Survey…However, any significant acceleration in housing activity will depend on whether consumers’ favorable expectations are realized in the form of income gains sufficient to offset constrained housing affordability. If consumers’ anticipation of further increases in home prices and mortgage rates materialize over the next 12 months, then we may see housing affordability tighten even more.”

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