real estate business model
The National Association of Realtors (NAR) in conjunction with the Swanepoel/T3 Group authored the DANGER Report (2015) that identifies multiple threats that will impact the real estate industry. The report reveals the thinking of 70 industry leaders and over 7,500 brokers and agents from across the country. The following is an excerpt from the report that highlights a significant threat to commissioned real estate agents and a great opportunity for home sellers and buyers.
A2- Commissions Spiral Downwards
A variety of powerful forces will exert significant downward pressure on real estate commissions.
Scale 1 – 5 (1= 10% chance, 5= 100% chance)
Index: 87.5 out of 100 (Critical concern for the Real Estate Industry)
“Home buyers might not always want to use a
real estate agent, but most think they have to.
What happens if their perspective changes?”
Consumers are definitely becoming more motivated to find an alternate solution, and a growing new generation of brokers and agents are exploring a legion of new business models and pricing models that will most likely become commonplace……….
The continued rise in home prices has facilitated the elevation of real estate earnings based on commissions.Those earnings have not gone unnoticed by consumers, who are responding by placing increased pressure on real estate agents to reduce their commission rates. As a result, many fear a gradual downward slide or a realignment of fees as charged in other countries in the world.
WORLD REAL ESTATE BROKERAGE FEES
According to a report by the International Real Estate Review, real estate brokerage fees around the world are:
United Kingdom…………….. 1 – 2%
Singapore………………………. 1.5 – 2%
Netherlands…………………… 1.5 – 2%
Australia……………………….. 2 – 3%
and in the United States 5-6%
Real estate home sellers and buyers are saving thousands of dollars by paying direct or not paying a % commission to a real estate agent. Fixed fee compensation or alternative models are consumer preferred. Save money don’t pay a real estate commission.
Read the full report online at http://www.dangerreport.com/
There is a compelling story evolving in real estate sales that meritoriously mirrors the recent proposed consumer protection efforts of the Consumer Financial Protection Bureau (CFPD).
In 2015, the advancement of technology and the influence of Zillow’s public facing listing platform has unlocked the control of the real estate agent and helped to devolve power to the consumer. Real estate sellers and buyers are frustrated that their consumer needs are not being addressed and the cost to transact real estate is too high. Many home sellers and buyers are challenging and questioning the traditional commission based sales model and asking WHY?
- REAL ESTATE AGENTS OPERATE in a VACUUM
The traditional commission based sales model is seeded in the Multiple Listing Service (MLS). The MLS is a restricted website for real estate brokers and agents only. It is also referred to as the broker’s network- an exclusive membership club for real estate agents to advertise and share commissions. Using the MLS, a commissioned listing agent will post a home for sale in hopes that a buyer agent will collaborate. Collaboration means posting and sharing a commission that is split between listing and buyer agent.
The listed commission determines how quickly a home will sell. The greater the commission the greater the chance a buyer agent will cooperate and show the home to their buyer. By design the home buyer has no knowledge of the commission offered to the buyer agent through the MLS. Both the home buyer and home seller are harmed by a lack of transparency and unethical real estate agents that conduct business purely in the vacuum of the MLS.
- REAL ESTATE AGENTS LACK TRANSPARENCY
The traditional commission based sales model is not structured to be transparent. Transparency is operating in such a way that it is easy for others to see what actions are performed. The home seller and buyer are the most important participants in a real estate transaction, but often times are not consulted until after the listing agent and buyer agent have forged a deal using MLS.
If you are a home seller be certain your listing agent employs a sales and marketing system that meets your approval and all your expectations are acknowledged.
If you are buying a home make sure your buyer agent (if you choose to use one) shows you every home listing, not just the listings that pays the most co-broke commission.
- REAL ESTATE AGENTS MAY VIOLATE the LAW & ETHICS
It’s truly amazing the number of buyer agents that ignorantly or knowingly violate (break) laws aimed at protecting the consumer by not showing a home buyer a home listing. The reluctance of a buyer agent not to show a home is generally because the MLS home listing does not offer adequate compensation to the buyer agent. Consequently, the buyer agent is steering home buyers away from properties for their own personal financial gain and putting their needs in advance of the buyer to whom they serve.
This type of deception by the buyer agent frustrates the reputation of all real estate professionals. It’s a sobering breach of the Realtor’s Code of Ethics, a serious violation of Mass General Law 93A (Regulation of Business Practices for Consumers Protection), and potentially an abuse of ANTITRUST regulations.
- REAL ESTATE AGENTS MLS is NOT CONSUMER FRIENDLY
In practice, a real estate commission/fee should echo free market considerations – consumers receiving the highest desired service at a competitive price. The reality is the MLS and the traditional commission based sales model fails the consumer and purely benefits the sales agent. Characteristically a real estate agent aggressively champions the traditional commission based sales model at the expense of the consumer by claiming:
“This is the rate every firm charges”
“I’d like to lower the commission, but no one else in the MLS will show your house unless the commission is X%”
“Before you decide to list with XYZ Realty you should know that because they are “discount” agents, members of the association won’t show their listings.”
The three above agent statements violate federal antitrust laws and state laws meant to protect the consumer. A free market is an economic system in which prices and wages are determined by unrestricted competition between businesses and consumers.
THE REAL ESTATE SOLUTION
- If you are selling a home only work with a full service, fixed fee real estate agent.
- If you are a buying a home use a fixed fee real estate agent and have a real estate attorney review all the documents/contracts.
Serendipitously the influence of Zillow may also help to reduce the transaction costs for both the home seller and buyer. Is paying a real estate commission really necessary? NO! But many real estate professionals feverishly protect the commission model suggesting it is in the only way to ensure sellers and buyers receive quality information and service. You can bet Zillow is delivering timely quality information and that there are real estate agents that deliver full service and do not charge a commission, but rather a fixed fee.
Zillow has cracked the dominance of real estate agents and brokers over the home buyer and seller. By devolving information and making home listing public facing Zillow has stripped real estate agents of a treasured commodity- the control of home listings. More importantly, Zillow does not operate like a Multiple Listing Service (MLS) – the real estate broker’s network. Zillow does not highlight the commission, also called the co/broke, a listing broker will pay a buyer agent. Often times a buyer agent using the MLS, will not show a home buyer a respected property if that listing does not offer a satisfactory commission to the buyer agent. Therefore the buyer agent under the MLS system is the gatekeeper of information. The buyer agent will serve his/her self-interest to make more money, rather than serving the needs of their client- the home buyer.
This point is confirmed by Inman News in a 2015 Special Report- “Why Real Estate Agents Don’t Compete on Commission Rates.” When asked what’s stopping the agent from charging a fixed fee or offering less in commission? The majority of respondents agreed that philosophically agents and brokers are opposed to commission discounts. Most noticeably because that means brokers/agents would make less money. More poignant is that agent and brokers said they fear if they represent a seller at a reduced commission, other brokers might not promote their listings to their buyers. This type of behavior is called steering and is in violation of laws that protect consumers and enforce competitive markets. A competitive real estate market based on reducing transaction costs is good for home sellers and buyers.
Fortuitously Zillow and the internet have leveled the playing field and empowered home seller and buyers. It is NOW up to home sellers and buyers to exercise this power and say, “NO to Paying a Real Estate Commissions”.
Save MONEY. Only list a home with a FIXED FEE Realtor.
The National Association of Realtors reported yesterday February’s existing home sales increased modestly.
Home prices are up 7.5% YoY. Days on Market is down. Homes are selling faster and for more money. As expected the Northeast existing home sale numbers were blanched due to extreme weather conditions. However home sales still recorded a 3.6 percent rise compared to one year ago and the median sales price of $241,800 is 3.3 percent above a year ago.
If you are thinking of selling your home this Spring, NOW is the time to contact your local real estate broker. Be the first to market and capitalize on low inventory. If you want to put even more money in your pocket LIST your home with a FULL SERVICE, FIXED FEE real estate broker. Don’t needlessly give your hard earned home equity away.
Your Choice Your Way
Back in August of 2014, I wrote a blog highlighting the genius of Zillow and Spencer Rascoff. In that blog I described how Zillow had commandeered consumer eyeballs (website traffic) using their Zestimate tool and then pivoted to monetize the Zillow website with ad revenue from real estate brokers. As a business model catering to investors it is absolutely brilliant. However the consequence of this new model is that Zillow has forsaken the real estate home seller and home buyer. Zillow uses home buyers and sellers (eyeballs) to seduce real estate brokers to advertise and list on Zillow. Sadly, Zillow has morphed into a simple real estate listing website offering the very best consumer infotainment.
The internet is real estate’s amazing consumer tool. It is credited with unlocking the coveted information that home sellers and buyers demand- a public facing real estate listing service. In 2015 a home buyer will find any one home listed on multiple sites. Try it yourself— conduct a Google search and enter “homes for sale” and a zip code. For example, Homes For Sale 33138 returns organic results in ranking order from Zillow, Trulia, Realtor.com and Redfin. The first three are listing services and Redfin is a real estate broker that seemingly scrapes listings from other brokers in hopes of engaging a home buyer to be their client.
Now Zillow, once again, is trying to rebalance their website as a more consumer friendly platform using a figuratively improved Zestimate. Last week I overheard a city building inspector sharing why he thought Zillow had reengineered their Zestimate and what it actually means to the consumer. According to the building inspector, Zillow’s number one goal is to attract and increase the number of unique visitors on their website. In this effort they have announced a new Zestimate tool. It is now possible for any homeowner to modify their Zillow home listing and instantly recalculate their homes value or Zestimate. What Fun!
He then shared another alarming Zillow fact. Zillow is in bed with the federal government too. Zillow’s Chief Economist Stan Humphries helps the federal government by “unleashing vast troves of Zillow data in hopes of promoting better decision making.” (Andrea Brambila, Inman News, March 6, 2015). The building inspector says BEWARE: Municipal governments may also take notice of Zillow’s data, especially the revamped Zestimate. Throughout many communities it’s the Board of Assessors responsibility to maintain residential and commercial property valuations at full and fair cash values. Now Zillow’s Zestimate could make this taxing authority easier.
WHEN CONSUMER FUN HURTS
Imagine on a Saturday night a homeowner innocently visits the Zillow website. For entertainment he modifies his housing data with updated information that significantly increases his Zestimate value. Many months later (January) the same homeowner receives his yearly recalculated property tax assessment and remarkably his property value has increased. The taxpayer is confused and frustrated and does not understand why his local taxing authority now expects the homeowner to pay more in real estate property tax- What changed? He did not pull a building permit or improve his house in any way. Clearly the homeowner does not recall that particular Saturday night, so many months ago, when he revised his Zestimate for fun. When he willfully told Zillow (and the government) he had an unreported extra ½ bath and a bedroom. Do you think the homeowner has a chance to win a tax abatement? No way.
So what do you think, will Zillow still be a market leader in 5 years? That remains to be seen but clearly a revamped Zestimate is not the balance home buyers, home sellers or the market needs.