RECALL: Real Estate Consumer Alliance

"Puffery" or consumer fraud? RE lawsuit reinstated in NJ

From the Star Ledger (NJ.com) by way of Northern New Jersey Real Estate Bubble: 

A real estate agent who misrepresents the section of town where a house is located can be sued for consumer fraud, a state appeals court ruled today in New Jersey.

In reinstating the lawsuit, Appellate Division Judge Susan L. Reisner began by quoting the real estate profession’s well-known mantra: “Location, location, location.”

“It is not unusual in this state for buyers to pay astonomical prices for houses in areas considered to have particular cachet,” Reisner wrote. “Given the importance of location in the purchasing decision, buyers are entitled to expect that the Realtors who are assisting them in their housing search will know where the houses are actually located.”

Time for the next revolution in real estate?

Nearly nine years after John Tuccillo, former chief economist of the National Association of Realtors, predicted...

"The next major revolution in real estate will be the spread of fee-based services, replacing the blanket commission pricing that has dominated the industry for so long."  (National Relocation & Real Estate, Vol. 13 #2, 1997, page 81.)

...it's good to see bloggers discussing and experimenting with hourly fees in various parts of the country.  The Real Estate Cafe has tried numerous pricing models over the past 11 years, and our straight hourly fee, 100% commission rebate is by far the most popular with buyer clients.

We just introduced a new sliding scale so buyers can decide how much they want to pay us hourly which in turn determines the rebate we offer.  For example, if a client pays us $100 per hour, they get 100% commission rebate; if they pay $50 per hour, they get a 50% rebate, pay $35 per hour, get 35% rebate, etc.  It's all about risk-shifting, as Douglas McCarroll, a computer programmer turned fee-for-service real estate consultant at The Real Estate Cafe, explains on his site.

One of the bloggers brought up the subject of separate fees for separate agents.  As the Department of Justice suit against the National Association of Realtors unfolds, we believe that uncoupling the traditional two-sided commission will develop momentum in 2006:

In my opinion, participants in the real estate market (specifically referring to buyers) are not rational actors when it comes to the payment of real estate commissions. This has much to do with the historical structural compensation model established by the real estate industry, namely, the offer of compensation made by the listing broker through the MLS. Until commissions on both the listing and sale side of the transactions are separated, and purchasers are empowered to go out and shop for and hire their own agent on whatever terms they choose, buyers will continue to act like lemmings and allow sellers and their brokers to dictate the terms by which their buyer’s agents are compensated.

Would you believe that the Consumer Federation of America first recommended "decoupling" the traditional two sided commission 15 years ago as one of five structural reforms to the MLS that could save real estate consumers billions of dollars annually?  Over the past three years, The Real Estate Cafe has identify 10 mega-trends which suggest this long overdue reform is headed for a tipping point.  If you'd like the executive summary, we can email you a 90 second video clip.

About a month ago, we teamed up with another fee-for-service pioneer in New Hampshire to offer real estate services on an hourly fee on a house hunt spanning two states, Massachusetts and NH.  We look forward to making referrals to other innovators who offer consumers the option to compensate them on an hourly basis and recommend that they consider joining the National Association of Real Estate Consultants (NAREC.com).  That organization was started by real estate educator / award winning journalist Julie Garton-Good in 2000.  The Real Estate Cafe was honored to be quoted in her book, Real Estate A La Carte: Selecting the Services You Need, Paying What They're Worth.  The title of the book captures our business model and could be a guide for others looking to offer or hire real estate services on a "pay-as-you-go" hourly basis.  (Special thanks to BohPhoto for "Will work for Bananas" Flickr photo.)

Research finds agents act as "Dealtors"

"Rogue economist" Steven Levitt, author of Freakonomics, appeared on NPR's On Point Radio in Boston this evening and briefly discussed his research on the performance of real estate agents.  Levitt's analysis of 100,000 transactions in the Chicago area revealed that agent properties sold for 3 to 4 percent more than similar client properties, and that agents kept their own homes on the market for 10 percent longer than client properties to get the highest price. 

The findings document what industry critics have claimed for some time, namely that some listing agents put their own financial interest ahead of clients because they are more interested in closing the deals quickly than holding out for the highest price for their seller clients (see excerpt from Chapter 2).  Levitt blames the industry's traditional two-sided commission structure for failing to properly motivate listing agents, who typically receive just 1.5% of the total sales price after a four way commission split.

If listing agents are more motivated to make the deal work than getting the highest price for their seller clients, should they be called "Dealtors" instead of Realtors?  Or should the industry's commission be reformed or abandoned all together?  What's your take?  If you are selling your own home this Spring, will Levitt's research influence whether you will (1) list your property with a traditional full fee, full service listing broker; (2) sell on your own, or (3) purchase services "a la carte" through a new breed of real estate consultants like The Real Estate Cafe?

Finally, will the debate about real estate bubble influence your decision?  We've asked Levitt the same question by email, and will let you know if he writes back or posts an answer to his blog.

The Oversupply / Under Enforcement Dilemma

According to the state's web site, the Board of Registration of Real Estate Brokers and Salespersons licenses approximately 74,433 real estate brokers and salespersons in the Commonwealth.  That's about one agent for each of the 81,000 existing homes sold statewide in 2004 via MLSPin.com.  Further, my guess is that there are at least that many agents with inactive licenses, that can be easily renewed with a weekend course and a modest fee to the state.  So with 75,000 to 150,000 active and inactive licensees in state, not to mention the fact that any attorney in the state can apply for and immediately be granted a Broker license without an exam, the industry is flooded with real estate professionals, a problem a National Association of Realtor's report once called "The Oversupply Dilemma."

Against the backdrop of the oversupply dilemma is more troublesome consumer issue:  the compliance under staffing dilemma.  In fiscal year 2003, the last year reported, the state's web site states:

"[The Real Esate] Board investigators inspected 10 real estate offices, checking 153 licenses. The Board received 359 new complaints and resolved 434 from this and previous fiscal years. The Board held one investigative conference and nine formal hearings, entered into 16 consent agreements, revoked 25 licenses, suspended 58 licenses and issued three stayed suspensions and one reprimand. The Board facilitated the refund of $26,845 in total."

That's less than the combined rebates The Real Estate Cafe gave to just two of our clients that year.  While I don't know how many investigators are assigned to this multi-billion dollar industry in Massachusetts, one can infer from the lack of investigations and enforcement penalties that the Real Estate Board will lack the resources to monitor how well 75,000 licensees understand and are complying with the new agency disclosure regulations.

If there is good news here, it is that some states are tightening up real estate licensing and education requirements.  Let's hope Massachusetts takes a similarly enlightened path to protecting consumers as the new disclosure agency regulations go into effect. 

Organizing alternative real estate professionals in Mass.

(The Department of Justice's headquarters is named after Attorney General Robert F. Kennedy.)

INMAN NEWS FLASH:   Thursday, April 21, 2005
Justice Dept., FTC warn against limited-service real estate rule

Dear Alternative Real Estate Professional,

The news flash above, plus Monday's article in Banker & Tradesman entitled, "Minimum Service Issue Being Monitored," begs the question whether it's time to develop a formal or informal association of listing entry only services and alternative real estate professionals in Massachusetts or New England? 

As some of you may recall, this question was first raised two months ago when the State of Texas drafted new regulations requiring minimum levels of service in that state (see News Flash above).  Similar legislation has since been introduced or enacted in other states, and this controversial issue is sure to be a hot topic at the National Association of Realtors meeting in Washington, DC in less than three weeks.

So what should we do locally?  Does it make sense to explore that at an informal meeting the evening of:

May 5, 2005
DoubleTree Guest Suites
550 Winter Street (click for directions)
Waltham, MA 

The proposed location, less than a mile from the Massachusetts Association of Realtors (MAR), should make it easy for some of their staff to attend and share their perspective on alternative business models and explain why and how we are being monitored.  Our intent is not to be confrontational, but to begin a dialogue to insure that the residential brokerage industry remains open and competitive in Massachusetts.

To make the proposed meeting even more worthwhile, perhaps we should ask someone from MAR to make a brief presentation on how the state's new agency law will impact non-agents, limited service, and fee-for-service business models.

Working as a group, we can continue to help real estate consumers in Massachusetts save millions of dollars annually in commissions.  Beyond that, we have the opportunity to extend our missions from saving money to saving lives.  To learn how your clients can use some of their savings to provide a shelter subsidy for AIDS orphans, drop by the Unite Against AIDS Summit this Saturday, April 23rd at Harvard's Science Center to learn how you can participate in the 1st Annual Million $ March.  Alternatively, we'd be glad to follow-up with a presentation at your office or at the proposed gathering on May 5th.

Bill Wendel, Founder
The Real Estate Cafe
Cambridge, MA  02138
617-661-4046 office / msgs
617-388-5818 cell
RECafe@mac.com
http://www.realestatecafe.com

PS.  Pat Rioux, the founder of ListForLess.com, who is quoted extensively in the Banker & Tradesman article and is knowledgeable about attempts to limit listing entry only business models around the country is willing to attend the proposed meeting on the 5th.