Counter Intelligence: The Real Estate Cafe Weblog

WBUR/NPR debate: Do buyer agents really help consumers save money?

Having already posted one comment to WBUR's heated discussion about "what caused the housing crisis and how to fix it," I was content to watch the debate unfold yesterday until several posts began spreading misinformation about the role of buyer agents and whether they help clients save money.

First, there is some truth that the current two-sided real estate commission does not align buyer agent compensation with performance. That's why some in the industry offer rebates and others are calling for commissions to be divorced. If that single reform comes out of this crisis, conflicts of interest would be reduced, competitive options would increase, and consumers would save billions of dollars as argued in these blog posts written two to three years ago:

$60 Billion question: How do consumers uncouple real estate commissions?

10 Mega-tends push real estate commissions to a tipping point

Contrary to assertions on WBUR's blog, some REAL buyer agents, not counterfeit buyer agents or "designated agents," actually do save their clients money by (1) rebating some or all of the buyer agency fee built into sales prices, and (2) by helping their clients shop wisely, time the market, and negotiating aggressively on their behalf. For tangible evidence, see Wall Street Journal article on the 100% commission rebate offered by The Real Estate Cafe, our menu of fees & rebates, and map of client savings totaling over $1 million during a twelve month period.

At least one other buyer agent in Chicago has helped clients save more than $1 million during a twelve month period and there are probably others. More importantly, new referral sites like http://www.ProOffer.com and conversations like this could bring performance based compensation into the real estate industry.  My guess is that millions of real estate consumers, both home buyers and sellers, would agree that reform is long overdue! 

What's your opinion?  Do buyer agents really help consumers save money?

How will the Bailout Bill impact home buyers & sellers? txt your answer

If you're unable to join us at the TweetUp tonight at TogetherInMotion, One Broadway in Arlington, text your response to our Wiffiti board so anyone online or at the TweetUp can read your perspective. 

Send us an email if you'd like to participate in one of our upcoming Bubble Hours or "Fear of Foreclosure" support groups for anxious homeowners.

What regulatory reforms are needed to protect real estate consumers?

Flames of "irrational exuberance" burning Realtors, too

I've spend the morning deconstructing Realtors are not immune to foreclosure, an amazingly transparent blog post on a leading real estate web site. The author's concluding question -- Why did so many people, including Realtors, buy homes in 2005? -- has been and will continue to be the spring board for innumerable blog posts, talk show interviews, research by economists and parodies on YouTube. But now imagine what the authors of Freakonomics or Saturday Night Live could do with this admission that some real estate agents "helped people buy homes that they could not afford," and then repeated the same mistake themselves.

Personally, I'd love to see investigative reporters dig into the conflicts of interest in the real estate industry and expose how deceptive and manipulative business practices, like dual agency and blind bidding wars, fanned the flames of "irrational exuberance" and, as this highly respected blogger admits, ultimately burned Realtors themselves.

Perhaps industry regulators will create new disclosures to protect consumers and prevent another trillion dollar collapse of the housing market in the future. Were you aware that a Washington think tank estimated a "loss of almost $6 trillion in real housing wealth over the course of the year, an average of $85,000 per homeowner"? Historically, potential home buyers have been advised to ask agents about their sales volume, but now it's wiser to ask prospective buyer agents if any past clients are upside down on their mortgages or involved in foreclosure. What if a such a negative equity or "foreclosure disclosure" were required by law?

Outrageous some might scream, unrealistic others would argue but blogs have already created a decision-making tool for web-savvy home buyers to decide who will best protect their financial interest. Try this experiment, visit two real estate blogs and see what their authors have written about the housing bubble. Look at their posts during 2005 -- was your prospective buyer agent echoing NAR's "anti-bubble" spin or warning homebuyers about the coming meltdown?

In retrospect, this Real Estate Cafe blog post from April 2005 sounds prophetic: Will mobloggers pop the real estate bubble?

My hope is this blogger's admission that Realtors are not immune to foreclosure will expand discussion about systemic flaws and conflicts of interest in the residential brokerage practices, and their cost not just to individual buyers and Realtors but to society. Who could imagine a better time and place for some "straight talk" about the need for real estate reforms than John McCain's speech tonight at the Republican Convention in this blogger's backyard?

"Real Estate Olympics" Redo: Call for Best "Do-it-yourself" money-saving tools at each step in the home buying / selling process

A leading group of real estate technology innovators is using a sports metaphor, the "Real Estate Olympics", to launch a compelling, timely competitive for the "Real Estate Pacesetter of 2008."

However, the first nomination (Zillow.com) and next week's run off between eight companies to pick a single winner suggests that this competition will be a battle of the GIANTS. Compare that with Seth Godin's presentation on "Small is the New Big" to the same group of innovators at ConnectNYC07 and  Time Magazine's Person of the Year in 2006: "YOU".

If you translate those MEGA-trends into an Olympic metaphor, you get a different kind of competition and a different call for "Best of Breed." Just as the Olympics have 302 events, there are hundreds of steps in the home buying and selling process and real estate innovators empowering consumers with money-saving, do-it-yourself tools at EACH STEP in the process.

For more than a decade, The Real Estate Cafe's has maintained a list of "Best of Breed" innovators at each incremental step, and we are eager to share them with our clients and others.  Real Estate innovators, if you think you should be on the list, please send us an email:

1. Nominating yourself for the appropriate step in the home buying and selling process, and

2. Explaining how you help do-it-yourself home buyers or sellers save money (or time).

Any nominations we receive before this weekend from innovators, or consumers who rave about them, will be showcased at our first "FSBO Trade Mart," tentatively scheduled this weekend at TogetherInMotion.com, One Broadway, Arlington, MA.  Watch Twitter & FriendFeed for more details.
http://Twitter.com/RealEstateCafe
http://friendfeed.com/realestatecafe

Fee-for-service real estate: professional advice without cartel pricing

Comment posted to debate on USNews & World Report's real estate blog, Home Front, asking: "Do you need a real estate agent to sell your home?"

More than a decade after the former chief economist of the National Association of Real Estate said...

"The next major revolution in real estate will be fee-based services replacing the blanket commission pricing that has dominated the industry for so long."

...it's discouraging to see this debate reduced to two options:

"There are two general ways to sell a piece of real estate. You can do it yourself (usually known as doing a for sale by owner, or FSBO), or you can utilize the services of a real estate agent."

There are dozens of tasks in both the home buying and selling process that web-savvy real estate consumers can purchase "a la carte" to meet their specific needs, without incurring a five to six percent real estate commission.

IMHO, presidential debates should not ignore credible third party candidates, and this residential debate should not exclude alternative fee-for-service business models either.  Those business models -- together with long overdue industry reforms -- will enable buyers and sellers to save billions of dollars annually without sacrificing the benefits of professional advice.

$60 Billion question: How do consumers uncouple real estate commissions?

If you live in New England and would like to join our experimental "FSBO Support Group," please contact us by phone (617-661-4046) or email.

Organizing real estate rebels, educating home buyers & sellers

Richard Howe's blog post, "Urban Rebels," provided a timely opportunity to use the 4th of July to update our rallying cry for a consumer revolution in real estate.  Howe is Register of Deeds for the Middlesex North District in Massachusetts, and has written extensively about foreclosures and their impact on neighborhoods and communities. 

Excellent, timely post. With three million households behind on their mortgage payments, and a projected two million headed towards foreclosure, could the time finally be ripe for a consumer revolution in real estate?

Some of use have been talking about that for more than a decade, but as Glaeser writes, industry insiders have had "strong incentives to fight for their regime.”  (See WSJ editorial originally entitled "The Realtor Racket" and download study on "Bringing More Competition to Real Estate Brokerage.")

Collaborating with fellow real estate change agents, we hope to invite home buyers and sellers in Greater Boston to restart conversations begun 15 years ago at the “Consumer Revolution in Real Estate” at our experimental new location: One Broadway, Arlington, MA.

We’ll experiment with seminars, real estate round tables, and web site demos. I’m particularly excited about reviving our Bubble Hours and hosting support groups for FSBOs & households facing foreclosure. Perhaps you can join us at an upcoming real estate unconference, or even present a topic / lead a discussion.

Billion dollar break-up: Protecting rebates vs divorcing two-sided real estate commissions

Redfin's corporate blog is cheering because an "Anti-Rebate Bill" introduced in Illinois that would have banned real estate rebates has apparently died in committee, or in Redfin's words, been "crushed."  Other sources report that the bill has changed focus, and as The Black Knight in Monte Python's Holy Grail famously said, may not be dead yet.  According to sources, there may still be an attempt to morph the anti-rebate bill into a procuring cause bill before Friday's deadline, which could be extended.  What's at stake is the definition of procuring cause, a legal concept which Realtors use to decide who procured the buyer, and therefore who is entitled to collect the buyer agency fee under their guidelines.  Although the exact language has not been shared, Redfin and other sources allege that the reworded bill would require a buyer agent to accompany their client to property showings to collect the buyer agency fee offered through the multiple listing service (MLS).

Buyer agency compensation is an old family fight in the residential real estate industry, one the consumer has been dragged into because a growing generation of discount business model use rebates to hook home buyers.  What most home buyers don't realize is the two-sided real estate commission is obsolete, and some critics have likened it to a real estate transfer tax (hence our photo above).  So, IMHO, firms discount business models like Redfin are actually propping up an artificial pricing structure and reinforcing a barrier to competition and consumer savings.  While a recent Redfin blog post called the 3% buyer agency fee "boring," it did not challenge it or call it unnecessary or anti-competitive.  In fact, the blog post says "Redfin has always been careful when listing a home to encourage our clients to offer the buyer’s agent 3%..."

I agree with Redfin, the proposed IL bill is not the answer, neither in it's original form, which sought to ban rebates; nor it's amended form, which may seek to define procuring cause.  However, there is a long overdue reform that would reduce real estate commissions by billions of dollars annually:  separate fees for listing agents and buyer agents.  Think of it as a real estate version of BYOB: Bring your own broker.  That's the only way to create an open, competitive market place in residential brokerage, where as one attorney wrote:   "the ability to freely price one’s service is a pretty basic, bread and butter tenet of competition." The Consumer Federation of America first proposed that reform 16 years ago, and there is growing interest in "divorcing" the commission even within the Realtor community.  You can learn more by viewing this 90 second slide show:

Uncoupling the traditional two-sided real estate commission:  10 Mega-trends leading towards a tipping point (click to see video)

As the real estate industry transitions to a more competitive marketplace, The Real Estate Cafe's will continue to offer a menu of hourly and flat fees plus rebates, including a 100% rebate option.  However, we'd prefer to work with other change agents to unlock billions of dollars of consumer savings annually by compensating buyer and seller agents independently.  If you are interested, please use this wiki to brainstorm about building a coalition and action plan to divorce real estate commissions.  If you'd like to meet in person in Boston, no need to BYOB -- we'll buy the beer.

Misleading home buyers: Conflict of Interest? What conflict of interest?

Thankfully, a recent NYTimes article, Feeling Misled on Home Price, Buyers Sue Agent and an interview hours ago on Today on MSNBC, are beginning to shed light on deceptive real estate practices.  However, the article doesn't expose widespread conflicts of interest that contributed to the real estate bubble and their growing cost to society. 

1.  For starters, look more closely at this misleading statement:

"As prices spiked, buyer's agents and brokers became popular as sounding boards, advisers and negotiators. The National Association of Realtors estimates they are now involved in two-thirds of all residential purchases."

That makes this the first housing collapse in which large numbers of buyers had a real estate professional explicitly looking after their interests."

My guess is that one in five * transactions or about a million sales of existing homes during 2006 involved "designated agents" or some other name that papers over the conflict of interest that occurs when buyer and seller are represented by the same brokerage firm. (* In some markets, the ratio could be considerably higher.)

2.  The means that home buyers do not receive proper advice and protection, or as a partner in a real estate agency told the NYTimes:

"We have seen so much misrepresentation over the last five years," he said. "So I appreciate where these buyers might be coming from: 'I'm a lowly consumer, you're certified by the state of California, you didn't do X, you didn't do Y, and I got hurt.' "

3. The NYTimes speculates that consumers, angry that their counterfeit buyer agents did not provide adequate advice and protection, will increasingly take legal action. Will their collection actions rise, at some point in some overvalued market, to a class action lawsuit? 

"The Ummels may be on the leading edge of the law, but they are unlikely to be alone for long. With the market falling, many homeowners owe more on their mortgages than their houses are worth. And many of those deals involved brokers who are required to carry professional liability insurance, presenting a tempting target for angry buyers.

'If you put someone into a property at the top of the market, you look really bad if it goes down,' said K. P. Dean Harper, a real estate lawyer in Walnut Creek, Calif. 'There are a lot of letters going out from lawyers to real estate agents saying, 'My client would never have purchased if you had properly evaluated the market conditions and the value of the property.' "

 

4.  A series of "Dual Agency Detective" blog posts dating back three years predicted "a new era of heart break for real estate consumers."  Although it's easy to poked fun at designated agency with political cartoons, the cost to individual home buyers and society, as this prophetic case attests, is no laughing matter:

My so-called buyer's agent (who promptly switched roles at contract signing without explanation), initially advised me to bid $750,000 for my house of choice, which was listed at $699,900. When I told her that such an offer was beyond my price range, she was quite adamant that I not offer anything under the list price. When I finally backed out the deal because of her bait and switch scam, I later heard that the house in question sold shortly afterwards for $682,000--in other words, nearly $70,000 less than the bid suggested by my so-called buyer agent.

This type of price inflation (caused by seller's agents masquerading as buyer's representatives) must have a very distorting impact on housing costs.  The economic fallout is enormous: ordinary citizens are forced to move out farther in search of decent, affordable places to live, which  leads to a host of problems connected with traffic congrestion, suburban sprawl, etc.

As I perceive it, the real estate cartel's use of dual agency [a.k.a. "designated agency"], which works to the detriment of the average consumer while enriching dishonest agents through the practice of double-dipping, contributes significantly to the manifold problems we see in the residential housing market and therefore should be fully exposed.

5.  Who will end up paying the cost?  Commenting on the mortgage package included in the tax rebate agreement announced by Congress and the President, a link on BostonBubble reads: "Profits privatized, risks socialized - Economic stimulus a wealth transfer from the middle class to the rich and the reckless." See Paper Money's blog post for call to action.

Conflict of interest, what conflict of interest?

PS.  The NYTimes may not have gone far enough, but the story (once, the most forwarded story in the NYTimes) is echoing around the blogosphere.  Some in the industry are worried this may be "the tip of the iceberg," and the buyers told MSNBC's Today show they want to change the industry.  Sounds like the Consumer Revolution we've sought over the past 15 years.

Best money-savings tools & trends for home buyers in 2008?

The Real Estate Cafe's "Booth Sleuth" is eager to attend the leading real estate technology conference in New York this week so we can identify the latest tools and trends to help clients save money.  To raise funds, we're repeating the "fare sale" we offered in November 2007.  If you think you'll be using our services anytime in 2008, we encourage you to prepay for them now so you can enjoy savings of up to 50%.  More details upon request.

If you're looking to develop a new product or service to help real estate consumers save time and / or money, we're also willing to conduct sponsored research at the conference.  For examples of our work, see Twitter posts and "Live Notes" from last real estate conference on The Real Estate Cafe's public wiki.  Confidential inventory of Web 2.0 applications in real estate also available.