Old real estate model requires surgery
Roadmap to Recovery: Essay
By Inman News, Thursday, January 22, 2009.
Editor's note: This guest essay was submitted by Inman News reader Larry A. Whited Sr. as a part of the Roadmap to Recovery editorial project. This project is a call to action in finding a new path forward for the real estate industry. Click here for details.
I am so tired of hearing real estate professionals say, "We need to work on our image, convince the public it is a great time to buy and prove to them we are worth our commission." They want to keep pumping life into last century's model, but it is way past CPR help. "The World is Flat" (see Thomas L. Friedman's book by that name) so deal with It!
Real estate professionals need to face the real issues:
- Our market will get worse until foreclosures slow down.
- Foreclosures will not slow down until we have job growth. I am counting on the new administration to repeat the Franklin Delano Roosevelt's "New Deal" ideas (Work Projects Administration, Civilian Conservation Corps, etc.) to get people back to work. God knows we need new bridges, infrastructure, etc.
- Property values will continue to fall until we have job growth and stop foreclosures.
- There are too many Realtors. We need only 500,000 or less. That would also reduce the political action committee funds used by the National Association of Realtors to support last century's high-priced business model at state and federal agencies.
- Our barrier to entry is too low. When the market improves there will be a flood of new agents coming back into our business. If you look at the last few decades the average number of sales per agent is usually around six per year. (See a previous guest article I wrote in 2006: "Close and consolidate: The new reality of real estate."
- Brokers will not self-regulate. We will hire as many agents as we can because we know everyone else will and we will fall behind if we don't.
- Commission is too high and subsidizes last century's business model. Lower commissions will force efficiency and cut the growth of agents. Realtors act like it is in the Constitution or at least the Bill of Rights that they deserve a 5 percent, 6 percent of 7 percent commission. The real estate world has changed and they are in denial.
- Our hold on information and our monopoly called the multiple listing service is hated by every homeowner who knows they need it but also knows it is an outrageous cost in today's Internet world. We need only one MLS system for each state that downloads all their information to every site that will post it. It is ridiculous that we have 800-plus MLS systems that can pass rules that I believe are protectionist, restrain trade and allow subtle price-fixing, and that these policies are protected with real estate professionals' money.
- If we don't reinvent our business now we will be replaced by a craigslist.com for real estate very soon. The buyers would then only call us to write an offer ... or they may call an attorney to write it and pay less than the 3 percent co-op we demand. We have no idea how close we are to killing our golden goose because we refuse to change except for minor surface changes.
As the old saying goes: You can put lipstick on a pig, but it is still a pig. Last century's real estate model needs a tummy tuck, facelift and a heart transplant at the very least.
Larry A. Whited Sr. is broker, president and founder of MaxUnet.com Franchise Systems and WebMLS.net.
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Submitted by Ralph DiLena on January 22, 2009 - 5:55am.
Foreclosures, short sales and property values are a near term issue that will soon (within a year or two) correct itself. These issues are working in favor of the current real estate model and agents proving them a source of captive clients who have no other choice in this market. What will happen when the market normalizes?
Moving forward the average consumer’s ability or desire to pay current market pricing for real estate services will surely change. This current recession has opened a big door to change in the real estate industry and with technology moving faster than ever change will pass us before we ever know it.
The Department of Justice has broken the grip of the local MLS and NAR and those [MLS’s] who defy its mandate have been getting hammered in court. At the same time Realtor.com the dominant real estate web site is quickly losing ground to other web sites.
And for those of us in the real estate business (at least in my opinion) the NAR’s value proposition is near zero.
Last century’s real estate model or anything remotely like it exists only on the short sale and foreclosure "life support" its currently on. After that, its time to pull the plug and declare the patient deceased.
Submitted by John Rakoci on January 22, 2009 - 6:00am.
Agencies will continue to hire agents as there is no cost involved. If they have 2 or 200 agents their overhead is nearly the same. If an agent has only 1 transaction the broker makes money. The income of the broker is up but that of the agents is diluted. Fewer transactions are a reason for higher commissions. It is less the cost of entry than no cost to brokers for the number of agents. If brokers had a cost involved they would only keep those that produce and less likely to bring on those that will only list their grandparents home in a 3 year period.
Submitted by bryanslist on January 22, 2009 - 6:20am.
Interesting stuff.
Couldn't agree more on many of the bullet points.
I guess it is pretty much a wait and see type of deal for everyone, but it should be interesting to see how the rise of internet real estate marketing pans out, if the overall national market does in fact come back.
Luckily, the Philadelphia area still seems to be in pretty good shape....
Submitted by Doug Gibbons on January 22, 2009 - 6:36am.
Thank you Larry,
This analysis is right on the money and we all know it. We also know that 95% of the marketing is the price. The seller does not need a real estate agent just to lower the price. Yes we provide a service (coordinating, hand holding, advice)but is it worth 5% or 6%? A new MLS system (e.g.craigslist.com) will leapfrog the current system FAST! Think how fast YouTube, MYSpace,Google Earth, and FaceBook have grown. Sellers have access to all the digital technology they need for marketing the house. They can also call to set up a professional VT, appointment center, get a lockbox, and rent a sign. They could hire an attorney or professional as needed. Sellers would just need to figure out how to pay the buyer agents.
Brokers are always arguing with MLS systems and other online interest about who owns the content. Perhaps sellers will figure out that they own the content. That advertisers and other service providers pay money to these websites. Should the seller (buyer agent)get money from these channels? Not sure, just a thought.
Submitted by Jason Hester on January 22, 2009 - 6:44am.
Is this an editorial or a rant? He starts with a couple of obvious and true facts: foreclosures need to stop and job growth needs to start. But the conclusions he reaches from there have nothing to do with that.
-If you think the WPA/CCC were the primary instruments of recovery in the Depression, you need to read The Forgotten Man by Amity Schlaes.
-Everything else he says requires someone else to impose their will on the industry and the marketplace. I may agree that there are too many agents, but the market is absolutely taking care of that. And how often do we get full shot commissions anymore? I split mine with another agent 9 times out of 10.
-The business IS changing. It has changed immensely in the last 20 and especially the last 5. In another 5 it will look different, and not from imposed change but rather from inovation.
The last thing we need is someone(s) to impose their vision of what the business should look like. We'll get there even if it takes us longer than you like. We are after all a profession of independent-minded, small business owners who love to negotiate. I hope one thing does not change though: we are not a commodity, and anyone who wants to change the real estate biz into that is selling snake oil (imho).
Submitted by REALonomics .net on January 22, 2009 - 8:20am.
Larry, you have made some good points. Three notions from your piece have grabbed me by the ears.
First, the notion that we can hype or PR our industry to a new plateau with the consumer is just ridiculous. NAR continues to use 1970s campaigns thinking the public actually cares about us and will respond to our "we love you, please likes us" rhetoric.
We have blogged extensively at www.REALonomics.net about the veneer coating we continue to apply to our complex economic situations, including our local and national business models.
We can't spit this shoe!
Secondly, you mention self-regulation. I'm dizzy with the simple notion that our Code of Ethics and Standards of practice are enough in our complex market arenas. We have advocated what we term "standards based brokerage" which has as it hallmark an ultimate consumer-centric core.
The idea that we won't write a contract that can't be supported as a financial performance instrument for a consumer is frightening to many in our industry. We still think, writing up a deal, submitting it to a lender and getting paid is the tell all and end all. Not so!
Finally, you mention another concept we have advocated for many years, which is the control of our labor force and its entry standards.
Floyd Wickman (I'm dating myself now!) once said, "Real estate is an interesting business because it is easy to get into, easy to get out of and optional in between." Yikes! He's was and continues to be correct and that is proving to be an Achilles heal for our industry.
Anyone with $1,000 can get into this industry and be empowered with our stamp of approval to execute legal agreements on behalf of the consumer that valued in the multiple millions of dollars. It should cost much more and the educational requirements, skill set and performance acumen should be elevated. We need highly skilled and financially trained participants who are NOT simply capitalizing on a prevailing market by getting licensed so they can chase a commission check or flip properties for themselves.
Well, I guess this means we concur with the nucleus of your piece! Nice work.
Respectfully,
Donald Teel - Founder
e-Partner
www.ePartnerUSA.com
REALonomics
www.realonomics.net
877-380-1000
Submitted by Bruno Skopinich on January 22, 2009 - 9:07am.
Who is Larry A. Whited Sr. Are you a Realtor?
Are you selling Homes? Or are you just a person with intellectual ideas?
Foreclosure is a Natural market correction. Don't mess with it too much... or we will delay our healing Time!
The Free market works in cycles... stop trying to control it via government regulations and Big tax projects.
Submitted by Larry Whited Sr. on January 22, 2009 - 9:22am.
To Bruno's question; I have been a licensed & very active estate broker for 36 years. See my bio on Inman.
Larry A. Whited, Sr., CRB, CRS, GRI
President & Founder
WebMLS.net & maxUnet.com
P.O. Box 757
West Chester Ohio 45071
Cell - (513) 543-2727 Fax - (513) 297-7497
Submitted by David DeSantis on January 22, 2009 - 11:42am.
Larry,
Great essay, I agree 100% that Realtors better wake up, and reinvent their business. The Internet has the power to make or break a business. There is nothing else out there with that much power.
Realtors are scrambling to figure out how to effectively embrace the Internet. They are in a very, very vulnerable position right now. I am seeking out agencies that want to take full advantage of this situation. I have developed a system that educates Realtors on how to use the Internet as a sales tool. The system that I've created is way ahead of where they are now, and I also educate the broker/owner, on how to leverage my system against their competition. No other industry is using this approach that I have. I've used this same system as an Internet Manager for a start-up boat dealership. We took full advantage of the lack of Internet knowledge of our competitors, and knocked them on their butts. It will also work with real estate because it is a sales focused approach. I didn't know crap about boats, but managed to do multi-millions in sales, all with a computer and a phone.
David DeSantis
President
dadzfeaturedtours.com
Submitted by Lenn Harley on January 22, 2009 - 1:02pm.
I'd be willing to double or tribble my contribution to the PAC if the number of Realtors were reduced to 500,000.
I'm not sure about the lower commission. Buyers can find homes on the Internet, but finding one is not buying one. The risk for Realtors is AFTER the home is located. We are paid for what we know, not what we do.
Lenn Harley
Broker
Homefinders.com
http://www.homefinders.com
Submitted by Brian-Logan Reid on January 22, 2009 - 1:43pm.
It is so blatantly clear that technology is finally creating the efficiencies that we all know have been a long time coming. Why would the industry NOT change when buyers are participating MUCH more in the search and compare process? When buyers are doing the vast majority of the work, the 'traditional' brokers have even LESS to do to collect their commissions. This makes no sense whatsoever. Technology and the Internet are creating efficiencies, buyers are utilizing them, and the old model WILL change; it must.
As we are seeing, buyers are beginning to vocalize their apprehension for paying the same commission whether they are out doing the search themselves, or if they are working hand in hand with an agent. It doesn't make logical sense for a buyer to spend her own time researching and narrowing down her home options, having to approach an agent to gain access to her selected properties (talk about protectionism), then having the agent write up the offer and walk with a $10,000+ commission. It will not be long until the buyers' collective force and apprehension mount, DEMANDING for the industry to adjust. Those who acknowledge this now (like here at http://www.CondoDomain.com :) ) are making changes and adapting with the times; those 'traditional' brokers who are clinging to the old ways are going to be the first to fall.
_____________________________________
Brian-Logan Reid
Director of Real Estate
www.CondoDomain.com
blr@condodomain.com
Submitted by Peter C. Fyler on January 25, 2009 - 7:06am.
Here, here! I agree; I am sick of real estate agents whose mantra is Sell, Sell, Sell. Don’t they get it? No one likes to be Sold. Let me say one thing first; the mother of the mess we are in is GREED. And greed has many faces, not just real estate agency. It looks like banking, law, construction and the list goes on. The first part of this decade practically buried the Golden Rule.
Sure, our market will get worse until foreclosures slow down, but have you ever tried selling a foreclosure? Our market will get worse until so-called professionals in all real estate related services know what the hell they are doing, and do the right thing. Talk about inept; the loss mitigation departments are a mess and the asset management companies are way past the Peter Principal. If bank properties are driving the market we will soon be six feet under. I could tell you stories …. I know there are newly formed bureaucratic sensitivity training classes, and ‘be kind’ memos circulating, but what about intelligence --- the education and knowledge required to work out this mess?
I want to skip to the topic that frustrates me the most, “There are too many Realtors”. Let’s not confuse Realtors with the professional designation of REALTOR® given by the National Association of Realtors®. As much as I miss the high times when all of us were doing better, I am glad we are experiencing lean times in real estate, because these are the times that separate the men (and women) from the boys. As in every real estate down cycle, those that are only in it for the money, who never truly learned their craft or understand what their true task is as real estate practitioners, will drop out. But, they’ll be back! They’ll wait tables, bang nails or clean houses. As soon as someone says the market is recovering, they will drop their aprons and dust pans and hightail it back to some real estate office that collects any body with a pulse. The entry level standards are way too low and in Massachusetts the joke is, when a traffic patrol officer stops someone for an infraction, they ask to see their real estate license! Why? Because not everyone has a driver’s license, but most likely they will have a real estate license.
Quite some time ago I realized that my profession is one of the most unprofessional uncreative businesses there is, and a good majority of the people in it are just plain lazy. Should someone come up with a new idea, everyone follows it. If they see companies advertising in a certain way, even if it provides no positive income producing advantage to their business, they will be there --- just because. I think the word is ‘lemming’.
I agree that commissions are too high if real estate agents continue to be apathetic and lazy. If they would really do their jobs and be 100% pro-active and supportive to their clients, seeing what is wanted and needed and producing that result, then I would argue the point. But most agents think the business is all about Sell, Sell, Sell. I think our business is Service, Service, Service --- and after the Buy we need do continue the Service. I’ll bet that when an agent pressures a buyer to see a house, if the buyer asks the agent after they look at the house, “Why should I buy this house?” the silence would be deafening. I decided long ago (I’ve been in this business for over 20 years) that I am not seller agent, I am a buyer agent and that means I am a service advisor and buyer counselor.
This happened not too long ago and it really made me laugh. There was a debate in my market as to whether we should give consumers property addresses attached to listings. One agent said, “If we show them how to get to the property, what do they need us for?” That comment clearly shows the mindset of most real estate agents. This business is no longer smoke and mirrors. The information is out there, it is everywhere. There is a lot involved in the process regardless of which side the agent is on, but if real estate agents are not willing to produce the goods and give maximum service --- who needs them? I don’t.
So, thanks Larry for taking the time to put a bitter pill on the table. I look forward to the day when real estate professionals gain --- I cannot say regain, the respect that is possible if they will ‘Just Do It”.
Submitted by Jonathan Kauffmann on January 27, 2009 - 10:17pm.
"Brokers will not self-regulate. We will hire as many agents as we can because we know everyone else will and we will fall behind if we don't."
Good. Let them dilute their brands and the brands of the agents' associated with them.
Jonathan Kauffmann
www.NestRealtyGroup.com