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The current glut of real estate agents is bad for the industry

I wrote in a recent post that real estate investors who sell via Realtor will end up overpaying. If you pay a $12 thousand commission check selling a $200 thousand property it's highly unlikely that you've actually gotten $12 grand worth of time or effort out of the agent. And the idea that "the buyer doesn't pay a commission" is a myth since the seller will have to pass on a healthy portion of this expense.

This isn't to imply that agents are raking in the big bucks or that they're greedy. To the contrary - I've worked with a lot of agents and many of them are supremely competent and professional. But agents, as a rule, don't spend their time selling and buying houses - they spend their time trying to build a business and trolling for leads, which is time consuming and expensive. All this gets bundled into the 6% commission which the customer has to shoulder.

So the customer pays too much, and many agents still struggle. What gives? The answer, simply put, is too many agents.

But there is a strange phenomenon at work here. Normally a glut of supply for a particular service will cause the price of that service to drop accordingly. The price should reset to a new equilibrium point, offering better value for the consumer. But in this case the NAR leadership has done everything in its power to resist market forces: from monopolizing MLS data to aggressively defending the current commission structure to encouraging legislative hurdles to keep the banks out of the real estate game.

This is a self-defeating strategy.

I spent three years living in Bogota Colombia - a beautiful city with wonderful people. But...the traffic is terrible, and the main cause is the fact that there are too many taxi cabs. But because there are too many taxis and not enough riders the drivers have to work morning, noon, and night to make a living. And the fact that they're all working so much just perpetuates the cycle of oversupply of taxi cabs - made even worse because the long hours looking for riders causes them to use even more gas individually, which in turn puts upward pressure on gas prices due to supply and demand. And so on, and so on. It's a downward spiral.

Same thing's going on here in real estate. Market booms lure more and more agents into the field, all fighting to sell the same number of houses. No one wins. And the industry's leadership has bet the farm on defending the status quo instead of encouraging new models.

::So...what's next?

A new business model will show up eventually. The consumer will demand it. Will it be Zillow or Redfin? This question reminds me of a now forgotten company that I bought stock in back during the dot com boom. This company was working on a groundbreaking new technology for recording and storing music called MP3. I knew that this technology was going to be big, but unfortunately I bet on the wrong horse. Apple applied their marketing savvy and design expertise and created the iPod. The stock I bought tanked.

So...I got the general idea right but picked the wrong company. Will Redfin or Zillow win. Maybe. But the odds are against it, in my book. If I were the betting type I'd wager on someone from left field. Citibank? Or Google?

Related Posts ::

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Update 12 July: I've gotten some feedback, both via email and via comments , that this post might be encouraging ActiveRain members to engage in inappropriate behavior with regards to discussing commissions.

To be clear: my statements refer specifically to structural inefficiencies in the Real Estate market which make it difficult for Realtors to economically price their services below a certain level. While I do believe that the current level of market inefficiency is bad for the consumer, I want to specifically state that I do not believe that Realtors are engaging in any unethical activity with regards to pricing - nor would I encourage them to do so.

Agents should be sensitive to FTC guidelines and steer clear of any statements that could be construed as colluding with fellow agents to establish commission levels. If you have any questions about the issues please refer to Caleb Mardini's post on the subject. --Chris

Posted by Christopher Smith on 07/10/2007 03:33 PM

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40 Comments on The current glut of real estate agents is bad for the industry

JUL

2007

The standards - it just seems that with so many licensees out there trying to do it part time it really puts a strain on us that work full time. I hope time will wash our industry clean. Because in the long haul only the strong will survive.

The banks are fighting to get into the Real Estate Industry which is not a good thing for the consumers. I support the NAR in fighting to keep banks out of Real Estate Sales. There would be a lack of customer service, lack of representation for the buyer and the seller and a lack of integrity as the people working in the banks will be getting bonuses off of profits the bank makes. If their staff are not commission based there is no real incentive to go the extra mile to get the deal done. This is just the tip of the iceberg of the problems. The good agents stay, the bad ones eventually leave. Real estate agents are dropping out like flies in our area. Too expensive to stay in business.

When you take into consideration that 97% Of the business is being done by 3 % of the agents then it is not as bad as it looks on paper.

not going to make many friends in the Real Estate industry with this blog.

OK, well lets see, in the states I seen statistics for 67% of the agents did no deals in 2006. the next 22% did one or two deals. The top 5% of the Realtors did 95% of the business. Why do they have to lower their commission, they are doing a good job marketing themselves and people want to work with them. I have been on the investor side of the business as well, and have sold plenty of 200k homes that the investor purchased in the range of 110K to 125K and spent 10K to 25K fixing up. Did the eventual buyers of those homes get 200k worth of value out of those homes? An argument can be made that the buyer did not get that sort of value. I had a bank try to tell me that the value was not they're on a investment that I made personally. Paid 95K for this 12 year old ranch home in a neighborhood where similar homes were selling for 150K to 160K put 13K into repairs and cleanup, put it on the market at 155K and it sold with 4 offers over asking price. Then bank come in and says no, the house it not worth that becouse you paid 95K for it just 3 months ago, never mind that there are 3 other ready and willing buyers for that home all well above what the bank is willing to allow.

Many of the new agents from the last few years are not even trying anymore and will soon be out of the industry. One county that I know the president of the board of realtors told me that they had set their budget up with expectations that almost 50% of the members would not renew when their licences expired.

I agree that it's not as bad as many people make it out to be. The cream has risen and will keep rising to the top in our industry, and as long as a licensee is committed to being part of that group, there's not a lot to worry about. So the statement that no one wins when more agents come into the business is false. Some agents are winning and winning big.

First of all, you think it would cost less if there were fewer agents? They do have supply and demand in Houston, right?

No, you didn't get $12,000 worth of work from the agent, but chances are first of all you may have paid 5%. And in the listing agreement you signed, it already said that 2.5% (or 50% of what you paid) would go to the cooperative broker. So to get your home sold, let's say you had twenty showings, and that for each one, an agent worked a total of four hours to get the lead and eight hours in total with the buyer, who may or may not have bought your house. So that's 12 hours times 20, or 240 hours. Now let's add in about three days of marketing, counselling you, entering the listing in the MLS for the listing agent. 264 hours. Now on the buyer's agent side, there's a cool 40 hours of paperwork, hassling with some incompetent out of area lender, letting your inspectors in, chasing down paperwork that isn't in the file, and general handholding. 304 hours.

So forget about the thousands of agents who were working hard to have buyers and failed, and the twenty other agents who didn't show your home but talked to a buyer about it. In direct labor you've received 304 hours of work to get your home sold, that you only paid if everyone was successful, at $32.89 per hour.

We charge 6% to sell a house. Now, if you were to go to work as a contractor or temporary employee, someone would bill you at double what they pay you. So those guys make 100% commissions. Horror of horrors. Redfin should do something.

You know what, if it's such a bad deal, sellers are free to sell it themselves. It's legal, and it happens all the time.

But it seems to me that if you really believed that I was so overpaid for so little work, you'd be doing my job.

I’m actually a bit surprised that this particular post ended up getting featured. Go figure!

Thanks for the comments. I’ll respond to a couple…

James: I agree with you that this is a message that some readers won’t like, but that’s ok – my point of view is that of the customer. However, there actually is not a lot in your comment that addresses anything I’ve written. As for your investment – if you bought an investment house and sold it for a profit then great – although not relevant to my point.

And that point is: the status quo benefits neither the average Realtor (who fights tooth and nail against the other 1.3 million other realtors out there and needs that 6% on deals they do close just to survive) nor does it benefit the consumer (who ends up subsidizing an inefficient and expensive industry). It’s an inefficient business model for an important industry, and that isn’t sustainable.

Nestor and Katerina: The NAR’s position on banks which you site in your comment is tough to defend. If Citibank and Chase get into real estate and offer poor customer service and questionable integrity then consumers will stay away. If their staff won’t go the extra mile then the banks won’t win customers. But I, as a customer would like to have that choice. Arguing that “we’re going to protect the consumer by making sure they can’t deal with companies that might offer bad service” is not reasonable. In my experience banks do a great job of commoditizing large volume, data intensive transactions – and that should make them reliable and efficient…and consequently, cheaper.

Nathan: I agree with your statement that “some agents are winning and winning big.” The current structure of the industry directly benefits that relatively small cadre of Realtors who are pulling 6% commissions in large volume. But this is bad for the majority of Realtors, and it’s certainly bad for the consumer which means it won’t be sustainable.

This post goes back to the adage that cheaper is always better. It's not. I like John's response, he's dead on target. And you miss James' point-the 'average Realtor' isn't fighting tooth and nail for anything and is out of the business inside of 18 months. Great agents do better in soft markets and intelligent consumers recognize their value. There's more to a successful transaction than finding a buyer.

John (sorry…missed you in my last post) Would it cost less if there were fewer agents? Yes, actually, it would. The current industry structure turns supply and demand on its head because it fights transparency, efficiency, innovation and competitive pricing. With so many agents each one over the course of the year spends too much time jockeying for business and too little time performing activities that directly benefit the consumer.

Thanks for your example, but unfortunately your math doesn’t jive with my experience. I’ve never had an experience buying or selling a house in which an agent showed the property twenty times and spent 12 hours with each prospect. Wow.

And from the customer’s perspective, it doesn’t matter that fifty percent of the commission goes to the cooperative broker. What matters is that 100% of the cost is borne by the buyer and the seller.

Note that I never said that real estate agents are “so overpaid for so little work” – that’s a statement that I’d never make because that’s not what I think. I think that agents do a tremendous amount of work, but unfortunately due to the industry’s current structure too little of that work directly benefits the consumer. It’s simply the cost of doing business which the consumer has to subsidize.

That’s a bad deal all around.

Thanks, Leigh, I like being dead on target. You're welcome to critique my comments any time. Where do I send the check. :)

In my humble opinion, I think we need major strengthening for educational requirements in order to hold a real estate license. One should at least have an undergraduate degree. The required amount of credits before testing needs to be at least doubled, if not tripled. The entry standards are way to low and NAR is the only entity that benefits when there is a glut of agents.

At the current time, there is ample business models out there that can offer lower commissions or even cash back to buyer and sellers, whether they are investors or not. One size does not fit all and there is a need for a full service, full commission broker.

I also think you left out that a good, trained agent can make an investor money on the buy, like I just did recently for one of my clients.

It's not just all about selling. Investing and flipping is not for everybody and most people who lose money or don't think they have made enough do so because of their own lack of experience. They get ripped off by their subs or over pay them, don't properly schedule or manage the work, don't have the connections they should, use hard money and receive bad financing. At the end of the day, it is always easy to get upset about the commission you have to pay the agent who sells your house.

I am surprised you did not mention the GOLDEN rule of investing: You make your money on the BUY!!!!

Whew! Christopher, you received some interesting responses to your posts. I have to agree 100% that we have too many people in this industry. Of course, with the slowdown in houseing, it should certainly make a difference as to how many renew their licenses.

Any product bought by consumers includes the business costs and other expenses of the business that it was bought from. Real estate isn't any different. Realtors, as any business person has the right to make a profit. Breaking even doesn't pay the bills or feed the family. A home owner using a licensed professional is always going to be more expensive than DIY. Just ask any licensed plumber or electrician.

David,

You have a point that I think Chris is missing. The 6% doesn't represent just that transaction, it's the profit you have to make to keep everything going. That's like saying the hour a lawyer spend in court wasn't worth the 5K you paid to retain them.

Chris you missed on this one, obviously you're not an agent, and maybe not much of a business man either. Businesses have to constantly attract new clients. It's a little known concept called growth. There's cost associated with running any business, and fixating on 6% and stating it in such a way that seems like one agent keeps it all isn't accurate.

Tech guys think their computer programs will do everything. What they forget is markets are inherently human and irrational. Many people who are much smarter than me have already proved this many times over. A system based on logic can replace the illogical behavior of human beings is a long way off. No different than saying the Internet was going to replace the stock broker.

Brian: Thanks for your comment. And my…we’re getting personal now! I actually think I’m a pretty fair businessman, but that’s besides the point…I’ll try to touch on a few things you bring up.

No: I didn’t miss David’s point, I just don’t agree with it.

Yes, all industries have overhead costs, and most industries have intermediaries who provide services (real estate agents in this case). But in efficient, transparent industries these costs go down over time and the value extracted by intermediaries gets squeezed. That is good for consumers. But in this particular industry this hasn’t happened for a variety of artificial reasons: monopolistic pricing power, control of data, lobbying for favorable regulation, and other steps.

Industries which operate in a transparent, free market are actually quite rational, contrary to what you state. I’m not sure what you meant by your stockbroker comment because it’s actually a great example. Stockbrokers have been almost completely dis-intermediated, as have travel agents. Ten years ago if you wanted to buy 500 shares of IBM you’d call a stock brokerage, where someone would pick up the phone, then they’d in turn call someone else and eventually your trade would get placed. All those people had to get paid! And their secretaries had to get paid! And their light bills and office rent had to get paid! Now the vast majority of folks go to E*Trade, Ameritrade, Schwab, Vanguard online, and pay $10 or $15 per trade. Having that option is great for consumers.

When this was first occurring the brokerages shouted that it would be financial suicide for the average American to take control of his own portfolio. Now it’s commonplace.

Note that brokerages haven't disappeared. There's still an important niche for stockbrokers - high net worth individuals, complex tax shelters, etc. And there will always be a niche for real estate agents as well. It just won't be large enough to keep 1.3 million agents busy (note: this is only NAR members and doesn't include all agents out there).

You’re right, David; I’m not an agent. I’m a customer. And customers are currently subsidizing an inefficient industry – one that benefits neither the consumer nor the average Realtor.

Whoa! Where is this coming from? In a market like this, sellers who pay an agent at settlement probably got there because an agent procurred a buyer and got the case to settlement. So what is the gripe? He might save the money for a commission by just not selling the property... Is that what sellers want?

Christopher,

Your argument that there are too many agents is correct. Flagler County, Florida was the fastest growing county two years in a row. At the peak of the market, we had about 1500 agents and only 800+ homes on the market. That's enough agents to staff an open house at every listing 7 days per week with each agent only working 5 days.

The rest of your post is flawed. Comparing 1973 households/agents to 2003 numbers ingores the fact that there is much more work involved in handling a transaction today than in 1973. More forms, more regulations, bigger houses with more gadgets and pools etc. to babysit for sellers. The larger percentage of second homes means the seller is less likely there to tend to things. The real estate industry is, by its nature, inefficient and complex. As long as sellers and buyers have options, which they do, the commission rate will find its own level.

Sorry, I wasn't logged in for my privious post so missed my A/R signature. Here it is.

Chris, I wasn't trying to get personal, I just don't think your argument holds water. Yes there are 1.3 million Realtors. You can take 80% of those out of the equation right off the bat. While the NAR appreciates their dues, they are not the ones doing business. So your Taxi cab comparison isn't accurate.

I do agree the way people shop for real estate has changed and agents are behind the curve as far as technology goes. Don't get down on the NAR for lobbying. So does every other industry out there. Including the banking industry you came from probably more so than most. There's more corruption in that industry, than anywhere. 2/3 of their profits come from fees. Please try to argue those are legitimate profits being made.

Monopolistic pricing power? I'm not sure what you mean by that. As a Realtor we present all offers to our sellers. The decision is always made by the buyer or seller. If you're referring to commissions, those are always negotiable. There are Walmart Models and Nordstroms models out there. Take your pick.

Control of Data? You can find information on any property you want. It's all public record. The MLS is a database that we paid to have built and fund to keep going. If you want access go get license, pay your dues, and ante up.

This is a gentle reminder issued to everyone here that talking commissions is very dangerous territory. Please see the following post on Talking Pricing.

All I can say is Wow! I sure am glad not all people believe we are overpaid and understand how the commission split works. They also believe that we can do a better job at selling, and don't forget marketing their property than they can, that is why they higher us and pay us to do so. The ones that want to save the money do so by selling it on their own.

I have spent over 12 hours with many clients...maybe you are just a person that makes quick decisions.

I can't recall when my doctor's or lawyer's fees have gone down?! Don't get me started on prescription costs!

Chris, there is a column in the San Francisco Chronicle called Moneybag by Arthur M. Louis. He has been complaining that commissions are completely out of line, even suggesting that the right number is 1%. According to him, many consumers agree. There are enough rumblings our there (including your blog), that I suspect, as you do, that changes will come. How this happens remains to be seen. I would like to think the market would weed out the agents that are below grade, and that market forces would dictate a change in the pricing structure. As you pointed out, this has already occured in certain industries.

Chris, this is a fine post. I've always had some issue with how commissions in Real Estate transactions are justified. For example, is selling a $400K home that much more difficult than selling a $300K home that it warrants an additional $6000 in commission? I'm not an agent, so I can't say, but I suspect that it isn't. Most of the arguements defending the status quo are poorly reasoned and supported; I tend to agree that at some point, there will be a major shift in how real estate transactions are conducted. Those agents that are agitated at the thought of change should consider this - most highly paid professionals in our economy are compensated for specialized knowledge, not for clerical duties like scheduling inspections, filling out forms, and being nice to people. If you're an expert in your market, and can provide real value in the areas of marketing and negotiations, you'll be fine.

I just have to disagree with you. Your post is mostly just regurgitated information from the main stream media. I don't see any real great defense of your examples "monopolistic pricing power, control of data, lobbying for favorable regulation".

1) Sellers set their price and buyers negotiate accordingly...no broker is pointing a gun to a sellers head to list or sell at a certain price.

2) Control of the data is the right of the listing broker and the seller. No government has the authority to tell a seller that they MUST give their listing to everyone in the free world. The demand for transparency is becoming ridiculous.

3) Lobbying exists in every avenue of business. Lawyers, doctors, the banks, mortgage brokers, etc all have lobby groups out their fighting for "favorable regulation". Please don't make is sound like a bad thing to have lobby groups out there. Someone is out there lobbying for you right now.

Nice to see you are also jumping on the bandwagon of the assumption that real estate agents will go the way of travel agents. Since when did travel agents have to be licensed and negotiate to get me a trip to Europe? When did they ever have to market my ticket to dealers in order to get me a trip? Oh, I remember now, they didn't.

Also, trying to lump investment brokerages in this category is also false. You say "Now the vast majority of folks go to E*Trade, Ameritrade, Schwab, Vanguard online, and pay $10 or $15 per trade." Could you please point me to your stats that verify this point, or are you just making an assumption? I have an investment portfolio ( and no, I am not rich), and I rely on a financial adviser and investment banker to help me make my decisions. We tried "doing it on our own", and since it wasn't our daily job, we sucked horribly at it and lost alot of money.

I'm also a consumer, but I'm not a dumb consumer. I don't ask my doctor to cut his rate and just give me basic services for my surgery, just to save a buck. Nor would you ask your lawyer to tell you how he will defend you, only to walk into a courtroom without him and do it yourself to save the fee.

As for banks in real estate, they are already when you consider REO properties. It's interesting to point out that banks already stipulate for their properties where the closing will be, what closing costs they will pay, that buyers cannot have contingencies, nor can they ask for any fixes as the properties are strictly "as-is". Some banks even stipulate that a buyer must be preapproved with them in order to have their offer considered! How is this helping the consumer? If banks are allowed to broker real estate on a daily basis, I shiver at the thought of how they will not be held to the same standard as real estate agents when it comes to the law and consumer protection.

Great post Christopher! I have to say I agree 100%.

I spend far too much competing against (and losing business to) the "friend", the "relative", the "spouse of a client", who happens to hold a real estate license, which licensee status appears not as part of a solid business plan, but as a hobby mentioned casually over brunch, at the country club, the church social whatever.

These lost clients will apologetically pay lip service to my outstanding ability, ethics, whatever, but for personal/political reasons choose a two-deal-a-year part-timer to handle this important transaction, rather than a professional. Aside from the statement this makes as to the general public's perception of our dispensable role, it reduces my number of potential transactions considerably, and increases my marketing costs. You reference 1.3 million REALTORS . . . I have seen the number of "licensees" (not just REALTORS), placed at somewhere over 2 million, making this congestion even worse!

That said, as my relatively new business picks up, and the field is narrowed by market forces, I am very seriously considering reducing my requested commission in line with the efficiencies that technology provides. If I don't have to rely on just 5 or 6 transactions a year to make a living, the need for a huge profit on each is reduced -- particularly if I'm working with trained and experienced agents who assist, rather than inexperienced novices who add to my work load.

The model is going to change, like it or not, and its the early acceptors and adaptors who are going to best survive the shift.

Chris, I don't know what to say.....So many things are not supported and some things are correct but spun to make them the way you want. The truth is results is what people want....nothing else. Your idea about standards reminds me of when the 60"s had a meeting to set barriers to entry. Educational issues are, in my estimation, key to success and proper representation. How this is established is up for grabs but I know one thing you and I will not be able to set the standards!

Marketing and real estate expertise is what people pay for, along with results. They pay for what I already know not what I am learning. Don Carter mentioned clerical duties, unfortunately some of the clerical duties in a contract can change a deal drastically. I have written in clauses in my clients favor that were overlooked by the other agents and buyers/sellers depending on the representation. These subtle little knowledge bits can be worth thousands if you are on the wrong side when something goes wrong!

Every industry has a glut of people come into it and go out depending on the demand cycle. Look at builders when there is a boom everyone is a builder, when the bust come they go do something else. Oil drillers have the same thing.....feast or famine. Right now it is feast, and on us!

You do not think the local boards also improve cash flow with more agents? NAR is not the only ones. Look at all the classes. The list goes on. You need to wipe your eyes and look again. Banks and mortgage companies are already in the business along with insurance companies. You may not see real estate 10 years from now the same as it is today but everyone coming in has another reason to be here. Do you think banks want to be in real estate because of loans? Insurance companies because of insurance....the fee may and I say may go down in one place an up in another. At least your post provoked a cross section of comment so I applaud you for that.

Actually it would cost more if there were fewer agents and here is why.

Even if all of the agents who did no deals last year went away, and say half of the agents who did one or two deals went away. The agents who are left are not going to discount just because they are doing more deals. Just the other way around they will walk away from deals where the seller demands discounts.

Wow...lots of feedback on this post and lots of complex issues. I'll try to touch on some of the comments made...

Janet, Don, Trent: Thanks for your comments. As you can see I've had to put my asbestos underwear on.

Toby: Your position is quite illustrative, actually. You state selling a house takes a lot more effort now than in 1973 - that there is more work handling the transaction, managing forms, etc. And that's despite the fact that the PC that you're using right now to read this post is a thousand times more powerful than the one that NASA used to manage the nation's space program in 1973.

This is a remarkable statement. Every other industry has gone in exactly the opposite direction - completing transactions is easier, cheaper, and more efficient. Real estate hasn't evolved, it's actually regressed! The number of salesmen has rocketed three times faster than the market they serve - twice as many agents chasing 60% more households. It's supposed to be the other way around. This is the very definition of inefficiency in an industry.

So I don't necessarily disagree with your statement that getting a deal done is more onerous now than in '73 - that's just evidence that technology has left this industry in the dust. Consumers, however, are starting to notice.

Brian: On lobbying - yeah all industries do it, but some do it well and some industries do it disastrously badly.

Real Estate isn't the only one who does it badly, though. Look at the shipping industry - in order to "protect" itself from foreign competition the industry successfully lobbied for and maintained Jones Act which mandates U.S. built ships for certain point-to-point trades within U.S. waters. The result: shipbuilders in Europe and Asia have competed in a free global market and are now lean, mean, and efficient, whereas the industry in the U.S. is a shadow of it's former self. Real Estate in the U.S. has achieved a similar result - as Toby points out it is as creaky and inefficient as it was back in 1973. The NAR, based on their lobbying "success", has set the industry to be crushed by Citibank, Zillow, Chase, Google, or whoever ends up coming up with the transforming technology.

On banking: it's the most brutally competitive industry out there. To a fault, actually - the banks were so busy bending over backwards lending money to borrowers with subprime credit that they've gotten themselves in trouble. Some minor hiccups notwithstanding it appears that the industry will avoid regulating itself out of this problem. Bravo - let the bad banks fail and the rest learn from their example. I can't speak for you, but I know that I've seen my fees steadily decline, while the options available to me have increased. Banking is a great example of an industry that uses technology to accomplish more for the consumer for less money utilizing fewer employees and lower overhead.

Pricing power: I wasn't referring to some scheme to control housing prices. I was referring to the industry's dogged defense of the current commission structure (the structure that Caleb notes that we should be careful about discussing in a public forum!) such as anti-rebate rules and other barriers to new business models.

Control of data: This is the anti-trust issue that we're all aware of - the ongoing issue about the use of rules and legislative hurdles to restrict the use of critical data for certain agencies that don't follow the "right" business model.

Jennifer: Online trading: hard to find hard data on this but as far back as 1999 the SEC was reporting that 25% of trades on the NYSE and the NASDAQ were via online brokerages - and note that the total includes includes the massive volumes traded by pension funds and other major institutional investors so it under-represents the number of households. And this was eight years ago when the online industry was just four years old.

Not sure how old you are but I know that I remember the E.F. Hutton ads from when I was growing up. No one is listening anymore; they're bankrupt.

Monopolistic pricing: You state that "No government has the authority to tell a seller that they MUST give their listing to everyone in the free world". Try telling this to, say, Microsoft. Once something becomes a dominant in a given marketplace - say Windows operating system or MLS data - the government tends to step in to ensure that access is not being used in such a way that it restricts competition. This issue has yet to be resolved - but some local MLS systems have seen the handwriting on the wall and started taking preemptive steps. Good for them!

Banks in Real Estate: True, they're in REO's. That's exactly the business they don't want to be in; an REO is a loan gone wrong. What banks want to do is market houses. What I would like, as the customer, is the right to buy a house from a bank. If their service is bad or their rates too high I'll go back to representing myself. Or...use a Realtor (as I sometimes do).

Gary: Sorry if you think I'm just regurgitating stuff I've read from USA Today or some other media outlet. Not the case, though - these are my own opinions based on experiences in this industry and others. And actually I agree with you that there are a lot of other entities besides the NAR with their finger in the pot (local boards, schools, etc). This doesn't help things.

Chris-

I would like up-to-date data. I worked for Edward Jones in 1998-2000, and the stats you mention from the SEC in 1999 were at the height of the dot.com mania and online services were all the rage. I wonder what they were like after the market crash? In parallel, selling FSBO was all the rage two years ago, but with the market crashing here in the Twin Cities, FSBO listings have decreased and more sellers have hired an agent to market their homes.

The government actually hurt the consumer where Microsoft is concerned. Shortly after the Microsoft deal, we bought a new computer. Because Microsoft was halted from adding their Office bundle to the available software, it wasn't included with our computer. We would have to pay upwards of $600 more dollars for those systems, but we didn't have the money. So now I have a computer without Excel, Microsoft Word, etc. But now that time has passed since the governments meddling, you can now once again get those options automatically with your computer. A huge benefit to the consumer.

My father worked for AT&T at 18 and saw it broken up into the Baby Bells. Over his 30 years working as a cable splicer, he saw it slowly decline to the point of non existence because the government felt is was better to "offer more competition" at the expense of AT&T, even if it meant eventual financial ruin. Once the government lightened up on regulating the telecom industry, guess what, AT&T started rebuilding itself. Now there are almost no BabyBells left, Cingular, Ameritech, SBC...they are all now once again AT&T. This is the perfect example of how the government should stop meddling in business and let the free market handle itself. If the consumer wants a change, then it will happen all on its own. We don't need the government stepping in and making the change for us....they always mess things up. Just take a look at the United States Postal Service and the airlines...both are subsidized by the government and never make a profit.

From the governments history of failure of regualting industries, I can only see bad things on the horizon for the real estate industry should the government continue to hide itself under the guise of "benefit for the consumer".

Its a tough call. In my narrow view I see ebay and craigslist as key forces that may topple traditional retail real estate brokerage. However, when working in unique situations such as foreclosure, preforeclosure, and REO transactions I see a need for agents/brokers with high ethics standards, specific training, and experience. I do sense a huge change coming...in NJ their are way to many agents all selling the same bag of goods...its hard to be differant when 100 other agents in your town are making the same attempt.

Anthony

jerseypreforeclosures1977@gmail.com

Jennifer

I'm not an anti-trust expert, but my understanding of the DOJ's anti-trust case against Microsoft was that it specifically prohibited bundling the Explorer browser in such a way that it give an unfair competitive advantage against other browsers like Netscape (firefox wasn't around yet). Wouldn't have kept you from buying the Microsoft Office suite of products - Word, Excel, Powerpoint, etc. I've always had these bundled.

Doesn't really matter, though, because I'm not for government intervention, as a rule. Banks, for example - I think that legislation keeping them out of the business is bad for the consumer. Those are regulations that need to disappear; let the market decide.

As for MLS - it very well might fail the DOJ's monopoly test over time. But that might be a moot point too...once a transformative technology steps up more local MLS's might very well take the path that the Houston MLS has taken and preemptively offer open access through some sort of partnership. We'll see.

Great Post!

Not that I agree with you LOL

One thing I do want to bring up is the banks in real estate issue. One of the biggest issues that REALTORS has with banks in real estate is states regulatory rights will not apply. Will the bank have to give Agency disclosure? Will banks have to follow the same rules as agents? Will the persons in the banks even have to get licensed to do the work?

That is my major concern.

But I also echo some of what I have heard on here: More education should be required to get into real estate. I don't agree that it should be an undergraduate degree (probably because I don't personally appreciate what I consider to be the elitist university system we have here in the US). I think apprenticeship is more the way, with graduated successes demanded, like in some other fields. Make the education requirements involved there more demanding. And at the beginning of course. Way too easy to get into the field and not enough oversight or responsibility required of the brokers.

I will seriously think about your issues with NAR too. It probably has grown too large. And too much focused on its own growth. It may be operating like another bureaucracy, where success is measured in growth and dollars instead of other things. Very provoking.

Thanks for the post, it is good to hear your arguments from someone who understands some of the demands on the people in the field.

JUL

2007

Chris,

I have to hand it to you. You sure know how to hold your own. I know I've been critical of this post and I don't agree with you. Your post was well thought out and presents a good argument. As an Agnet countering these points is what I do. I have to show people value in what I do. Some will see it and some won't. I've been on both sides, the agent and FSBO, I've had good agents and bad. A good agent is the most valuable part in a transaction.

Chris - Like me, when you feel like you need a little excitement, you rattle the cages of the agents, who are, for the most part, either clueless, not able to do battle with a man of your intellect, or who simply get all their talking points from the industry.

I've been licensed since Nixon's first year in office, and I've seen all the different economic cycles and how they (predictably) affect the industry. This discussion has been going on since Moses' son died. :) The only difference is the internet is now involved, making more and more info available to the masses. It also allows agents to voice their takes on this subject, which at times borders on a standup routine.

Who cares if the banks sell real estate? They'll screw the pooch anyway. There current business model will not play well with homeowners. They'll just be another player out there -- and I'm willing to let the chips fall where they may.

The amount of the commission is a direct result of the free market. The public currently has an incredible menu from which to choose. To suggest otherwise is either ignorant or for fun. I KNOW you're anything but ignorant, so I"m opting for fun on this one. They can go to anyone they want a pay from below 1% up to as much as 8% in any market in the country. Any owner can, within a couple hours, set as many listing appointments as they wish, and all with agents charging in the range mentioned. So saying home owners don't currently have choice is incorrect to say the least.

As an investor I do however understand your irritation with most agents, as most of them couldn't find their butts with a map, two helpers, and a GPS when it comes to helping guys like you. Why? Because you know exactly what you're doing, and if they studied real estate investment full time for a year, they wouldn't know what you've forgotten about the subject. :) I feel your pain.

NAR and the MLS? They're a private operation and how they distribute their data is nobody's business. If anyone wants to compete the field is open, and you're welcome. It's not anything like Microsoft. I predict this MLS thing will evolve anyway, like it has been for the last 20 years. How it might end up is anyone's guess.

Nobody really addresses the 900 pound twin gorillas in the corner.

1. People pay for value perceived - period. They've complained about 6% since I was first licensed, and even with massive alternatives available the vast majority still chooses, FREELY, full service brokerages.

2. Buyers/Sellers have a problem paying for this, and they always have. Tough. Do it yourselves, but don't whine about how you haven't been able to, by artificial means, i.e. gov't force, make agents work for less. Stop using all the arguments about 'fair' and 'too much' etc. because it just doesn't wash.

This discussion comes up about every decade or so and it goes away because folks figure out whining can't control a free market.

Again Chris, I totally undersatand where you're coming from, and in fact feel your pain. When it comes to buying, you no doubt have had to do the heavy lifting. When you sell, and IF you use an agent, I can't imagine you're paying them 6% with the way you approach things.

The real estate industry will survive just fine, and will continue to charge more than people like to pay. It's a fair deal or folks wouldn't be choosing the higher commissions for the last 40 years.

Love your stuff Chris. And for the record, I do these kind of blogs for fun too. :)

Mr. Brown!

I was wondering when you'd stop by!

Well there's a lot that you and I agree on here, but I have a slightly different view on a couple of things.

Incredible menu of options for the consumer: Hmmmmm.....well speaking as a consumer my menu seems pretty thin, actually. With the current industry structure a decent Realtor basically has to charge 6%. After she hands half of it to the buying agent and half of what's left over to her brokerage she barely has enough left over to pay for all the time and effort she's going to spend trolling leads for her next sale in competition w/ the other 1.3 million Realtors out there.

Sure, I can get some bozo to help me for 1%, but I'll spend more time managing him than I would have spent just doing the deal myself.

So technically you're right: there is a whole smorgasbord of options out there, but unfortunately they're all pretty lousy!

The service you offer, by the way, is quite different than what the average agent offers, so much of this doesn't really apply to you personally. When I fly to California I go to Expedia.com or Continental.com, but when I went on my honeymoon I went straight to a travel agent 'cause we went to Fiji and I didn't want to botch the plans up. A couple buying a single family starter home = flying to California. Buying an apartment building as an investment = Fiji. You, and other knowledgeable agents who represent investors will never have a problem.

Gazing into my crystal ball (that's a disclaimer, by the way) I see a big shift ahead. As other industries have moved forward this one has regressed (see Toby Tobin's comment above). But as we know past performance is no guarantee of future results. I see a lot of catalysts in the wings that have the potential to turn this into a more efficient, more transparent industry - which will be beneficial both for the consumer and for those Realtors who are evolve along with the consumer's demands, either by specializing or adopting new models. Those who are busy digging their foxholes as per NAR guidelines will be hanging out with out-of-work travel agents and stockbrokers.

I have been hearing "I see a big shift ahead" since 2001...If I'm correct, its currently 2007. I have

seen many discount brokerages come and go, while the old-line pros are still around, advertising in the

same papers. Only one comment out of the many here make sense. Indeed, the top 5% ARE the RE

business. The other 95% are wannabe's, with essentially no impact, after they sell uncle joe's house.

BTW, when I grew up in the 70's RE was for housewives and retirees. C-21 offices resembled a PTA

meeting more than a hot industry. How and when did a sleepy, post-menopause avocation for bored

housewives become a sexy, hot industry? Honestly, I think if we went back to the PTA atmosphere,

and all the outsourced folks under 45, male and female, were able to find decent employment as readily

as they were able to in the 7o's, we would ALL be better off! I miss the days when way past menopause

agents named Mabel and Ethyl with craggy voices and hair on their upper lips ruled the local real estate

roost. Let's bring the good paying jobs back from India and China, and put Ethyl back in the RE office!

Chris,

Great post! I'm an agent who loves using statistical analysis. I do agree that there are too many agents and that a new business model is coming. A couple of points:

The number of Realtors have grown much faster than households, but that's partially mitigated since home sales growth has outpaced household growth. In other words, people are moviing more often that they used to. That said, most of the Realtor growth has occurred in the last 8 years, and sales growth has dropped off in the last two.

The issue with keeping banks out of the industry is that they have unfair advantages over all other industries. One is the FDIC insurance of $100,000 per depositor. (not to mention that the gov't would probably bail them out in an emergency anyway, ie. S & L crisis of the 80's). The other is that banks can create money just by making a loan, and earn interest on the newly created money. We can't do that. For these reasons. banks can just do banking.

The internet did dis-intermediate stock brokers and travel agents, but real estate is a bit more complicated for most people (not you of course). In Minneapolis/St. Paul, we adopted broker reciprosity in 1998, giving up MLS data to the public. This hasn't stopped or even slowed customers from coming to us. Information is everywhere. It's the expert that knows how to organize, interpret, and present the information in a meaningful way.

Excellent post, changes are coming.

Christopher,

Last time I checked this was a free country. If you want to sell your own house then go for it. If you want to purchase your own house without a Realtor then go for it. No one is stopping you are they?

Realtors bring a lot to the table to help people to reach their real estate goals. Not everyone has the time, energy and know how to get a house sold. There is one thing I was taught from a very young age... You do what you do best and let them do what they do best. This goes for anything. Do you grow your own food or do you leave that up to the experts? Do you build your own house or do you leave that up to the experts? Do you work on the engine of your car or do you leave up to the experts? Do these experts do anything that anyone couldn't do? NO, because it isn't cost effective or they don't have the know how or just don't want to be burdened. Do any of these experts make a profit? Of course they do or they wouldn't do it.

On the other hand if a different business model works then let the market forces work, but no one will be working for free. This I can guarantee!

JUL

2007

Christopher, Great post and great comment thread! Congrats for the featured post. I don't agree that 6% is too much for what many Realtors do, much to the contrary, when listed properly, the agent actually earns the seller more than they would net alone or with a limited service firm. But when NOT done properly, I agree that it is too much and this is what gives our industry. I have no problem with varied prices for varied services, but neither full service, a la carte or discount providers should sell to their clients more than what they really do an then under service the listing. Hopefully our challeneged market will wean out all agents, regardless of model, who does less than they promise.

Chris - You know my feelings from EquityScout. And I love the responses here. Pretty entertaining. Actually, it has made my last half of an hour reading them all. Of course, you also know I'm allied with Jeff Brown and his thought process...he's just better at talking than me!

Take care. I imagine you got the response you were looking for! :)

AUG

2007

Hello! Has everyone forgotten that everything is negotiable. If you're a seller and you paid full commission, shame on you. I'm an experienced agent and I often cut my commission and/or provide rebates. I'd much rather make something than nothing. And, I don't undercut my services either. I also give back to the buyers I assist. My "thank you" gift? I pay for their home inspection. How's my business doing? Quite well, thank you.

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Christopher Smith

Houston, TX

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