The current business model for selling real estate needs to change. The collapse of the housing bubble may be what causes a major shift in the way real estate is sold in the United States.
Today’s featured property was purchased by us at auction. IndyMac,
which is now owned by the US taxpayer, bought this property, and now
they are trying to get some of their money back.
Asking Price: $631,900
Address: 4 Rockrose Way, Irvine, CA 92612
{book}
The End — The Doors
Of our elaborate plans, the end
Of everything that stands, the end
I got out my crystal ball this weekend and gazed into the future of
the residential real estate sales business. I foresee the end of the 6%
sales commission model.
The 6% Business Model
When a seller signs a listing agreement with a realtor, the
commission is typically 6%. This commission is split between the
buyer’s broker and the listing broker. Each one gets 3%. This
commission is often further split between the broker and the
salesperson. Each one gets 1.5%. Each real estate commission could
potentially get split into 4 pieces each representing 1.5% of the sales
price. This structure supports a great many people — too many.
The 6% sales commission business model only survives for two
reasons: 1. The National Association of Realtors (NAR) lobbies every
level of government to maintain their advantage, and 2. The NAR
controls market data through the Multiple Listing Service (MLS).
It is hard to say what the future is for the NAR lobbying efforts.
I, for one, have been suggesting that the NAR be regulated by the
Securities and Exchange Commission (SEC) due to their propensity to
routinely make false statements regarding the financial performance of
housing as an investment class. When people stop to examine the role of
the NAR in the inflation of the housing bubble, the power of their
lobby may be pushed back by public opinion. Of course, they were just
as responsible for helping inflate the coastal bubble of the late 80s,
and they managed to convince people the deflation of the bubble was due
to the economy. The realtors were blameless, of course. Perhaps they
will get lucky and avoid responsibility again in the eyes of the public.
The big problem for the NAR and their business model is the
free-flow of information on the internet. The internet is taking away
the exclusivity of their information. Eventually, this factor alone
would lead to the death of this sales model. Competition for
commissions among all those with data access who are not subject to the
cartel arrangement of the NAR would cause commissions to fall.
We already see this among the buyer’s brokerages like Redfin who are
offering 1% buy-side sales commissions instead of the usual 3%. Redfin
and other discount, buy-side brokerages like them have already chipped
away at half the commission structure. The only thing missing is a new
business model to chip away at the sell-side of the equation. That is
where today’s post comes in.
Problems with the Current Model
In the 6% business model, the realtor is totally responsible for the
sales and marketing effort. Any staging, photography, advertising or
other resources devoted to the marketing effort comes out of the
realtor’s pocket. If there is no transaction, the realtor does not get
paid, and any sums spent in marketing efforts is gone. There is no risk
to the seller in this business model as the risk of a sale resulting in
a commission is entirely on the realtor.
This creates a number of incentives that do not work very well.
Since all the financial risk is on the realtor, their incentive is
to do as little as possible. Even though there is a fiduciary
responsibility to market the property, realtors often do nothing that
requires an outlay of money. They will take their own poorly-staged
photographs and write the awful descriptions I lampoon on a daily
basis. They will sign up for whatever free marketing is available, and
do little else that costs them money.
Realtors are not entirely to blame for this behavior. Since owners
have no risk, and since they are not personally invested in the
process, they often behave in ways that inhibit a transaction from
taking place.
Owners will list their homes for sale purely for vanity. They put a
WTF asking price on the property so they can brag about how much it is
worth.
Owners are sometimes very greedy. They put a WTF asking price on the
property to make sure they extract every last penny from the sale.
Prices outside the realm of possibility simply waste everyone’s time —
and the realtor’s marketing dollars.
Owners do not always stage the property well or keep it clean for
showings. If a realtor has to show a pigsty, it does not help
facilitate a sale.
Owners are not always emotionally ready to sell their property. This
often causes them to behave in ways that prevent a sale without their
even realizing it. Owners may know they need to sell, so they list a
property, but unless they want to sell, it will not happen.
The Pay for Marketing Model
The business model I propose changes these incentives. It would have the following characteristics:
- Sellers contract with realtors for marketing services.
- A 1% commission is paid to the listing agent if there is a sale.
- The buy-side commission is set by the seller ranging from 1% on up.
Contracting between the potential seller and the listing agent takes
the risk away from realtors and compensates them for their marketing
efforts, whether or not a sale occurs. It changes the mindset
of sellers. Once a seller starts spending money to sell their house,
they are far more motivated and committed to completing the transaction.
There is a 1% sell-side commission to provide additional incentive
for the realtor to perform their marketing and sales duties well. It is
nice to know they are making enough to cover their expenses and make a
few bucks through the marketing program, but the commission structure
is still necessary to motivate them properly.
The seller also gets to determine the buy-side commission. A typical
commission would be 1% similar to what Redfin makes on its buy-side
activities. However, if the seller is particularly motivated, they can
increase the buy-side commission to attract more attention to their
listing.
How It Works
Can you picture what will be
So limitless and free
The business model of a consultant is fairly simple: you write a
scope of work detailing what will be done, and you list the deliverable
products you will produce. The purchaser of these services agrees to
pay for these services as work proceeds and deliverables are produced.
If sell-side realtors embrace a marketing consultant business model,
with a 1% sales commission incentive bonus, they would have limited
risk of spending money without getting paid (every consultant has this
risk), they would not be starving to death in the lean times, and they
have some upside potential if they do the marketing job well enough to
make a sale happen. The advantage to sellers is obvious: a 1%
commission plus direct marketing expenses is much less expensive than
paying a full 3% on the listing side of the commission structure. It is
truly a win-win.
A good realtor or property marketing company can devise a number of
marketing plans to suit any budget. The minimum plan would contain
whatever services the realtor felt was essential to facilitate a home
sale. It is a waste of time to do less than this. Each realtor or
marketing company can devise their own plans and cost structure. They
could even keep track on statistics on each plan’s success (did it
sell, and how fast). Since the focus is on tasks and deliverables, the
seller of the property who is contracting for these services can easily
verify if the services are actually being performed. As stated
previously, the seller pays for these services whether or not a sale
occurs.
For instance, a realtor may have a minimum package that is one step
above a for-sale-by-owner effort. The property can be photographed by
the realtor who also writes the description and loads it into the MLS.
For an extra $1,000 the property can be professionally staged and
photographed, and a professional copywriter can write a description.
For more money, the property can be included in various real estate
advertising publications. I think you get the idea. A full menu of
possible marketing possibilities can be put together into packages or
sold to the property seller a-la-carte.
The savings for the seller would be enormous. For example, the
typical 6% commission on a $500,000 property is $30,000. This comes
right out of the seller’s pocket at the closing table. If the seller
were to contract with a realtor for $2,500 in direct marketing (which
would buy a lot of marketing), a 1% sell-side commission, and a 1%
buy-side commission, the seller would be spending $2,500 trying to
facilitate the sale (a motivating risk to the seller) and $10,000 in
commissions ($5,000 to the listing, sell-side broker, and $5,000 to the
buy-side broker). Instead of costing $30,000, the sale costs the seller
$12,500. That is a 59% reduction in cost to the seller.
{book}
There will be resistance to this plan on the part of some realtors
who would prefer to continue to get 3%-6% for doing little or nothing.
Those that have been enjoying the free ride will have the most to lose.
However, this has not stopped Redfin from taking 2/3 of the commission
out of the buy-side of the transaction. If a person or organization
with vision, good marketing skills, and a basic understanding of the
consulting business model were to go after the sell-side, I don’t think
there is much that would stop them.
I am not a marketing expert, so I am not the one to do it, but
perhaps one of the readers of this blog is. I hope someone does this —
at least by the time I am a seller again…
This is the end
Beautiful friend
This is the end
Today’s featured property was purchased by us at auction. IndyMac,
which is now owned by the US taxpayer, bought this property, and now
they are trying to get some of their money back.
Asking Price: $631,900
Income Requirement: $157,975
Downpayment Needed: $126,380
Monthly Equity Burn: $5,265
Purchase Price: $870,000
Purchase Date: 12/20/2006
Address: 4 Rockrose Way, Irvine, CA 92612
| Beds: | 4 |
| Baths: | 3 |
| Sq. Ft.: | 2,500 |
| $/Sq. Ft.: | $253 |
| Lot Size: | 3,328
Sq. Ft. |
| Property Type: | Single Family Residence |
| Style: | Traditional |
| Year Built: | 1966 |
| Stories: | 2 |
| Area: | University Park |
| County: | Orange |
| MLS#: | P672478 |
| Source: | SoCalMLS |
| Status: | Active |
| On Redfin: | 3 days |
 Fixer-upper
|
|
bathrooms. tile and carpet flooring. Good size living room with
fireplace. Oak kitchen cabinets. Huge master bedroom with fireplace.
Enclosed den. Direct garage access. Subject property is being sold in
its as is condition without any warranties expressed or implied.
Lately, I have been trying to look at properties as if their prices were approaching reality. Even with the big discount, this property is still grossly overpriced. I might become interested at $420,000, but at $631,000… not.
This property was purchased on 12/20/2006 for $870,000. The owner used a $696,000 first mortgage, a $130,500 second mortgage, and a $43,500 downpayment. The owner went into default, and the property was purchased by INDYMAC FEDERAL BANK FSB on 12/10/2008 for $552,758. That sale represents a 37% drop from the peak.
If this property sells for its asking price, and if a 6% commission is paid, the total loss on the property will be $276,014. I, you and every US taxpayer will lose $232,514. The original owner lost $43,500.
{book}
This is the end
Beautiful friend
This is the end
My only friend, the end
Of our elaborate plans, the end
Of everything that stands, the end
No safety or surprise, the end
Ill never look into your eyes…again
Can you picture what will be
So limitless and free
Desperately in need…of some…strangers hand
In a…desperate land
Lost in a roman…wilderness of pain
And all the children are insane
All the children are insane
Waiting for the summer rain, yeah
Theres danger on the edge of town
Ride the kings highway, baby
Weird scenes inside the gold mine
Ride the highway west, baby
The End — The Doors
I’m not like them
Who`ll Stop The Rain