patrick.net

I heard that this is how it is done in Canada.

Imagine that there are no stock brokers. Nobody to collect fees, and everything is handled via a simple electronic exchange of buying and selling stocks. An entire demographic of highly paid professionals is removed from the equation of growing wealth.

It's a wonderful system for people who educate themselves about the stock market and track it daily. But realistically, not everyone is that astute. You pay a broker to know the stock market and the relative risks of various investments. You pay a real estate agent to know the area, the neighborhoods, the builders and impending changes to the local environment.

To participate on this board, you have to have studied the housing market far deeper than a casual observer. And thus you are far more educated about housing than most people, which is why an agent-less system seems like an excellent idea. If you know as much as a realtor, then you really do only need a real estate lawyer...

I think it is going to happen by itself Patrick. Like travel agents, modern technologies are disrupting the normal business models of realtors. Don't be surprised if in the next couple of years you don't see low cost preparer type firms geared solely to the actual lower value service side such as arranging inspections, and explaining the contract options.

This is a great topic. Please also post to LinedIn.com Q&A section.

There was a PDF white paper listed here once demonstrating a lot of efficiencies from the application of IT to RE transactions also.

The thing is that you will always need a solicitor or otherwise conduct due diligence on the transfer of title, plus performing inspections, etc, because it is a buyer beware system. However, the agent takes a 3% 'premium' payment for supposedly drawing together a pool of potential buyers, through the use of advertising, and thereby supposedly getting the highest possible market price for the property on behalf of the vendor. Supposedly.

(The very notion of land use and title appears to come from the early days of intensive horticulture, where plots were marked out and farmed for the first time, then leading into the complexities of exchange of title and value we know today.)

With apologies to W. Shakespeare, the Duke of York, and Dick the butcher:

Dick: The first thing we do, let's kill all the Realtorsâ„¢.

Cade: Nay, that I mean to do. Is not this a lamentable thing, that of the skin of an innocent lamb should be made parchment, being scribbled o'er, should undo a man. Some say the bee stings; but I say, "tis the bee's wax: for I did but seal once to a thing, and I was never mine own man since."

Clearly making reference to an exchange of contracts and a mortgage...

The problem we face is not fees. I am more than happy to pay tens of thousands to an honest agent who handles my biggest purchase decision more professionally than I can ever do.

The biggest problem is the base price. Shaving off tens of thousands of agent fee is just not enough to compensate for the ridiculous transaction price which in turn will lock me in a ridiculous tax base till eternity.

If the market comes down 50% in nominal price, I am willing to double the agency fee for a qualified one. If the price stays where it is today, I won't move even if the agency fee is 0.

While the Internet is in the process of radically reshaping the process of buying and selling homes, the analogy to travel-agents is wrong. The market for houses will never be as efficient as the market for air travel. Air travel is marked by many aspects of a perfectly competitive market. Most importantly, airlines offering identical flights are almost identical substitutes. Houses will never be anything near identical substitutes. There will always be a large amount of asymmetrical information in a house transaction. This is where agency becomes valuable.

I suspect the Internet will continue to reduce search costs, and will enable buyers in a house transaction to act either without a buyer-agent or with a new breed of buyer-agency firm that provides discount services. Eventually, buyer-agents may be little more than fixed-fee process agents. They will not earn a percentage of the transaction.

But seller-agents will continue to be necessary for a long time. Over the long run they will also experience downward price pressure. Maybe, given enough time, they'll also lose the ability to command a percentage of the transaction. But I doubt it. When I sell an old car on consignment I still am happy to pay a percentage (or a fixed fee computed largely based on expected price) to have someone else do the dirty work of selling. I suspect it will become more realistic for people to sell their house themselves, much like many people sell their own cars. But there is enough real work associated with the transaction that most people will find value in having someone else do the work for them.

It's my position that buyer-agents are already redundant and pointless. Not only do they add no value to the buyer, they are a negative to the buyer. Their job is to "sell the transaction" to the buyer, which most often means they're aligned with the seller. They do not negotiate in good faith on behalf of the buyer. They endeavor to execute the transaction for their own profit motive. All the rest of their services are little more than form-filling and box-ticking.

The same could be said of seller-agents, but there is a difference. The actual home seller has control of the asset in question, and they ultimately control the asset's price. By trying to chase a transaction the seller-agent is not nearly as misaligned with the seller's interests. If the seller-agent can cause a sale to happen at a price acceptable to the seller, they have added value and earned their commission.

I expect in the short-run, seller-agents will actually *increase* their cut of the transaction as buyer-agency changes into a simple service.

Aren't agents in the UK fixed-fee?

It may not be that agents provide an unnecessary function but that they get paid too much to do too little. The buying/selling process can be much less expensive and much more efficient, as I learned when living in Sweden.

Before we moved back to the US earlier this year, we quickly and easily sold our house, receiving a fantastic service and paying "only" 2% in the process. From the date we contacted an agent to the date that we signed our contract took just over one week. It took just a days to get the house listed and have great digital photos and sales specs posted on the single website that serves the entire country (granted it's the size of California w/ only 9 million people). Less than a week later the agent held a single showing, meaning that we only had to get the house ready to show once. From there, getting to contract works like an auction: interested buyers submit bids, negotiations take place (closing date being the main issue) and people sign a simple, standardized contract.

The agent performs all legal functions - no lawyers for buyer or seller or mortgage provider and no title company. Everything is regulated, which in this case keeps costs down and increases transparency. An inspection is required, giving buyers the opportunity to renegotiate if something turns up. Otherwise it's all very straightforward.

Even the closing, which we didn't attend, takes less than a half hour. Typicaly taking place at the buyer's bank, you have to sign a few papers (very few) after which the banker leaves for ~10 minutes, coming back to confirm that the money has been transferred and the sale is complete. We walked out (figuratively, in this case) with the agreed sale price less 2%.

It's only slightly more complex for the buyer but has to pay for the inspection. And the mortgage providers do not (maybe cannot) concoct complex deals with underwriting fees, origination fees, etc. Even in a country that small the market is quite competitive, in large part because everything is so transparent, and your rate is your rate - everything included.

Granted, you have to set a reasonable price, and there's some conflict of interest on the agent's part. They tell you what they think your house is worth, based (again) on highly transparent market prices. To some degree the commission they quote is based on the price at which you decide to list. If we had decided to ask for a price 10% higher than their recommendation, they might even have turned away the listing. But they provide good information for their recommendation.

I came away very satisfied, feeling that we'd benefited from a fair, transparent, efficient and low-cost real estate market.

No Used Real Estate Salespeople is a great idea. I think it is also within the realm of possibility. A website that is marketed throughout the country with in-house $500 dollar a transaction lawyers could do the trick. Patrick's idea could work but he need much more publicity and an in house lawyer to start it off. You would need nationwide TV commercials, billboards, and radio ads. This would take a lot of money to kick off, but I think it would work in the long run. There are a few web sites out there already, but they are limited to a few big cities and have virtually no advertising. Ebay has some real estate, but Ebay is not geared toward real estate and their search functions make it difficult to narrow down to a neighborhood and exact type of house people want.

A similar idea, but probably not in the realm of possibility:

I have often wondered why Federal employees and military personnel pay federal income tax. Why don't they reduce their salaries by 30% or so, and not tax them. They could then reduce IRS staffing as well as all the accountants and HRM people that are paid to calculate and withhold the tax. States that collect income tax could do this with their employees too.

DennisN,

I believe some of the articles SFWoman used to post referenced UK "estate agents". I got the impression that while they openly engage in high pressure sales tactics, exercise inappropriate influence over appraisers and have no qualms whatsoever placing people in homes they can never afford... they are on a 1% compensation model.

So there's nothing wrong with their system. :)

chesterview,

If only... if only.

Malcolm> Don't count the real estate agents just yet. The travel agents are a good example, although travel sites weakened the Travel Agents hold on the travel market, those that adapted to the changed business environment are coming back stronger than as ever. Those real estate agents that can adapt themselves will thrive. And those that resist change will disappear.

Or they have morphed to becoming the customer service reps at Expedia. Sometimes you do need a live person, and me personally, I'd like advice on planning trips so it would be nice to have a long term relationship with a travel agent as opposed to the purely transactional interface online.

OO Says:
"If the market comes down 50% in nominal price, I am willing to double the agency fee for a qualified one. "

That sort of happened but backwards. As prices more than doubled it became quite easy to find agents for half price. Most people who give it any effort at all can craft a way to sell for under 4% as opposed to the traditional 6%.

With technology it is merely a matter of time. The public perception of agents is not positive after the run up in prices over the last few years. Many lied and conned people motivated by greed. Long time agents knew this cycle was short lived and were well aware of the fallout to come. There was am influx of people from other industries becoming agents saturating the market with non qualified fly by night realtors. You know the kind that jump in when the pickings are easy? The whole industry was rife with fraud up to and including appraisers, originators, loan officers, est. Thank god for the tightening going on now. I'd like to see the home buyer do most of the sale process themselves.

Randy,

I appreciate your well thought out response, especially about Seller's agents, and I believe you're right on wrt their future role.

However, I believe that we'll see a different role with buyer's agents. Since the current process involves a % paid to the buyer's agent, I believe that there will be 2 things happen:

1. Buyers will begin to get a % of the transaction from the buyers' agents out of the agent's fee. (most can already get as much as 2/3rds of the agent's commission). I don't believe this will go away because the process is the status quo, and it benefits buyers as well.
2. Some buyers (most notably mentally frail and first time buyers) will still need and want substantial hand holding. Their buyers' agents will still probably retain their entire %.

Seller's agents, on the other hand will probably reduce listing commissions due to the lower cost of marketing and open visibility.

Overall, sellers will likely pay lower commissions, but that would likely be to their agent, not the buyers' agents. There is still a financial incentive to bring in a buyer with a higher commission.

Like in economics, follow the incentive, and that's where we'll go.

Chuck Ponzi

The answer is, obviously, the Internet (you know, the series of tubes.)

Whoever establishes a NASDAQ like system, while taking into account everything an agent does today and makes it available in easy to read document format will provide an alternative.

It is happening for cars, so why not for houses?

Also, just like CarFax, may be there is a need for something similar for houses?

There is also a need for impartial inspectors and appraisers.

I can see such a system coming, along with some major changes to the way houses are built.

For example, in the 21st century, why aren't more houses built on the assembly line? Early in the 20th century cars were still custom built and costly and unreliable. That is what we have in houses today. Somehow, factory-built houses have become synonyms for mobile homes, but it doesn't have to be.

We are missing out on a lot of efficiencies. Maybe the bubble has to totally burst before something emerges.

Imagine there's no Realtors,
It's easy if you try,
No HELOC below us,
Above us only sky,
Imagine all the FBs
living for today...

You may say I'm a dreamer,
but I'm not the only one,
I hope some day you'll join us,
And owners and renters will live as one.

Randy, totally agree with your position re: buyer's agents. Their job is unnecessary, adds little-to-no value, and the financial incentives are completely misaligned with the buyers (who they are purportedly representing). Sellers agents add enough value (marketing the house, dealing with buyers, transaction ppwork, hassles, etc.) to justify their existence, but at the full 6%? Doubtful. 1-2% or a flat fixed-fee is the rule in most other countries, and can be here too --if the NAR/MLS cartel can be broken. Hopefully Help-U-Sell, Redfin, PropertyShark, Zillow, etc. will gain enough public and political support to erode their information stranglehold. We'll see...

Houses will never be anything near identical substitutes. There will always be a large amount of asymmetrical information in a house transaction. This is where agency becomes valuable.

Yes and no. One could argue that mass-produced cookie-cutter developments today are chock full of IDENTICAL substitutes. Sure, owner A's faux Spanish McMansion is .2 miles closer to the freeway than owner B's, but does that really represent a huge difference? The asymmetry and lack of direct substitution comes more into play in older neighborhoods with lots of inventory pre-dating cookie-cutter mass construction (c. 1950s). In my neck of the woods (greater Pasadena), sure there are lots of turn-of-the-century Craftsman that it may be hard to find an *exact* substitute for, but not impossible. Actually even these "unique" Craftsman houses were by-and-large kit-built homes that were ordered from a Sears catalog --the pre-fab houses of their era.

Your house is less "special" than your Realtor would have you believe.

Speaking of realtors' extinction... after a year of slow business, my friend's wife, (she of the Main Street Media fame) has reportedly "quit" her job with the RE agency. She now plans to focus on her kids education.

Don't feel sorry for her though - they are flush with her husband's IPO money, so it is not like their lifestyle will take a hit or anything. I think the only setback is that she seemed to bask in the attention she got as a hotshot RE-"insider" from other women at parties.

SP

Good agents, like good salesmen, will be employable for a long time to come. But a probable majority of agents are basically the Best Buy salesman who's been on the job for 6 months. He/she is not telling you anything you can't find out with 5 minutes of Googling.

OT,

But I attended Surfer-X's party this Saturday, which was really more of a house-warming than blog party. I can personally attest to the fact he did not catch a falling knife and got a phenomenal deal on the place. We should all be so lucky.

One of ladies at the party happened to work for D.R. Horton and mentioned she & hubby just bought in early '05 (not exact peak, but close). She mentioned that Horton has already drastically trimmed staff (down to around 7,000 from peak of 10,000) with more cuts possible. She thought the downturn might last another year, but no longer --for her city, that is (Ventura). She wasn't so sanguine about other locales: Riverside, San Bernardino, Palmcaster, etc. Oh, and here was the kicker --they got an option-ARM on their place. But, unlike all those *other* suckers out there, she claimed to be aware of and financially "prepared for" the eventual reset. As she was very pregnant with twins, I thought it best not to probe any further. Don't want have a miscarriage on my conscience ;-) .

I spent the whole last week not worrying about housing or work or anything at all, basically. 9 day weekend!

As for getting rid of Realtors, well, you're always going to have ill-educated buyers and sellers out there who want/need the services a realtor provides, so I don't think you'll ever see the demise of them.

The real problem with housing isn't the realtors, it's the funny money that got funneled into this. Once that dries up, the shine will be off being a Realtor and they will be back to being perceived as used house salespeople. Ask any long-time real estate agent and they'll tell you about the tough times in the industry. We'll probably see 50% of realtors try to go into other work after spending the next year woefully underemployed.

The problem you will run into, is the entrenched bureaucracy and legal barriers thrown in your way. Every state will have their own system for handling sales, and if you aren't an approved and certified person to take part in that process......

Every little squeaky wheel in this process will trumpet that their role is ESSENTIAL, and if you take them out of the way who will you turn to for help? Not that suing any of these people does any good when the process goes wrong now. But anyhow you have an uphill battle.

If you wanted Federal intervention to untangle this mess, they would only make it worse. Probably end up with a bill with 57 other things added onto it.

I for one would welcome anything that is leaner than what we have now.

I should add, it would be nice to see a potential service like this, with a transparent and understandable set of fees. The current system involving a percent of the sale price so heavily, encourage agents to find way to inflate the price.

On the other hand something like fee of X per square foot of house or of yard, would be more transparent and fixed. And this would reflect perhaps that doing lawn-care and staging for a larger house or lot, would be more work. You get the idea.

@HARM,

Loved your rendition! Finally... Patrick.net has a theme song. Sorry I missed X's party, that HAD to be fun! We "had" to be in Vegas on their 2nd hottest day in recorded history. I was determined not to have to come back to OR and admit I spent it in an air conditioned (and somewhat cheesy) "theme bar". I could only take about 2 hours at the pool though and when my fore arm accidentally touched the aluminum lounge chair it felt like splattered cooking grease!

In sfbubblebuyer tradition of the "9 Day Weekend" we came back through Gerlach, NV (host to Burning Man) and crossed over on Hwy 447 not realizing we were in Eagleville CA!? How can anyone hate Reno that much?

Hourly commission is the way to go on the buyer's side.

On the seller's side, maybe some sort of combination of flat listing charge and commission at completion of the deal.

I agree with most of the views here. Buyer's agents will be going the way of travel agents. The process has already started.

I was passing via Blaney in Cupertino, and the board on a house said
"SOLD - For 1%".>/b>
Upon inquiry, I was told by friends who had visited the open house that the selling agent was telling everyone that if they chose the same agent as buyer's agent, the commission will only be 1%.

This trend will increase, no matter which direction the market goes.

Yuck. Sorry for the messed up tags.

I think it is going to happen by itself Patrick. Like travel agents, modern technologies are disrupting the normal business models of realtors.

Malcolm,

Randy addressed this a bit already, but I'll also add in general that the Realtor Mob (ie, the NAR) is putting up a darn good fight to keep these changes from happening.

The DOJ Antitrust division keeps an active investigation on various local and regional/national Realtor groups:

http://www.usdoj.gov/atr/public/workshops/rewcom/213351/9.htm

Also, the NAR is one of the largest campaigin donors in local, state and federal politics, and they wield enormous clout in preventing legislation being passed that would allow changes towards a more competitive market.

HARM, good seeing ya! Hopefully next time Mrs Harm can make it also.

have often wondered why Federal employees and military personnel pay federal income tax.

I'm not sure they all pay the same tax structure the rest of us do. My father-in-law is career military and a good portion of his income isn't taxed. I'm not exactly clear on how it's set up, but he gets an "allowance" for housing and other costs that isn't taxed. I think the untaxed portion is a good half of his pay.

Well, it looks like CNN at least has finally found the Credit Suisse ARM Reset Schedule. And with there being no Spring Bounce this year, it looks like we might actually be getting past the denial stage.

That means it's time for anger! I bet the local news gets pretty interesting in the areas getting hit first. Ouch!

Skibum, I agree it won't be smooth, and a lot of the higher end properties will probably be represented one way or another just because it will continue to be a required hipness to market homes like that through agents. I can't help but wonder though, what would have happened if Zillow had offered free ads for sellers when it was a sellers' market. It was critical timing window that was unfortunately missed but could have totally upheaved the industry.

Yes, I'd say we are through the denial stage SF. I think we've skipped the anger stage and moved straight to the compromise stage. Acceptance should be the last one and we can call that one when we hit bottom which will come when sellers accept the value of their house and actually sell.

HARM, your poetry brings tears to my eyes, and I hope it brings tears to realtors eyes too, only for different reasons.

Patrick

skibum, thanks for the link.

Check out the other dirt on realtors (not TM) on the DOJ site:

http://www.usdoj.gov/atr/public/workshops/reworkshop.htm

and

http://www.usdoj.gov/atr/public/workshops/rewmajor.htm

The paper titled "Nine Pillars of the Citadel" is informative.

http://biz.yahoo.com/ap/070710/dollar.html?.v=11

AP
Euro Hits New High Against U.S. Dollar
Tuesday July 10, 10:17 am ET
Euro Soars Through $1.37 Mark, Trading at All-Time High on Concerns About U.S. Housing Market

FRANKFURT, Germany (AP) -- The euro soared through the $1.37 mark for the first time on Tuesday, trading as high as $1.3716 amid concerns about the U.S. housing market.
The 13-nation currency hit the new high before falling back a bit. It was up from the previous record high of $1.3682 it bought on April 27 and above the $1.3623 it bought late Monday in New York.

The dollar's drop came as U.S. stocks fell in early trading as Wall Street nervously awaited a speech from U.S. Federal Reserve Chairman Ben Bernanke and reacting to troubling forecasts from the retailers Home Depot and Sears.

Bernanke is expected to speak on inflation later Tuesday in Massachusetts, and any indication that he believes price pressures are rising could heighten worries about a possible interest rate increase and give the stock market a jolt.

Meanwhile, Home Depot Inc. and Sears Holdings Corp. offered disappointing financial outlooks that raised concerns about whether corporate America's future performance will give stocks the boost investors have been hoping for.