Coach Unlimited

The question real estate agents everywhere are asking is “How long will the down market last?”  From what I can see the answer will not please them. We have just gone through the whole issue of the “bailout ” or “rescue” of the financial markets, specifically the credit markets, and many have acted like this is the solution to our problem. From what one reads in the press you would think that all of the economists are in favor of the plan that passed and think it was necessary. Nothing could be further from the truth. Many economists opposed the plan but this fact received scant attention in the press. This is important because one of their concerns is that the bailout will actually prolong the recession. Yes, I said recession. This is the other shoe that is about to drop or has dropped depending on who you talk to. An article today by Bill Fleckenstein for MSN is one of many predicting that a severe recession is soon to come. I attended a meeting the other day with the head of Connecticut’s (my home state) economic advisers to the Governor who says that by his measurements we have been in a recession since December of 2007.  The bottom line on the bailout is that it may help some banks and financial institutions, but it will do little or nothing for the mortgage and housing markets. Foreclosures will continue to happen at record rates (there is nothing in the bill to stop this) and this in turn will further depress prices which, in turn, will cause more foreclosures. Couple that with a recession that by all accounts will be very severe and the picture is not looking rosy. Anyone in real estate who thinks they can hunker down for a year or two and the markets will go back to where they were two years ago is sadly mistaken. The idea that anyone who is breathing can get a mortgage is gone, perhaps forever. Even when the credit markets return it will be a return to the markets of yore when you had to have the three C’s to get a mortgage. (Cash, Credit and Collateral) The pool of buyers has been drastically reduced. In the future you will need a good credit rating, a stable income and money of your own to invest in order to buy real estate. The days of “no money down” and “no income verification” are gone. The lack of buyers will force a lot of agents who’s abilities are marginal to get out of the business and for those who stay in there will be a need to examine their business model to see if it is going to be competitive in the future. I expect the changes in the economy to speed up the changes that I foresee in real estate (see my previous blogs) concerning how agents charge for their services and how they structure their offices.  When we finally emerge from this significant downturn in three or four years the landscape in the real estate industry will have been dramatically altered forever.

When I look at our current financial crisis I am reminded of a quote from Oliver and Hardy: “Now that’s another fine mess you’ve gotten me into.”  Sadly the way we got into this “fine mess” and the proposals to get us out of it also smack of slapstick comedy. We got into this mess because we “deregulated” our banks and financial institutions and the people who were supposed to be enforcing the remaining regulations were not doing their jobs.  We got into it because of the out and out greed of some lenders who used legitimate mortgage products to take advantage of borrowers, some of whom were also acting out of personal greed. The mortgage lenders greed was fed by the greed of the investment market that was willing to pay them a premium price for risky mortgages. And (shades of Laural and Hardy) everybody justified what they were doing by the fact that everybody else was doing it and of course that makes it OK. Now our Secretary of the Treasury and the Chairman of the Federal Reserve are going before the Congress of the United States proposing that the government (which is really you and I) take on billions of dollars in debt so that the banks and other institutions which behaved in a greedy and irresponsible manner can be saved from the consequences of their own foolish actions. It is interesting to see both the conservative and liberal members of congress reacting negatively to the current proposals, albeit for different reasons.  I remember going through a similar financial crisis in the late 1980’s and being assured that we now had regulations in place that would never let that happen again. Apparently that was not true. So are we going to go through the same thing again? Will we allow a few businesses to fail as an example and perhaps punish a couple of individuals to make the point that we are “serious” and basically push the expense over the the taxpayers and our grandchildren? Or is this the wake up call we need to really understand that the system is fundamentally broken and it needs to be fixed?  The Chairman of the Federal Reserve tells us, “I believe if the credit markets are not functioning, that jobs will be lost, that our credit rate will rise, more houses will be foreclosed upon, GDP will contract, that the economy will just not be able to recover in a normal, healthy way.” He wants us to believe that the proposed bail out is necessary and should be approved as is, but who is really getting bailed out?  It looks to me like the people who caused the problem are getting bailed out while the ones who were really hurt by it are left to fend for themselves. In my opinion any bailout plan should at a minimum address the following.

• Any company receiving federal support should be required to pay back every penny of it at a solid rate of interest over a short period of time.
• Companies that are not able to pay back the federal support should be allowed to sink and their stock holders as well.
• No company executives should be allowed to profit from the crisis or use so-called “golden parachutes.”
• Those who knowingly engaged in fraud or misrepresentation should be prosecuted to the fullest extent of the law including mortgage originators and real estate agents.
• Every effort should be made to protect those who were victims of this crisis even though some of them acted out of personal greed.
• New meaningful laws should be passed that restrict the financial and banking industries so that this will not happen again.

I am a great believer that everything that happens to us, no matter how bad it is, is an opportunity to learn and grow and eventually prosper.  Having said that, I believe that if we don’t at least do the things I mentioned above, then we will be doomed to keep on repeating this cycle until we come to our senses.

In the first part of this post I discussed the necessity of using a real estate agent when buying or selling a home and I discussed some of the factors you might want to look at, but that should not be decisive. I ended by saying that when you are hiring someone to assist you with a very major financial decision and paying them thousands of dollars, you should base your hiring on a thorough job interview. In part II I took a look at what to look for in an agent if you are a seller. In part III I want to look at what you want in an agent if you are a buyer.  Here are things to discuss with a prospective agent in your job interview.

• A Buyer’s Agent You want an agent who works for you and that isn’t always the case with every agent you will talk to. Up until quite recently all of the agents in a residential real estate transaction were agents of the seller and required by law to put the seller’s interests first.  They were not allowed to lie to and cheat the buyer, but other than that their job was always to get the best possible deal for their client, the seller.  That has changed and in pretty much every market today you can find agents who will work to represent the buyer. So the first question you will want to ask an agent is, “Will you work for me as a buyer’s agent?” Assuming they say yes, you should expect to be asked to sign an employment agreement with them stating how long they will work for you, what they will do for you and how they will get paid.
  • Percentage, hourly rate or flat fee Most buyer’s agents get paid a percentage of the sale price just like listing agents do and it is usually 2.5% to 3% of the price. Almost always this fee is collected from the sellers at the closing.  It is important for you to know that even though the seller is writing the check, you paid the commission because it was built into the price of the house. If you don’t like the idea that your agents fee goes up when you pay more for a property you may want to talk with an agent about a flat fee or an hourly rate instead of a percent of the sale price.
  • Guaranteed payment Another issue regarding commission is what would happen if you bought a property where the seller wasn’t offering a commission such as a for-sale-by-owner property or a foreclosure.  Would you be required to dip into your own wallet to pay your agent?  Would your agent be willing to work for you if there was no provision for them to be paid? If you want the highest level of service from an agent you should consider an agreement in which you guarantee that they will be paid in the event that there is no other agent involved.
  • Paying regardless of a sale In the great majority of real estate transactions you will only pay your agent if there is a sale. In reality this means that you are paying for all the services you received and you are also making a contribution towards the agents time and expenses for the transactions that did not result in a sale. After all they can’t really work for nothing.  If you are sure that you will be purchasing, you may find it to your advantage to negotiate a much lower fee that you guarantee to pay whether or not there is a sale. In some states you might even be able to get a rebate or credit out of the proceeds of the sale for the unused portion of the commission the other agent was offering to your agent.
• Market Analysis You will want to use an agent who agrees to give you a written price analysis for any property that you seriously contemplate buying.  The asking price is sometimes related to what the sellers need to get rather than actual worth.  You don’t want to reach an agreement to purchase and then have the bank’s appraiser tell you the property is worth what you agreed to pay.
• Property search How hard will the agent you hire work to find a property. Any agent will look on the Multiple Listing Service.  Will your agent also search the Internet in places like Craig’s List or the for-sale-by-owner sites? Will they look in the for-sale-by-owner magazines? Will they advertise on your behalf in print or on the Internet for property wanted? If you are interested in a particular area will they send out a mailing, or telephone or knock on doors in the area to see if anyone who’s home is not on the market would like to sell? By the way, they are only likely to be willing to perform these services if you have guaranteed to pay them a fee.
• Negotiation You will want an agent who is willing to negotiate on your behalf. Sadly in many real estate transactions the agents do little negotiating.  There are several components to a good negotiation and you will want to be sure your agent is willing to do them.
  • Develop a strategy When you find the right property you will want to work with your agent to develop a negotiating strategy. This should be based on the actual value of the property, your needs such as timing, finances etc, the perceived issues or needs of the seller, work that may need to be done on the property and anything else that figures into your decision.  You may not ask for everything you want in the opening offer however if you have to go up in price you add in the other things that are important to you or you may choose to make a full price offer and ask for everything including owner financing and all the furniture.  It is important to have an agent who understands all of the things that are important to you including price, and will help you to get everything with a good strategy.
  • Presenting the offer You will want an agent who is willing to try to present the offer in person to the sellers. I need to tell you this isn’t usually done. In most places your agent would simply call the other agent and tell them about your offer over the phone and then fax them a copy. The listing agent would then present the offer to the seller. This is not in your best interest. What if that other agent has an offer of his own working or someone in their firm has an offer. What if they just forget some of the stuff your agent told them?  By insisting on presenting your offer in person your agent assures that it will be properly presented and nothing left out. It also gives your agent a chance to observe the reactions of the sellers which can be very valuable when it coms to crafting a counter offer. I would go so far as to say that if an agent says they won’t present in person you haven’t found the right agent yet.  By the way, when I say it isn’t done this way in most places, the rules of most MLS’s and the Code of Ethics of the National Association of Realtors® give the buyer’s agent the right to be there when the offer is presented to the sellers.

  Choosing the right agent to represent you when purchasing a home is an important decision. Don’t just pick the first agent you talk to or your friend from the bowling league. Be sure to spen some time interviewing the person you are hiring. Remeber you are the one who is paying them and choosing the wrong agent could cost you thousands of dollars.

In the first part of this post I discussed the necessity of using a real estate agent when buying or selling a home and I discussed some of the factors you might want to look at, but that should not be decisive. I ended by saying that when you are hiring someone to assist you with a very major financial decision and paying them thousands of dollars, you should base your hiring on a thorough job interview.  In this post we will look at some of the things you will want to discuss with prospective agents if you are a seller. In part three we will look at what to discuss if you are a buyer hiring an agent.  Here are the things that you will want to discuss with an agent if you are selling real estate.

• A market analysis It is a standard practice for most agents to assist a client by helping them determine what a property is worth and this is certainly a service that you will want as a seller.  This is more than the agent simply saying, “Well, let’s see now. I guess it’s worth about $200,000.”  You want an agent who will put their analysis in writing with a detailed examination of properties similar to yours that have sold recently and others that are currently for sale. When you find an agent who will do this (and not all agents will) you should pay attention to what they say because one of the worst mistakes you can make, especially in a market like today’s, is to over price your property.
• Marketing You will want to ask your agent for a detailed marketing plan for your property. It should be very specific detailing what will happen in week one and week two and week three and so on.  Certainly the marketing will include putting the property on the Multiple Listing Service but it should also include much more, especially Internet marketing.  Today the Internet is more important than print marketing. It is typical for sellers to want to see a picture of their home in the local papers, but in most markets this is not a good use of marketing resources.  Today’s buyer typically goes on line to start their home search and you want your property to be there. Your agent may want to do an open house for the public and this is OK but in most markets it is not likely to find a buyer for your home. Be sure that your agent does use one of the most effective sales tools which is the yard sign.  Well placed attractive yard signs are a very productive way to attract buyers.
• Communication When people are unhappy with a real estate agent 99% of the time the major complaint is lack of communication.  You will want to be sure that your agent will contact you on a regular basis, even when there is nothing new to report. Ask them what sort of contact system they have in place. When will they contact you? How will they contact you? Phone? Email? How do you get in touch with them? How quickly do they get back when you leave a message?
• Referances “Please give me the names of five of your previous employers (clients) so that I can contact them.  Do you have any written letters of reccomendation from previous clients.”  You want to know that the people who used this agent in the past would use them again.  If an agent can’t give you any reccomendations be suspicious. In return you should also be prepared to write a reccomendation when the transaction is over to describe the good service you got.
• Negotiation According the the National Association of REALTORS® 2007 Profile of Home Buyers and Sellers one of the major concerns of buyers and sellers in hiring an agent is that they know how to negotiate. Sadly many real estate agents don’t negotiate very well. Let me explain why I say that. The typical practice in a real estate transactions is that the buyer makes an offer to purchase a property. The agent of the buyer then contacts the agent of the seller and tells them what the offer says and faxes them a copy. The agent for the seller then presents the offer to the sellers and this is usually done over the phone. The sellers make a counter offer to the buyers through their agent and the buyer’s agent. Most of the time these offers and counter offers are about price. It is not a negotiation, it is an auction. “We offer $250,000.” We want $290,000″ “We will come up to $260,000.” “OK, we will come down to $285,000.”  And so on.  This is not really negotiating. In a real negotion there is give and take. “We are willing to come down $10,000 in return for moving the closing date up two weeks and we will keep the riding lawn mower.” You want an agent who will do several things for you with regard to negotiating.
  • Your agent shoud be willing to ask the agent of the buyer to come over and present the offer in person. Why? So that you can ask questions and learn as much as possible about the buyers position. Price is always a major consideration, but there can be other factors that can be important such as time frames, owner financing or personal property to be included. Information is the key to a strong negotiation and talking over the phomne and faxing just don’t deliver enough information.
  • Your agent should work with you to develop a negotiating plan to help you get the things that are important to you. This would include more than just price. Planning a negotiation takes skill and time and you will want to discuss this in detail with prospective agents. How do they plan a negotiation? Do they have any worksheets or planning tools they can tell you about?
• Commission In a previous post I mentioned a recent survey of buyers and sellers of real estate done by Consumer Reports which showed that 46% of buyers and sellers asked their agent to cut the commission and when they asked, 71% of them got a reduction. What’s more this did not seem to effect the service they got in any way.  Based on this you should always ask for a cut in the fee knowing that there is a 70% chance that you will get it. In fact if you find more than one agent that seems to fit your needs do not be afraid to have them bid against each other. A reduction of 1% in a $200,000 transaction is $2,000 more in your pocket.

The bottom line in all of this is that when you are hiring someone to help you with a big financial enterprise like selling real estate you want to hire the best person you can and if you pay attention to issues I have mentioned above you should do well.

For most of us the purchase or sale of a home will be the largest financial transaction of our lives.  After all a home is more than just a roof over our heads; it is a symbol of who we are and it is our single biggest asset. In fact it is often seen as the money to send the kids to college or our retirement fund.  Given how important this financial transaction is to us we want to be sure that we do it right and for most of us that means using a real estate agent. Perhaps the first question we should address is “Do we need a real estate agent?  It looks like they charge a lot of money. Perhaps we could save thousands of dollars by just doing it ourselves.”  The correct answer to this question is that you do need an agent. The money you spend to hire them will be well spent if you choose the right agent. Real estate agents, just like doctors or mechanics or chefs or any other profession you can name, are not all alike. Hiring an agent who is really good at the job is well worth the extra effort that it takes to find that agent and that is what this post is all about. Lets start out by looking at some of the things that are NOT very important. These are things that the agent may brag about but which really don’t mean a lot with regard to the service you will get.

• Alphabet Soup. Some agents are designation collectors.  They have all kinds of initials after their names. Now I have to say that I teach many of these designation courses and the information that a student gets from them can make them a lot more professional and effective. I think these designation courses are a good thing, but don’t be fooled into thinking that just because a person has and ABR, SRES, GRI, CIPS, CRS, CRB, etc after their name they are super agents.  There are many people who collect designations but aren’t very good at real estate. By all means consider the designations but do not decide on someone only because of their “alphabet soup”.
• Company Name When you are new to an area it is only natural that you will be attracted to the nationally known brand name firms because you have heard of them before. In fact one of the main reasons that the owner of that franchise decided to pay the money to affiliate with a brand name was because they hoped people would choose them just for the name.  I am not saying that these firms are not good.  In fact on the whole they usually are good and they may have some support and referral systems that a smaller local agency might not have. Having said that, you need to understand that while you are usually signing a contract with the firm, the important consideration is the agent themselves.  Big brand name companies can have lousy agents and good agents. Obviously you want a good one. In fact you want the best one in the market and they may very well not be working for the big brand name firm.
• Top Producers When I first got into real estate over 30 years ago a top producer was someone who did more than one million dollars in sales. Today one million is just barely making a living. In choosing an agent to work for you you do want someone who is successful and experienced, but you may want to be cautious about hiring the top salesperson in the company. Why? Because they may be too busy to give you the attention you want. If you are considering a top producer you will want to ask lots of questions about who will be working with you; will it be them personally or one of their assistants.
• The Listing Agent  Often the first thing we do when we decide to buy is call real estate offices and arrange to see houses.  The firm that is showing the houses to you was hired by the sellers to help them market the property and they are pledged to help the sellers get the best possible deal. If you decide to buy one of the properties listed by their company they may not be able to legally give you the level of service that you will want.

So by now you may be asking yourself, “If I can’t rely on these things, then how do I find the right agent.” The answer is that you take the time to conduct job interviews. You are hiring this person to assist you with the biggest financial decision of your life so far and one that will have a large effect on your future. What’s more you will be paying this person thousands of dollars for their services. Doesn’t it make sense that before you put them on your payroll that you give them a thorough job interview?  Your decision to hire them should be based on more than their good looks and the fact that they “seem nice enough”.  So what sort of questions do you wnat to ask in interviewing agents for the job? That is somthing we will get into in my next post.

Recently  Consumer Reports did a survey of buyers and sellers and some of the findings are quite interesting in light of what I have been saying about real estate commissions and the responses from real estate agents.  The first finding was that fees are quite negotiable. 46% of sellers tried to negotiate a lower fee and roughly 71 % of them were successful in getting a reduction. What’s more sellers who were unhappy with the transaction often said in their complaints that they should have negotiated a lower fee.  So does this mean there is a credibility problem for the agents?  I think so. If you ask me about commissions I will tell you that I charge 6% (or 5.5% or 5% or whatever the company policy is) and if you don’t push me that is the fee you pay.  If you are savvy enough to ask me to cut the fee then I will do it in order to hang onto the listing. I really don’t have a set rate and if you are not bright enough to ask for a discount then you will pay full fare. Is this a professional or fair way to do business?  Not really. But then the agent says to me, “You are not comparing apples to apples. The agents who charge less are not “full service” brokers. They don’t do as much for the client as I do.” Is that true? Consumer Reports said, “We found that paying an agent a lower commission rarely had any effect on the sales price. And readers who paid commissions of 3 percent or less were just as happy with their brokers’ performance as those who paid 6 percent or more. People who paid extra, in fact, were more likely to say they had regrets about the selling process.”  If the consumers were getting less service (and I doubt that they were) the consumer certainly didn’t know it. In fact the report goes on to say, “The industry generally defends the full 6 percent commission by saying it enables brokers to provide all the services home sellers need. And some of our survey respondents who paid lower commissions did get fewer services from their agents. But there wasn’t as big a gap as you might expect. For example, 81 percent who paid 3 percent or less said the agent provided a competitive market analysis of their home, compared with 87 percent of people who paid 6 percent or more. And those who paid a lower commission were somewhat less likely to have agent-sponsored open houses (54 vs. 59 percent).”  All of this tells me two things about the 5% to 6% commission that most real estate companies charge for their services.

• The public thinks the fees being asked are too much to pay for the service they are getting and they show that by asking for a discount. If they don’t get it they will most likely take their business elsewhere knowing the service will be just as good at the shop down the street that charges a lot less.
• Agents know that the services are overpriced or they wouldn’t be so willing to cut their fees.  After all, if a firm is losing money they can’t stay in business so you can only cut your fees within the range where it is still profitable for you to do so.  I am willing to take less profit to get the business but I won’t work for no profit.

It is my experience that most agents (other than the fee-for-service companies) have a set marketing plan that they plug every client into regardless of what they pay. The agent doesn’t say, “You are paying a lower fee so I will cut back on the marketing and I won’t hold an open house.” Instead you get whatever marketing they always deliver. After all, they don’t get paid until the house sells so they won’t do anything that might reduce the probability of that happening.

My advice to the public (buyers and sellers alike) is always ask for a discount and if you can’t get one look for another firm. My advice to real estate agents is take a realistic look at the way you are charging for the excellent service you are providing and see if it really makes sense. Is it fair to the clients? Is it fair to you.

In previous posts I have said that I think the the standard 5 to 6% commission or success fee is a holdover from a previous era that will sooner or later disappear because there are better ways to pay real estate professionals. One of the main reasons that I think compensation will change is because in many ways the current system is unfair to all parties. I will acknowledge that “fairness” is hard to examine. You and I may look at the same set of circumstances and you will say it is fair and I will think it isn’t.  Generally speaking anything that works to my advantage is fair from my perspective and anything that puts me at a disadvantage is obviously unfair.  Having said that, lets look at some of the reasons that the percentage of sale price or success fee model of real estate compensation as practiced today through the MLS is unfair to the parties.

• Real estate agents spend lots of time working with clients in transactions that don’t close (often because of the choices made by the client) and the agent doesn’t get a penny for their work.  In fact usually agents work harder and put in more time for these clients than on those that do close. Is this fair to the agent? It is only fair if we agree that the agent’s job is to make a sale.  Most of the agents I know see themselves as consultants and not as “salespeople”. If you are a consultant then tying your compensation to a successful transaction is clearly unfair. You can do an excellent job and the client’s actions make a sale impossible so you gave away your services.
• Because real estate companies only get paid when there is a sale and they work in many situations where a sale doesn’t take place, the cost of those unsuccessful transactions must be built into the fee. If I am going to work without compensation in one transaction, I have to make up the costs somewhere else and in real estate that means my commission must reflect the losses I suffered in transactions that didn’t complete. In other words the seller, who commonly writes the compensation check, is paying for their own transaction plus several others. Is that fair to the seller? If everyone, buyers and sellers, paid for their own services no one would ever pay more than 1% or 2% of the sale price as a fee and the real estate companies would still be properly compensated for their services.
• Because the commission is based on the sale price, the more a buyer pays for a property, the higher the commission. Is that fair to the buyer? You might say, “But the seller pays the commission so it doesn’t matter”, but that is not really true. Technically speaking the seller usually writes the check, but because the commissions are built into the sale price, both the buyer and seller contribute.  The higher the cost of the house is the more dollars the buyer and seller have to contribute to the transaction to compensate the agents. So, I ask again, is this fair to the buyer?
• The higher the sale price, the more money paid out in commissions. Does this mean that agents work harder selling higher priced homes so they deserve more money? Does it mean that as sale price goes up the cost of marketing increases proportionally?  I don’t think so. I would buy the argument that it costs a bit more in time and marketing to sell a $2,000,000 property than it does to sell a $500,00 property, but it certainly does not increase the cost by a factor of 4. So is it fair to clients that they have to pay significantly more money in commissions just because their property is valuable?

So if the system is so unfair why hasn’t it changed?  In fact it is changing, but change is hard and usually comes slowly. Agents don’t want to upset the apple cart. They say, “If it ain’t broke, don’t try and fix it.”  Change is a little bit threatening so we avoid it unless we can see a clear benefit to changing. The change in compensation is coming slowly, but it is happening. We are seeing more and more companies trying different compensation systems. I should mention that this is where I usually hear someone scream, “People want full service brokers.” I agree that this is true for most clients and I am not talking about reducing service at all; I am talking about giving the full range of real estate services and pricing it in a way that is fairer to all parties.  The new systems are slowly evolving. Some brave companies have taken the leap and are using pricing other than a percentage success fee. They charge retainer fees, and/or hourly rates or flat fees or some combination. Some companies are offering a percentage fee and another type of compensation to clients as a way of easing into a newer system. The bottom line is that they change is not only coming, it is happening now.

Recently the US Department of Justice got into a legal battle with the National Association of Realtors over whether some of the association’s practices constituted a restraint of trade and one of the issues that came up was the commission charged to clients. It wasn’t the main issue, but it is one that deserves some consideration. Consumer groups have long stated that they think real estate agents overcharge for their services and yet most real estate agents make a rather modest living to say the least.  Should the agents make even less money or could it be possible that the way real estate firms price their services no longer makes sense?  Is the commission system a dinosaur that has outlived its usefulness. I certainly think so.  Let’s look at some of the issues with this way of doing business.

• The concept of paying a commission or success fee was based upon the idea that the real estate agent’s job was to sell the property and if the property didn’t sell, the agent didn’t get paid. Most real estate agents today see themselves in the consulting business, not the sales business. They are hired to advise and guide clients through the rather complex processes of a real estate transaction. They have very little control over whether a sale actually happens. Often the clients unrealistic expectations or demands make a sale impossible. Why then should the agent only get paid when a sale happens?
• Why is the commission so high? The average commission today is a little over 5% nationally according to Real Trends, a trusted source of information on the industry.  On a $300,000 house a 5.1% commission would mean the real estate agents got $15,300 in commission. That is usually divided between the agency that listed the property for sale and the one that found the buyer. Assuming it is divided equally is $7,150 a reasonable fee for this service? The number of hours the agent actually put in is usually between 10 and 20.  Assuming $2,000 was spent on marketing (a very high figure for a $300,000 property) then the remaining $5,150 divided by 20 hours means the company earned over $259 per hour. What did the agency do to earn that money?  One of the things they did was work with other clients who did not complete a transaction. Since the agency only gets paid when there is a sale, when there is no sale they work for free. How do they make up the money they lose on those transactions? They have to build it into the fee for the successful transactions.  A really good agent might be successful 50 % of the time; an average agent maybe 25% of the time. So the client that is paying the commission is also paying for the transactions that didn’t work out.  I pay for the sale of my house and the costs of 2 or 3 or 4 others that didn’t sell. How fair is that?
• The original system evolved over 100 years ago when all of the real estate agents in a transaction worked for the seller. Today much of the time the buyer is represented by their own agent. So how is that buyer’s agent paid? Usually by the seller as a percentage of the sale price. Does it make sense for the buyer to pay a higher commission when the price they pay goes up? I think not.
• Is there any relationship between the sale price of the property and cost of the services; in other words does it really cost twice as much to sell a $1,000,000 property as it does to sell a $500,000 one? Of course not.

Because of these inconsistacies and some others we are starting to see a shift in the industry away from commission based pricing and towards other methods of payment such as flat fee, retainer fees and hourly rates. The majority of sales are still commission based, but I expect to see this changing substantially over the next 10 years for the simple reason that commission based pricing is really not in anyone’s best interest. It is unfair to both the agents and the clients and like the dinosaurs, it will become extinct.

When I look at much of what is being written about the so-called sub-prime mortgage crisis I have to scratch my head in disbelief because much of the blame is centered on appraisers. We saw this same thing happen when we had our last “adjustment” in the real estate market in the 1980’s.  Prior to that appraisers were not licensed. Then as now many of the banks that got into trouble had real estate in their portfolios that was over appraised. In fact it was often appraised at figures that were substantially above market value, so of course that must be the appraisers fault. After all they are the ones who drew up the appraisal. As the song from “Porgy and Bess” goes, “It Ain’t Necessarily So.” It is true that in the 1980’s and today the appraisals were high, but we need to look a little farther and see why they are high.  I know a lot of people who are appraisers and they are honest hard-working people.  Why would they lie about value and inflate prices? Because their jobs depend on it. Let me explain.  Appraisers get much of their work from lenders. To be a successful appraiser you need to have lender clients who send the appraisal work your way. So the lender sends you an appraisal and you, the appraiser, get back to the lender and say, “I have examined this property and it is worth $350,000.”  The lender then says. “That won’t work. We want to lend $400,000. I’d like you to go back and take another look.”  The appraiser says, “I don’t need to take another look. It is worth $350,000.” To this the lender replies, “We want to make this loan. I need you to give me an appraisal that says the property is worth $400,00. If you can’t do that I know other appraisers who will and they can have all of my banks business.”  Sadly this is not an unusual scenario.  Now you may be asking yourself, “Why would the lender want to make a risky loan that they may have to foreclose on?” There are two reasons this happens. In a hot market like the one we have just been through (and the one in the 80’s) there is a feeding frenzy mentality. The pressure is on the mortgage originator to make mortgages, lots of mortgages. In order to do that the properties have to appraise. The other factor is that if the loan does eventually go bad it will be someone else’s problem because the mortgage lender will have sold the mortgage to an investor or a government agency like Federal National Mortgage Association (Fannie Mae), the Government National Mortgage Association (Ginny Mae) or Federal Home Loan Mortgage Corporation (Freddie Mac). So who’s supposed to be protecting the public from this? At the federal level it is The Appraisal Foundation. They are authorized by congress to set national standards and oversee the various state appraisal commissions.  The problem is that the Appraisal Foundation has only one way to punish a state that does not comply with their rules; the Appraisal Foundation can remove their accreditation so that the state can no longer do federally related appraisals. In other words all loans would dry up which would be an economic disaster for the state. They have never done this although they have threatened to. There is no lesser punishment such as fines or other penalties available to them. Meanwhile most of the states try hard tp enforce the rules but they do not have the funding to police the appraisers under their jurisdiction. So the congress just recently passed new laws to protect the public from further predatory lending in the future. Did we correct this problem? No, we did not. The truth is that a lot of money was made on the high risk mortgages and there is pressure on the congress to ensure that they don’t do anything that would dry up this lucrative market.  The recent federal legislation is merely a band-aid and will do nothing to cure the underlying problem. Meanwhile the appraisal industry gets unfairly blamed for the problem.

We hear and read a lot about change today. It is part of the political campaigns and is certainly permeates everything around us. I know from my work as both a manager and as a coach that most of us find change threatening and we fear it, yet is the one thing that is certain. No matter what we do, there will be change. The field of real estate is no exception and I believe that the next ten year will see more dramatic changes in the business than we have seen in the last 50 years. A lot of what happens in the practice of real estate today has remained unchanged over the last 100 years and is out of touch with what consumers want and the world we live in. Here are two of the fundamental changes I expect to see in the next 10 years.

• The structure of fees will change In a typical real estate transaction today the real estate agents get paid a commission which is a percentage of the sale price. They only get paid if there is a successful sale and the commission is paid by the seller. This system dates back over 100 years. When it evolved (and up to about 15 or 20 years ago) all of the real estate agents in the transaction worked for the sellers and the system was set up to reward a good job done for the sellers. The more money the agents got for the property the more they were paid. If they were unsuccessful in selling the property there was no paycheck. In recent times there has been a big change in that buyers now have agents of their own in most transactions yet theses buyers agents are still getting paid in the old way. How does it benefit the buyer if their agent can make more money by selling them a pricier property? How is the buyer benefited by having the seller determine what their agent will get paid? Is it a good thing for the buyer that their agent has to talk them into buying something in order to get a pay check? The rules of the game are changing because the old system no longer serves the clients best interests. It is too early to determine what sort of compensation system will evolve but we are beginning to see agents who work for a flat fee or an hourly rate; we are seeing retainer fees being charged  and we are seeing the fees no longer tied to a sale. Today some agents get paid for their work whether there is a sale or not and that is only fair.The agent is providing the same information and expertise to a client regardless of whether a sale takes place. And more and more we are seeing situations where each client pays their own agent for the services received. The real estate agent of today is not a salesperson; they are a consultant and that demands a different payment structure.
• The MLS as we know it will die The primary purpose of the MLS is to create an offer of compensation and cooperation between the real estate agents. It was not designed to be a marketing tool or form of advertising. In the “old days” real estate agent used the MLS to control access to the inventory. A buyer who wanted to know all of the properties that were on the market had to contact a real estate agent because the agent controlled access to the information on the MLS. Today with the exception of a few backward markets where agents don’t use the MLS a buyer can find out about all of the listed properties simply by going on the Internet to Realtor.com or to a local or state MLS site and accessing the public side of the web site. Today because most agents get paid a commission by the seller the MLS serves to facilitate that offer of compensation, but as more and more agents start getting paid by their own clients this basic function of the MLS will disappear. There will still be a need for a central source of data about properties for sale. The question of who will provide this database is one that is up in the air at the moment. Non-REALTOR® controlled websites such as Zillow and Trulia as well as the public sites of the large national firms such as Coldwell Banker, Century 21, RE/MAX and others already have an abundance of market data that anyone with a computer can access.

We know from history that one change often leads to another in a cascade of new ideas and these two changes I have talked about are so fundamental to the real estate business that I would expect to see them create other changes as well. The end result will be a more professional real estate industry that will do a better job of serving it’s clients and provide a better and more stable work environment for the professional real estate agent.