What are brokers for?
Once upon a time, people bought trips through a travel agent, a stylishly romantic expert who could not only conjure up a magic-carpet journey, she could arrange it for you.
Travel agent fees were invisible to travelers, because they were paid by the sellers — tour operators, airlines, hotels. So buyers used the services, because they were helpful and free.
Then came the internet, and the travel agents, after a series of self-immolating strategies (like suddenly charging customers!), died like the dinosaur and the dodo.
Travel agent as flightless bird
Might this happen to real estate brokers? As a profession, they are not generally admired, and their fees — say, 6% of a $350,000 house, or $21,000 — sound very large. A recent Washington Post article that tacitly speculates on the broker’s demise invites the question, what is a broker for?
“Spot the broker.”
Jasmine and David Ng tour an
Will those skills represent value added in an interest marketplace?
What do brokers do, anyway?
Well, they …
1. Stimulate consumption
A broker is paid only if the house sells, which motivates the broker to stimulate — many would say induce — consumption, by accelerating the decision. (How many of us, upon touring a home for-sale, have heard the broker utter the hoary fib, “the couple just before you said they will be putting in an offer”?) When markets are hot, people think they do not need that:
Daniel Yohannes, 36, a real estate investor, agrees. “I wouldn’t even think about using an agent in this hot market,” he said. “The title companies will provide you with all the information and documents you need. And you can list the property yourself and find lots of interested buyers.”
And there’s a downside to broker enthusiasm:
“I think realtors fuel the craziness around the bidding process — they up the temperature,” said Colleen Mitchell, who bought a home in Silver Spring with her husband with the help of a real estate agent after they sold their
2. Reduce search costs
Originally, brokers took prospects to particular properties. But today, “site” means Web, not plot, so most buyers search without ever leaving their home:
According to the National Association of Realtors, younger home buyers are more likely to use the Internet to search for real estate than older people. In 2004, 36% of home buyers 25 to 34 and 28% of those 35 to 44 searched the Web while looking for homes, compared with 17% of those 45 to 54 and 10% of those over 55.
For younger people, Web-nicks figure the Web can tell you everything:
Like so many relationships these days, it started when his ad on the Web site Craigslist.org caught her eye.
She called him to express her interest, and they agreed to meet on a bright Saturday afternoon in June. Rita Johnson was a law school student from
By the next morning, she was ready to commit.
So, tucked at a table in a crowded deli, Johnson wrote out a check for $20,000 as a good-faith deposit on Bantayehu’s two-bedroom, two-bath condo in
There are no official statistics, but Johnson and Bantayehu seem to be part of a growing number of buyers and sellers who meet through Internet sites, rather than professional agents.
Internet site operators say younger people especially are more likely to eschew agents and try to buy and sell property over the Web that they have come to depend on to meet all their needs.
Blogging keeps you young ….
“It’s a generation that’s very self-directed and their first reaction to anything is to head to the Internet,” said Steve Udelson, chief executive of Owners.com, a Web site that lists properties for sale by owner. If the net-savvy want to find a mate, book an airline ticket or buy stock, he said, they go to eHarmony, Orbitz. or E-Trade. “They’re not pre-disposed to paying commissions for anything. They’ve grown up in an era where you cut out the middleman and use the Internet to find the lowest cost options.”
Searching takes time — but the Web makes searching much faster.
3. Improve choice matching
Beyond searching, there’s the plethora of choosing. That is hard, because it is so personal. Buyer preferences and decision factors are exceedingly personal, not standardized. Some are subconscious. Some are unknown, revealing themselves only when presented with a home that meets all your criteria but, somehow, just … isn’t … right.
“If you have the time and energy to do the work, then it doesn’t make sense to use a realtor,” he said. “I mean it’s not like being a doctor. Obviously you wouldn’t want to perform your own surgery. But it is like being a barber. You could save 20 bucks and give yourself a haircut. Except when you’re your own realtor, you save like 20,000 bucks.”
4. Price more accurately
Houses are not stocks. Each is unique, and trading volume is low. So how do you find a fair price in this game of bargaining (not negotiation!):
Another hurdle was that it was difficult for owners to determine a fair asking price for their homes because they didn’t have access to comparable sales, or comps, the listings of properties that recently sold in the same neighborhood.
Now, however, owners can find information about comparable sales from public records on the Internet. And for a fee they can arrange to have their properties listed on the multiple listing service, which can easily be accessed by would-be buyers. Meanwhile, sites such as Craigslist.org and Owners.com have picked up in popularity.
So just as the cost of search has dropped close to zero, so has the cost of data assembly. But what about interpretation? As professionals in the marketplace, brokers became attuned not only to the data but also its meaning. As many who has studied a multi-page MLS printout knows, data by itself is not insight. Classical regression analysis comes a-cropper when confronted with home sales, because in mathematical terms there are too many independent variables (house features and attributes), too few data points (comparable sales) to derive any kind of ‘normal’ market value. It still comes down to buyers’ poker.
5. Specialize in one-time tasks
Every pro golfer who plays
Without that local knowledge, his ordinary instincts will land him in an impossible situation:
You play the home-sales golf course only once. Would you like a caddy?
Well, maybe not him ….
6. Deliver a reliable execution
For a seller, the worst thing is not to sell your house for too low a price — it’s not to sell your house at all:
Susan Minsek of
After unloading her antique piano, leather loveseat, Scan dining room set and other items for a total of $3,000, Minsek decided to just go ahead and list her townhouse, too. Recently married, she was selling her home to relocate with her husband to
“Nice, normal people use Craigslist,” Minsek said. “It just made sense to list the house there. I don’t want to pay commission for something I can do myself.”
Minsek held an open house on the July 4th weekend, filling bowls with popcorn and setting out a fresh orchid. She’d had the carpets professionally shampooed and the whole townhouse scrubbed by a cleaning service, following advice she had gleaned from a do-it-yourself book. Just 10 people came by the first day, and three the second. The only one really interested in buying was encumbered by a complicated financial contingency that Minsek worried wouldn’t work.
Professional advice, anyone?
By the second week, she was talking to real estate agents. But Minsek said she still wasn’t prepared to pay a 6% commission. She thought she had located a few more potential buyers via Craigslist and wanted an agent to vet them for a reduced fee of perhaps 2%.
Is finding prospective buyers the sole value-add? Or is value added throughout the entire process?
“I’m under a time constraint and it’s difficult for me to take time off to show the house,” she said. “Otherwise I would be able to do it all myself.”
You successfully sell your house once; you’d like the first purchase and sale you sign to be the last one. Sometimes it’s harder than it looks to make the sale stick:
According to the National Association of Realtors, 5% of all home sales in 2004 were originally listed as FSBO, but the owners went on to use a licensed agent to get a sale.
7. Work contingent
“The people who contact me are professional and savvy and ready to buy,” Yohannes said.
Many of the owners interviewed concede they may have been able to get a higher price if they had used an agent, but they think they still would have paid more in commissions — so they came out ahead in the long run.
“I buy and sell, so I’m on both ends and I prefer not to use an agent when I buy, either, because I can get a better deal,” Bantayehu said. He thinks buyers realize the seller is potentially passing along some of the savings. “Ideally they split the savings and each get 3%, but that’s a delicate balance and it’s almost impossible to achieve,” he said. “Still they both can negotiate a price they’re comfortable with. There’s a 6% savings on the table.”
That, you see, is the broker’s conundrum — by pricing their service as a percentage of the sales price, and taking payment entirely contingent, they obscure search costs, process efficiency, consumption stimulation, time in inventory … in short, everything but the gross price.
What’s the new business model?
Sellers have always tried to bypass agent’s commissions by selling their own properties. According to the National Association of Realtors, the number of for-sale-by-owner [FSBO] transactions nationwide has been 13% to 15% for the past decade.
“It certainly hasn’t been increasing, and we believe it may actually be decreasing,” said Iverson Moore, an association spokesman.
Keep whistling, brokers, you’re not past it yet …
He said FSBOs may be able to use the Internet to more effectively market their properties, but they still face problems when they attempt to sell without professional help, including identifying qualified buyers and negotiating legalities.
But some people, like Owners.com’s Udelson, think the rapid rise of Internet sites, combined with a self-sufficient generation, will eventually revolutionize the real estate industry, just as it has revolutionized the travel industry.
“It’s going to be a big, big challenge for real estate agents in the years ahead,” he said. “The challenge is for the industry to come up with new service options to address the needs of this emerging generation — such as flat fees for specific services, discounted commissions or services for do-it-yourself sellers.”
Ironically, the new internet broker model may resemble not so much the travel agency as the car dealership — another business whose model has completely changed in a decade:
- Take out the hype.
- Give away information assembly for free.
- Educate your consumer for free. Sites that teach something will bring consumers back when they are ready to buy.
- Provide added value through pricing transparency and choice selection.
- Price a whole-outcome service.
- Specialize in a niche.
- Price your service in a way that removes perverse incentives.
- Facilitate, don’t pressurize.
- Don’t scorn the breakthrough technology, use it!
All of the foregoing, by the way, is good advice for investment bankers and affordable housing consultants as well.
In fact, the real estate section on Craigslist has become so popular that some professional real estate agents are using it to advertise properties as well. Sometimes their ads are almost indistinguishable from those placed by the FSBOs and don’t reveal that the contact number is for an agent, not the owner.
“That’s going to ruin it,” Mitchell bemoaned. [Moaned, darn it! Doesn’t the WaPo have editors? — Ed.] “People go on there looking for deals — and to deal with sellers directly. If it becomes just another way for realtors or car salesmen to advertise, then it defeats the purpose.”
Does it?
“Matchmaker, matchmaker, make me a match!”
