How is it that despite incredible advancements in the technology available to real estate agents and tremendous increases in agent productivity and efficiency is it possible that the commission charged by most firms has not changed in the last 30 years and is still 6% of the sales price?  That defies every basic economic principle.   I cannot think of another service industry where advancements in technology and productivity did not lead to lower prices.

One comparable example is stock brokerage firms.  Firms used to charge hundreds of dollars to execute trades for their clients.  Enter companies like E-Trade and Scott Trade who offered to execute trades for $15 or less.  Now most brokerage firms do not even charge their clients to execute trades.  Instead they focus their services on advice and wealth management.

In addition to being more efficient, studies have been done that demonstrate that real estate agents do not end up securing higher prices than homeowners that sell their own homes.   In fact Steven D. Levitt and Stephen J. Dubner cite these studies in their book Super Freakonomics leading them to conclude that when analyzing which type of agent provides greater value a pimp or Realtor, “it seems clear that a pimp’s services are considerably more valuable than a Realtor’s.”

The role of an agent has changed.  Like changes in the stock brokerage industry, the role of an agent these days is to utilize their knowledge as well as the technology available to them to provide advice for their clients.  Their role is not to be a market maker helping buyers and sellers find one another.  The internet allows buyers and sellers to find one another.  Instead, buyers and sellers need advice through the process once they find one another.  That is the role of the agent and the fees charged should be commensurate with the services provided.

It is time for a change.

From yesterday’s vermontbiz.com

According to analysis of the MLS (Multiple Listing Service), real estate sales in Vermont increased by slightly over 10 percent in the first quarter of 2012. Compared to last year, MLS data for 2012 shows 955 sales while the first quarter of 2011 saw total sales of 867. This increase can be attributed to increased buyer confidence that the housing market is starting to return to equilibrium after 2008’s “Great Recession.”

“While we still aren’t seeing the same level of confidence that we did in 2006 or 2007, it is greater now than at any point during the prior four years,” said Rob Foley, owner of Flat Fee Real Estate in Burlington. MLS data shows that Chittenden County experienced an increase from 224 sales in the first quarter of 2011 to 243 sales in the first quarter of 2012, and the median home price increased by $1,000.

While experts warn that the national housing market could suffer another blow from the ‘shadow market’ of foreclosures (proceedings that banks have been delaying until the robo-signing litigation is completed), Foley believes that the Vermont market will be largely unaffected, and will continue its recovery. “The Vermont market is more stable, and in better health, than national markets. Our state sees less speculative housing activity, lending practices are more conservative, and inventory tends to track carefully to primary home ownership demand, all of which lead me to expect a continued recovery of Vermont home prices.”

http://www.rd.com/slideshows/13-things-your-real-estate-agent-wont-tell-you/

Flat Fee’s Rob Foley quoted in Pittsburgh Post Gazette story regarding “lease to own”.

Leasing to own or more commonly known as “rent to own” is in essence the “layaway” of real estate.   However, unlike setting aside consumer goods, renting real estate to eventually own presents a number of practical and legal challenges not found with consumer goods.

In the rent to own situation, the buyer and seller typically enter into a purchase and sale contract that stipulates the buyer shall be entitled to pre-closing occupancy of the home.  One major difference between the rent to own contract and your standard purchase and sale contract is that the seller will likely require a much larger good faith deposit from the buyer.  The reason for a larger deposit is that the seller is being asked to bear greater risk than in the normal context because of the longer duration between the execution of the contract and the closing.

In addition to a purchase and sale agreement between the parties, the buyer and seller typically enter into a lease agreement.  The creation of the landlord-tenant relationship between buyer and seller is the second major difference between the rent to own contract and the standard purchase and sale contract.   It is this difference that creates the greatest practical and legal challenges.

From a practical perspective, the buyer essentially gets to take a long term “test drive” of the home that they are supposed to purchase.  The buyer may discover after living in the home for a time that they really don’t care for the home or there are particular issues that they just rather not address as the eventual owners.  Unlike most buyers that may suffer slight buyer remorse, a buyer that rents prior to owning can suffer from tremendous buyer remorse.  If this happens then it is likely that both the landlord-tenant relationship will deteriorate and so to will the buyer-seller relationship between the parties.

From a legal perspective, the rent to own situation can lead to unusual situations not found in your normal purchase and sale.  For instance, if the buyer and seller in a non-rent to own situation disagree, the two parties can simply part ways.  In the rent to own, this is not possible.  If a dispute arises in the rent to own situation, given the legal protections of tenants under most state laws, then the seller will need to begin an eviction to terminate their relationship.

While there are negative implications in the rent to own scenario, there are of course benefits.   This type of situation is particularly beneficial where the seller has already moved because they get a party to occupy the property and cover the carrying costs while knowing that in most circumstances they will eventually be selling the property to their tenant.

Earlier this week one of the principal real estate brokers of the largest firm in Burlington suggested that my company’s Radon Addendum “incorrectly states that 2 pCi/L is the US EPA recommended acceptable level for radon.  The actual level recommended by the US EPA is 4.0 pCi/L.”

I would understand if a junior agent made such a comment but for a principal of the largest local firm to make such a statement stunned me.  Here is language directly from the EPA’s website: “EPA recommends that Americans consider fixing their homes when the radon level is between 2 pCi/L and 4 pCi/L.”

Clearly the EPA does not think that 4pCi/L is an acceptable radon level and our Radon Addendum correctly states the EPA’s position.

I urge all real estate professionals to educate themselves so that they know of what they speak.  Have a good weekend.

Most agents that represent buyers require the buyers to pay them a percentage of the purchase price as their fee for assisting in the purchase of a new home.  There is an inherent conflict in this model.

A buyer agent has a fiduciary obligation to act in the best interest of their client.  However, because the buyer agent requires their client to pay them a percentage of the sales price, the agent’s interest is actually in conflict with the buyer’s interest.

The buyer’s interest is to pay as little as possible for the home.  In contrast, the agent’s interest is to get paid as much as possible for each transaction.  Because the agent gets paid more if the buyer pays more, there is a divergence in the interest of the client and agent.

Arguably this inherent conflict is itself a breach of the fiduciary obligation an agent owes to its buyer clients.  We recommend that buyers fully discuss this potential conflict with their agent before signing any agreement.

Because of the emotional aspects of homeownership, it is natural when selling a home to believe that your house is better than any other comparable property on the market and as a result is worth more than any other comparable property.

Real estate agents are very cognizant of these feelings and some unscrupulous agents will prey upon these emotions to help secure your business.

Some real estate agents will intentionally provide a homeowner with an unrealistic valuation of their home when trying to secure their listing.  The theory is that if the agent can secure the initial listing that they can later convince the seller to reduce the listing price to a more realistic one.

It is normally easy to convince sellers to reduce the price after the initial inflated listing price because the seller sees little activity at the unrealistic price.  The agent will say something like, “in a good market your home would have sold quickly at this price, but because we are in a challenging market I think you need to reduce the price to help stimulate activity.”

The practice described above is known as “buying a listing” and it is unethical.    Please “Don’t Be Bought”.  Thank you.

Way too often these days I hear real estate agents tell prospective clients that their firm “aggressively markets” its listings.

Agents use the term “aggressive” when referring to their services because it is a buzz word.  Agents want to invoke images in the prospective client’s mind of a fast paced “wheeler and dealer” type that can get results fast.

The truth of the matter is that “aggressive marketing” of listings is an illusion.   Every firm utilizes the same tools and has access to the same pool of buyers.

Every firm utilizes the MLS.  The MLS then pushes the listings out to all of the local and national brokerage websites.  Agents also have access to Craigslist and other message boards to post listings.  Thus, all agents advertise their listings in the same places and in very similar ways.

In addition to having access to the same listing websites, firms have access to the same pool of buyers.  No firm has a secret or exclusive pool of buyers.  Most, if not all, buyers these days search for properties online themselves before ever contacting a real estate agent.  Thus, every firm has access to the same pool of buyers.

The only reason agents and firms use the term “aggressive” is to create a perception of strength and power.  Instead of creating perceptions based upon an illusion, agents should explain to potential sellers what the benefits of their services are and how they differ in substance from the services provided by other firms.

While the internet has made the process of buying and selling homes much more efficient, there have been a few drawbacks associated with the ability of buyers and sellers to easily access volumes of property information online.

One notable drawback has been what I refer to as the “Zillow Effect”.

Zillow is a popular website that allows buyers and sellers to look up listings of homes and then determine an estimate of the home’s value. Zillow, like other desktop appraisal software, bases its values on recent sales from databases of public information.

Zillow, like other desktop appraisal systems, is very good at giving broad general estimates of value.  However, also like desktop appraisal systems, Zillow does a poor job of providing a detailed analysis of value based upon a particular home.

Zillow does not have the ability to judge the interior quality of a home.  It also has no way of knowing whether the home has large items of deferred maintenance or needs immediate repairs.   As such, Zillow’s estimate of value can be off by more than 10% in many cases.

The problem with sites like Zillow is that sellers have started relying upon the values provided as the absolute accurate fair market value for their home.  In many cases, the estimate provided by Zillow creates unrealistic expectations for sellers.  This unrealistic expectation of value and sales price is the “Zillow Effect”.

Sellers need to understand that Zillow is a great tool for getting a general sense of the market but a poor tool for determining exact value for a home.  Zillow is simply processing readily available public data of sales.  It does not process the quality of individual homes.  As a result, sellers need to take Zillow’s estimates with a grain of salt and need to understand the other market factors that drive prices.