One of the most important decisions in buying or selling a house is finding a good real estate agent. Unfortunately it’s not an easy process for one simple reason. There are a lot of really bad real estate agents out there. The following quote in the November 2007 issue of Realtor Magazine from Bert Waugh Jr., CEO of Prudential Northwest Properties in Portland, Ore., sums it up nicely “Most of the surveys you see on how people think about real estate professionals don’t paint a good picture. We as the brokers are the ones at fault, because we’re still hiring 100 percent of those who get into this business. It takes a beautician 1,700 hours to get a beauty license in Oregon; it takes a sales associate 150 for a real estate license.”

You can get a good feel for just how weak the playing field is by actually reading the direct mail pieces that come to your home or browsing through the online profiles of some real estate agents. For the most part there is nothing that distinguishes these agents from each other - there is no value proposition and in some cases… well, check out some real examples:

• Mission Statement: to assist my clients in utilizing other peoples (sic) money to aquire (sic) appreciating assets of which the profits can be 100% tax free
• I have excellent customer service skills and always put my clients first.
• My #1 priority in the course of business is my clients.
• As a __________ agent, I have a commitment to my clients to provide them with exceptional service.
• I am a client advocate…I am customer focused and work at clients’ pace.

I think you get the picture.

So let’s talk about how you should go about making this decision and, just as importantly, how not to make the decision.

Knowledge

One of the key reasons for using a real estate agent is to be able to tap into their knowledge of the market and the real estate transaction. Don’t be afraid to quiz prospective agents about information that you are looking to access through them. However, no agent can know everything so it’s also important to find an agent who has…

Intelligence

It’s critical to find an agent that is resourceful, knows how to deal with unusual situations, and knows where to go to get answers to questions. Unfortunately, determining how smart an agent is is a bit of a squishy undertaking. You can start by talking to them to see how they come across. You can also find out about what educational background they have, in what academic area, and what business experience they had prior to their real estate career.

Integrity

As you can surely appreciate, when dealing with the purchase or sale of a home integrity is a major consideration and the real estate industry has not done a great job of making people comfortable with the integrity of their agents. In the absence of direct feedback on the integrity of an agent there are a variety of questions you can ask to reveal an agent’s integrity:

• Have you ever served as a dual agent? In that case describe for me how were you able to balance the interests of both the buyer and the seller?
• Have you ever discouraged a buyer from considering a home that they liked? Tell me about it.
• Tell me about how co-operating bonuses work and how you deal with them when working with a buyer. See if you can draw them into a discussion of the possible conflict of interest in showing a buyer a home with a bonus and whether or not they disclose these bonuses to buyers. Of course, if you come right out and ask them if they do, they will answer “yes”.

Business Model

What type of business model does the agent/brokerage employ? Will you be getting full service or will you be expected to do a lot of the work yourself? Find out exactly what services and support you will be receiving. If you are selling your home find out what vehicles will be used to market it. Here is the typical list:

• MLS listing
• Professional photos
• Brochures
• Direct mail
• Newspaper
• Newspaper Web site
• Specialty magazines
• Open houses
• Broker open houses
• Email
• Craig’s list
• Other Web sites

This is a fairly standard list, yet agents will present this list as though they are the only ones that can provide it - and consumers fall for this all the time. On the other hand, the list is useful for what an agent might leave out in an effort to cut costs. The only trick is that several of these are ineffective at selling your home and are used to merely pacify you, raising their operating costs in the process. So you need to carefully consider the options being presented.

One other consideration. Find out how the agent will communicate with you and how often. During what days/hours are they reachable?

Cost

Don’t let anyone fool you. Cost does matter. Find out what the agent charges and how they justify their commission. And if you are buying find out if the agent provides a commission rebate and how much you will be getting back. At this point most agents will look at you like you are from another planet.

Skills

Find out what capabilities the agent has in key areas. There is no better way to do this than to get specific:

• Negotiation skills. Ask the agent to describe for you in detail a particularly difficult negotiation that they handled.
• Communication skills. Is the agent articulate? If they can not communicate clearly to you then not only will you have difficulty in working with them but they will not be able to communicate effectively with the agents on the other side of your transaction.
• Marketing skills. This is key if you are selling. Ask the agent to write up a description of your property for the MLS to share with you. Does it capture the essence of your home? Does it set your home apart from other properties in the area?

Avoid These Pitfalls

Friends or Relatives in the Business

Friends don’t let friends handle their real estate business - unless they are the most qualified to represent them. Many people make the mistake of using a friend or relative simply because they feel like they are expected to do so. In fact, this is a key element of the traditional real estate model: get your friends to do business with you because they won’t try to negotiate the commission down. However, this creates a serious problem when the friend or relative is not really qualified. In fact, from our observation of the characters in this industry we would guess this happens at least 50% of the time.

Getting a Referral From Another Agent

Agents love to give referrals - for a very simple, self serving reason. They get paid handsomely to do so - anywhere from 25 - 30% of the commission. They will give you a glowing recommendation of someone from the other side of the country whom they have never met - just so they can collect that fee. Often that person is just some random agent from an affiliated office. So beware of referrals and ask the referring agent specifically what their experience has been with the referral.

Getting a Referral From a Friend

There is nothing wrong with getting a referral from a friend but just make sure that your friend’s referral is based upon a rigorous examination of objective criteria. Ask them what they specifically liked about the agent. If all they can talk about is the annual wine and cheese picnic or birthday cards or pumpkins at Halloween then you should look elsewhere.

Going With the High Volume Agent

Everyone wants to work with the winner but there are a couple of problems with this approach. First, top producers don’t discount because they don’t need to. They have all the business they can handle. Second, they have so much business that they won’t have much time for your transaction. You will either have trouble getting the time of day from them or they have a team of agents working for them and you will be passed off to one of them.

Going With the Highly Visible Agent

The agent that has high name recognition usually spends a lot of money and time building up that recognition. They advertise, they belong to civic groups, and they do lots of charity work. But that says nothing about their capabilities. The only thing you will know for sure is that they are brilliant at marketing…themselves. And all their marketing activity raises their operating costs.

Going With the Big, Highly Visible Brokerage

Some people get a sense of security from going with an agent from a large, highly visible brokerage with a particularly appealing image in the marketplace. Similarly they might be impressed with a fancy office on Michigan Avenue and CMAs that are bound in leather. But it’s a false sense of security. First, all that “brand building” is really expensive. They do that to justify their high commissions and they need their high commissions to pay for their high overhead. Second, real estate agents move between brokerages like bees pollinating flowers. The agent that works today for the broker with pictures of clients in formal wear was wearing a yellow jacket yesterday. When the rubber meets the road you will be dealing with the agent, not the brokerage, and most of the time that agent is just an independent contractor.

The Real Estate Industry’s mantra is “real estate is local”. That is supposed to calm the fears of potential buyers who are hearing about real estate woes across the country. I personally believe that the subtext of this message is supposed to be that losing money in real estate is something that happens somewhere else.

Whatever. Let’s figure out what is going on in the Chicago area because that’s what everyone here cares about. Basically it comes down to “supply…demand”. For those of you old enough to remember that was Father Guido Sarducci’s distillation of all you needed to remember about economics so why bother taking the entire course. The man was a genius.

Taking his advice a long time ago I began to track Chicago area employment as a primary indicator of the underlying demand for real estate - let’s face it, employed people buy homes. This data is available from the Bureau of Labor Statistics on a monthly basis. I focus on what’s called the broad metropolitan area that includes Naperville and Joliet because people commute all over the place around here and you can’t separate out the impact of jobs on homes in Chicago vs. Naperville for instance.

So what does the data show?

The data shows that, although employment growth in the area has slowed down a bit, employment continues to grow. January 2008, the most recent month of data, is actually slightly higher than January 2007. The other interesting thing about the data is that area employment actually declined fairly significantly during 2000 - 2003, after the tech crash. So far, we are not seeing anything nearly as bad as that time period. And interestingly, during that period, the housing market in the area did not really suffer. So the fundamentals would seem fairly strong still.

But there’s a bit more to the story. First, where is area employment headed? In last week’s Crain’s they mentioned that “the economic research unit of New York-based Moody’s Investors Service Inc. also predicts local employers will shed 19,000 jobs in the first half of 2008.” So, although employment has been largely unaffected until now, that may all soon change and we may be at the beginning of another dip. We’ll know soon enough if this is going to be an issue.

The other issue is that, although people may be capable of buying homes and may want to buy homes, they may be holding back because they are nervous about the market or they are waiting for prices to come down more. In fact, I think this may be the primary factor holding back the Chicago real estate market right now. Activity is slow because there is a fairly significant bid/ask spread in the housing market - sellers want more than buyers are willing to pay. However, sooner or later this spread has to close because eventually people have to move - for business or personal reasons. And once that spread begins to close I think we’ll see a lot of pent up demand from the employed masses looking to be satisfied.

This is Part I because I have a feeling that I am going to be writing about this topic for a long time.

Having spent a lot of time in past lives analyzing data to make business decisions I know how people often mistakenly use data or intentionally use them to misrepresent the facts. The real estate industry is ripe with examples of statistics used inappropriately and, frankly, I can’t tell if it’s just incompetence or maliciousness. Let me give you a few great examples.

Example 1

My favorite is the real estate industry’s often trumpeted “Research shows that in 2006, sellers who worked with a real estate professional sold their homes for an average of 32 percent more than homes that sold directly by their owners.” That particular quote is from the March 2008 issue of Realtor Magazine but I’ve seen variations of this quote all over the place. We’re encouraged to use it to convince sellers to use a real estate agent to sell their home. I guess they expect the cowering seller to immediately sign up for a 6 or maybe even 7% commission, which is a small price to pay for realizing a 32% higher sales price.

Excuse me? How stupid do they think we are? I don’t doubt for a minute that the statement and underlying statistics are 100% correct. And I also don’t doubt that a really good agent can get a higher price for a home than a seller can on their own. But 32%? Come on! As a REALTOR® I would be embarassed to tell a seller this.

So what’s really going on here? I think it’s pretty simple. People with more expensive homes are more likely to use a real estate agent to sell their home. This could be for any number of reasons:

• They have higher incomes and can afford to pay a commission
• The volume of home sales in their price bracket is lower so it’s a little bit harder to sell their home
• They tend to be older with larger families and have less time to spend selling a home themselves
• More expensive homes offer more fertile prospecting for real estate agents so they’re all over these owners

I think we’ve beaten this one to death.

Example 2

“Our brokerage’s sales volume is up X% over last year while all of our competitors have shown sales declines”. Again, this is intended to wow the unsuspecting buyer or seller into signing with that particular brokerage firm.

Well, I’m sure the data is correct but the implied conclusion is wrong. There are two problems with this statement:

• The number 1 way for a broker to grow is by recruiting agents from their competitors, so odds are that this is exactly what happened. I happen to know for a fact that the fastest growing broker in Chicago right now is growing exactly in this manner and is using the resulting data to try to market themselves.
• The implication is that when you sign with an agent you are somehow also benefiting from all the success of that brokerage. While that would be true of a firm that actually employs their agents, like ours, it makes no sense at all for a firm that uses independent contractors.

This issue of how brokers grow and the drawbacks of the independent contractor model are covered in more detail in our real estate industry white paper if you are interested.

This misuse of the data is endemic to the real estate industry. If it weren’t so pathetic it would actually be funny but at least it provides plenty of fodder for future blog posts.

Well, I guess that’s the problem. They’re up.

The decline in mortgage rates seems to have not only stopped in the last several weeks but it has actually reversed. During the last 12 months we have seen the rate on 30 year fixed mortgages peak at 6.4% in the middle of last year and then decline to a low of 5.3% in January. However, since then they have bounced back up to 6.1% where they are currently.

If you’ve been listening to the news this may surprise you a bit as you have been hearing a lot about what the Federal Reserve has been doing to help out the credit markets, including lowering interest rates. So you’re probably wondering what is really going on.

The answer is, as usual, that nothing is ever as simple as it seems. First of all when they say that the Federal Reserve is lowering interest rates what they are talking about is the rate on what is called federal funds, which is the rate charged for overnight loans of bank reserves at the Federal Reserve. It’s basically a short term interest rate. However, mortgages are longer term loans and unfortunately as short term rates have moved down investors have become concerned about inflation. Inflation is a byproduct of the abnormally low short term interest rates that the Fed has been creating and when investors become concerned about inflation they want a higher interest rate if their money is going to be tied up for any length of time. So this is one reason that mortgage rates have risen.

But there are other reasons as well. I’m sure you’ve heard about the rising defaults on mortgages. As investors start to get burned by defaults they start to demand a higher interest rate to compensate for those defaults. In addition, with all the turmoil in the financial markets lately large investors have been forced to liquidate some of their portfolios. Consequently they have been forced to sell large quantities of mortgages into the market. With a shortage of buyers in the market, those investors that are buying start to demand a higher rate of return and that also drives up mortgage rates.

So what does all this mean for the average homebuyer and seller? Well, I’m afraid it’s not good news. You can use our loan calculator to experiment with the numbers yourself but according to my calculations an interest rate increase from 5.3% to 6.1% on a 30 year loan results in a 9.1% increase in one’s monthly payment. So either buyers have to buy 9.1% less home or sellers have to cut their prices 9.1%. So, in a way it pays to stay on top of mortgage rates and to be ready to move quickly when rates are attractive. But don’t get carried away. The fact of the matter is that no one can predict which way rates are headed and there is no way to pick the absolute bottom. Besides, there is no guarantee that you will find that perfect home just when mortgage rates bottom out.

For those who are interested, we have created a page on our site to help you stay apprised of the recent mortgage trends.