What else is new? The NAR is asking the government for handouts.

As I’ve mentioned before, the last thing we need is for the government to prop up inflated home prices. Nevertheless, the NAR came up with their four point housing stimulus plan a while ago, in an attempt to do just that. Last week they emailed realtors with a Call To Action to get them, and their clients, to email their representatives in Washington in support of the handouts. Chicago Association of Realtors President David Hanna is quoted: “Your action has never been so important, now is the time for you to stand up for your industry and demand the changes we need. Every Realtor must participate in this Call to Action, please contact your representatives and urge your peers and clients to as well.”

Here, in a nutshell, is what they are asking for:

1. Make the $7500 tax credit available to all buyers and eliminate the repayment requirement.
2. Make the 2008 FHA, Fannie Mae and Freddie Mac loan limits permanent.
3. Target more funds to mortgage relief and create a federal mortgage interest buy-down program to make below-market rates available.
4. Permanently bar banks from engaging in real estate brokerage and management.

Here, in a nutshell, are the problems with each of the four points:

1. Why should people who make $200K per year get a tax credit from the government? For that matter, why should anyone? The government should not be subsidizing home purchases. Not to mention that this would cost at least $38B per year.
2. As if Fannie and Freddie weren’t already spread too thin.
3. The very existence of Fannie and Freddie is a buy-down program. They effectively lower mortgage rates. In fact, the entire economic bailout program is helping to lower mortgage rates and low mortgage rates is what got us here to begin with.
4. And this will help the economy how? By keeping real estate commissions high? The NAR is positioning this proposal as necessary to keep the banks focused on fixing all their problems. But come on! Could anything be more blatantly anti-competitive?

It’s stuff like this that gives Realtors a bad name.

As I’ve written in the past, the real estate industry is full of really weird rules - or maybe they’re not that weird in light of the fact that the intention is often to undermine competition.

One such set of rules pertains to the arcane world of IDX and VOW - two different ways for MLS listings to be distributed across the Internet. The rules regarding these two different protocols are so convoluted that I always need to refer back to my notes to remember what the deal is.

IDX stands for Internet Data Exchange and is also known as Broker Reciprocity. Brokers who participate in this program agree to allow each other to display their listings on each other’s Web sites. When a listing is distributed via IDX it can be shown on any Web site without the user needing to register. However, the local MLS may restrict the display of some data fields and the Web site must display the name of the listing broker. OK…with the exception of the data restriction and the fact that brokers can choose not to reciprocate (why in the world wouldn’t everyone reciprocate?), this seems to be the way things should work. So why is there any other way to do business? Because this is real estate and nothing is simple. Hence, there is VOW.

VOW stands for Virtual Office Web site. The idea of VOW is that the Web site is a virtual office of the real estate broker and therefore the broker has established a client relationship with the visitor - provided the visitor has registered. Once the visitor registers, the broker is allowed to interact with that client just like they would if the client walked in the door of their office. They can show them all the information on any listing, whether or not the listing agent is participating in the reciprocity program. Seems to me to be a trivial distinction in order to show consumers something they should have access to without restriction.

When I first started researching the real estate industry the Multiple Listing Service of Northern Illinois (MLSNI) told me that only 60% of the listings were available through IDX in the Chicago area. Therefore, a Web site operator really needed to get users to register in order to show them all the listings. However, since then MLSNI merged with the other local MLS system (MAP) and in the process IDX became the default process. As far as I know this had nothing to do with the recent settlement between the NAR and the DOJ. Today around 97% of the listings are available through IDX. In other words, registration is really not necessary.

So then why do many broker sites still require registration, often with messages like the following when searching on their Web site?

It looks like Remax is only showing their own listings without registration but requiring registration to see anyone else’s listings, under the guise of MLS rules. Just to be clear, it is a flat out lie that the MLS requires registration - a great way to engender trust.

So why is registration required? Because they want your contact information so that they can follow up with you. We would love to follow up with you also but we don’t want registration to stand in the way of you getting what you want right now. We figure that if you would like us to follow up with you you will contact us.

People who are aware of the considerable lobbying machine operated by Realtors get pretty hot under the collar about it. I don’t blame them. I’ve always seen this as an obviously self serving activity and the description of these organization’s purpose is pretty scary to consumers.

• Protects your income and maintains your commissions.
• Educates and elects policy-makers who support REALTOR issues.
• The candidates we support make decisions that affect REALTORS’ ability to assist clients in buying and selling property.
• RPAC ensures that we have strong and informed candidates who support our issues.

Of course, that’s what all lobbying efforts are so why should this one be any different? Which is why I’m not in favor of lobbying in general. But I guess it’s a fact of life with our political system.

I bring up the Realtor lobbying machine because I recently got the invoice for my 2009 dues for the three levels of Realtor associations: national, Illinois, and Chicago. (I have no idea why we need three levels of this stuff. I think it’s part of the bloated bureaucracy of this industry.) Just to give you an idea of what it costs to be a Realtor, those 3 total $520 - and that’s before MLS fees. But added on to the bottom of the invoice are”voluntary” charges for RPAC (REALTORS® Political Action Committee) and CARPAC (Chicago Association of REALTORS® Political Action Committee), which total an additional $75. In going through the online payment process it’s actually kind of tricky to remove these charges. However, if all of the 17,000 Realtors in Chicago (At least that’s how many there were at the end of 2007. Maybe a lot of these folks have left the business since the gravy train is gone.) were to pay this money that would amount to $1.2 MM for just Chicago. Of course, I’m sure that many Realtors, like me, chose not to pay this money. (I don’t think I’ve ever supported a PAC.) However, RPAC’s goal for the year is to raise a total of $10 MM.

As a side note, RPAC claims to be the largest bipartisan PAC in the world. In the 2006 elections they spent $12 MM supporting various candidates sympathetic to Realtors’ causes. You can check the following link to see exactly what else these Realtor PACs do.

Surprisingly, it’s actually not such a bad list after all. Sure, it has it’s share of anti-competitive initiatives, such as keeping banks out of the real estate business. However, overall, it’s dominated by activities in support of homeowners and landlords. Perhaps one of the most important pro-homeowner activities CARPAC engaged in during the last year isn’t even listed. That would be their opposition to the city of Chicago’s increase in the transfer tax. It’s not listed because CAR chose to highlight their accomplishments and this is a battle they lost. Nevertheless, I think they deserve an A for effort against what I think is a really bad idea.

If you like the list, I’m sure they would take your money - even if you’re not a Realtor.

Nothing irritates me more than a lack of basic ethics among certain Chicago real estate professionals. It’s an endemic problem in the industry, and one that motivated me to enter the industry. However, maybe there’s such a thing as real estate Karma, as my recent experience with a certain real estate developer has led me to believe.

The names in this story are being withheld to protect the guilty and to protect me from a slander lawsuit. Of course, if it’s true then it’s not slander but then I would have to pay my lawyer to prove it and I like my lawyer but I would rather not pay him for defending me against a slander claim.

The story begins with my client who was looking for a condo. We finally found what appeared to be a nice garden unit. However, on a subsequent visit to the property we encountered one of the other residents of the building who not so subtly let it be known that he and his wife were having issues with the developer. They had been the first people to buy in the building and they had a laundry list of problems that they felt the developer needed to address. However, according to them, the developer was either not responsive or didn’t fix things properly. Since they mentioned that many of these issues had been uncovered during an inspection of the property I asked them if I could see a copy of their inspection report. Karma #1: the developer had unresolved issues with a buyer and now it was coming back to haunt them. Oh…did I mention that the property had been on the market since August of 2007, starting at $219,000 and was now listed at $169,000?

I then went through this issue list with the developer who either claimed that the issues had subsequently been fixed or that they really weren’t problems or that they would be fixed. My client and I discussed our strategy and decided to make an offer contingent upon some important subset of these issues being fixed. Once we did that it became much clearer exactly where the developer was on each of these issues and what they were willing to do: not much. In addition, some problems that were supposed to have been fixed “next week” had still not been fixed. So our mistrust of this developer was growing rapidly. I’ll skip past a few rounds of negotiations but let’s just say that we dropped our upper limit in order to compensate for the problems and our mistrust of the developer.

Finally we agreed on terms and scheduled the inspection but between the last time we had seen the unit and the inspection it had rained - rather heavily. I think you can see where this is going - especially since this was a garden unit. When the inspector arrived he didn’t even set down his bag before pointing out that not only did the unit have water damage but that there had been an attempt to hide it. The lower two feet of many of the walls had been repainted. The inspector also found evidence of mold and, as a side note, there were serious deficiencies in the electrical wiring. That’s 3 material defects that are required disclosures by law.

We ran into that other resident of the building again and he confirmed that he had seen workmen in the unit during the past couple of weeks replacing carpeting and drywall - repairs that are purely cosmetic and won’t stop the water from coming in. I think that pretty much killed the deal right there. Within a week the listing price dropped to $159,000 and a week later it dropped to $155,000. Did I mention that when I went by the developer’s office to present the offer there were several large Mercedes in the parking lot?

Fast forward to Monday of this week. It rains in biblical proportions. Tuesday morning the listing on this unit is canceled. Coincidence? I think not. Let’s just say that in response to an inquiry my sources have now confirmed that there was extensive damage to the unit and once again the developer is making cosmetic repairs. Karma #2: they didn’t fix it correctly and now they are having to fix it again.

This is a rather interesting situation. The developer is required to disclose these problems to potential buyers. Think they will? If they don’t they can be sued by the buyer. If they do who is going to buy the place? Or will the developer just throw in a lifetime supply of drywall and carpeting? If the developer doesn’t fix the water leakage do they expect the condo association to fix it? There is a paper trail a mile long documenting this problem and there are numerous witnesses to the aftermath. Think the association will allow themselves to get stuck with this problem?

What goes around comes around.

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.