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Articles for ‘Industry Issues’

2009 Took Its Toll On The Real Estate Industry

Friday, February 19th, 2010 by Gary Lucido

I guess it’s no surprise that 2009 was a tough year for the real estate industry but I’ve just run across some information that gives us a pretty good idea of just how bad it was. After losing 4,000 agents in 2008, the Chicago area lost another 1,000 agents in 2009. That’s a 7.6% decline on top of last year’s 25% drop, bringing the total down to 12,054 as of early February. I guess these agents ran through all their relatives and friends – or they’re no longer on speaking terms with them.

Meanwhile, business hasn’t  been good for the brokerages either. Realogy, which is probably the largest brokerage organization, just reported a loss of $262 MM on revenue of $3.9 B. In case you didn’t know (most people don’t), Realogy is the parent organization of the following brokerages:

  • Coldwell Banker
  • Century 21
  • ERA
  • Better Homes & Gardens Real Estate
  • Sotheby’s International Realty (and you thought they were high end)
  • NRT

How do you charge outrageous commissions and still lose money? For starters, it doesn’t help if you have a huge overhead and spend a lot of money on advertising of questionable value. However, the biggest issue is that Realogy was taken private in 2007 by Apollo Management, a private equity investment firm. As with most private equity deals this one was heavily leveraged and today Realogy still has around $6.7 B of debt from that deal. Oh…and they have negative equity – close to $1 B worth – which is appropriate given that most of their former clients also have negative equity. Things got so bad last fall that Realogy was on the brink of bankruptcy when Carl Icahn stepped in at the last minute and saved them.

BTW, I find Realogy’s so-called strategy interesting. Either they’re not too bright in having all these brokerages that compete with one another or they’re smart enough to realize that there really isn’t any real competition between them. What do you think?

Anyway, Realogy’s woes are symptomatic of the entire real estate industry. RealTrends and Bloomberg recently reported that the dollar value of real estate commissions dropped by 6.2% last year. So, that’s about in line with the decline in the number of real estate agents in Chicago, which makes sense.

But what does all this mean for you? I’m afraid not much. There are still more real estate agents than there is productive work for them (much more on that topic in upcoming posts). And even if Realogy closed the doors on all their brokerages I maintain that it would have zero impact on the real estate industry because all those realtors would simply get new business cards with a different broker’s name on them. At least that’s the way it works with the independent contractor model (more on this some day soon also).

What home sellers don’t know…

Thursday, December 17th, 2009 by Gary Lucido

…will definitely hurt them.

I was poking around this morning doing some research on enhancing real estate searches for our Web site. We’re about to introduce building specific searches. While testing the listings for 340 On The Park I discovered that we are only allowed to show 9 listings, while there are actually 15 units for sale in the building. Why can’t we show those other 6 listings? Well, we could if we required you to register but we don’t want to do that because registration is a pain in the ass. Furthermore, it’s a real turn off for real estate buyers who are afraid that some pushy real estate agent is going to start harassing them – not to mention that many home buyers provide bogus registration information when faced with that requirement.

But why do we have to get you to register to see these other 6 listings? Because the real estate brokers that are listing those units do not participate in an arcane and convoluted program called broker reciprocity. As explained in that prior post real estate listings from brokers that participate in the program get put in the IDX feed, which is broadly available on all realtor Web sites without registration. If a broker does not participate, their real estate listings are only available in the VOW feed that requires registration to access on a realtor’s Web site.

What is surprising about the 340 On The Park situation is that 6 out of 15 listings are not in the IDX feed. That’s a huge number. Just the other day I did a quick estimate and determined that in the city of Chicago only about 2 – 3% of the real estate listings are missing from the IDX feed, which is consistent with what the MLS folks tell me. That’s the reason that we decided to not require registration on our site.

So why is 340 On The Park so different? It all comes down to the dominant broker in the building who has all 6 of those listings. Apparently, this broker does not participate in the reciprocity program. This is especially peculiar in light of the fact that a real estate broker has to actually go through the trouble of opting out of the broker reciprocity program. In addition, opting out of the program only prevents the listings from showing up on other realtors’ Web sites. The listing brokerage still has the ability to advertise the listing on any Web site they choose – e.g. Realtor.com, where these “missing” listings do appear and without registration. So the listing brokerage selectively withholds access from the Web sites of brokers like us who refuse to require registration for accessing MLS listings (we still have access to the properties through the MLS system but we can’t put them on our Web site without requiring registration).

All of these shenanigans highlight yet another problem you can run into using the top producer. So, if your home is currently listed and you want to find out if your realtor is holding out on you just check for your home on our site. If it doesn’t show up then it’s not getting the broadest distribution possible.

As I asked before, why would any broker not want their listings to receive the broadest exposure possible? Could it be that they are trying to restrict access to their listings so as to increase  the likelihood of their getting both sides of the transaction? Nahhhh. A real estate broker would never put their own self-interest above that of their client.

Realtors Loath To Discount Commissions

Saturday, December 12th, 2009 by Gary Lucido

That’s basically the headline of one of the articles in the weekly email that I got from the National Association of Realtors (NAR) on Friday morning. Well, the headline certainly doesn’t apply to this realtor!

The very short article references a recent LA Times article that features quotes from realtors like “You’d be foolish to give part of your salary away. I’m worth what I get paid” and “[realtors are] really digging in their heels because they aren’t selling as many homes.” Hmmm. First of all, if the realtor works the low end of the real estate market they are worth what they get paid but in Chicago there are an awful lot of realtors collecting pretty fat commission checks from $500K+ real estate transactions. As for realtors not selling as many homes these days…well, that’s not the customer’s problem now, is it? All that means is that there are still too many real estate agents out there.

Given the tone of the NAR article and the fact that it was only 158 words I couldn’t help but wondering if it was nothing more than a blatant attempt at price signaling – i.e. “don’t cut your commissions”. The original LA Times article, at 1547 words, conveyed a much different tone which I summarize as follows:

  • Some real estate brokers are willing to discount their commissions but you have to ask – well, not always :)
  • Agents are reluctant to discount their commissions because in this market they have to work a lot harder to close a deal
  • Some discount brokers may underprice a house in order to get a quick sale
  • In a related article the author points out that a discount broker may overprice a house in order to have a listing to attract buyers
  • There are several special situations in which you might be able to get a discount – e.g. when the listing agent acts as a dual agent or when the broker is independent of a national chain (these chains usually take 8% of all commissions)

On the whole it’s a much more balanced picture than that presented in the short NAR article. The only peculiar thing I noticed was that in one article the author cautions about discount brokers overpricing a house and then in another article cautions about them underpricing a house. The truth of the matter is that any realtor, discount or not, can either intentionally or unintentionally overprice or underprice a house. I would not assume that it’s more likely to happen with a discount broker.

One last point: there were two glaring omissions in the LA Times article. First, there was no mention of service level. Many discount brokers offer a discount because they provide a lower level of service. Consumers should always find out how the realtor can afford to offer a discount real estate commission. Second, there was no discussion of the buy side, where buyers can get rebates of the seller paid commission from their agents. Let’s face it, for every seller there is a buyer (eventually we hope), so you can’t ignore this half of the equation and the savings can be just as substantial.

You’d be foolish to give part of your salary away. I’m worth what I get paid

Illinois Legislature Rewrites Real Estate Act

Friday, November 6th, 2009 by Gary Lucido

Last week the Illinois Senate passed a bill to substantially rewrite the Real Estate Act of 2000. The bill now goes to the governor for signature. Here are some of the highlights of the bill:

They’re changing the terminology of the industry. Currently, a Salesperson is what most people think of as a regular agent and Broker is the person that the Salesperson works for. Of course, the public thinks of everyone as a broker because, well, they broker deals. So they’re changing the terminology to match popular usage. The new terms will be Broker and Managing Broker. Probably a good idea since realtors aren’t supposed to be selling anything when they are working for a buyer (yeah, you heard me right).

They’re increasing the course work required in order to become either a broker or a managing broker. The broker requirement is going up from 45 classroom hours to 90 hours, while the managing broker requirement is going up from 120 hours to 165 hours. 15 of these hours have to be situational (not exactly sure what they have in mind here but with any luck it will include how to answer your phone, how to return phone calls, and how to use email). In addition, they are increasing the ongoing educational requirements for both licenses.

The increase in coursework is definitely a good idea because, let’s face it, there are a lot of Bozos running around as real estate agents. If nothing else this should clear the ranks out a bit, pushing some of the marginal players over the edge. You would be surprised at how much is missing from the current curriculum that we have had to figure out on our own. For example:

  • How to handle a short sale
  • How to find and pull up public records
  • How to determine zoning
  • Where to find the building codes
  • How to find out what the development plans are for adjoining properties
  • All the documents required for a closing
  • Typical inspection issues to look out for
  • How to use the MLS effectively

Of course, there’s no guarantee that they will apply the additional course hours to this practical stuff.

In addition to a host of consumer protection initiatives, another new requirement is that a broker will have to be licensed for at least 2 years before becoming a managing broker. The cynical part of me thinks that this is an attempt to restrict competition but I guess it makes sense – for the average person. However, given that the job is not exactly rocket science, I know of at least a couple of people who were able to move quickly into this role, without a lot of time in the trenches, and became more effective than most overnight.

This new law takes effect December 31, 2009 but existing licensees have until April 30, 2012 to comply with the new requirements. So, there’s still plenty of damage that can be done in the meantime.

If Your Realtor Gives You A Pumpkin…

Monday, October 19th, 2009 by Gary Lucido

It’s that time of year again when realtors do their annual pumpkin dropoff. Well…not all realtors – just the ones that follow the traditional real estate marketing model of ingratiating yourself with your clients. It’s an old realtor ploy popularized in the realtors’ bible: How To List & Sell Real Estate In The 21st Century. On page page 53 the author tells the story about how she learned about the success of Tommy Hopkins in Simi Valley a few weeks after she started in real estate: “For Halloween, he rents a truck and loads it up with pumpkins. Then he puts on a ghost costume and drives around his neighborhood giving away pumpkins.” She includes this strategy again under her “Full Year Farming Almanac” on page 93 under October SUPER-promotion.

Uhhhh…I refuse to go around in a ghost costume – even at Halloween. I’d rather discount my commission and give rebates to buyers.

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