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.

It just doesn’t stop. The NAR (National Association of Realtors) has launched what they call a Surround Sound Campaign. The idea is to talk up the real estate market by making sure that consumers get the same message from all sides. We got an email explaining that:

The key is for REALTORS® to say the same messages about the market and why “it’s a good time to buy” using many different tactics including radio, print, digital media, networking via professional organizations and word of mouth. When asked at the grocery store, church or a school function, be positive and informed about your local market.

As part of this campaign the NAR has engaged professionals to train spokespeople for local Realtor organizations in media and community relations. In addition, they have made available for download a thick Surround Sound Toolkit document to make sure we all stay on the same page.

Of course, the NAR has been broadcasting variations of this message now for 2 years and has lost tons of credibility in the process. This is the equivalent of “pumping” stocks on the message boards.

Many of these talking points are simply recycled myths, lies, and distortions of facts that we have examined before but there are a few that we haven’t looked at yet:

Current market conditions won’t last long. NAR research shows that prices are beginning to stabilize and interest rates are creeping up. A modest increase in property values is expected in 2009. Well, as a cheerleader for housing, the NAR isn’t exactly an unbiased source of this kind of information are they? There are plenty of economists out there who differ on this point and the NAR has had to downgrade their forecast several times over the past few years.

Home ownership continues to be a wise investment. FHA market share is expected to triple over the next three years, from an estimated 4 percent in 2007 to 12 percent in 2009. Aside from the fact that their date range indicates that this is an old prediction what does FHA share have to do with the wisdom of owning a home?

Americans on average still believe buying a home is a good investment. Nine out of 10 consumers consider home ownership to be a sound financial decision. We’ve seen variations of this appeal to popular opinion before. If everyone believes something it must be true, right? I think the only thing this proves is that most people in this country still believe a house is an investment rather than a place to live - which is how we got into the current mess in the first place.

Homeownership is how many American families begin to accumulate wealth. According to data from the Federal Reserve Board, a homeowner’s net worth is 46 times that of a renter’s. While the statistic may be accurate they’re clearly trying to trick you into mixing up the cause and effect here. Most likely, it’s the net worth that drives the rent vs. buy decision as opposed to the other way around.

Humorous  side notes:

As an aside, under tips for buying a home the NAR says: “Commit yourself to your new home for at least a couple of years before making your next move.” Wow! A couple of years? Wouldn’t they love people to move every 2 years! I can guarantee you that if you are planning on only staying in a house for 2 years you are better off renting on average - that is if you insist on looking at your home as an investment.

As I promised in part I of this series there is plenty to write about regarding how the real estate industry uses statistics to propagate lies and myths. Today I’d like to call your attention to an NAR sponsored Web site: www.housingmarketfacts.com, the goal of which is to talk up the real estate market. Nothing like an unbiased source of information.

Here are some of the “facts” found on this Web site:

More than three-quarters of all recent buyers believed their home purchase was at least as good as an investment in stocks. So…when three-quarters of the world thought the world was flat that made it true? It is incredible that they can even publish such a statistic. In the last 10 years this belief was probably justified but in the long run it’s simply fantasy. As I’ve pointed out before, in the long run, after adjusting for inflation, housing has had a zero return.

According to the 2007 NAR Profile of Home Buyers and Seller, first-time home buyers made a median down payment of 2 percent, while repeat buyers who financed their purchase put 16 percent down, indicating the wealth-building effect of homeownership. Well it’s bad enough that they even report this statistic in the first place but it’s really sleazy to add in their own, highly-suspect conclusion at the end of the sentence. In all likelihood the higher down payment has nothing to do with the wealth building effect of homeownership. It has everything to do with the forced savings of monthly mortgage payments and the fact that repeat buyers are older and more successful for other reasons. Do you think that maybe upwardly mobile consumers are more likely to move around?

Homeowners benefit from the power of leverage. Over 10 years, a $10,000 investment in the stock market at a normal 10 percent market rate of return would yield $23,600. The same investment as a down payment on a $200,000 home at a normal appreciation rate of 5% would return nearly 5 times the stock market return, at $110,300. Oh….my….God. This thing is wrong on so many levels I don’t know where to begin.

1. Their math is wrong, though directionally correct. The stock market return under their assumptions would be almost $26,000 and the return on the home would be almost $136,000.
2. 5% annual home appreciation is way too generous so there is nothing “normal” about it. For instance, for the 10 year period beginning in January 1987 the average appreciation for the 10 city composite in the Case-Shiller index was only 2.2%. At that rate the $10,000 down payment in their example only returns a bit under $59,000.
3. They are assuming 20 x leverage (5% down). You can leverage your stock investments as well and if you use 20 x leverage then that stock return would be almost $329,000.
4. Of course, using 20 x leverage is just not smart. It cuts both ways. If your investment goes down by 5% you are wiped out. That’s sort of what happened to people in the last couple of years.

I’ll save the rest for part III.

Anyone who is savvy enough to shop around knows that the old adage “you get what you pay for” is simply not true. The fact that many people still believe it to be true creates job security for the marketing gurus since the whole purpose of marketing is to create perceived value that is substantially greater than the actual cost of producing the product. I remember when I was a Booz, Allen consultant and we did a study for Heileman Brewing. As I had always expected, the same beer was sold under different names with drastically different prices. More telling was the fact that around 60 - 70% of the cost of a beer was in the packaging and the marketing. The beer itself was a minuscule portion of the cost, with transportation taking up the another big chunk. Marketers understood that it was better business to spend the money on marketing than the underlying product.

Continuing with the alcohol analogy a bit further, my attention was grabbed a while back when I read an April 28, 2008 BusinessWeek article about how the advertised price of a wine influenced people’s perception of the taste. In an absolutely brilliant experiment by the Standford business school and Caltech, which was published in the Proceedings of the National Academy of Sciences, researchers showed that when tasting the exact same wine under two different price tags subjects liked the wine with the higher price tag. Go figure!

Not only was this their stated preference but MRI scans on these subjects actually confirmed increased activity in their prefontal cortexes as shown in the graph below:

So the connection with real estate should be obvious at this point. If a real estate brokerage spends a lot of money on advertising an upscale image and charges a high commission, chances are that people will believe that the service they receive from such a brokerage is better. However, that isn’t necessarily the case - the wine or the beer may be exactly the same.

Now, if you think you may be susceptible to the marketing ploy of the traditional brokers we would be more than happy to provide you with our Platinum Premium Exclusive Diamond Plus service and charge you accordingly.

When people are picking a listing agent to sell their home they can fall victim to any number of self-imposed myths or outright lies perpetuated by the agents they talk to. When I hear about these it really gets my dander up. Of course, in reality, I don’t have dander. Dander is “loose scales formed on the skin and shed from the coat or feathers of various animals” so I’m not entirely sure how I can get mine up. But any way, many of these conversations are inane. Here are some of my favorite examples.

“I don’t discount my commission because if I did I wouldn’t work as hard selling your property”. Some sellers already subscribe to a variation of this lie themselves: “I don’t want to negotiate the commission down because then they won’t be motivated to sell my house”.

This is utter nonsense. The reason a real estate agent won’t discount is because they are sitting fat and happy with lots of referral business with people who are willing to pay full commission. They’ve got a strong network that they have been very effective at leveraging to get more business. Furthermore, many of these same agents will take referrals from other agents or take Internet referrals from their broker and forfeit up to 30% of their commission in each case. So, obviously they don’t have an issue with earning less under the right circumstances. If you want a deal, move on to someone else.

Also, if a real estate agent takes a listing at a reduced commission don’t believe for a minute that they are going to work less diligently on it. First, if they took the listing they must have decided it was worth it. Second, if they are the kind of agent that would take a listing and then neglect it you were going to have trouble with them anyway. Third, if their degree of attention was proportional to the commission rate then perhaps you should pay them 15% and get lots of attention, right? After all, there is no reason to believe that you coincidentally get the optimal amount of attention at 6%.

“I will look for buyers in _____________” or “I have a lot of buyers for this type of house” or “My office works with a lot of buyers for houses like this”. This falls under the heading of the listing agent delivers buyers. Many sellers already believe this without a listing agent having to tell tall tales of their prowess with buyers.

More nonsense. The fact of the matter is that the listing agent is usually not the one that delivers buyers. It’s the buyers’ agents that deliver buyers. The listing agent gets the listing in front of the buyers and their agents and positions the house in the most favorable light for them. For instance, I just pulled over 600 sales of single family homes in Lincoln Park over a more than 2 year period from the MLS. In less than 15% of the cases did the listing agent produce the buyer. The other 85% of the time it was a buyer’s agent.

One other thing. If a potential listing agent is talking about delivering the buyers herself or through her office I would get very worried. That might be a red flag that she is trying to get both sides of the commission and might pursue that strategy to the detriment of exposing your house to other agents. I have heard conversations where this appears to be an explicit strategy.

“My list-to-sell ratio is___” or “My average time on market is______”. You’re supposed to be impressed with a high list-to-sell ratio or a short market time. However, how do you know the agent isn’t giving the houses away? That would certainly make both of these numbers look favorable. I’m not suggesting you ignore these numbers entirely, but you should be aware of the limitations of these numbers and take them with a chunk of rock salt.

As always, when dealing with those slippery real estate agents caveat emptor.