Death to the 6 percent

Burnham’s Beat has a great post about the walled gardens that are most under siege in an open, searchable, post-scarcity, edge-controlled world. They’re all the classified categories — real estate, jobs, stuff-for-sale, personals — that technology took away from newspapers. I’ve long contended that this was only a temporary move: expensive, monopolistic, and inefficient marketplaces (newspapers) were replaced by cheaper, more efficient marketplaces (Monster.com, eBay, et al). But they’re still centralized marketplaces in a decentralized world. Search, Google Base, microformats, structured blogging, and so on will slay the monsters that slayed newspapers’ businesses.

: The one category that has been less open than the others is real estate: the most irksome, closed, anticompetitive, quasimonoplistic, overpriced service out there. What they do is simply not worth 6 percent. But because brokers control access to the multiple listing pool, you’re pretty much screwed without them.

When I started working on the internet a dozen years ago, I predicted that would be one of the first walls to fall. I was wrong. But I think it’s teetering under constant barage from community (see: CraigsList), would-be competitors, technology (see, again: Google Base and microformats.org), and customers eager to be set free.

The New York Times writes today about banks trying to fight the huge lobbying power of Realtors to offer competition. Factoids:

The association’s power has swelled during the heady days of the real estate boom. Its ranks have grown by more than 500,000 in the last five years. With almost 1.3 million members, it is the largest trade association in the country. One out of every 203 adults is a dues-paying member, according to August statistics from the association and the United States Census.

The boom has enriched many brokers. With the average cost of a home reaching historic highs, consumers paid roughly $61 billion in brokerage fees for residential real estate in 2004 as some 6.8 million homes changed hands. Last year, the industry was on track to sell almost 7.1 million homes, according to estimates in December.

I have no idea what percentage of real estate sales people belong and so this calculation is suspect, but if you divide those numbers and then give the brokerage half of the take, it works out to $23,400 per. After the boom and the invasion of all the new market factors above, that is bound to shrink.

I’ll be that you’re going to see a lot of former Realtors as competition and openness encroach on their turf.

  • http://flig.us Eric J

    When do I get to go to Honda.com, select the car I want in the color I want, with an accurate base price listed, then add the options I want, and leave off the options I don’t want, and have the car delivered in 2-4 weeks?

  • http://www.phillyfuture.org Karl

    Burnham’s post is terrific. But I’m going to sound like a heretic and be devil’s advocate now – his post points harder at third generation centralized services and their vulnerability:

    Flickr, del.icio.us, digg, MySpace and similar.

    * Content Availability: Generally speaking, the more “self published”, publicly index-able data there is, the more vulnerable the walled garden.

    On a blog it’s: Easy to post photos. Easy to post links. Easy to post text. Getting easier to post files of all sorts. Structured blogging and microformats in addition to RSS syndication make it easy to share.

    * Index Affinity: The more willing a data owner is to make their data available for indexing, the more tenuous the walled garden’s business.

    That’s what bloggers do every day with links, photos, stories, etc.

    * Process Simplicity: Walled gardens can create value by not only aggregating and displaying data, but also by providing a process for acting on that data.

    Flickr, del.icio.us, digg and similar provide social glue. That’s it.

    I’m rapidly getting tired of having twenty accounts to do what I can do from my blog.

  • John

    LOL. Another walled garden: the nation-state….

  • http://www.brunoandtheprofessor.com Bruno

    Here’s a great piece in Slate on why the 6 percent has stuck. Essentially the barriers to entry to the real estate world are relatively low. And since they’ve been able to band together and (mostly) hang on to their 6 percent, what’s happened instead is that there are more Realtors out there selling fewer and fewer houses.

    In a normal system, each would compete by lowering their rates: 5 percent, 4.5, on down. But since they won’t cannibalize themselves, instead they’re just slowly starving: each Realtor is selling half as many houses. Interesting.

  • http://www.Kens411.com ken b.

    There is no barrier to information. Information with multiple pictures, virtual tours, and links to everything real estate related are available to everyone. It’s all on-line…free, everywhere.

    It’s absolutely false to say that there isn’t fierece competition among Realtors. It simply isn’t true.

    The big problem and truth – 6% is too much if you hire a bozo…so is 5%, 4%, 2% or $100 dollars. This same principal applies with every product or service we buy. No big revelation. It’s a value proposition…if performance doesn’t match our expectation…we get pissed.

    Talk about monopolies and the sad state of competition…how about big oil, health care and leagl drugs…things people consume every day…not every 7 years or so.

    My two cents…of course…I’m a Realtor who believes that our Realtors earn their fee. I believe it because our repeat and referral business is growing not shrinking. Choose wisely and win….choose otherwise and it’s a rip-off. The principal applies with every service and product.

    Sorry you had a bad experience.

  • Puff

    I would sorta agree with Ken, but I would point out that the reason people still use brokers, and ones refered by friends especially, is the desire to be with others like them. Its illegal to mention that neighborhoods are black, but its considered good service to have the schools explained well and spacial advantages like nearness to certain churches, shops, and various organizations that make it plain exactly what kind of neighborhood is being considered.

  • http://unbeknownst.net KirkH

    “It’s absolutely false to say that there isn’t fierece competition among Realtors. It simply isn’t true. “

    The Justice Department’s take:

    Indeed, the U.S. Department of Justice sued the National Association of Realtors last year over its policy of limiting Internet sites’ access to MLS information. The government said the restriction is anti-competitive and undercuts online and discount brokers’ ability to gain a foothold in the market…

    A September report by the U.S. Government Accountability Office was also critical of MLSs, noting their use may artificially prop up broker commission rates.

    Why the lawsuit then? Renters lobbying? Comissions are around 3-4% in Europe. What other than the MLS keeps them so much higher?

  • http://www.Kens411.com ken b.

    Well Kirk…the goverment also said that there were weapons of mass destruction in Iraq too…you don’t believe everything the goverment sez do you?

    Seriously, Go to Realtor.com and see all the information that is availalbe…your head will spin.

    Nope the renters aren’t lobbying…it’s the banks…currently they are not permitted to engage in the real estate business. They want in and they are lobbying. So you’re correct…just the wrong lobby.

    I’m sure you can find a broker to help you for 3-4%…even less if you want. Don’t know if you’d be happy with the service though.

  • http://unbeknownst.net KirkH

    Median home prices in San Diego are $616,000. That’s about double what it was a few years ago. $37,000 for one sale. Are realtors working twice as hard now? The problem is with discount and For Sale By Owner realtors who are are excluded from the listings and aren’t shown by “real” realtors.

  • Anon E. Moose

    Past two sales and purchases of our homes did not involve a realtor on either side. Sellers saved, buyers saved. We paid a lawyer a few hundred to review the contracts. Made sure we had title insurance, all the checklist items required. Saved 10’s of thousands. Realtors fees are GROSSLY inflated. My wife could teach you how to buy and sell a home in one hour flat.

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  • http://neomarketing.typepad.com Mike

    I’ll give you a clearer sign that the real estate people are in deep Jello®…

    If you do a search for marketing manager positions, especially in hot markets, you’ll find a lot of realtors. That has to mean that competition is ultra-intense, no matter what the NAR (who has given a truckload of money to politicans of both parties) or the Justice Dept. says. They must think that, with some slick marketing, they can get those 150 more basis points than the other guy. Riiight…

    Where there is honey, there will be flies.

  • http://www.phillyfuture.org Karl

    Seems like folks here are focussing on the realestate portion of Jeff’s post and not what I thought was it’s meat – a point about walled gardens.

    I wrote a longer post about this here . Bill Burnham’s post, and the factors he indicates that are play, will effect services that are the darlings of today – if they don’t meet the challenge. They’ve certainly framed ideas I’ve thought for a while and focussed them.

  • http://marginalizingmorons.blogspot.com/ CaptiousNut

    KenB,

    I knew you were a broker before you even admitted it on your post.

    Real Estate brokers are mostly slimeballs, but I don’t fault them for that. They are trying to earn money and protect their business – just like most other people.

    The onus is on the customer to understand the transaction. Most people don’t even realize they can ask for lower fee. Sure the agent will snap back that his fee is “standard” and it may affect you sale, but any person with a clue will know that it is BS. Walk out on the guy. Everything is negotiable and it always has been. You can put your house on Craigslist or Ebay for free. Or put a For Sale By Owner in your yard.

    In a hot market you don’t need a broker and in a poor one they can’t help you.

    Again the agents are self-interest slimeballs, but don’t blame them for your own economic illiteracy.

    Like paying for a funeral, up until now, people hadn’t bought and sold homes too many times in their lives and collectively aren’t savvy about how to go about it – and this is generally when consumers get ripped off.

    One slimeball example.

    Looking at homes near Lake Norman in Charlotte, I had an agent tell me:

    “the homes off the lake will appreciate at 9% per year and the ones on it will appreciate at 12% per year….”

    If a stock broker PROMISED returns like that they would lose their license. I am knowledgeable enough to have laughed in the agent’s face. I even mocked and scolded her as was warranted, but many others would probably be influenced by that bald-faced lie.

    Having worked in real estate extensively (and having family in the biz too) I could fill up this blog with countless more slimeball examples.

    Maybe I should list all the really bad agents (and their transgressions) from Brooklyn Heights on my blog….

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  • http://4mysales.com Randy James

    Thanks to the dissemination of information on the web, the real estate agents level and type of service need to adapt in order to compete. Now we can all do an online search to find our dream home. Real estate agents need to be able to provide the value add in off-line and online marketing as well as helping the buyers and sellers through the process. Otherwise, they are just not earning their commission.

    -Randy
    http://www.4mysales.com

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  • Dirk

    WEll, you sort of have MOST of the issue about real estate agents wrong. TO run an office is VERY expensive. Every agent works for a Broker who takes 15-50%. Then there is the National Association of Realtors, the State Association of Realtors, The local Realtor Board. Now…if you MLS access there is another 1500 per year. The average Agent MUST sell 2 to 3 houses at 3% to break even after taxes. Mnay Brokers charge phone and sesk fees, come even repro fees.

    Driving, well lets see, I put on about 30,000 miles driving clients, looking at properties and going to sellers places of business etc About $15000 actual cost. My phone runs about 300 per month and then there is the web. Ok, so I don’t have a website but my expenses at home for a fast and wide are about 50/mo.

    About 50% of the clinets do not buy through an agent that has worked for them even if they put in 30 to 50 hours. Sometimes just call on a sign and wind up buying through the listin agent (at over value without representation etc.

    My buyers are given full comparatives, the market is discussed (even by neighborhood) and suggenstion s are made as to how much they should pay (maximum) and what a reasonabl eoffer (that won’t slam the door) should start at (minimum). I include banking information in our discussions AND give REAL numbers for what the taxes and insurance will be after they purchase. Many times I tell them to walk away unless they really want this particular house.

    For the Seller, I give the highest number that I feel a bank will allow to loan against. Remember the Bank controls and makes all the money here. I then tell teh Seller the average price they can expect to get based upon market conditions, the condition of teh property and HOW FAST they want /need to sell.

    My numbers are VERY accurate and in cases in the past where a client insisted to buy at full offer, the bank has said NO and given the exact value I gave as highest for this property.

    I won’t even go into the list of things that I do for clients as their agent. Just remember there are real estate laws, however “caviat emptor” for an unrepresented client is the way of the world.

    Now lets talk of the number of sales that I have done that never closed for a zillion reasons. I don’t get paid for thosa AT ALL. How about the sales that close and I have to sue to get my commission or just forget about it? I have had over 3M worth of these probelms in the past 18 mos. Ok to many 6% looks like a LOT of money. Yes it is expensive but well worth it to a seller or even a buyer.

    WHen I sold my property in California, I was an agent and had to pay no listing commission. I offered 4% to the Selling agent by mls listing. The next mornign I had a line of realtor’s cars around the block waiting to look at the 685K house. Within 48 hours I had above price offers and a contract signed and accepted.

    That’s right, 4% to one side got me more money than anyone had ever seen for a house like that one, about 100K more.

    The lesson, list your house, pay 2% to the listing agent, offer 4% to teh selling agent! it works. They want the commission and will bring good offers!

    Dirk

  • john s

    Dirk,
    If I wanted a fast sell on my home ( I am relocating from california to new york for school), it sounds Ilike I should use two seperate agents, one for listing and one for selling. What is the responsibility (work performed) by each?
    John

  • Jon

    I don’t think Dirk’s example is necessarily an accurate reflection of the real estate market as a whole. There are places like those in California that Dirk mentioned that have high salaries and high demand for housing. Buyers will compete with one another for a given property.

    I many other locations, the demand for existing houses is relatively low and even when competetively priced, sellers may have a hard time getting offers at their asking price.

  • http://realtorweblog.xptechsupport.com Realtor Marketing

    I have to agree that there will be a lot of pressure on Realtors when this boom ends. One of the things to look at is that there are a lot (1,000,000) of Realtors around and many will have to fail for the market to become more professional. What we will have to see is the number of Realtors to fall to about 10% of the current and these Realtors will do much more volume and will be able to build a business with a lower commision level.

    This has happened in all industries and Real Estate will be no different over the next 5 years or so.

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  • http://www.charlotte-propertyguide.com John DiCristo

    Realtors in Charlotte and around the country are now earning their commission. Even the charlotte market has become a buyer’s market. Houses are sitting and buyers are running their realtors all over the city.

    I spoke with my broker and she said the buyers are waiting to see if the bottom has hit so they are staying on the fence. The only buyers pulling the trigger are the out of towners. The buyer agents are wasting time and gas waiting on the client to buy.

    The selling agents are getting hammered by their clients wanting them to advertise and run open houses. When will the bottom hit. That is what we are all waiting on.

    Once living high on the real estate hog we are barely paying our bills!