Is your income below $12,000 per year?

By
Real Estate Broker Owner with Cimpler Real Estate, Inc.

Jim Walker (look up also his Trulia Voice profile) published the following question/request on Trulia Voice earlier today: Agents! Do you know what Nadel's 4 questions are? Read his 66 page polemic to learn to defend yourselves. 

For those who don’t know, Mr. Nadel is an attorney/policy adviser with the federal government who published a paper on real estate commissions. Jim sees it as a must read for those who “want to understand the attempts to undermine real estate brokerage, in order to understand the rate cutters arguments, or to defend your profession”.  I agree with Jim on the “must read part”, however totally disagree with him on why we should read it. It simply is a good reading for everyone involved and/or interested in real estate, so thank you for bringing it up. Mr. Nadel’s paper reads very well, independent on if you agree or disagree with his views on commissions. As a matter of fact Mr. Nadel is making a lot of great comments.

Real Estate game

What Mr. Nadel doesn’t understand is what he cannot feel – the pain of doing real estate business. He cannot – as he is not a real estate practitioner. The current real estate price structure is a “historical accident”. The commission pricing sounds great (and is great), but only for 10% of agents who own 90% of the market. 90% of agents sells less and earns less (they own the remaining 10% of the market). They also seem to follow the NAR lead not realizing that it might be doing more harm than good. According to the California Association of Realtor statistics, the average income of a California agent is $12,000 (twelve thousand dollars per year). This means that an average agent sells a fraction of a house per year. Can you expect a quality of service from someone who does it once in a while (sells one house every two or three years)? The problem is that everyone tried to become an agent or a broker – as there are too many brokers as well. The lack of serious license requirements led to the “overproduction” of agents and brokers licenses. More agents and brokers - more competition, so it should be good for the business, right? Unfortunately not -a lot of competition between agents and brokers is just for the  the 10% of the market. It is very difficult to dislodge those who are in business for long time and own the 90% of the business. Are these 10% of agents and brokers best for the clients? Not necessarily – sometimes yes and sometimes no. They are simply in the driving seats and they don’t have much competition.

So why should we defend NAR, its policies and the status quo it created?  For overpopulating the field by weak agents as result of not sufficient license requirement? For not being able to create clients respect to our profession and us, agent and brokers? For leading us blindly to the potentially disastrous low suit by Department of Justice?  Yes, they are good things about NAR activities (Good and Bad about NAR: Can We fix it?  and Can We Fix NAR - Sequel Part 2), but we not always remember good things once disaster struck.  Do you remember Enron and all the great things it did (what were they?) or you remember the largest “corporate disaster” in history, that wiped out savings of thousands of its employees?  Do you remember another great monopoly, AT&T (if you have more time – read this)? Today it is a part of a former Baby Bell, Southwestern Bell, as a result of many disastrous management decisions following the law suit by DOJ. Organizations, such as AT&T and Enron, created management power and arrogance that lead to their destruction.  Will the same happen to NAR? Can actions of a trade association be compared to those of corporations? Management power and arrogance are certainly the common denominator. Will the consequences of NAR loosing the DOJ law suit for an average broker or agent will be similar to those of the AT&T break up or the Enron collapse? Possibly not, but would you continue to defend NAR leadership if livelihoods of small brokers, including yours go away? Are you waiting for an average agent income to drop even further?

The competition between agents and brokers is not enough to “cure” the real estate business and improve our image with clients. Fortunately, we have Trulia and Zillow and even Redfin (I guess – we love to hate them, but they are good for our business, so let embrace them). All these companies are helping “to steer up” our th stale for years real estate business. And this means change and change is always good and competition is even better. Even MLS is starting to change. NAR has a long way to go, but it will feel the DOJ heat pretty soon – and this might help to create the upward pressure from agents and brokers to revise the way NAR does its (and our) business.

We are lucky to witness the period of changes in real estate and hopefully we will see more. It will be good for clients and it will be good for agents and brokers who are willing to change and adapt to changing clients requirements. Average commissions might drop, we will have also fees for different services, flat fees, but some brokers and agents will continue charging more than 6% (or 5.1%). We are part of a great business, so let’s do our share to improve our service and our image.

 Please check also the UPDATE.

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Rainmaker
41,885
Artur Urbanski
Cimpler Real Estate, Inc.

Mark, thank you very much for your prompt reply. I posted it separately.

I am glad that you don't favor a regulatory approach. However, how do you expect "decoupling" of the buying agent commission from the selling agent commission to happen? Do you believe that market forces will bring necessary changes just via client education? In such case more educated clients would require more and better quality service from brokers and competition between brokers and agents would do "the trick". It would be nice example of market forces at work. Internet has a power to be a catalyst of such changes, but it might not be enough. Such change could be an outcome of the DOJ lawsuit and could lead to judicial limitation of the NAR monopoly power.  At the same time the history of the consent decree and divestiture of AT&T is a great example that judicial interference can produce much unexpected and often undesirable results. So, if you had power to implement the real estate reform what would be your suggested stimulus for this change?

 

August 14, 2007 01:08 AM
Rainer
125,501
Stefan Scholl
Northern Michigan Real Estate
Buyer's Broker of Northern Michigan, LLC

Artur,

I enjoyed your post very much.  I think this is a fascinating topic which has seen very little discussion or debate.  I agree with many of your points regarding NAR and the positive changes which are being stimulated by new entrants into the marketplace.  I have read Mr. Nadel's article, but will revisit as it has been updated.

August 14, 2007 08:08 AM
Anonymous #15
Anonymous
Mark Nadel

Artur,

I agree with your response to my post.  I believe that the decoupling of buyer and listing broker fees will require a substantial amount of education by consumer affairs media reporters and editorial writers - TV, radio, and print media (online and off).  But I believe that the market will work as follows: increasing numbers of sellers will learn that a growing number of buyers desire the option of doing some of the work of searching for a home on their own and thereby saving a significant amount of money - using an excellent broker who passes on the lower costs s/he faces by charging a lower, non-traditional fee.  Particularly in a buyers' market, most sellers will not want to deny an interested buyer this option, if the buyer wants it.  Sellers will want the flexibility to accommodate such buyers.

Therefore, increasing numbers of sellers will request that their listing brokers agree to a new provision in the listing agreement.  The provision would state that the listing broker agrees to reduce its fee by the coop-fee amount it has offered if and when the buyer and the buyer's broker have independently agreed to a specific fee.  The listing broker would agree to apply that coop fee towards

1. the payment to the buyer's broker of the fee that the buyer and his/her broker have agreed upon and

2. the remainder to a reduction in the sale price of the home.

Unless all the significant brokers in a local market refused to offer a provision like this (if all refused, it would suggest to me that they had probably made an anticompetitive agreement that violates current antitrust laws), I would expect that competitive pressures would force most, if not all the brokers in the market to offer this provision in their listing agreement.

This would then lead all those sellers and many others to seriously consider the use of buyer brokers who charged such non-traditional fees once those sellers looked to buy something new, if that arrangement served the interests of these new buyers.

I think that this would create a positive feedback loop that would effectively decouple buyer and seller brokers' fees.

I agree that my scenario does include the application of the antitrust laws, but that is the extent of it.  There would be no micromanagement of any markets, simply enforcement of prohibitions against anticompetitive agreements to deny consumers an option that they were requesting.

Maybe this will not be enough, but I am hopeful that the traditional media AND the Internet will help improve consumer education.  In fact, I think that one of its greatest benefits to consumers will be its improvement in the consumer product selection process.  But that is another very long law review article that I wrote in 2000 in the Harvard Journal of Law & Technology.  See www.ssrn.com/abstract=247818.

August 14, 2007 09:41 AM
Rainmaker
41,885
Artur Urbanski
Cimpler Real Estate, Inc.
Stefan,  thank you very much for your comment.
August 14, 2007 12:11 PM
Rainmaker
41,885
Artur Urbanski
Cimpler Real Estate, Inc.

Mark, thank you very much for the quick reply. I like your "decoupling" logic a lot. Giving clients payment options dependent on their interest in the level of service. It would force new buyer agents to offer "basic" transaction closing service before they will be able to offer more services and charge more.  This would be very healthy as it would restore clients confidence in the system and Realtors. Also it might spread like fire if a single, successful brokerage adopts it. In such (preferred) scenario giving clients options would be a thing to do and brokers would embark on this option voluntarily, as it would be a thing to do.

Hopefully, as a matter of fact I believe it is possible, the change could be accomplished voluntarily, as application of the anti-trust law might cause totally unpredicted results.  I believe that if this happens small brokers will be loosers, as they willl be elbowed out by "big money" newcomers including banks (big lenders doing real estate transactions sounds as a very scary scenario to me).

I have not had a chance to review your article in the Harvard  Journal of Law and Technology yet, but will do it later today (tonight). As I mentioned above, I believe that the time is right and the change will happen within next few years. Do your remember the "Berlin Wall"? A few months before it was torn down and the communism collapsed most people didn't believe that it ever could happen.

August 14, 2007 12:42 PM
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Rainmaker
41,885

Artur Urbanski

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