Price Signaling as a Quality Indicator
Firms often use
pricing to signal product quality to potential customers. That is,
people assume that if a product costs more, it must therefore have a
higher quality. Firms know this, take advantage of it, and price
Why do traditional real estate agents charge so much?
Let me present two lists, A and B:
Proper property pricing, MLS listing with as many photos as allowed plus syndication, other internet marketing activities including yet more photos, yard signage and comprehensive on-site flyers, and finally, home condition, presentation, and accessibility.
Note, individual agents may add or subtract an item or two (e.g. internet accessible virtual tours and perhaps video), but this list is most definitely finite.
Note, this includes (in no particular order): Open houses and broker caravans; most print ads especially newspaper, radio and television ads, billboards; expensive office fees and high splits, franchise fees, technology fees, voice mail fees, documentation fees, and all other firm-related junk fees, including triple-priced E&O insurance; cold calling, most mailings, and email ad campaigns; wrapped vehicles, moving vans, “talking” houses and information lines; lead referral websites, relocation company referral fees; motivational training and coaches; and on and on, this list is truly infinite.
List A represents marketing efforts which result in 95% of sales.
List B represents marketing efforts which lead to the remaining 5%. But more importantly, List B also represents 95% of the traditional real estate agent’s marketing expenses.
Of course, individual results may vary. But in any case, many agents run their business on very thin margins. And clearly they would be hard pressed to accept lower fees. However, what worked, and was perhaps necessary, a generation ago is simply unnecessary overhead today. Another agent recently scolded me for this view, saying that "great agents sell substance." But the fact is, much of what passes for "substance" in this business has little or no value to the client.
This starts with the firm. Yes, our choice of firm is a marketing decision. If you believe that the firm’s television and print ad campaign is a value-added service to the client, so be it. But I challenge you to consider what you pay your firm and what you receive in return.
Further, we should question the efficacy of all marketing efforts and expenses with the goal being to focus on those marketing endeavors with the highest ROI. This way we will make more money AND have greater flexibility regarding our fees.
Chris Butterworth has developed a similar list, although he does not draw my conclusions.
Darwin for real estate agents
It is not the strongest among us who survive. Nor is it the most intelligent. It is those among us who are the most adaptable to change.
Lisa Unger, Beautiful Lies
Greatest Real Estate Agent in the World
For Those of You Awake in Europe
I just finished reading Bruce Bawer's quite disturbing While Europe Slept. Without really meaning to, I purchased it on September 11th - how appropriate. There have been many reviews published about this work, including one by J. Peder Zane in our local Raleigh News and Observer. The most entertaining commentary on Bawer's work can be found here [No direct link, scroll down to March 6, 2006], where Bawer "fisks" Steven Simon's review in The Washington Post.
Bawer pretty much continues the work on his website.
What does this have to do with real estate? Not a thing. Well, maybe it does...if you are awake in Europe, I'd like to invite you to visit the Triangle area of North Carolina. What will you find here? Well this area, like most urban and suburban areas in the United States, is one of the most culturally diverse places in the world. Oh sure, like everyone, we have our problems, but the United States in 2008 is simply the most diverse and integrated society on the planet. The Europeans talk a great game about integration and diversity. But if you want to see it in action, there is no better place than the States.
Atlas Shrugged; What About You?
While many real estate agents and firms could be taken straight from the Christina Stead classic, House of All Nations, I happen to know a couple of real estate agents reading Ayn Rand's Atlas Shrugged. If ever there was an industry that needed to read both of these works, it is traditional real estate. In regard to the latter, a few rhetorical questions come to mind:
Do you work for Amalgamated Realty Corporation?
Do you support the Universal Alliance of Amalgamated Realty Corporations?
Do you support the Equalization of Commission Offered Opportunity Rule ("unilateral offer of compensation")?
Are you paying-off looters and giving to moochers? By whose sanction?
Is there a "destroyer" at work in the real estate industry?
Is your firm headed by James Taggart or Hank Rearden?
Do you think Francisco d'Anconia would make a good firm president? How about Ragnar Danneskjold?
Is there a Richard Halley in the real estate business? If so, is he still writing concertos?
Do you get your real estate market and business news from the likes of Balph Eubank, Bertram Scudder, and Simon Pritchett?
Would you invest in the John Galt Line? Is there such a thing in the real estate business? Or, would you rather invest in the San Sebastian Mines Real Estate Enterprise?
The San Sebastian affair was managed from the Wayne-Falkland. Do swindles require a fancy facade? Do we find those in the real estate business?
Do you know John Galt? Are you Dagny Taggart?
Uncomfortable with the "heroic" atmosphere of the novel? Fine: Do you strive to emulate John Galt or Dagny Taggart or Hank Rearden?
Finally: Do you think for yourself?
Real estate is the most counter-intuitive business I can imagine. On its face, it is full of contradictions. Or should I say, perverse machinations? Some obvious to the client and some hidden. But, I would remind you, there is no such thing as a contradiction. If you find one, check your premises. You will find at least one of them is incorrect.
Well, the schools around here are really good....
Thank You for Your Insight: How Not to Recruit Real Estate Agents
I had an interesting exchange of emails with an agent currently working for one of the local large, traditional real estate firms. Here is my last email to her:
Her response? Well, she thanked me for my insight and wished me a great day....
Note: Okay yes, I admit it, this is not the exact email I sent her. This one is better. This is the one I wish I had sent her! Maybe she will read it here.
Let me state the obvious. The people who own large traditional real estate firms are incredibly wealthy. While a few agents do make a great deal of money, the average agent earns less than fifty thousand dollars annually. For the most part, residential agents have more soft skills than financial savvy. The firm owners know this and take advantage of it. So, that 'family feel'? Can you say farce!? Don't believe me? Who is the single largest individual owner of traditional real estate operations in the United States? Answer: Warren Buffett.
Real Estate, circa 2007: Yes Virginia, there is Competition
I have long argued that today's real estate market is competitive. But, it's a tough sell. Many people continue to believe that the real estate business is non-competitive at worst and a two-product market at best. The two products being the flat-fee discounters and the traditional agents. These two market segments are only too happy to spread this misperception. But they are hardly alone.
The traditional firms and agents continue to live and die by the six percent commission. That's it, they tell potential clients, take it or leave it. Regardless of service level desired; regardless of property price. In fact, there is a large local firm which actually pre-prints their listing agreements with a seven percent commission. That way, they can "negotiate down" to six and the seller can feel good about it. And after all, they do have those beautiful newspaper ads. Look, this crowd represents an ever-decreasing share of the market. Don't get me wrong, they will always be around. But, in the future, the high-end will be just another niche.
Many discounters, with generous help from the press, are just as bad. Their marketing plan includes yelling "All other agents charge six percent!" from every rooftop. Why? Because it makes their business model look like the only alternative, and lack of service aside, an attractive alternative at that. In her glowing report on Redfin, Lesley Stahl did not have to look very hard to find a traditional agent to help fuel this fiction. But had she bothered, she could have just as easily found a more competitive firm and agent.
In fact, the popular press play an important role in this misperception, as their coverage of our business is consistently awful. I think this is for a number of reasons. First, it's easy to deride traditional agents because they can be such hapless competitors. Second, and forgive how harsh this sounds, real estate is a somewhat complicated business and the shallow press is either too lazy or too simple-minded to adequately cover the topic. And third, most importantly, it just makes for a sexier story to beat up on traditional agents as the only alternative available.
Finally, poorly-served consumers do not help our competitive reputation. Without doubt, this is an agent quality issue. But, I would argue that the root cause of this has to do with the way some people choose their real estate agent. Frankly, these guys will spend more time and effort researching their next flat-panel television purchase than they will on choosing a firm/agent to assist them with a six-figure transaction for a place to raise their family. Often, these same people end up with a low-value agent (See our definition of "Value" below). Then, these now disgruntled consumers come away from the process with a bad taste and proceed to complain about the unfair real estate business. This firm has long argued that we need to improve licensing standards. But these guys most often seem to be displeased not with licensing standards, but rather with lack of value received. Real estate is a complicated, high-dollar transaction, with many poor-quality, low-value players. Be careful who you hire. Further, if you do not want or need a traditional agent, don't hire one and then complain about it. This is akin to flying first class and complaining about the price.
Our firm fiercely competes for business every day. We have taken listings from $500 flat to six percent. In the right circumstances, I can imagine that we would list for free or charge more than six percent. We vary our offered buy-side compensation based on the needs of the seller and the price of the property. In other words, we listen to the wants and needs of our clients, and price accordingly.
In regard to the necessity for the seller to offer "competitive" buy-side compensation. Sellers are told, if you do not offer 2-3% buy-side compensation, the buyer's agents will simply not show your house. How do I know this? Because I have said it myself. And, I believe it to be true for low- and moderately-priced property. While this may sound uncompetitive, it is a market-driven figure like any other. And in the market, we are starting to see greater variation in the offered compensation. As the price of the property rises, at some point, I think it is probably safe to reduce the rate. This is a discussion that the seller can and should have with their agent. In any case, the seller can offer any buy-side compensation they see fit. I will return to this in Part Two, below.
I see two pro-competitive trends developing in this business, the first further along than the second. First, I believe the real estate business is quickly becoming analogous to retail. Yep, you got your Nordstrom's at the high end and Walmart at the low end. But more importantly, you have market players at every point and every niche in between. This trend will continue to develop, and don't forget, more people shop at Walmart than at Nordstrom's. Over time, we will see a similar movement in the real estate business. Second, I submit that this business is transitioning into a state where, in the aggregate, the total commission rate is inversely related to the price of the property. In the meantime it is, in fact, a dynamic, competitive market. If you do not see it, you are not looking. So, yes Virginia, there is competition in the real estate market.
So, what about on the buy side? Is there price competition among buyer's agents? Well, on this side of the transaction, the question is more murky. To begin, most real estate agents tell buyers that their fee is paid by the seller, and therefore, their service is "free" to the buyer. This may be technically true, but it is certainly debatable. Mr. Savvy Buyer may very well argue, that as best as he can tell, he is the only one bringing money to this transaction. Therefore, he is paying for everything, including of course, his own buyer's agent. And, he may very well want to know how and if there can be price competition on his side of the transaction.
Let me say that the same factions working to deny the existence of competition above are also vocal here. Of course there is no competition, they say, because the buyer's agents are all paid the same. And, since the buyer agent commission is reflected as a seller expense in the transaction, the poor buyer client has no control over it. I would agree that there will never be pure price competition on this side of the transaction unless, and until, the buyer's agent commission is reflected as a buyer expense. Then the buyer could easily distinguish between the fees of various agents and decide who to use, or even, to not use an agent at all.
But as currently configured, is this market competitive?
As I pointed out in Part One, the amount of the buyer agent commission is typically determined by the seller. And smart sellers will look to the market to help them determine what compensation to offer. Buyer's agents can charge more than this amount, if the buyer agrees to pay the difference. The more interesting question is: Can they charge less? Increasingly, the answer seems to be, yes.
Through a buyer rebate. The seller pays the buyer's agent, and in turn, the buyer's agent rebates a portion of this fee to the buyer. Buyer's agents can and do compete in this market. Agents offering the highest rebate are arguably offering the lowest price. Hence, price competition. Take my word on it, I have been on the losing end of this competition on more than one occasion.
Let me stop here and point out that our firm has absolutely no policy on buyer rebates other than they be disclosed to all parties, approved by the buyer's lender, and reflected on the settlement statement. Assuming the rebate passes these not insignificant hurdles, like all of our pricing policies, it is negotiable.
However, that said, I don't expect us to agree to a buyer rebate very often. For one thing, typically, the buyer agent just works too hard. But of course, it all depends. To illustrate, let me offer two simplified, and admittedly extreme, examples. Buyer One is purchasing a $100,000 townhome (I will leave all other requirements aside). His buyer's agent shows him 20 homes over a two-month period and they write three offers before they finally put a home under contract. If the buy-side compensation is 3% that would be $3,000. Reasonable readers obviously will not expect a rebate here. Buyer Two is purchasing a five million dollar home, and in fact, had already narrowed it down to three possibilities, and with their buyer's agent saw all three on Saturday afternoon. They wrote an offer immediately afterward on their favorite of the three and a contract was easily negotiated. At 3%, the buy-side compensation would be $150,000. Reasonable readers might well expect a rebate here. Keep in mind, it is not only a question of time. Surely the buyer's agent's experience and expertise are worth something.
Let's look more closely at the Buyer Two example. As I discussed in Part One, the Seller is free to offer any buy-side compensation he sees fit. The question becomes would fewer buyer's agents show the property if Mr. Savvy Seller lowered the buy-side compensation to, say 2%? That is, after all, $100,000. How about 1%? In the confines of the Buyer Two example above, clearly this would not have been an issue. But the answer is, in the abstract, we do not know, and we cannot know. It is entirely situational. It is situational for each and every seller, and each and every buyer, and each and every property. What I do know is we are indeed seeing more variation in this market-driven figure.
Just as on the sell side, surely each buyer's agent has the right to determine where to position themselves in the market. Some will never offer a buyer rebate no matter what. Some will always offer a rebate, most often with some set minimum guaranteed compensation. And some, like us, will say, well it depends. I can tell you that most set rebate programs are married to the concept that all sellers offer the same compensation. This is a flaw in their business model that seems to work today, but I do question the long term viability of this concept. Note: Read their fine print!
Also note, this commentary is about price competition, leaving aside any discussion of the duty-shifting employed by some discounters, on both sides of the transaction. If you use a rebate program, make sure they fulfill their duties to you. If you and the firm agree that their role should, in fact, be reduced because they are getting paid less, that is perfectly acceptable. But do not expect the agent on the other side of the transaction to take on these responsibilities.
Now, back to the original question: Is there price competition in the market for buyer's agents? I would argue that just because many firms, including ours, may not agree to a buyer rebate, that does not preclude the existence of competition. Today, there are enough firms that will offer a rebate in almost any circumstance, that we have to acknowledge that price competition also exists on the buy side of the transaction.
Lately, I've taken to referring to our firm as an Experimental Brokerage. As best as I can tell, this term was originally coined by Greg Swann to describe Bloodhound Realty in Phoenix. But, what does this mean anyway? Well, with apologies to Tolstoy,
We question everything and continuously seek new methods to serve our clients. But, let's not over-simplify the issue: Many of the problems in this business are structural and systemic. And of course, these very issues cause our industry's value proposition to be dreadfully low and ultimately result in the deservedly low public opinion of our 'profession'. Frankly, there is not much to like about the traditional residential real estate business.
Let me give you a taste of what I mean:
First and foremost, we do not like the way agents are licensed, trained, "employed," or paid. It breeds incompetence.
Further and in no particular order, we do not approve of the relationship that most firms have with their agents. We think agents put too much weight on self-promotion and not enough on client service. We do not approve of firm-mandated pricing. We believe agents should have a knowledge of technology on par with their clients.
Traditional firms are slow to react to changes in the marketplace and do not know the meaning of 'proactive'. Traditional firms have party faithful and committees. And, they have central committees and secretariats. All of which can be overruled by the premier (ehr, president/owner), if they do not tow the party line. That is, suggest anything to negatively affect the upward flow of cash. Real estate is very similar to multi-level marketing: Do not even think about doing anything that will affect my cut of your cut...Clients be damned! This regime relishes the status quo. Do not expect voluntary change. 'Change' is anathema to these firms; it does nothing but cost them money. To these firms, experimental means, "Let's try a new coffee vendor...."
My friend, Kris Berg, refers to these guys as battleships, arguing that they will "make the turn" eventually. And, she is partly correct. But, the US Navy no longer uses battleships. In their day, they were surely big and safe and lethal. But these days, while they are taking their sweet time making the turn, they are susceptible to missile attack. In other words, for most consumers, traditional real estate has outlived it's usefulness.
Finally, we certainly do not approve of anyone trying to force their business practices (traditional firms) or responsibilities (other non-traditional firms) upon us. I suppose if we are not doing it 'their way,' then we are doing it 'wrong'.
Now, lest you think that we are simply complaining without proposals, fear not! We have addressed all of the above issues on this web log and in our primary firm website and/or in the 'Careers' section of our website. Yes, it all starts with having the right people. In fact, have a look. How we address potential brokers speaks volumes for how we treat clients and potential clients. Note this at the end: We certainly do not seek to improve the reputation and performance of our competitors. Complacency, poor performance, incompetent management, crass, pushy motivational training, kitschy marketing, and greed-driven, antiquated business models supported by our competitors hurt the business overall, but can only benefit a firm like ours.
Meanwhile, we will continue to experiment....
Not Your Typical Agent "Thank You"
You gotta know that anything that starts with, "I hate Realtors....." is going to find its way to this site. Below is an email one of our brokers, Vanna Langdon, received today. I hope you enjoy it as much as I did!
I think, therefore, I Twitter Not
We are a pretty "connected" real estate firm. We maintain a rather large web presence, which includes this web log. While perhaps totally "Web 1.0", our website continues to be the easiest method to convey information to clients and customers and even just passersby. You can call us; Yup, we do answer the phone. Then there's fax, email, and instant messaging. Which IM? Well, we have accounts on the six largest services, so take your pick. These days, you can also find us on LinkedIn and Xing and Zillow and too many other real estate sites to list here.
But, there is a limit. For us, we seem to have developed a limit-by-default approach. If it is a social-networking or Web 2.0+ endeavor, we may well join - but only if it meets a certain indefinable standard of professionalism. Like the old court case, "standard of professionalism" may be hard to define, but we all know it when we see it. So, you will not find us on MySpace or Friendster or Facebook. It may very well be true that many businesses and professionals (and certainly politicians) have joined these services. But while they continue to look like an online party for fifth-graders, we will take a pass.
Hugh MacLeod disagrees. One of us will be proven wrong!
The Future of Real Estate
The below graph represents the future of real estate pricing. For all firms, for all business models. For flat-fee models, for traditional percentage models. For all service levels, for all price points. Hardly rocket science! Get used to it.
Bryan Regan Photography
What's Wrong with Real Estate Agents, Part 23
Quote of the Week
This came as a response to a comment I made about his blog post. And I added: "I agree that marketing is an important discipline in any business. But I loath the level of self-promotion that many real estate agents employ. I cannot tell you how many agents I have encountered who are wonderful at self-promotion and yet totally incompetent."
In my view, Mr. Ray has it backwards: What "happens on the field" is entirely competence driven. Marketing is filling the stands!
I do agree that licensure does not ensure competence and competence alone does not ensure success. But, let me take it a step further: Sadly, in the residential real estate business, marketing, in and of itself, too often does ensure success. To pick up the above analogy: Your team may lose every game, but so long as you have effective marketing, you keep the stands full. This is the mantra of too many agents. Yes Mr. Ray, successful agents.
Of course, this strategy is common for many consumer products. But I think, what is so irksome about this strategy in regard to real estate is just how large and vital the transaction is for most people.
It helps that, for most people, a real estate transaction is an uncommon occurrence. If they were in the market more often they could see for themselves the "results on the field." But the fact is, many successful agents keep filling the stands because their public does not realize their on-the-field incompetence. In other words, their next client did not watch the last game.
The result of all this is that too often people have a bad experience with real estate agents. And our dismal public perception ratings prove it. I posted this a few days ago, but here is just one example, of what I'm talking about. Please note the extremely successful agent involved. He keeps the stands full!
In this example, the client caught his error. Too late, of course, but he now knows. However, in the real estate business there are an endless number of ways to harm your client without them ever knowing. Promote yourself, secure a client, do a lousy job for them - and the client is often clueless. Under-price a house and the client might just thank you for getting their house sold so quickly. Imagine that.
So in the end, I grudgingly accept Mr. Ray's position. But, I find his attitude towards the concept of competence troubling. Unfortunately, this attitude is widely shared in the real estate community.
Let me close with our new Competence Maxim:
The Ray Rule: Competence does not ensure success.
The Triangles Corollary: Lack of competence does not preclude success.
Brick and Garden is an independent real estate and investment firm based in Cary, North Carolina. We operate in the Greater Research Triangle Area of North Carolina.
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Raleigh & Taipei Development Corp.
Galt, Rearden & d'Anconia
Brick and Garden Real Estate
Post Office Box 3882
Cary, NC 27519