IPayone finally made a good sale

[PerryChase]

Good suggestions, JES.

I’ve not bought a house lately, but I noticed that ziprealty has a “make offer” button. I like ziprealty more than the rest because, it’s not a referral service. You can actually buy and sell with ziprealty.

sdrealtor has a point that certain transactions are complicated. However, the vast majority of transactions are straight forward.

I think that we’ll see a dual system evolve where people who need hand holding can go to a full service broker whereas others will use discount brokers. Let the customer choose.

I think that RE brokering will evolve like the travel or insurance industries but at a slower pace. Remember, those agents used to charge 10% of everything.

The real estate lobby is very strong and they’ll try to slow the evolution process as much as possible. In the end, politicians will have to step-up and write new regulations to streamline the process.

Less friction in our economy will mean that resources can be freed-up for more inovative uses. That’s how, as a society, we can increase our standard of living.

[sdrealtor]

Some phones calls to heirs is not labor intensive? How about several dozen phone calls to heirs that are not on speaking terms with each other and have diametrically opposed viewpoints? I would estimate that I make over 500 phone calls during the typical escrow. Valuable knowledge about properties comes from spending hundreds of hours looking at homes, researching neighborhoods, talking to agents, neighbors, clients, builders etc.

It is easy for someone on the outside to look at what we do and say this is an easy business. It isnt and the failure rate is among the highest in any industry. Success in this business is the result of hard work and carefull planning. While many are failing and losing interest these days, the good agents I know are working harder and growing market share. Sure there are lots of newcomers that jumped in for an easy buck. But the business is returning to normal and going back to the way it was. Good, honest hardworking agents will do well and will get paid what they are worth. Mediocre agents were always overpaid and will vanish as the size of the pie shrinks.

[JES]

SDRealtor – You raise some really great points and I agree that in many cases there is real value that can never be replaced by the internet. There are a couple reasons in addition to cost savings why I believe this trend towards internet based services will continue to replace services typically offered by realtors. Information availibility – The information is now available to all, whereas in the past it was only available to realtors therby creating a demand for certain services. Wired Consumers – As people become more technologically savvy they demand efficient online services.

There will always be a need for the services you described, but I also think that as people become more savvy with technology there will be a growing percentage who want to do much of it themselves. I consider myself a prime example. Using all my the resources I have available I forsee needing only limited help with my next purchase. Wheras my parents would have just called up a realotr, I will probably pay something along the lines of $500 for advisory services, document review etc. If this trend gains traction it will result in less people seeking the full services of realtors, but more people seeking a la carte, document review, limited advisory type services. There will always be full service business advising heirs, high income clients etc., but if I had to guess I would think that there will not be nearly enough of it to go around to all the realtors we see in business today.

[sdrealtor]

PC

“sdrealtor has a point that certain transactions are complicated. However, the vast majority of transactions are straight forward.”

The problem is that you dont know which kind of transaction you are involved in until it is too late. Seemingly simple transactions end up in arbitration every day. I’m not arguing that this is brain surgery, it isnt. However, it is not as simple and NOT as profitable as you think.

I would venture to guess that there are considerably more engineers, stock brokers, car salesman, plumbers etc. earning 6 figure salaries than Realtors. Furthermore, if you took the average after tax earning of realtors that get no benefits, pay both sides of SS tax, all their expenses and only get paid if escrow closes you would be very underwhelmed by the figure the saw. The vast majority (80%+) would make more money working at Target.

[lindismith]

There will always be full service business advising heirs, high income clients etc.

Well said. Agreed.

[sdrealtor]

JES,
I know you would like to pay $500 for advisory services but no one will be able to offer them and earn a living for that. Who is going to take the liability of advising someone on a huge transaction for $500? One lawsuit (which are very common) and they would be wiped out. It’s easy to think this is simple but it isnt. The profits you think we enjoy just dont exist. A few at the top make big bucks as they do in most industries but you grossly underestimate the real costs of doing business in RE brokerage.

I do agree there are too many realtors and 50% should disappear IMHO.

[JES]

SDRealtor,

Is there a disconnect between the commissions paid and the commissions earned by realtors? In other words, are brokers taking the bulk of the fees and not paying their realtors?

I have heard the argument you raised before, but I still do not consider it a valid argument for why I should pay 6% transaction fees. The fact that the average realtor is not making alot of money is in direct conflict with the huge amount of commissions being paid, so someone has to be making money, right? Or I suppose in todays market, homes just aren’t selling and there are too many realtors.

[sdrealtor]

JES,
Lets take an average transaction of $600,000. Average fees these days are about 4.5 to 5% not 6%. That gets split in half with 2 to 2.5% going to the listing agent and 2.5% going to the buyers agent.

That is $12,000 to $15,000 for each agent. The broker the agent works for typically gets 50% to 30% off the top leaving $6,000 to $10,000 for the agent. The average agent does 2 to 4 transactions a year while good agents do 8 to 12 transactions a year. There are a handfull of top agents that do more than that (maybe 5 to 10%).

So a very good agent working their tail off earns $80,000 to $120,000 in gross commissions. These are the folks you see providing neighborhood updates every month who have been doing so for the last several years or longer. They are the names and faces you recognize if you have lived somewhere along time. Health insurance for a family runs close to $10,000/year. Out of pocket expenses run $10,000 to $20,000 a year. Liability insurance, MLS fees, license fees etc add another $5,000 a year. Both sides of SS is around 12%+. Combine a 60 hour plus work week with nights and weekends. Bottomline is they are making the equivalent of a job paying $50,000 to $70,000 and taking the risk of earning NOTHING! Does that seem like a lot to you for someone that is very successful at doing something they have been doing for 10 years?

If you assume prices fall by 30%, they will take a paycut of $25,000 to $35,000 and will then be netting $25,000 to $35,000 before taxes if they are successful. Does that sound like a job you want?

[sdrealtor]

That was the realtor side. If you look at the brokerage side which gets the 30 to 50% of the commission you will find that it is barely above breakeven. Based upon what I have heard from management and colleagues, less than 10% of the offices at the big full service brokers (Prudential, Coldwell Banker, ReMax, Century 21) are generating any profits. Next year, it is doubtful that any of them will.

[Carlsbadliving]

I have the same question. What’s the breakdown on say the sale of a $500,000 home. 6% commission would be 30k.

Where does that 30k go?

————————————–

Nevermind, looks like you just answered my question.

[JES]

That’s a pretty bleak picture. Would you advocate higher standards for realtors so that you would have less competition for listings? I’m sure many realtors will go under in the current downturn, but what if there were a requirement to have, say, 30 college hours before you can sit for the exam?

[bgates]

Interesting Argument:
Does the Internet explain why a certain location or floorplan has held its value better than others? Does the Internet know the soil conditions a neighborhood is built on? Does the Internet know that the kids on the street have been redistricted to a different elementary school four times in the last 5 years?

I think arguing that the problem with the internet is insufficient information flies in the face of the entire history of the network. What keeps the school district or local parents from putting district info up for free? What keeps the local government or civil engineers from putting soil conditions up for free?

But personally, I would no more buy a home without a trusted realtor than I would buy a book without a trusted independent bookstore recommendation or plan a vacation without a trusted travel agent. So unless people figure out how to put those kinds of things online, I think Realtors are safe.

[PerryChase]

What about 5 years ago when prices were 50% lower than today?

Realtors were doing just fine back then. If anything Realtors got a 100% raise in 5 years. I don’t understand how brokers are not profiting.

[PerryChase]

bgates, you are right. To each his own. That’s why we need choices. We don’t need regulations protecting any entrenched business model.

You want a recommendation from a trusted bookseller; but I know what I want to read and I’m happier ordering on the Net and saving $5.

You want a travel agent to plan your trip; but I’m happy taking my chances.

There should be room for everyone.

What bothers me about the real estate industry is that the agents and brokers are colluding to prevent other ways of doing business from taking hold. They do it under guise of consumer protection, but in reality they want to protect their pocketbook.

[sdrealtor]

PC,
There are and have been plenty of other ways of doing business. They havent taken hold because they arent profitable. Take a guy like SD Realtor. Based upon his business model (1%) and the volume he’s doing, he’s generating at the top of end of what I estimated a good realtor nets. He charges 1% but makes it up on volume. He pays all of his own expenses and has no broker to share anything with. All expenses are his own and all liability is his. One $100,000 judgement against him that is not his fault in any way but for which he is held liable and he is wiped out. If you are the second $100,000 judgement against him, you are likely SOL. He takes a big risk and probably works very hard for his money. I have no doubt that he does a good job for his clients. His bottomline is no better than a mid level engineer’s salary (which i believe he is), his expenses are much higher and he works more hours. nights and weekends. Do you envy his position?

[Author]

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