[JES]

Wow, I just opened another window just to keep all of this straight in my head while I respond. A few points to clarify and respond:

-Lawyers work on a billable hours basis, or a flat fee. Want a will, pay $500 to get it. Even with a trial, they account for their hours and are paid accordingly, right? I guess some pay contingency fees though.

-My comment about non-college educated realtors was not out of line. I was describing a transaction where I paid $1000/hour for exactly that.

-Looking at the bigger picture, many realtors have degrees, CPAs and even JDs, but the vast majority don’t. If we compare the fees charged by realtors to those charged by professionals who have earned advanced degrees in everything from accounting to law we see a huge discrepency. We can point to the few realtors who have CPAs to make our points, or we can look to the majority who have no education whatsoever, but are supported by a system that allows and encourages them to charge ridicules fees that would have bought me the services of 2 full time lawyers and a personal trainer and cook for a month:)

-Efficient systems do not justify current fees. I can transfer $500,000 (if I had it to transfer!) from one account to another tonight very efficiently and be charged nothing. I can buy $500,000 in stock tomorrow very efficiently and pay reasonable fees. Efficient systems save the RE industry money that should be passed on to consumers.

-sdrealtor: From what I can tell you seem to be the kind of realtor that everybody should want to use. Educated, experienced etc. Do you feel that the current system is really helping you? Seems like it would be the equivelant of me getting a law degree and then having the state bar turn around and allow anyone to practice law. Can you imagine the jokers we would see trying to charge $300/hour for legal advice?

[JES]

IMO sdrealtor makes very good points regarding the value of a realtor, but I also believe that the answer to futuresdguy’s question is a resounding ‘no’. I have yet to hear any convincing arguments as to why commissions are so high, other than tradition; liability and meager realtor earnings just aren’t cutting it for me. I paid a non- college educated realtor the equivelant of $1000/hour in 2001 to sell my house – a ridicules fee that would have bought me the services of 2 x Yale educated lawyers.

Can someone tell me why realtors – unlike accountants and lawyers – are paid on a percentage basis to begin with? Shouldn’t we be paying for the amount of work done, or the time involved and not just some arbitrary percent?

Also, technology and pay-for-service models will not make realtors obsolete, but they will surely reduce the number of people who need realtor services. We can only hope that these new technologies and business models will help to break down the barriers that this industry has set up to protect itself and provide consumers with fairly priced choices.

[JES]

I fully understand the risk of lawsuits and appreciate the impact they can have on agents. However, I stand by my earlier statement. On a number of occasions I have asked agents why I have to pay such a high commission and every single time the answer has been that they face a huge the risk of lawsuits. Do all agents use this as a sales tactic? No. Do many use it to try to use it to justify what most people consider sky high commission fees? Yes.

IMO, the risk of such a lawsuit is mitigated by insurance that I assume all agents and brokers maintain. And I assume that the ‘risk of a lawsuit’ is not solid enough justification for me paying 6% fees on the sale of my home. If I were to pay $15,000 in fees on a home sale, how much of that is actually going to pay for insurance or into a fund to help pay for the fees associated with a lawsuit?

I’m open to changing my mind here. Again, how many lawsuits have you been involved in during your past 100 sales? And of the fees realtors charge, what percent of that fee goes to lawsuit insurance?

[JES]

I honestly think it is a sales tactic because I have heard it from a bunch of realtors that I have encountered. I do not doubt that liability is an issue, but insurance covers the risk and unless I am proven wrong, I am sure that lawsuits against realtors for home purchases are rare.

[JES]

On the issue of liability:

I have heard so much about the risks associated with a home purchase, the potential for lawsuits etc., but I have yet to meet anyone who has actually been involved in a lawsuit on a home purchase. During my last sale I was curious, so I asked two realtors with 10+ years of experience each and both told me they have never been involved with a lawsuit. I realize that there are always risks, and that there are indeed lawsuits that get filed, but my feeling is that it is an overused sales tactic. Do you have any data to illustrate how frequently these lawsuits occur? Out of your last 100 transactions, or an average realtors last 100 transactions, how many end up in a lawsuit?

“5 years ago you weren’t asking us to invest thousands of dollars in new technologies to save you money.”
-The argument is not about us asking realtors to lower their fees or invest in technology, but rather how ‘mainline’ realtors will respond to the realities of the marketplace. You don’t have to invest a dime because technologies are coming online that will allow a consumer like me to bypass a realtor and do much of my research and transactions from my laptop, on my own and with the assistance of advisors and service providers who will charge a flat fee for services like research, document review, escrow, legal review etc. IMO, the argument is whether full service realtors will still have relevance in the majority of transactions that do not involve communicating with heirs to an estate or servicing rich or technologically unsavvy clients, or those who just feel they need a realtor.

I would hire that caddy, but only because he would have very specific local knowledge that I wouldn’t have, and it wouldn’t make sense to fly my own in either. In your example, that knowledge gap will never close and the cost of bringing one in will always be high. With home sales, that knowledge gap is closing fast and there are millions and millions of ‘caddys’ to choose from, but the cost of hiring one hasn’t changed.

[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?

[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.

[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.

[JES]

I’ve bought and sold two homes since 2001 so I am no expert, but it seems to me that there is alot of room in the industry for technology to create more efficient and lower cost processes. Here’s some ideas off the top of my head where money will be saved:

1) ‘The search’ – Realtor.com and other sites are making it easier to search without a realtor. Online videos, photos, comps, neighborhood photos, tax data, school data, crime data etc. are changing the landscape. I am confident that I can go to any city in the U.S. and figure out everything I need to know about an area online and via my own research. Realtors will still perform this function, but in a much more limited fashion for a more select audience.

2) ‘The negotiation’ – We are now armed with more and more data regarding what homes should cost in a given area and in many cases don’t need realtors to give us comps, inside sales data etc. Also, online systems will evolve and offer negotiation functions over time. EG: If I see a house I like on Zillow, perhaps I make an online offer, they counter, I counter back and say I’ll pay closing costs and we have a deal. If the negotiation process for a home purchase were as utterly complex as many realtors say it is then something other than a high school diploma and a one month course would be required to do it.

3) ‘The paperwork’ – Online resources are lacking right now, and unless you belong to the CAR you basically have to go to Staples and buy outdated, generic forms. This is another area where online resources will grow and already have. I can go online today and find someone to do the paperwork for a couple hundred $, and if I am paranoid I can pay a lawyer to look it over for a few hundred more. I’m sure many lawyers will offer online RE review services in the future. Why pay a realtor $15,000 for this function?

4) ‘The Escrow’ – Resources to track and conduct escrow online will continue to increase. Less paperwork, more streamlined processes = less costly and easier for Joe on the street to keep track of what is going on. EG: Here’s your escrow web link, and on this page you will see all actions taken and also POCs for everyone involved. Would you like automated emails sent to your cell when each milestone is completed?

I’m sure I missed a whole bunch of issues, but clearly things are going to continue to change regardless of whether a few discount realtors go out of business. Already today, but especially in the coming years, many of the traditional functions performed by realtors and used to justify high commissions will be done online. Still, there will always be a need for good realtors, just not as we know them today IMO.

[JES]

Perry, It is interesting that the common theme emerging from the industry now is that inventory levels are high now but will level off in the next year. Their reasoning seems to be that builders are trying to get rid of inventory now, discounting deeply to do it, but that this will eventually end and the market will then go up again. In this analysis they completely ignore issues like the one presented above with resetting ARMSs. When you combine it all together it paints a pretty gloomy picture for at least the next 2-3 years.

[JES]

Bugs: I second your comment about the mis match of themes and home styles at Bressi Ranch. I remember driving by there with my wife a few years ago and looking south from Palomar Airport Rd. towards the NE part of Bressi Ranch, near the ‘grand entrance’. The mix of colonial, craftsman and other style homes just didn’t look right together. I’ve driven through there a few times this year and I also don’t like the narrow roads, alleys behind homes, quality of construction, and cookie cutter feel of the neighborhood. These issues are all the more disturbing when you compare Bressi to other neighborhoods like Rancho Carillo and even Aviara in Carlsbad where you may pay a little bit more but get a world of difference, and in some cases no mello roos (Parts of Aviara).

[JES]

Just to clarify. The builder sells the home to an investor group at close to asking price, but then the investor group rents that house back to the builder at 350% of the typical monthly rent? So the builder is effectively funneling the discount back to the investor group each month. Did I get that right?

If this has been going on legal action really does need to be taken. If there were a specific example that could be confirmed it would make headlines, I’m sure of it. To take this Bressi Ranch case as an example, what types of things would one look for to confirm that it is indeed a scam? EG: The homes have been vacant for a year, or all have been rented for a year? Perhaps they were all bought at list price at a time when discounts were being given, therby raising the question of why the investor group didn’t get a lower price. Even better, if the monthly rent records of the payments from the builders to the investors could be gotten a hold of…

[JES]

So there is the possibility that an investment group affiliated with the builder actually made a bulk purchase of homes in order to create the perception that homes were selling? Nothing surprises me anymore. Any idea what price the bids will start and if there is a minimum bid for these homes?

On a side note, did anyone see the UT Homes section today? There is a light orange commentray section every week that is filled with realtor propaganda. Today’s article is the worst example of blind misinformation I have ever seen. The realtor blames the media for creating the perception that prices are falling, and even denies that the market is falling. Every single paragraph is filled with lies! And he is from San Marcos; a city that is crashing very badly in many areas right now. The home I sold in March there is now selling for 100k+ less – someone tell this guy to wake up!

[JES]

Perry – That is exactly what I am doing myself. I was in a 7 year interest only ARM and sold earlier this year. I’m now earning 6%+ on my proceeds and sending the earnings into 529 plans for my kids and maxing out our IRAs. I caught flak from family for selling and people generally considered me a fool at the time. Even when I explained about the college and retirement savings I received no love.

Further validation that I made the right decision came this week in the form of a reduced price on my old neighbors house. It is directly next door to the one we sold, 150 sqft. bigger with similar upgrades and is now selling for $100,000 less than our sales price.

[JES]

Completely agree with you Perry,

I can buy that same home in Fort Collins, CO and my mortgage payment would be the same as the mello roos, property taxes and HOA in Temecula, not including the mortgage! I don’t quite understand all the talk about now being a great time to buy either. A friend in the new home business told me that last week, as did a relative. Once the first news reports came out about falling prices they must have immediately thought “prices are going down, now is the time to buy”.

It is possible that we are all wrong and everything could turn around next Spring. But who on earth would buy now at a time when news reports can’t even keep up with price reductions, the selling season is over and the market is in a virtual freefall! At least wait until next February or March and see what the market looks like before the beginning of the next selling season. Really, what are the chances that everything is suddenly going to take off again next Spring when nobody can afford to buy, the economy is softening and the psychology of the market is dead.

[Author]

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