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Redfin.com’s Real Estate Consumer’s Bill of Rights: A wolf in sheepskin clothing . . .

I am a hardliner on the subject of reform in the real estate industry. Over the last nine months, I have written at great length about, among other things, the skill-set required to survive in the future of full-service real estate, empowering buyers, dual agency, how the NAR makes war on the free enterprise system, divorcing the buyer’s agent’s compensation from the listing agent’s fee, rebuilding the MLS without the co-brokerage fee, eliminating the IRS safe-harbor for real estate brokers to induce them to take responsibility for managing head-count, and getting rid of real estate licensing laws — or at least the broker’s level of licensing — to promote better competition among agents and better due diligence among consumers in hiring agents. There’s all that, plus much, much more.

Why am I going through my bona fides as a reformer? Because I am about to denounce a failed, flawed, fractured, false reform that is to be proposed today by Redfin.com. At first blush, this “Real Estate Consumer’s Bill of Rights” sounds like a good thing — and it easily could have been a good thing. Instead, it uses a treacly moral suasion and calls for new legislation to ram the corrupt Redfin style of doing business down everyone’s throats.

Start at the beginning. Yesterday, Kris Berg, Ardell DellaLoggia, Kevin Boer and I had this email from Redfin.com CEO Glenn Kelman:

Hope you’re having a good weekend. We wanted to let you know, under embargo until tomorrow at 9 a.m. (or whenever Inman goes live with the news), that we’re launching a program on Monday called the consumer bill of rights.

It doesn’t argue the issue of commission rates; we don’t consider it our business what others charge. It mostly focuses on simple reforms that would ensure that consumers get complete and open access to information about properties and the process of buying or selling properties.

The reason we’re asking you guys about it is that we want other brokers to support these rights. This is something constructive and positive, not antagonizing and negative — which itself is a result of coaching you’ve given us.

Maybe it would seem odd for you to find common cause with Redfin, or maybe you disagree with the rights as we’ve set them out. But if it’s something you agree with, saying so publicly would be a powerful statement to your customers and to the world at large.

The four of you in particular are extremely influential, more than you probably realize.

Anybody who participated in the program would show up on a web page we’re putting up tomorrow morning, www.redfin.com/rights. We’re also designing a nice-looking logo for supporters to post on their website. We have no intention of judging how your business upholds these rights, since we couldn’t pretend to be objective anyway. For us, the first step is just finding common ground in a set of principles we all agree to uphold.

Let me know what you think, but please don’t blog on this until tomorrow morning. Take care.

Who could object to this? Well, I could, inasmuch as this is the kind of creeping Babbittism I was beefing about over the weekend. But, even so, at first glance I thought this was doubly smart: Smart to come up with a statement of principles about highly-principled real estate practices, and smart to approach prominent, reform-minded weblogging Realtors for support.

On the other hand, I believe in my heart that Glenn Kelman is a centipede. He can always come up with another foot to shoot himself in. And, of course, that foot left bloody tracks — in Redfin red — all through the “Real Estate Consumer’s Bill of Rights.”

I don’t dislike everything in the document, but there is quite a bit that I oppose on general principles, and quite a bit more that is simply Kelman trying to foist off Redfin’s cowbird business practices as matters of moral right. This is obscene, as is the attempt to marshall support among Realtors and brokers — who should know better by now.

Let’s take it apart. I’m going to highlight specific language I object to in red.

1. Choose the services you pay for: Laws in more than a dozen U.S. states forbid brokers from refunding commissions to you, or require brokers to provide services you may not want to pay for. These laws protect the industry, not the consumer.

All for it. The more laws we repeal, the better.

2. Know how your agent makes his money: In real estate, the seller pays both his own agent and the buyer’s agent a percentage of the sale; the agent earns more when his client pays more. If a house seems difficult to sell, the seller may even offer buyers’ agents an especially high percentage. Buyers’ agents should be required to explain to their clients how they are paid.

We just repealed laws and now we’re passing new ones. I think agents should disclose how they are compensated, and I think buyers should make a point of finding out. But the idiot real estate laws already on the books are not enforced. Adding another law for feel-good purposes will change nothing. Note that divorcing the commissions will change everything — but not to Redfin’s advantage.

3. Know when you are committed to an agent: Often just showing a property entitles an agent to the commission for representing you, regardless of whether you intended to work with someone else or even preferred to represent yourself. The relationship between an agent and a consumer should always be explicit, so that both parties know when they’re committed to one another.

I have no objection to this as a statement of principle, in the present circumstance, but this is a perfect example of Redfin’s self-dealing. Who has a procuring cause problem? So-called buyer’s agents who impose the responsibility for showing the property onto the listing agent, but expect the full buyer’s agent’s commission. This is an issue we will revisit as we go along, as you might expect. And, of course, this is another problem that would be entirely solved by divorced commissions.

4. Know what services your agent will provide: Much of the work of a buyer’s agent begins after the buyer has agreed to buy a house. This work includes coordinating inspections, repairs, mortgages, title reviews and escrow services. But agents today are paid only to bring a buyer to a transaction. Once that happens, it is virtually impossible to fire your agent. In most cases, this is appropriate, as the agent who puts a deal together deserves the commission. But in becoming committed to an agent, you should know what services the agent will provide as part of that commitment and what recourse you have if the agent doesn’t perform those services. An open agreement between you and the agent protects the agent from being unfairly dismissed, and ensures you get the service you expect through closing.

The sentence in red is legalistically true and is stupid and false in practical reality. Because commissions are not paid by both seller and buyer, each for his own representation, the sine qua non event resulting in earned compensation for the buyer’s agent is introduction of the buyer to the seller. But in fact the buyer’s agent will not get paid if he does not shepherd his buyer through the escrow process. This applies to all buyer’s agents, traditional and discount. The advice to buyers is good, and it would be even better and more meaningful and more easily enforced if commissions were divorced.

5. Have an agent that represents only your interests: Most states allow an agent to represent the buyer and seller in one transaction, and get both sides of a commission. As a result, some sellers’ agents are on the prowl for unrepresented buyers to bring to the seller. It’s a solicitation neither side can easily refuse because the seller wants the buyer and the buyer wants the house. But an agent can’t fairly represent the interests of two parties to the same transaction. An agent should represent only one party, and take commissions for only one party.

Boy, howdy! Who can’t hear enough about Dual Agency? There are obvious problems with this paragraph. First, sellers — including Redfin’s $2,000-a-listing sellers — want Dual Agency. It’s one of the things they’re hiring in a listing agent, the idea of a rainmaker who will bring the buyer himself, ideally with a discount on the buyer’s agent’s side of the commission. I truly hate Dual Agency for many sound reasons, but there is a limit to how far I can oppose it with a seller without betraying the seller’s interests. I would prefer to do as is suggested here, to refer the buyer out. But if I refer the buyer to an agent who proceeds to take that buyer to other listings, I have deprived the seller of a procured buyer. Arguably, I could refuse to represent the buyers, but the likelihood of my creating an undisclosed Dual Agency is virtually certain. It is conceivable to me that there could be circumstances where a Realtor could not avoid a Dual Agency, and, because of that, I went to some pains to devise a rational, real-world-correspondent Disclosure of Limited Dual Representation. In fact, in a Dual Agency, I would prefer to write the Buyer-Broker Agreement with our brokerage named, appending the language “and/or designee,” to allow for the buyers to select their own representation later in the process.

But: All that notwithstanding: What’s really going on in paragraph five is that Redfin is trying to deprive listing agents of the fruits of procuring the buyer in the present commission structure. What makes this issue go away entirely? You guessed it: Divorcing the commissions.

6. Know the commission refund you can get before you buy a house: Depending on the service provided by the buyer’s agent, some sellers vary the commission offered to buyers’ agents. This flexibility is good in theory, but in practice it’s often used to thwart commission refunds: buyers expecting a refund of $10,000 or more from their agent discover on making an offer that the amount has been radically reduced in favor of the seller’s agent. Buyers should know in advance what circumstances let the seller’s agent keep more of a commission for himself. It’s fine to change the price but not at the cash register.

The language in red is all Redfin self-dealing. Why are brokers writing variable commissions into their listings? Because cowbird discounters like Redfin push the cost and legal risks of showing onto the listing agent, then demand full compensation as procuring cause of the sale. Is the variable commission disclosed in the listing? Has to be, by MLS rules. Why doesn’t the buyer know about the variable commission? Because the lazy cowbird real estate brokerage doesn’t even provide that little bit of representation for its buyers. Again, this specious problem is easily solved by divorcing the commissions.

7. See all the houses for sale: Many of the multiple listing services set up to share listings between brokerages forbid participating websites from displaying for-sale-by-owner houses alongside broker-listed houses. As a result, home buyers usually don’t see all the houses for sale, and home sellers have to hire brokers just to get their house on mainstream sites. MLSs should not require exclusive display of listings.

More laws, and the worst possible kind: Forced speech and forced association. This is totally alien to American principles, as exemplified by the First Amendment to the real Bill of Rights. The actual purpose of the MLS is not to advertise properties but to publicize and promise shared commissions on listed properties. For-Sale-By-Owner homes are logically-excluded because the promise of shared compensation is absent. Want to make the problem go away? By now you should be able to guess how.

8. Have an open discussion about a house for sale: On the web, you can openly discuss almost any product for sale except a house. That’s because sellers’ agents “own the listing,” controlling where and how it’s posted for their benefit. The rules of some MLSs discourage real estate websites from publishing independent reviews and preclude owners from distributing MLS marketing materials outside MLS-sanctioned websites. Once a house is for sale, everyone in the market should be able to discuss it.

And don’t think they don’t! The whole paragraph is more Redfin self-dealing, an attempt to do an end-run around MLS rules it voluntary agreed to abide by. MLS members might be forbidden from trashing each other’s listings, but nothing prevents ordinary people from speaking and writing as they choose.

9. See all the information available about a house for sale: Many MLSs make it difficult for buyers to see recent past sales data, how long a house has been for sale, or whether its price has been reduced. Once a house is for sale, you should be able to see all the information available about it on your own, without becoming anyone’s client. The only exception to this rule is information whose publication jeopardizes the seller’s safety, such as when the presence of children precludes a showing.

More Redfin self-dealing. If you don’t like MLS rules, don’t join. Alternatively, if you want to pull the teeth from the MLS, perhaps even replacing it completely, divorce the listing and buyer’s agents commissions. Everything in the MLS turns on the co-broke. Lose that, and reform is very easy.

10. Be sure your agent will show your house to everyone: Some sellers’ agents selectively refuse to show houses to a buyer represented by an alternative brokerage, which hurts the seller and the buyer. If, as part of his service, a seller’s agent doesn’t show houses to all buyers, the seller should know it, and the buyer should be able to contact the seller directly. When agents don’t facilitate showing a house, they should at least stand aside and let buyers see the house on their own.

Another whole paragraph of Redfin self-dealing. What’s the real problem? Redfin can’t make money if it has to provide true buyer’s representation for its buyers. To make a profit — someday, maybe — it has to shove the costs of showing homes off onto the listing agent. Why don’t listing agents want to do this? Because they’re paying 50% or 60% or 75% of the sales commission so that buyer’s agents will show homes to buyers. If the responsibility of showing is to be pushed off onto listing agents, they must either refuse to do it — paragraph ten — or pay less commission — paragraph six. If, on the other hand, buyers paid for their own representation, all of these problems would go away.

I thought I might propose an alternative “Real Estate Consumer’s Bill of Rights,” but there really is no need. The simple reform of divorcing the buyer’s agent’s compensation from the listing agent’s commission will solve all of these problems, plus many more. Such a change would be easy to effect, a simple matter of lenders permitting the buyer’s agent’s fee to be expressed on the buyer’s side of the HUD-1 form. The seller would pay the listing agent on his side of the form, out of the proceeds from the sale. The buyer would pay the buyer’s agent out of his own or the lender’s funds. Practically speaking, the money traveling across the closing table would seem to be identical to the present circumstance. But the buyer would have true representation, and the buyer’s agent would have nothing to gain — or to fear losing — from either the listing agent or the seller.

That would be true reform, of true benefit to the consumer. So why doesn’t Redfin propose divorcing the commissions? Why is it spending so much time and effort chipping away at the mortar between the stones in the MLS edifice, when it could much more easily advocate this simple and obvious reform that could bring the entire MLS commissions-fortress tumbling to the ground?

Why? Because a divorced commission is a negotiated commission. Redfin can’t live without the three-percent buyer’s agent’s commission. It doesn’t want to earn that commission, so we get ten paragraphs of self-serving tap-dancing. But if buyers discover beyond doubt that they have the power to set the fee — and the terms — of their representation, all the cowbird brokerages will be instantly nestless. All of the do-nothing agents will be gone, and the survivors, exceptional-service or deep-discounters, will be very, very business-like. This will be a great thing for consumers, too — but it will be the end of Redfin.

What we end up with is not a consumer’s bill of rights, but a Redfin bill of rights, an attempt to paint the color of rectitude on all of Redfin’s wrongs. Redfin seeks to enlist support for this document not because it wants or expects other brokerages to do business this way, but to rob them of the right to complain when Redfin and other cowbird brokerages dump the cost of representing buyers onto listing agents and yet demand full payment for defaulting on their responsibilities. This is about as wolfish a ploy as anyone could envision — all cloaked in the guise of consumer protection.

Ten paragraphs of specious “reforms,” all designed, in camouflage, to buttress and ratify Redfin’s unprofitable dis-service business model. Or one simple and obvious reform that will cure nearly every ill in the real estate industry overnight. My reform might be too radical for you, for now. Redfin’s “bogus” reform is simply absurd. Don’t make the mistake of attaching your name to this transparent piece of propaganda.

Elsewhere: Inman News, Redfin’s weblog, Kevin Boer, Ardell DellaLoggia, Jonathan Dalton, Joel Burslem, Blue Collar Agents, Inman Blog, NY Houses 4 Sale.

 
The divorced real estate commission file: This is an organic compendium of weblog posts and internet-based articles arguing for and against the idea of divorcing the residential real estate commission — eliminating the co-brokerage compensation from the listing agreement, with buyers contracting for and arranging compensation for their own representation. One way this might be effected: Lenders could permit buyers to expense representation on the HUD-1 form as sellers do now. The entries collected here represent the full gamut of opinions on what may be the most important issue facing Realtors today. To submit additional posts or articles for inclusion on this list, fill out the form at this link.


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