I really, really like ideas, and I sometimes feel like I should talk about them in a larger, more comprehensive way. Events intrude, always. Plus which, I think extended rumination is what god made retirement for. For now, we gallop on horseback through the museum of my mind, since this is what I have time for.
I love having Russell Shaw with us, because he is serious, rigorous and thorough-going. But he sees the world from where he stands, and very few of us command similar heights. Russell says, in essence, “I charge more because I’m worth more.” This argument has unassailable particular merit, as do the similar arguments made by Our Lady Ardell and the avuncular Jeff Brown.
But the argument does not invert, as many wish it could: “I’m worth more because I charge more” is the fallacy non sequitur. How much commission should a Realtor charge? In fact — in actual, demonstrable, undeniable fact — some large fraction of the NAR membership is earning nothing.
Surplus capacity argues either for lower prices, for liquidation of some of that capacity, or both. Ardell argues with some cogency that nothing will be done from the inside about prices — although she might be surprised at what can be done from the outside. Even so, the quantity of real estate transactions will not go up with a marginal reduction in transaction costs. We still sleep one pillow per capita. In any case, the problem of excess capacity can easily be solved by eliminating the real estate broker’s safe harbor from tax withholding laws.
Brokers really don’t even have much reason to oppose this, if we presume that the quantity of real estate transactions is inelastic. In other words, if a broker can anticipate 1,000 transactions a year whether he has 1,000 agents or 100 agents, then the only real difference to his business is the marginal cost of tax-withholding itself — which that broker will surely find a way to socialize to the agents anyway.
Privately, our own billionaire brain trust — god help us if they ever dun us! — has been reflecting on the difference between sellers and buyers. Except for first-time home-buyers, they’re the same people, but you’d never guess it. Sellers are all over every detail, years in advance, but buyers sometimes seem to be sheep ready to fall in behind the first Judas Goat to come along. This is how they can get themselves in trouble. But it also suggests that, lacking any comprehensive understanding of the current business model, they have no strong resistance to alternatives.
All of this is of interest to me, this and quite a bit more. I’m willing to take just about any new idea out for a test drive — not because I intend to implement it, but simply to understand it. And what we’re doing here — “here” being BloodhoundBlog — is a serious, rigorous and thorough-going exploration of real estate ideas.
I want for this to be a place of truth. I really don’t like certain ideas I hear around the RE.net — “How can I milk my weblog for leads?” “What’s the best SEO strategy?” “Which is the best way to attract an audience, link-baiting or circus stunts? Poison-pen well-poisoning or bald-faced demagoguery?” By contrast, last night, Zorro said inbound links will come of their own, and that’s true and beautiful — but it’s irrelevant here. This is not about anything that happens after we hit “publish.” It’s about our motivation for speaking out in the first place.
Bonum, verum, pulchrum, the Romans insisted, but these are Greek ideas — the good, the true, the beautiful. They describe not three ideas but one — encompassing everything, encapsulating everything, explaining everything. This is what BloodhoundBlog should be, a place where very big ideas — some sublime, some ridiculous — can be examined in the cold, pure light of truth.
Everything else is a secondary consequence…
Technorati Tags: blogging, compensation for buyer representation, disintermediation, real estate marketing
ardell dellaloggia says:
Here’s a bit of blasphemy for you, Greg. I charge more to high maintenance clients and less to low maintenance clients. Let’s take transparency the extra mile. Some people deserve to be charged less, while others deserve to be charged more. As I always say…no one size fits all commissions.
November 8, 2006 — 11:34 pm
Greg Swann says:
> Here’s a bit of blasphemy for you, Greg.
That’s not blaspheny, that’s Capitalism. I salute you.
November 8, 2006 — 11:37 pm
dustin says:
Did you wake up on the wrong side of the bed today?
My comments were not about:
* “How can I milk my weblog for leads?”
* “What’s the best SEO strategy?”
* “Which is the best way to attract an audience, link-baiting or circus stunts? Poison-pen well-poisoning or bald-faced demagoguery?”
The point I was making was that agents should focus on building up a community and not focus on SEO. Granted, in retrospect, I realize that building up a community around real estate is my “motivation for speaking out in the first place”. I’m all for your focus being on “a serious, rigorous and thorough-going exploration of real estate ideas,” but I clearly do not expect all agents to partake in (let alone enjoy) philosophical debates about real estate on a regular basis.
November 8, 2006 — 11:57 pm
Greg Swann says:
> Did you wake up on the wrong side of the bed today?
You misread me straight down the line. I praised you at your place and I’m praising you here. I’m contrasting your take — and mine — with others I like a lot less.
So you know, my respect for you and what you have done is beyond boundaries. I might tease you. I would never presume to chastise you.
November 9, 2006 — 12:03 am
Greg Swann says:
Further notice: I edited that section slightly to eliminate any misunderstanding.
November 9, 2006 — 12:10 am
Jeff Brown says:
The commission remains at roughly the same as it’s been for decades, with a possible trend towards mild decreases. However, since it’s now more difficult to actually sell the damn things, the VALUE of the service is going back up.
Shaw has it right. Of course you knew way before this I’d agree with him. 🙂
The only way brokerage fees significantly fall is if a large minority of companies lower their commissions. Not likely in this market. So all those super discount houses will begin to fall like decaying Oreos stood on end like day-old corpes.
The price for a service cannot be willed. The invisible hand is ever vigilent. 🙂
Ardell – You remind me of the mechanic who had three price lists: $30/hr when you left and came back; $35/hr if you stayed and watched; $40/hr if you helped. 🙂
November 9, 2006 — 12:36 am
Greg Swann says:
> The only way brokerage fees significantly fall is if a large minority of companies lower their commissions.
That’s not the only alternative. The number of Realtors could plummet. This will happen anyway, but if the broker’s withholding exclusion is rescinded, the number of Realtors will drop precipitously.
But even ignoring all of that, at present there is a tremendous amount of excess capacity going to waste. This is why the median income for Realtors is so astonishingly low. The half-above are making great money. The half-below are making nothing.
An “invisible hand” in a truly free market would have pruned our tree by now…
November 9, 2006 — 7:36 am
Jeff Brown says:
Although I’d have to give it much more thought, my initial take on the withholding issue is this. The type of agent would change dramatically if through this change the pay for excellence dropped. You could end up with a bunch of DMV types. If that happened I’m not sure how it would shake out for the homeowner.
November 9, 2006 — 8:38 am
Greg Swann says:
> The type of agent would change dramatically if through this change the pay for excellence dropped.
Doesn’t happen in any other sales business. What does happen is that management manages — builds systems to cultivate talented people and improve their results.
Right now, the best thing a broker can do for his own bottom line is add as many agents as possible, no matter how poorly prepared they might be to do the job. Everyone has a warm network, and even a blind pig finds an acorn now and then.
Eliminating the exclusion would turn real estate brokerage into a real business.
November 9, 2006 — 8:52 am
Jeff Brown says:
November 9, 2006 — 9:09 am
Jeff says:
“The commission remains at roughly the same as it’s been for decades, with a possible trend towards mild decreases.”
I hear how Realtors (from Realtors) have been forced to drop their commissions to an average of 5.1% from 6% nationally over the past 8 years. Hogwash! More NAR bred double-talk…
One needs to look a little deeper. 6% of a homes value in 1994 equals less than 5.1% of the same home today, in dollars.
In fact, Realtors are pocketing apprx 11% more in actual dollars today than 10 years ago (even after adjusting for inflation).
November 9, 2006 — 9:57 am
Jeff Brown says:
XBroker – Your point is well taken, but not on my point.
My point isn’t the difference in total pay from one decade to another, or if the broker today is making more while charging less.
My point is that whatever he charges, the public for generations has perceived it as worth it. Over the decades there have been countless attempts a discount brokerages with almost all of them cropping up in boom times and failing during the inevitable adjustment cycle.
5-6% has been the gold standard as endorsed by the paying homeowner, and hasn’t shown any real weakness recently. Now that the market has again adjusted you will begin to see the homeowner look for the most effective brokerage and pay him his price.
November 9, 2006 — 10:36 am
JeffX says:
The public perception is far from that of ‘worth it’…much closer to that of ‘requirement’. List your home with a Realtor at their price, or suffer the dreaded Realtor steer-away/ black-ball treatment. In theory, this is not supposed to be. In reality, it happens.
The Internet, has only been here for a little over 1 decade…barely enough time for it to truly influence the real estate sales industry, from the inside out. Slapping up a static website to extend marketing reach is/was the most superficial type of web based benefit.
The integration of technologies that reduce cost and increase efficiency, into the traditional Realtor’s business process model, is causing a paradigm shift.
You are correct: ‘the market has again adjusted you will begin to see the homeowner look for the most effective brokerage and pay him his price’.
The variables that are being redefined and revalued are ‘effective service’ and ‘price’.
November 9, 2006 — 11:38 am
Jeff Brown says:
JeffX
>The public perception is far from that of ‘worth it’…much closer to that of ‘requirement’. List your home with a Realtor at their price, or suffer the dreaded Realtor steer-away/ black-ball treatment.
Let’s look at what you’re not saying. You’re not saying this is a decades long conspiracy to not only fix prices but block all comers from creating and marketing a better mouse trap. Unless you’re saying Realtors have been granted a monopoly comparable to say the local power company, this just doesn’t even pass the smell test.
It assumes guys like Buffett, who are like great whites when it comes to opportunity go blind when it comes to real estate brokerage. Buffett in fact surveyed the entire country looking for new models that might work. He failed, and concluded that buying the largest home brokerage in So. Cal was the way to go. He obviously has the capital to have made the decision to undercut the industry, but saw how much of a losing proposition that was going to be.
Every other industry has huge examples of small firms taking on an industry’s accepted model successfully. It’s my firm belief when and if a new model shows up and proves superior to the current model, it will be victorious in the market.
So far all I hear is theory, excuses, and accusations. It sounds an awful lot like UFO stories to me.
November 9, 2006 — 5:08 pm
Broker Bryant says:
Hi Gregg,
I’ve said this before and I will say it again. One of the reasons we have so many Realtors is because there are many Real Estate companies that are in the business of hiring Realtors not selling Real Estate. The Realtor is their consumer. With this is mind your statement:
if a broker can anticipate 1,000 transactions a year whether he has 1,000 agents or 100 agents, then the only real difference to his business is the marginal cost of tax-withholding itself —
would not hold up, in a lot of cases. There would be a substantial difference in income if the biz model is based on collecting “rent” from 1000 sgents. All that’s needed to be a successful brokerage these days is a beautiful high tech office, high splits and a great agent recruiting team. Selling Real Estate? Very old fashion.
November 9, 2006 — 5:21 pm
JeffX says:
JeffB
Well I guess there is alot that I am not saying…
It is a decades long argument, and a relatively futile one until recently, the disruptive technologies to build the better mousetrap have only been in existence for apprx 24-36 months.
Buffet was/is a sure(st)thing kinda guy, not a Maverick Investor by his own account…he is anti-diversification, choosing instead to invest in what can be and has been studied extensively. I never said the current model wasn’t a profitable one to currently own. If im betting safe and had his bankroll, I would buy the largest brokerage in the biggest RE market on earth too!
Speaking of UFO’s, you have heard of Area 51, no? Just because you have yet to identify it, does not mean it doesn’t exist.
Heres to building a better mousetrap!
November 10, 2006 — 12:50 pm
Jeff Brown says:
JeffX – If anyone thinks Buffet has made his billions being safe, they’re mistaken. He sees hidden facts, trends, and most importantly flawed business models.
You can bet your last dollar he looked at all the RE models, and then decided to buy the big dog in Cal. He’s invested countless times in ‘incubator’ industries or inovative biz models in an existing industry. He just didn’t see any in our industry that worked, or in his judgment, that would work better than what’s been done.
The only real change I’ve seen since Carter was in office is the ‘rent-a-desk’ approach. But even that doesn’t mess with the 5-6% commission.
So unless someone is able to produce an effective model that allows for reduced commissions while making a profit, guys like Buffet, and VC’s will stay away from all the current theorists.
As far as Area 51 and the better mouse trap? You may indeed be correct.
November 10, 2006 — 1:05 pm
Michael Daly says:
Thanks, Greg- You keep bringing me back to where I belong. Michael
November 13, 2006 — 6:59 am