Our real estate brokerage, BloodhoundRealty.com, is about to list a house for sale in one of the pricier neighborhoods of Phoenix. Our listing strategy is like a military campaign, so we’re always aware of our competition. We knew a similar home two doors away was ready to go on the market, but we were convinced it would be marketed For-Sale-By-Owner so we didn’t feel threatened.
Why not? Because despite what you might have read, a by-owner seller is no match for a skilled listing agent. I’m willing to concede that there are some unskilled listing agents, but that doesn’t matter to us. We compete against professionals, not amateurs.
In fact, the seller went with a limited-service listing instead, which is slightly — but only slightly — more likely to succeed. By now, true FSBOs are thin on the ground. If you are willing to pay the buyer’s agent’s commission, you can get a true MLS listing at a range of discount prices, from $3,000 down to $99. With IggysHouse.com, you can list your home in the MLS for free.
So why is a limited-service listing unlikely to succeed? If you’re in a high-demand market like Seattle, it just might. But in most of America, right now, a home must be marketed perfectly from the first day or it will sell slowly and at a deep discount — if at all.
The one difference between a true FSBO and a limited-service listing is the searchable record in the MLS database. The home will be offered by-owner in all other respects: Priced wrong, prepared wrong and inaccessible to buyers and their agents. This is not a necessary consequence, but it is very, very common. In the case of our newly-listed competition, the home is offered at $200,000 over its market value. Presumably because of the recent re-financing craze, it is encumbered at about $75,000 over market. This home will not be a threat to our listing.
But it wouldn’t be a threat even if it were priced right. There are too many weapons that a professional home marketer will bring into battle for an amateur, no matter how dedicated, to compete. A limited-service listing comes with none of the professionals’ arsenal. So much the worse, it shouts out a warning to skilled buyer’s agents to stay away.
Why would that be so? Because even if it’s competitively priced, even if the buyers love that particular home, it is being marketed by an amateur who will, in all innocence, make egregious errors again and again. Worse, the seller will have no one to turn to for advice, exposing the buyer’s agent to double the legal liability in the transaction, potentially even creating what a judge might regard as an undisclosed dual agency.
The same situation obtains in reverse with discount buyer’s agents like Redfin.com or Buyside.com. Their vaunted cost savings come not from their technology, nor even from picking the low-hanging fruit of well-prepared buyers. The savings they pass on to the buyer come from pushing the costs of buyer representation onto the listing agent.
Here traditional real estate is hoist on its own petard. The actual — commissionable — act of brokerage consists of introducing buyer to seller, with no legally-necessary further involvement on the part of the buyer’s agent. This is an extremely common expectation in new home sales and in tenant representation. In residential real estate sales, both before and especially after the advent of buyer’s agency, listing agents would expect the agent working with the buyer to show the home, negotiate the contract, attend to the disclosures and inspections, etc.
Discount buyer’s agents do few or even none of these things. Like the sellers of a limited-service listing, the effectively unrepresented buyers will turn to the listing agent for showings and advice, doubling the listing agent’s workload and liability and potentially creating an undisclosed dual agency.
The difference is here: A seller pays less for a limited-service listing, expecting and getting lower value for a lower price. But when a home is sold through a discount buyer’s agent, the seller — and the listing agent — get substantially less value with no discount in price. The buyer’s agent’s commission — paid by the seller as a part of the listing contract — is the same whether the buyer’s agent works very hard or not at all. Discount buyer’s agents pass their discounts through to the buyer instead.
I argue stridently that buyers do in fact pay for their own representation - even thought they don’t know it, and, therefore, don’t properly supervise their agents. But the obvious solution to the contradiction created by discount buyer’s agents is to divorce the real estate commissions, with the seller paying only for the listing agent, and the buyer paying only for the buyer’s agent. It will be a knee-slapper for traditional Realtors when a Redfin agent writes a contract on an IggysHouse listing, but that’s what pays the bills at law firms.
You will note that in all the talk about reforming traditional real estate emanating from the new discount real estate start-ups, there is no discussion whatever of divorcing the commissions. This is because it is a true reform, not the sly exploitation of an inane contradiction. When buyers finally knowingly pay for their own representation, they will demand full value for their money. And those willing to go it alone will pay little or nothing in commissions.
But even if we don’t get true reform in real estate, it seems unlikely to me that sellers and listing agents will continue to pay full commissions to limited-service buyer’s agents. Instead, listing brokers will start to offer buyer’s agent’s commission in the form of 3/1 — three percent if the nominal buyer’s agent works with the buyer, one percent if the listing agent has to pick up the slack. This is already happening around the country. The discount buyer’s agents have trickily exploited a contradiction their own trickiness will eliminate.
In any case, discount Realtors are not a threat to traditional Realtors. They are odious because they double the full-service agent’s workload and liability, without a corresponding increase in compensation. But for anyone who values the advice of an experienced professional — and for anyone whose time is more profitably spent at work — discount real estate is a costly proposition. But because full-service Realtors cannot for long bear the operating costs and liability risks of dealing with discounters, investors should expect changes in the marketplace that will reduce the discounters’ already strained prospects for profitability.
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Greg Swann is Designated Broker for BloodhoundRealty.com, a boutique real estate brokerage in Phoenix, AZ. He founded and operates BloodhoundBlog, a national real estate industry, marketing and technology weblog.
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[Source: Blown Mortgage]
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