Joe: @1000wattmarc Riddle me this: When looking at a specific home zstimate, what value is knowing the median error rate for a city?
Marc: @jfsellsius Totally. After receiving my CMA last night and going through it, I realize how much value the agent offers in this area.
Joe: @1000WattMarc Certainly no.The error rate is a red herring to lend air of authenticity. It has no real value,even 2 those who understand it.
Marc: @jfsellsius The question I have is — why did it take getting a CMA to realize the value? I know the value of BMW without owning one.
Marc: @jfsellsius What needs to be illustrated here is how much agent value is buried beneath the surface. Points to areas they can improve upon
Second, I read this post by Eric Bryn over at Real Estate Relativity on Antonin Artaud, a long-dead French playwright, and real estate (no, really, I swear):
Similarly, it seems to me, the real estate industry is due for an Artaud-like challenge to existing norms with respect to representation, compensation, and professionalism. The run-up to 2009 was indeed a real spectacle, but the tent has fallen, the elephants have flattened the performance space, and the audience seems to have run away. Indeed, many have written about the current state of affairs.
Now, I know what you’re thinking: “Boy, Rob’s life must really be sad if those things made his evening interesting.” But let me assure you that my life is not quite as sad as it may seem. Because those things made me wonder — as I often do as I wait for my entourage of rock stars and Ford models to arrive at my house, so we can go over to George Clooney’s place for a nightcap — about agent value.
How Much Is that Doggie in the Window?
The whole conversation began, I think, when Joe Ferrara asked over Twitter what the difference was between a normal CMA and an “advanced” CMA. (CMA = Comparative Market Analysis). A CMA purports to give the consumer a professional opinion on the fair-price of a particular property.
As this Realty Times article says:
This is one of the areas in which the real estate industry really earns its keep – by showing you in black and white what your competition is.
It takes a skilled person to be able to use it. For this reason , the CMA will always need to be interpreted by a professional or with complete objectivity by the seller or buyer.
I have no particular opinion on CMA, nor am I qualified to judge whether it takes a skilled person to be able to use it or not. I do think, however, that much of what is perceived to be an agent’s value is tied up in this ability to look at comps, look at intangibles, interpret the mystic omens, and price property.
The thing about pricing, however, is that it’s nothing more than a guess. Even the most sophisticated pricing models — that make advanced CMA’s look like blindly throwing darts — utterly failed to predict the financial collapse of 2008. Turns out, these sophisticated models, built by math geniuses and bona-fide rocket scientists, were really nothing more than guesswork cloaked in arcane language.
When it comes right down to it, what something is worth is precisely equal to what someone will pay for it. Not in theory, but in legal tender. You can use historicals, comparables, trend analysis, macroeconomics, risk-adjusted capital asset pricing models, whatever to argue that the price should be X or Y, but the price will be what the buyer and seller end up agreeing on.
As it happens, there is a mechanism that pretty much always works for finding market price: the competitive auction.
The Ebay Effect
Here’s one listing in Dayton, OH:
At time of writing, the highest bid on this house was $8,600.
Now, as it happens, the real estate market in the United States is not yet ready to embrace full open, competitive auctions over the Internet. The number of people willing to spend hundreds of thousands on a website is, well, pretty small. And I don’t believe Ebay will take over the real estate market.
But let’s imagine that it does. That every seller and every buyer goes on to Ebay to find, and buy & sell properties.
In that world, what is the value of the agent?
Pricing is pretty much automatic — it’s what some buyer and some seller agree on. Comparables, historicals, and so forth have very little bearing — except that they might influence a seller to set reserve prices at a point where there are no buyers or get a buyer to bid far over what the seller would have been happy to accept. Point is that pricing is no more a matter of expertise, but of simple agreement.
Value in Transparent Markets
There is no doubt that realtors will have some value in a perfectly transparent market. As the comments in this old thread shows, realtors actually do quite a bit more than just provide pricing guidance. They do consulting work, they provide psychological counseling, they handle the paperwork of the transaction, and project manage the whole thing.
However… the emphasis on consulting, on “local expertise”, and the like is interesting. Because so much of that consulting, local expertise, and the like today is tied up with pricing. A realtor is a local expert who really knows the local market, and can help you price your house to sell or give you guidance on what you should pay as a buyer.
Much of the “consulting” is tied up with how to present, market, and stage a property so that it fetches the maximum price. Or conversely, how to look behind the marketing to determine the “true fair price”.
Negotiation is a skill brought up often by working realtors. Well, that’s a particularly useless skill in an Ebay world.
In an Ebay world, the realtor’s value appears to consist of doing paperwork, providing psychological counseling, and project managing a transaction — and right now, I’m thinking that justifying taking a 6% commission is going to be difficult based on those services.
What the experiment shows me is that so much of a realtor’s “value” today is tied up with pricing. Despite all of the data and information in the hands of consumers today, they would still rather have someone else tell them what to charge or what to pay.
And if this ability to price properties lies at the heart of agent value, what implications does that raise for agents and brokers and real estate company marketers around the country? For one thing, should smiling photos really be on every realtor business card? For another, what sort of investment should brokerages be making into mo betta pricing models and training to use them accurately?
There are dozens of questions that arise from the thought experiment. Which was sort of the point. Which is why the two events — Marc and Joe’s debate, and Eric’s post — made my evening so interesting.
Now I have to run — Brett Michaels and boys are here with the Ford models, and George is waiting.