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Agent Value in the Age of Ebay

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So two events conspired to make my evening interesting.

First, there was a brief Twitter exchange between Marc Davison, he of the Kilo-class wattage, and Joe Ferrara of Sellsius:

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.

Who wants to CMA me?
Who wants to CMA me?

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

For the purposes of theoretical discussion, let’s imagine a world in which all sellers of real estate just put their homes on Ebay.  Oh wait, we don’t need to imagine that much: Real Estate On Ebay.

Here’s one listing in Dayton, OH:

Someone show me a CMA!
Someone show me a CMA!

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.

NOW, What You Worth, Punk? Huh?
NOW, What You Worth, Punk? Huh?

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.

Implications, Simplifications

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.

-rsh

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Rob Hahn
Managing Partner of 7DS Associates, and the grand poobah of this here blog. Once called "a revolutionary in a really nice suit", people often wonder what I do for a living because I have the temerity to not talk about my clients and my work for clients. Suffice to say that I do strategy work for some of the largest organizations and companies in real estate, as well as some of the smallest startups and agent teams, but usually only on projects that interest me with big implications for reforming this wonderful, crazy, lovable yet frustrating real estate industry of ours.

4 COMMENTS

  1. I’m not an expert in auctions certainly. The best I can say is I have been to a few car auctions and I’ve seen art auctions on TV. From that limited experience, however, what I recall is that the people doing the big bidding at those events are often experts in art or cars — they do it every day. The people for whom they are working have the money. Houses are more like art than cars, and my guess is that agents would still provide excellent value in a real estate auction process. Their value would be both on the value question (what to bid) and the process (when to bid). And then, of course, they’d help you close just as they do now but the big money for their services would be based on the what and when of the bidding.

  2. I’m not an expert in auctions certainly. The best I can say is I have been to a few car auctions and I’ve seen art auctions on TV. From that limited experience, however, what I recall is that the people doing the big bidding at those events are often experts in art or cars — they do it every day. The people for whom they are working have the money. Houses are more like art than cars, and my guess is that agents would still provide excellent value in a real estate auction process. Their value would be both on the value question (what to bid) and the process (when to bid). And then, of course, they’d help you close just as they do now but the big money for their services would be based on the what and when of the bidding.

  3. Ron.

    Great post and good insights. The intrinsic part of pricing is the great mystery of real estate, and good agents know how to address it. Most buyers’ buy on emotion; if the house has all the wow the buyer is looking for, then the house sells. A good listing agent will not only price the intrinsic into the listing price, they will know how to show it in its best light. Online value estimate don’t even address the subjective or intrinsic part of pricing.

  4. Ron.

    Great post and good insights. The intrinsic part of pricing is the great mystery of real estate, and good agents know how to address it. Most buyers’ buy on emotion; if the house has all the wow the buyer is looking for, then the house sells. A good listing agent will not only price the intrinsic into the listing price, they will know how to show it in its best light. Online value estimate don’t even address the subjective or intrinsic part of pricing.

Comments are closed.