Category Archives: Real Estate

As the Real Estate World Turns

There is something about Zillow that brings out the melodramatic in the real estate commentariat, both of the professional variety and often more hilariously, of the amateur variety. The big bombshell from yesterday, of Zillow acquiring Trulia, has brought out some of the finest performances in a drama and in a comedy.

It’s an odd thing to see both massive over-reaction and huge under-reaction. But such is life in the funhouse that is the American real estate industry.

I’d like to look at a few and just… well… comment, I guess. I don’t know if I have much useful stuff to add, except snarky maybe. Though to be honest, sometimes, snark can be useful!

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Why Are Referrals Still Legal?

kickback

A brief question, born out of discussions online and offline in the wake of the Zillow-Trulia deal…. Let me set the stage.

More than a few people think that Zillow will ultimately want a piece of the commission (as evidence, they point to the brokerage licenses that MarketLeader once owned, which then Trulia owned, and in the future, the combined Zillow-Trulia entity will own). But no one thinks that Spencer Rascoff is going on listing appointments. The thought is that Zillow will just charge 25% referral fees for sending a lead to one of its Premier Agents.

That 25% referral fee, of course, is standard industry practice. Your seller is moving to another state? You find an agent, refer your client, and you’ll get 25% of the commission if/when she buys a house.

In fact, this practice is so common that it is widely abused by “paper brokerages”. (See Inman’s excellent coverage of the issue starting here.) From Inman:

“Paper brokerages” — companies that join multiple listing services in order to access and display MLS listing data online, but don’t provide brokerage services to consumers — could be the next big thing in online real estate. But only if the traditional brokers who control the nation’s MLSs continue to tolerate them.

The missing piece from the Inman story is how these paper brokerages make money: referrals. I mean, why else join MLS’s and display listings online while not providing any brokerage services if it weren’t for the fact that they can make money simply from referrals?

Thing is, once upon a time, these kinds of referrals were commonplace in the larger real estate industry as well. Mortgage companies, title companies, escrow companies, etc. all routinely paid referrals to real estate agents for sending them business. Until Congress passed RESPA (Real Estate Settlement Practices Act) in 1974 banning pretty much all such practices. Sure, there are narrow exceptions today (affiliated businesses, etc.) but for the most part, it is illegal for a mortgage company or a title rep to provide anything of value to a real estate agent for sending leads their way.

So… the question is, given the obvious problem of paper brokerages, and given that the spectre of Zillow-charging-referrals would be eliminated overnight by extending RESPA to agent-to-agent referrals… why aren’t we advocating for this as an industry?

Well, yeah, sure, the obvious answer as to why not: it’s all about the Benjamins. I get that. But is there any reason that isn’t patently self-serving not to prohibit referrals altogether?

If what’s good for the goose (the title companies, mortgage banks, and escrow companies) is not good for the gander (real estate agents paying 25% of the commissions to each other), I’d like to understand why. I think I’m pretty knowledgeable about the industry, but this is one of those practices that has me scratching my head….

-rsh

Zillow Acquires Trulia; I Speak With Greg Schwartz & Paul Levine

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By now, every reader of this blog knows that one of the biggest deals in recent memory (if not ever) just went down this morning:

Zillow, Inc. (NASDAQ: Z) today announced that it has entered into a definitive agreement to acquire Trulia, Inc. (NYSE: TRLA) for $3.5 billion in a stock-for-stock transaction. The Boards of Directors of both companies have approved the transaction, which is expected to close in 2015.

It appears the rumors were in fact true. The reaction so far this morning might be characterized as stunned confusion, leavened with the expected amount of zaterade. For a variety of reasons, including my business relationship with Trulia, I haven’t commented on the rumors. But now that it’s a done deal, and I’ve spoken with both Greg Schwartz, Chief Revenue Officer of Zillow, and Paul Levine, Chief Operating Officer of Trulia, about the deal, I think it’s worth discussing at least a little bit.

At this early stage, however, everything that isn’t directly stated is conjecture. They two companies announced the acquisition; it hasn’t gone through due diligence, the normal amount of litigation, and the long integration process. I’ll do what I can to provide actual information, and then speculate away.

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NAR’s Organizational Realignment and Core Standards: Part Deux

MandatoryCoreStandardsHi intrepid readers. Notorious Junior here to do a follow-up report to Notorious Senior’s parsing of the NAR Organizational Realignment and Core Standards project, Part 1. So why isn’t Rob handling his own follow-up promises? Well, he’s been kind of busy lately, being chased around by the Audubon Society for talking smack about Black Swans and other aviary oddities.

Plus, I recently attended the certification training for Core Standards Facilitators hosted by NAR in Chicago and came away with a renewed respect for NAR for taking on such a project and for the staff for figuring out all the nitty-gritty details that will need attending to in order to make this thing work. So these are my thoughts.

First, a little background.

NAR president Steve Brown appointed a PAG (presidential advisory group) to study how NAR could make itself, and its state and local associations of Realtors (AORs), better, more targeted to the mission of helping Realtors be successful in their businesses. The PAG report was published this past April and at the May REALTOR® Party Convention (and political rally, congressional lobbying party, and general governance meeting – oh, yes, and trade expo) the NAR board of directors acted on the recommendations by adopting the Core Standards by which all state and local boards will be measured.

The criteria for success are in six categories.

  1. Code of Ethics (strengthen and streamline)
  2. Advocacy (politics and policy influence)
  3. Consumer Outreach (promotion, publicity, charity work, fund-raising, etc)
  4. Unification Efforts (refers to alignment of services at all three levels, rather than unifying boards, i.e. merging them, which was not the intent)
  5. Technology (boards need a website; they’re cheap; get one now)
  6. Financial Solvency (pretty self-explanatory – don’t let your bankruptcy be a surprise)

Most of the criteria are going to fall into the “Duh, don’t we already do that?” category. But there are some sleepers in there that are going to keep some AOR CEOs awake at night. As you toss restlessly, keep in mind the ultimate purposes of this project:

KEY GOALS:

  • Every member receives services they deserve, regardless of geography or structure.
  • Every association contributes to the strength of the whole. Locals, state, national are all working together
  • Every association must be capable of delivering the standard services. Those that cannot now must find a way to do so or else.
  • Every association is highly functional and delivers member value – size is not the issue. Functionality is the goal. Small boards can be highly functional, while some large boards may not necessarily be that functional.

Despite what Dale Stinton told the AEs at their annual institute in Baltimore (as Rob reported his best recollection), the official line is this is not about culling the herd (of crappy boards) through mergers or defenestration. This is not just about getting rid of small boards (although everyone admits that the smaller the board the harder it will be for them to meet the standards tests). It is, instead, all about service to the members. Mergers may be a side effect, but if the service levels can be achieved without mergers at all, the Realtor mission will have been accomplished.

I was surprised to hear that many (hundreds) boards are so small they can’t afford one full-time employee. They exist solely to exchange listing information through an MLS that may be a PC on a modem line in the president’s garage. Those will be the first to die. Those that cannot make the grade on their own because of size, inefficiency, or just plain incompetence will have a number of options available to them short of termination with extreme prejudice.

  • They can fold into another board as a local chapter, thus keeping a portion of their local identity.
  • They can joint venture with other boards to share service costs and jointly present programs that meet the standards.
  • They can hire services to be delivered on their behalf, either from other AORs or outside vendors, although this might entail some increased costs.

What they cannot do is continue to slide by on good looks and charm. The days of the AE or board president cajoling the state AE to not have to meet the board’s RPAC quota are over.

Let’s take a closer look at the major areas and point out the highlights of the upcoming requirements.

Code of Ethics (COE) Rob's version of COE Justice

My notorious friend jumps on his high horse about the lack of teeth in the Standards around the COE. Rob would like a Judge Dredd to go out and find those desperado Realtors, given them 48 hours to ‘splain themselves (even if their name isn’t Lucy) and then shoot them on the spot if they don’t straighten up, clean up, and fess up.

But the purpose of this section isn’t to force Realtors to be more ethical. It’s to make sure the AORs are doing their best to educate the members that (a) there is a COE, (b) they are expected to follow the COE, and (c) in cases where someone is harmed (whether that’s another Realtor or the general public), try to facilitate a resolution short of a full-blown professional standards marathon inquiry.

Through years of evolution and expansion, the Code of Ethics and Arbitration Manual is now over 250 pages long, chucked full of due process and rigor and quite frankly is a total PAIN to follow.

The three options, of which the boards much pick at least one, all intercept the complaint before it enters the formal ethics process. Mediation can resolve disputes in a short time. An ombudsman can intervene early and get the parties to negotiate a settlement even before mediation. And many states (NAR promises to publish details and examples) have a fine system in place that allows a member, when s/he gets caught withCode of Ethics a hand in the cookie jar, to say a couple of hail Mary’s and a mea culpa, pay a fine and get back to business. The fines can be substantial and a couple of them should be a deterrent to further mischief. But if not, the board can still throw the manual at them later (which, at 250 pages, has to be painful).

Advocacy

Just a couple of comments on this topic because for the most part Rob is right on in his analysis. Advocacy may be the saving grace for Realtor Associations, their raison d’être. Of all the services an association can offer, keeping good politicians in office and bad laws out of the books is the most noble.

NAR has put some substance around the metrics** of Calls for Action. They publish the response rates for each association and the Y-o-Y change so one can easily see the trend. My former state, Arizona, is dead last (8.8% response rate) among les États ( a couple of territories and one District are doing worse, but then there are a couple territories with fewer members than the Black Hills, SD association with about 300 warm bodies, so we won’t pick on them until they grow up). But other states like IN, OH, NH, and VA  have equally abysmal response rates, all 10% or less. Top dogs in the political arena are North Dakota (surprise) and Iowa (no surprise) with 32% or more responses to CTAs.

Funding Advocacy

RPACThe RPAC requirements are interesting as well. On the one hand AORs must include a voluntary contribution line on their dues statements, and in so doing imply that the payment of the contribution is anything but voluntary. Members can lineout that RPAC item and pay the dues amount only, but there is no requirement in the policy that requires AORs to explain this to the members. It will be interesting to see how those associations who accept only electronic on-line dues remittances handle the option to allow members to remove the RPAC amount from their “shopping cart” before they check out.

Yes, this procedure is an admission that most Realtors don’t understand the importance of strong, well-financed political action by their trade association. That’s the other part of the requirement, that the boards go further to explain, to educate the members why this is such an important part of the Realtor mission.** After all, this is why they changed the name of the spring meeting from Mid-Year Governance Conference to REALTOR® Party Convention. What remains unanswered, and prickly, is that end-around loophole. If the board doesn’t want to include the RPAC line item in the dues statement, they can just write a check on behalf of all of their members. But where does that money come from?

Unless the board has a for-profit subsidiary feeding money into a separate contribution channel, as Notorious #1 conjectured in his modest proposal <here>, then the check the AOR writes is coming from the same bank account into which dues dollars are deposited. And that co-mingling is the basis for separating out the RPAC item as voluntary in the first place. It will be interesting to see where the challenge to this comes from and how loud the screams are, or if the membership will look at this situation with the same laissez-faire “Meh” and yawn that greets most association political efforts.

Then there’s the POWER Thing.

Yes, the plan as first published (or at least first interpreted) smelled like a power grab by state and National, forcing locals into compliance or threatening them with termination either through dissolution or merger.

The truth is, and I saw this first hand in Chicago, the purpose here is not to consolidate power, not to cull the herd of weak Swanepoelian Wildebeests, but to strengthen the associations, and to align them at all levels toward the common purpose and Realtor mission – better, more productive members.**

Cajoling is just one option. Mentoring is preferred. The states can show the locals, and the national show the states, how to mobilize the membership and instill them a sense of pride in supporting the political actions of their PAC.

And therein lies another problem – whom do you support? And do your members agree with your decisions on whom to support? And if not, how do you either (a) do what the members want or (b) quit taking money from the Reds and giving it to the Blues (or vice-versa).

The better solution, in my opinion, would be some variation on Rob’s proposal to raise RPAC money not through voluntary donations but through unlimited corporate contributions allowed by Citizens United v FEC. But NAR isn’t ready to go there yet, so we’ll continue down this path for a bit longer, and work harder to explain it to the members.

These are just two of the six major areas that have detailed requirements for compliance. To quickly touch on the others:

Consumer Outreach

Boards must do four meaningful** consumer engagement activities annually, but can’t do the same thing four times. Examples are promoting market statistics and/or real estate trends and issues (e.g., release through press releases, interviews, etc. of MLS statistics, local market statistics, NAR research reports, local/state analysis of NAR statistics, etc.); promoting the value proposition of using a REALTOR® and/or engaging in community activities which enhance the image of the REALTOR®; engaging the public** in legislative/political issues that impact real estate and related issues; and organizing human assistance like a Habitat for Humanity** project or fundraising for the benefit of charitable/community organizations.

These are all pretty self-explanatory and really easy to hit out of the park. Realtor associations love these kinds of activities, so no challenge here.

Technology

If you can believe this, there are some organizations out there that don’t have a website. The bar for what constitutes a website is pretty low (one page with links to state and national websites), so this hurdle shouldn’t be much of a problem. The Kansas Association of REALTORS® will sell you a copy of theirs for $45/month. If you don’t know your HTML from your URL or your DNS from your TLD, give them a call. And the AOR must use email (or some other internet channel like Twitter or Facebook) to communicate with members. My advice – stick with email. It’s free (Google) and verifiable.  

Financial Solvency**

There were early concerns that locals would have to show the states their balance sheets to demonstrate solvency. Some locals don’t want the state association to know that much detail about which coffee can in the back yard has the buried cash. Fortunately, they will be able to keep their money under the mattress and free from state level prying eyes. The states will monitor only the reports from the auditors or CPAs about board financial condition and only from boards with $50K in revenue or more. (By the way, if your board has less than $50K in annual revenue, what in the heck are you paying your staff with? Bartered chickens?)

Unification Efforts

Here’s where it gets a bit tricky and where the CEO insomnia syndrome might set in.  Unification refers to alignment of services at all three levels of the association, rather than to unifying boards, i.e. merging them, which is not the intent of this section. The particulars are designed to get the three levels of Realtorism to work in concert with each other, to compliment the other levels, avoid duplicate of efforts and ensure that services to which member are entitled are delivered regardless of which level delivers them.

  1. AOR must have access to legal counsel**. This can be the state association in-house counsel or an outside attorney. But if you use an outside attorney, be sure it’s someone who understands your business. Realtor Associations are unique creations, unlike other businesses or trade groups. Representing one is not for the faint of heart. There is no requirement that you use the lawyer but if you need one you better have his/her phone number close by. There are firms that represent multiple associations across wide geographies. Contact me if you want some names.
  2. AOR CEO, President (or Chair), and Treasurer must certify in writing they have been filed all necessary corporate docs, reports, and tax returns.Alice meets the Cheshire Cat
  3. Board must have a business or strategic plan in place, including advocacy component.** The BoD must sign off each year that plan is in place (even if plan is for multiple years). This makes sense. As the Cheshire Cat once said, If you don’t know where you’re going “it really does not matter which way you go.” NAR has certified a whole cadre of strategic planners ready to help you put your plan together. <Click Here for the Roster>
  4. Chief staff person must have a minimum of six hours of professional development each year. (Hold on to your passports small board CEOs – you don’t necessarily have to travel for this.) The state AOR must provide these opportunities which can be virtual web-based online classes that you can take in your jammies.**
  5. NAR will survey members as to their understanding of the value provided by their associations at all three levels. Locals MUST promote these surveys.**
  6. Locals maintain a list of LFROs and may solicit them for voluntary contributions to PACs.** What’s an LFRO you ask? That’s the acronym du jour for Limited Function Referral Organizations, those holding companies that brokers set up for their part-timers so they don’t have to pay REALTOR® dues. NAR would still like them to contribute to the RPAC even if they aren’t members.
  7. State AORs must provide locals list of non-member licensees twice each year. The implication here is that the locals will then chase down the brokers of these agents to impose the dues formula on their non-member agents or force them to move the licenses to a non-Realtor holding or referral company. But the standard doesn’t require the locals to do anything more than they already are. It only requires that the state give them the list, not that they act on it. **

By now you have noticed a few provisions with double-stars appended and some of you have been sent looking for the footnote to which those stars refer. This is that footnote. Those provisions of the standards that are *starred* currently have no teeth. There is no measure of success, or of progress, against which to measure compliance. How does the state know if the local met the standard if there isn’t any scale by which to pass or fail?

That’s because there is yet one more missing piece to this puzzle. The PAG report tantalized you. The standards adopted by the NAR BoD enlightened you. The FAQs prepared by NAR staff enlightened you and clarified things. Now the missing fourth piece sure to raise your resistance if not your ire: the measurement criteria. NAR staff is still working on that. There are six squads of staffers putting together the “how much” to go with the “what” and the “why” and we hope to see their report soon.

Examples of missing measurement details:

  1. What if you hold a town hall meeting to engage the public in political dialog, but one person shows up? Have you met the requirement of “meaningful” consumer engagement?
  2. Yes, NAR publishes the Call to Action response rates, but what rate is sufficient for a state to pass the test?
  3. If an AOR pours its heart and soul into educating the members about RPAC, and they still think it’s a lousy idea, has the AOR met the test of “explaining the importance” of the program? Explaining is not the same as persuading or convincing.
  4. A bake sale to raise charitable donations is not the same effort as building a Habitat for Humanity house. Do they count the same under the community involvement test?
  5. The financial solvency test has no guidelines. Will there be minimum reserves required? What happens if the AOR depends on MLS revenue more than it should? Is that acceptable in the eyes of the auditor?
  6. Merely certifying that the AOR has a strategic plan in lace does not require the board to actually follow it. Does a ‘shelf registration’ count in meeting this test?
  7. What constitutes professional development for the association CEO? Would a self-directed online Power-point lecture on Facebook for Dummies qualify?

That will surely be the fodder for Part 3 of this series, which I will probably bounce back to Notorious the Elder since by that time I hope to be on the road facilitating understanding and compliance. Either that or traipsing around in a shroud like Dr. Jack Kevorkian at Halloween passing out cyanide capsules to those miniature associations who are sounding the death knell after just reading the requirements and finding they don’t have much to offer beyond MLS. Don’t fret, small board AE or president. Instead of dying, you can become a Chapter of your larger neighbor and keep your name – just as soon as NAR defines what a Chapter is and the process for becoming one (coming soon, they promise).

I’m working on a website geared toward shameless self-promotion as an approved Association Merger Facilitator to guide associations and their MLSs through the process. As soon as that is up and running, I will post an update here. In the meantime, if you just can’t wait to get started and are interested in a quick one-day outside audit of your current status and what areas  you might have to work on to pass inspection, give me a call. Contact info is found at www.NARCoreStandards.com. There’s also a link there for the current FAQ list from NAR that goes into more detail. That should get you started.

For this post:
Cause – Our organizations are out of alignment
Effect – We must hang together or we will surely hang separately.

This post also appears on Procuring-Cause.

 

First Ever Notorious Reader Contest!

clipart-contest

So… earlier this year, at the T3 Summit, I listed as one of my Black Swans the possibility that the 1099 independent contractor status for real estate agents might go away. The reason, I thought, was that state and federal governments would want MOAR taxes. You know, Social Security, Medicare, Obamacare, whatever taxes that are tied to “employment”.

Fast forward to the California Association of REALTORS event earlier this week, and Joel Singer, CEO, mentions that this exact issue is one of the big challenges that keeps him up at night. I heard much the same thing from Budge Huskey of Coldwell Banker. There are a couple of lawsuits making their way through California courts that may result in real estate agents being classified as employees.

Here’s the thing. One of the points that Joel made was that if agents became employees, that will be horrible for organized real estate, for franchises, etc., but it might be great for others. And in all of the discussion that followed, I kept asking myself a question… that I could not answer.

A few days later, I still can’t answer the question. So this post/contest. I figured I might as well outsource my thinking to some of the best and brightest in the industry and outside it.

Here’s the deal. Please email your best answer — as long or as short as you’d like — to the question below to rhahn@7dsassociates.com. I will select a few that I think are the best, then post them on the Notorious Rob Facebook page. The top vote getter (by Likes) will then win.

What will they win, Chuck? The first place winner will receive an all-expenses paid vacation for a week to Houston suburb of Katy in August! The runner-up will receive two weeks to Katy in August! No, not really.

I think $20 gift certificate to iTunes, Amazon, or Starbucks — your choice — to the winner seems about right. Woot! Free cash from Notorious!

The Question

Here is the question/topic for your participation in this lovely contest:

In 2015, Congress proposes changing legislation such that real estate agents would be treated as W-2 employees. Now, imagine that you are speaking to a regular homeowner, not to another real estate professional.

Please provide the best consumer-centric reason why real estate agents should remain 1099 independent contractors, instead of employees. How does the home buyer or seller benefit from having real estate agents be 1099 independent contractors?

Again, your answer may be as long or as short as you’d like. Email them to me. I’ll pick the top few and post them. We’ll give this a week maybe? Then I’ll post the winner. Share with your friends! The deadline for entry will be… Wednesday, July 30th, at noon central time. We’ll pick a winner by Friday.

Here’s wishing you better luck than I had trying to think of the answer to that.

-rsh