Notorious R.O.B.

It’s a very personal, a very important thing. Hell, it’s a family motto. Are you ready, Jerry?  I wanna make sure you’re ready, brother. Here it is: Show me the money.

- Rod Tidwell, Jerry Maguire

I was recently researching a somewhat different topic (deflation, inflation, and price sensitivity in real estate) when I came across a paper written in 2007 by a trio of economists at respected institutions.  This paper has me in a tizzy.  I need to know what you think of it, and how we as an industry might answer it.

The paper is called The Relative Performance of Real Estate Marketing Platforms: MLS versus FSBOMadison.com (PDF) and the authors are Igal Hendel and Aviv Nevo at Northwestern University, and Francois Ortalo-Magne at the University of Wisconsin.

The findings are… disturbing to say the least if you work in or near the real estate industry:

After controlling for houses and seller heterogeneity, we …find no support for the hypothesis that the MLS delivers a higher sale price than FSBO. Considering that realtors charge a 6% commission versus $150 for FSBO, FSBO sellers come ahead fi…nancially. The lack of a MLS premium does not mean realtors do not provide value to the seller. It means instead that the cost of the convenience provided by realtors seems to be the full commission.

And more:

The raw price comparison shows that the average sale price of homes that sell on FSBO is higher than the average price of homes that sell with a realtor. The characteristics, reported in the city assessor’s database, of houses sold on the different platforms are somewhat different. However, after controlling for these observed characteristics a significant price gap persists. Naturally, platform selection is the main suspect behind the persistent premium. We take several approaches to deal with selection. All the approaches support the same conclusion: MLS does not deliver a price premium.

Emphasis are mine.  If you are so inclined, read the whole paper.  I read through it, but didn’t have time to dive in.  For that matter, I don’t have the Ph.D. in economics to really criticize their work.

Turns out, the New York Times had covered this paper, both in an article and on its Freakonomics Blog.  This is from the blog:

But the paper supports the argument that, unless you’re the kind of person who needs a little help through a “stressful and maybe difficult period,” and unless you’re unwilling to wait a little longer to sell your house, then the commission that you pay your Realtor is in essence a big fat tip.

Oh wow.  This is a problem, y’all.

Read the rest of this entry »

So let’s say that some brave soul out there has decided to gamble away his life at the urgings of a certain blogger who works for a certain data company in New York City. To him, I offer my deepest sympathies.

But courage! If this works, please do remember to look down upon us peons as you fly overhead in your Gulfstream G650. (Damn, even the website for that plane looks like it cost more than I make in a year.)

This brave soul would have gone forth, found rainmaking partners, installed an institutional CRM system, and is ready for business!

Well, not quite… there are still more steps, more things to consider.

One of the things this brave soul and his partners must do is to think about redefining the profession of “realtor”. [ED: Oh, is that it? I was worried they might have to do something hard.... /rolleyes]

Keep in mind that by going the institutional route, the Firm has taken on a very different cost structure than traditional brokerage. Instead of commissioned 1099 independent contractors, the Firm has 1040 salaried employees with benefits (which are costly). It has to take on the cost of CRM, of support staff, and of support professionals in IT and marketing that a traditional brokerage simply does not have. As older and wiser heads have pointed out, the Firm forgoes the very sweet IRS rules treating real estate agents as Statutory Nonemployees.

The 1099-based approach rewards brokerages that unleash a horde of low-training, low-skill agents to go forth and blanket the marketplace. They will make up in volume what they lack in quality, because even the worst agent will probably get her sister to list with her, at least once. Since the 1099 doesn’t actually get paid until some sort of transaction has closed, the brokerage could have nearly an unlimited number of such agents running around. For that matter, it almost appears as if some traditional brokerages have become de-facto landlords to their agents based on some of the desk cost oriented business model.

The 1040-based approach simply cannot compete with this low-cost, low-skill, high-turnover model on the same basis. At the same time, it should be pointed out that the 1099′s simply cannot compete with the high-cost, high-skill, low-turnover model of the 1040-based Firm on its home turf.

Therefore, for the Firm, it becomes necessary to shift the grounds of competition. If your thoroughbred can outrun any other horse running in a straight line, you don’t take him to a steeplechase competition. You take him to the Kentucky Derby. Read the rest of this entry »