Tuesday, August 16, 2005

Realty Rant

Today I took some time off work to pick up Alisa & the kids and go down to sign the Gigantic Pile Of Paperwork™ in order to close on our house. Yay! We’re moving in at the end of the week! Yay! I just shifted the decimal point on our bank account by several places :-(

As anyone who’s bought a house (or *especially* sold one) will tell you that the realty business and the sum of paperwork, involvement of other parties, and obfuscated terminology seems to be entirely designed with one purpose: Getting you so flabbergasted that you’ll sign off on multi-hundred dollar fees without questioning them.

It’s been quite frustrating, but fighting it is more or less pointless. Every question of “what is this for” is answered with a “that’s standard. We always charge that, it’s for blah…”, to which you’d have to put hours of research into disputing it, and even then, they can just refuse your business, and chances are you want to buy the house and move on with life.

The number of parties involved is quite astounding too. Mortgage brokers, mortgage lenders, insurers, escrow companies, title companies, realty companies and agents (buyer & seller)… the list goes on.

Additionally aggravating is the fact that the margins in each of these businesses (as judged qualitatively by the office décor, saltwater aquariums in their lobbies, cars the agents and other employees drive, etc, is very very healthy. [Aside: Last year when I bought a new road bike, I was looking at one place when the owner of the store pulled up in an $80k porsche. I left the store and shopped elsewhere. Any bike shop owner driving that car is padding his prices too much!]

These two facts add up to one thing for me: There’s a great business opportunity for someone to come implode the real-estate business.

This would be done primarily through 3 mechanisms:

  • Collapsing the food-chain: By combining many of these companies into one entity, you could sustain profitability on thinner margins, passing the savings along to the consumer. There might be some legal reasons why some pieces have be maintained as separate entities, but at the very least you could save “courier fees” currently charged every time something is sent from realtor to lender to escrow company to … you get the idea.
  • Live on thinner margins, especially for agents. Fifty years ago (so my daddy tells me), realtors lived of 3 point commissions, not 6 or 7. And that was before the internet, which has simplified their jobs in some respects. True, they’ve gotten harder in other respects, but still, realty is a more lucrative profession than it was fifty years ago – and it doesn’t have to be. Even more to the point, the agents are all commission driven. There were laws passed to ensure that they look out for your interests, but they are hard to enforce and teh commission structure still incents behavior that isn't always in their interest. (Example: Seller's agents will almost always push for a lower price than the house could fetch. Though their commission will be slightly lower (say by 5%), they are more likey to sell the house in 2 days vs 2 weeks or two months.)
  • Related to the above - Agents should not be commission based, but salary + bonus. Bonus should be scored on a *combination* of how well they make their employer money and on a customer satisfaction survey run by an independant third party.
  • Run a transparent business. Put the entire money flow in front of the customer, in terms they can understand, and state it all up front. No surprises. I think if you did this and marketed it well (call it the 'Saturn' model), you could win business even if you were 1:1 on price).

So, why hasn’t this happened yet?

Getting in and “undoing” the status quo in this space is difficult because typically, startups are small and need to work with other companies to get going in one area. This model depends on the “one stop shop” idea.

"So do it on the Internet!" You probably cry out.

Problem two. This is a local business. Customers want people that (a) know the area they are selling/buying in, and (b) want to work face to face, especially for what is likely the biggest purchase they’ll ever make. So local representation is also needed.

The only players I can see that might be able to address both is someone like a Price Club or Walmart. Price club already has a mortgage lending business, but they are basically a bulk-buyer and broker of mortgages .They probably did the math and while they could have a bigger business at a thinner margin, the math probably worked out that owning just one piece of it, in exchange for higher margins and lower risk, basically made sense.

So in the meantime, we’re screwed, but at least I got to vent. Maybe I should go make a pitch for MS Mortgages :-)


Anonymous said...

We bought and are currently trying to sell using the local for sale by owner support, which is fairly extensive in Madison - there are at least as many FSBO signs in yards as any of the big other two realtors and, in general, it seems to work fairly well as houses move on and off the website at a reasonable clip. I have a sneaking suspicion, though, that realors are avoiding/not looking at the FSBO market very much and not bringing potential buyers through FSBO very often. I have absolutely no proof of this, of course, but the potential for it underscores the point that a all-in-one clearinghouse would have to have a lot of volume, too, to ensure that the established entities don't just crush it by not interacting with it.

KimPallister said...

There's got to be something illegal about the "old boys club" way of doing business, if in fact they are shunning new entrants like that. Good luck proving it though!

Anonymous said...

I can't prove it, of course. In that the FSBO market does not advertise what, if any, co-broker percent you're willing to pay, I could see how buyers's agents might be less motivated to help their clients pursue FSBO properties. It would be illegal because it isn't in the best interest of the client, but is how the buyer's agents make money. If there were by-the-hour buyers agents (paid by the buyer) instead of commission from the seller, it might be different. Perhaps someday?