Heard an interesting interview with economist Steven Levitt on NPR this morning. He co-wrote an article that will be coming out in the New York Times Magazine titled Endangered Species – The future of real estate agents. He dicusses all of the innovations going on right now in real estate and how like travel agents we will become obsolete as “all we do is connect buyers and sellers on the MLS system“. Oh how easy my life would be if my work ended at the point I put a listing on the MLS.
A second point he makes in his radio interview is that in spite of the “high commission” most agents don’t make that much money. The reason is there are so many agents chasing the available deals that they have to spend so much time finding new clients. Look at California where 1 in 75 people has a real estate licences. This touches on my pet peeve. If the real estate industry really wants to be viewed as the profession it should be, than they should raise the standards of what it takes to become an agent. I’ve just looked at too many incomplete contracts, had an agent try to force his way (without prior notice) into a rented unit at a duplex I was selling and other instinces that demonstrate an individual with the intellect to fog a mirror but not much else.
It should be an interesting article. So what do you think? Is the real estate agent going the way of the Dodo? Do people really want to buy a house from an “Amazon.com for homes” or an agent that can guide them through the whole process? How about the idea of fee-per-service or hour basis instead of percentage of sale?
– Robert
Real estate agents who make Sunday afternoon telephonic cold calls should be endangered!
At least in the piece on NPR this morning, Mr. Levitt failed to note an important distinction between travel agents and real estate agents: real estate agents control the information that creates the marketplace (the MLS), whereas travel agents do not. As to travel, the relevant sources of information are well-maintained and publicly available (airlines, hotels, rental cars, etc.), and no there is no cost for “listing” information. In contrast, to list information regarding real estate, one must not only pay some sum to a broker, but must also agree to compensate an agent who uses the information to bring forth a buyer. This control of the de facto marketplace by real estate agents insures their survival, perhaps in a reduced form but still part of the process.
Admittedly, someone could conceivably create an open alternative to the MLS, in which case the role of agents really would be threatened. Of note, however, none of the “big-name” internet real estate business models are based on an alternative to the MLS. Rather, at this point, all of the technology seems to be geared towards working within the MLS system. So, at least for the foreseeable future, and as long as the MLS controls the marketplace data, agents will be around.
Craig
Bill Wendel of Counter Intelligence has an interesting follow up to this story… If this topic interests you, definitely check out Bill’s take on things. For years he’s been writing about the future of real estate when agents are an endangered species.
Dustin,
Thnanks for the track back. I’ve been impressed by the new innovations coming out of Seattle, so maybe Robert and others will come up new ways to respond to his concluding question:
“How about the idea of fee-per-service or hour basis instead of percentage of sale?”
Are people familar with the study Arthur D. Little did for the NAR Strategic Planning Committee in 1999? They predicted that real estate agents would be replaced by real estate CONSULTANTS over the decade, so one could argue that the upcoming NYTimes story is merely the mid-point of that transition.
For more details, see:
http://narec.com/arthur.htm
Are your readers aware that there has been a trade association for fee-based real estate consultants called National Association of Real Estate Consultants or NAREC since 2000? At least one other group of “alternative” real estate innovators is being formed and it will be interesting to see if the Times article mentions them.
Bill,
I knew you wouldn’t disappoint! Thanks for the great information.
Excellent post. But why cast the question in such stark terms? It seems indisputable that electronic services will become more popular, but that agents, unlike the Dodo, will always be around too, and in great numbers. Regards, Glenn
Glenn,
in reality I don’t think the technology will eliminate agents…particularly the good ones. But it does foster an interesting coversaton. What I rather hope is that services like Redfin, Zillow etc will actually weed out the agents that put in the 20% effort. The flip side is that I hope it doesn’t drive revenues so far south that it drives the good agents out of the market. Those who hope for “cheap realtors” may end up ruing what they ask for — cheaper commissions at the cost of superior service.
The argument I have heard against paying an agent by the hour is that you have to pay them whether you close or not, like an attorney. You also have to pay them for the hours they spend on houses you do not buy. You also have to pay them for the hours they are thinking about you when you are not with them and when they preview homes for you when you are not with them, etc…
Also, if you switch agents, you have to pay them up to that point, where now if you switch agents, you owe the first agent nothing.
I remember your saying Real Estate Cafe charges by the hour. Do you charge them when you are talking with escrow or the lender or when you are talking to your broker about them?
Ardell
“Also, if you switch agents, you have to pay them up to that point, where now if you switch agents, you owe the first agent nothing.”
This, I think, is a very important statement. Certainly, THAT buyer does not owe anything to the dropped agent. However, I have been told by many agents that they make such large commissions in order to pay for all of the work that they do “for free.” If that is the case, then THAT buyer really IS paying for the right to switch, at a macro level. Looking at the value proposition for agents at the micro level can be deceiving. I think a better approach is to analyze the value proposition as it relates to the market of buyers and sellers as a whole.
Ardell and Russ,
The Real Estate Cafe’s contract is on our web site, and Option 1: Hourly Fee for Service clearly states:
“Professional Consultation includes but is not limited to: showing properties, travel to showings and appointments, e-mail, telephone discussions, faxes, MLS searches, Internet searches, TREC licensed software use, market analysis and other due diligence efforts by TREC.”
Switching agents has never been a problem for us, as the contract language for hourly fee clients gives them a compelling financial incentive to complete the transaction with us: “Any Buyer Agent fee provided by seller will be rebated, in it’s entirety, to Client.”
Although it has never been a problem in more than a decade, Ardell is correct to note that there is a theoretical risk that some clients may not buy. My colleague Douglas McCarroll spells out the risk and rewards of each fee option on the matrix on his page (which we coauthored). What we’re beginning to see is buyers who are delaying or extending their searches and beginning to make inquiries about converting from a straight hourly fee to the hybrid plan we introduced about six weeks ago. Under that option, the client chooses their own hourly fee which sets their rebate.
http://www.douglasmccarroll.com/buyer_contract_options.html
Russ, as to other agents saying they make such large commissions because of all the clients they “lose”, I say that is hogwash. I never charge one client for what I do with another. I have worked with very few people in 15 years who didn’t end up buying or selling a house with me, unless we mutually agreed that would be best 🙂 I do not charge my other clients for the few times things didn’t work out.
To those who say I charge you $40,000 because the first three were free, I say does that mean if the first client pays $40,000 the next three are free? Baloney!
I think it is more likely that some pay a little more because some pay a little less. I like to make between $6,000 and $12,000 per sale. $10,000 is good. Sometimes I make $14,000 to make up for a $6,000. I spend a good part of 30 days with my clients. 200 emails on average. Lots of hours and a month’s work by and large. Not too many at the same time or I can’t focus on their interests and needs. I do a lot of first time buyers because I’m good at it. I don’t need a $40,000,000 listing, to make me feel important, that never sells. I’m certainly not going to charge my first time buyer more money so that I can advertise a high priced listing for a year.
Whoops…I think you hit a nerve there, Russ 🙂
Real Estate Cafe Guy, I’m obssessive about my work…people would not want to pay me by the hour 🙂
Robert, I’m not so sure it’s easy to become a RE agent. My girlfriend recently became one, and at least here in Rhode Island, it took a long time with all the required classes, and was fairly pricey with many mandatory fees for this and that (on top of the classes).
Honestly, we couldn’t see how one person could manage doing it by themselves, at least as a full time job, without getting support from someone else (i.e., money to live on) through the whole process.
I agree that there is a big gap between full-time and part-time agents in terms of professionalism, with many part-time agents giving agents in general a bad name because they don’t have the motivation to be very professional – it’s not their main job anyway.
As to whether RE agents will go the way of the dodo, I would say no, simply because of the dollar amounts and the complexity involved. Any time you have a complex situation involving big numbers, there’s an industry available for people who are willing to guide the general public through the jungle.
With travel agents, the dollar amounts have come down so much (usually only a few hundred) that it’s not that big of a deal if you get a slightly worse deal than a travel agent could get you. But with real estate, you’re talking thousands of dollars, not just in commission but in extra holding costs.
As for “limited service listings” (just stick it in the MLS for a flat fee), I think there may be a place for that for some homeowners who are bolder, who have more experience with real estate, and who (most importantly) have the time and patience to deal with buyers directly.
But I think a significant number, probably the majority, of people just don’t have the time to manage the sale of their own house, despite what they may think the first time they go FSBO or limited service listing.
We live in an age of specialization, and when a lot of people work 50+ hour work weeks (do you know anyone working 40?), they just don’t have the time or energy to also take on the job of selling a house.
I’d say the combination of big dollar amounts (thousands), complexity, and the emotional factor of selling one’s home and buying another one, combine to ensure that there will continue to be a market for full service agents for some time to come.
I wouldn’t be surprised, though, if one or two percentage points got squeezed out of full service agent commissions due to technological advances that make those agents’ work more efficient, and through the power of competition of some of those efficiencies get passed on to homeowners.
I was discussing this topic with a friend of mine last night who runs a hedge fund. I think he had an interesting insight — “comparing real estate agents to travel agents is the wrong analogy. What they should be compared against is stock brokers. Everyone predicted that the internet would eliminate all the stockbrokers. Well it didn’t…it just eliminated the order takers who thought they were stock brokers. The true professionals that provide good advise are making as much money as ever if not more”.
I thought his analogy was dead on. There will always be a segment of the population that will value the services of a professional agent. As I said in an earlier reply to Glen, I’m rather hoping this disintermediation of data will drive out the 20% effor agents.
Also, I do admit to adding the “dodo” remark to spark some feedback. I’m actually a little more optimistic about the future for those agents (like Ardell and I’d like to think “me”) who treat their job as a profession.
Great analogy Robert and a very good piece. Having worked closely with institutional stock brokers supplying them with research on a daily basis, I saw firsthand the night and day difference in approach and rewards for those who were professional and added value and those that didn’t. The same will likely play out in our profession.
If you haven’t already read Marlow Harris’ take on this article, she provides an interesting perspective on the role of gender in this issue.
For some reason, I missed this entry by Robert when originally posted (until I saw my own name mentioned!). I agree with his observation that real estate brokers do much the same type of job as stock brokers, with essentially the same educational and licensing requirements. Stockbrokers, on average, make more money, operating often as “order takers”, yet they have not suffered the same degree of hostility that we’ve seen directed towards residential real estate agents. A friend of mine in commercial real estate points out that stock brokers and most commercial and leasing agents are men (where, of course, most residential agents are women….) Yes, I know it’s a coincidence, but it is still an interesting observation.
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