Monthly Archives: July 2009

Big Brokerages – how do they really work, and what’s changing?

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We started getting into this a bit on my Disappointment Index post, but I think its worth a post and thread of its own. David Losh’s comment “Every Brokerage wants you to do it yourself so they can get rid of all the dead wood they have hanging around in the office. Real Estate is a numbers game. The more agents, the more money. With an online Brokerage all you need is a technical support staff” kind of triggered my decision. Read his whole comment; there is some interesting insight in there.

Is the business really changing? And do the different generations – Boomers, Gen X, Gen Y have different preferences that would favor one business model over another?

In 2006 we had a lot of discussion about new business models and the rise of the Internet, including an MIT Enterprise Forum program on the topic, and a post here on RCG by Robert Gray Smith. So now it is three years later, Redfin has declared its first profit (congratulations, Glenn), we are no longer in a bull market for real estate, transaction volumes are way down, and everybody is three years older and wiser 🙂 Has anything really changed in the real estate business? The core of the business is still appears to be the big traditional brokerages – RE/MAX, Coldwell Banker, Windermere and John L. Scott – some are national, some are regional; some offices are franchises, some are company owned. Some people will want to add others to the list, from Skyline to Realty Executives to …

My view of the big brokerages (I happen to be affiliated with RE/MAX, and formerly with John L. Scott) is they fundamentally are not in the real estate business; they are in the real estate services business. Their client is not the buyer or seller, it is their affiliated real estate agents. As a residential real estate agent in the state of Washington, I am licensed to facilitate the buying and selling of residential and condominium homes, under the direction of a licensed broker. In the traditional model, I am not an employee of that broker, I am a sub-licensee and an independent business person. My activities are not directed by the broker, I do not get benefits, and my earnings show up on a 1099.

For the privilege of being affiliated with that broker (i.e. sub-licensed, or ‘hanging my license’ there) I pay a fee – actually lots of fees. There are transaction fees and E&O fees and B&O fees and legal reserve fees and desk fees and non-desk fees and membership fees and advertising fees and website fees and commission splits. In general the big brokerages expect to collect about $20,000 to $25,000 per year from each agent; that is how they make their money. So I am their real client, and they are in the business of selling me real estate services. They certainly want me to be successful, and able to pay their fees. They will claim that being affiliated with their brand will help me attract more business, and they spend big money on institutional advertising, particularly their website. It is not clear how much of the advertising effort is aimed at attracting buyers and sellers to their agents, vs how much is aimed at attracting agents to their brand and fee services – the more agents, the more fee revenue for the broker, almost regardless of sales volume. They often say I will get a share of the institutional leads they get from their web site – but in practice for me, so far, no value. In fact, I have to do my own business development and establish my own reputation with things like newletters, seminars and blogs (and taking good care of my clients), and I have had to build my own web site to get what I consider to be a credible web presence. I am for all intents and purposes an independent business person who contracts for certain support services. The traditional model.

An alternate model is for the broker to hire the agents as employees. Then they are W-2 employees, probably get benefits, the company probably generates most of the leads – for example with a good website and some buyer/seller incentive programs, the agents probably do more transactions, and probably get a lower percentage of each transaction commission in exchange for the lead flow. But those agents will show higher in the transaction rankings, because they are basically on an assembly line instead of spending a lot of time doing their own marketing and business development. I think this is basically the Redfin model, but happy to have someone who knows it better chime in.

A third model that was tried by Redfin initially in 2006 was a model of generating the leads through the website, referring them out to a set of selected agents (sub-licensed to other brokers), and collecting a substantial referral fee if that agent was able to convert the lead into a transaction. During this time I was Redfin’s lead referral agent for the Eastside. That model did not generate enough revenue to support the Redfin business model, and it was abandoned in favor of the agent emplyee model above in mid-2007. During that period I served some wonderful clients who came to me from Redfin, and I am still in touch with them, but I agree that the “wanna see a house? – we’ll get an agent to show it to you” model didn’t have a very high success rate for either the referral agents or Redfin.

So how much do we really think the business is changing? Do we think the big brokerages would really like to migrate to the Redfin model? There is an implication that the Redfin model is a short-term relationship transaction model and that the traditional brokerage model is a personal referral and longer-term relationship model. Which model to consumers prefer? And does it vary by generations?

This seems worth exploring.

How About a ‘Disappointment Index’ for Real Estate

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Tim just posted an interesting set of stats on Redfin, titled Biggest Discounts, and one of them particularly caught my eye.  His primary topic was the difference between Final Listing Price and Sold Price and how that varies by area.  But what caught my eye was the final chart that showed discounts from Original Listing Price to Final Sale Price.  This hit right on a topic I have been thinking about for some time, that I had mentally labeled the Disappointment Index.  In a very real sense, it represents the difference between what a Seller hoped to get for their home, and what they actually got after perhaps many months and many price reductions. 

Presumably a Seller, in consultation with their agent, has consciously decided what they want to ask, and get, for the property, and has some expectation that that might happen. So to the extent that they start with that expectation, then a subsequent completed sale for less is a disappointment.  And a 15% disappointment on a $500,000 house would be a big disappointment  – $75,000 not showing up in your bank account would be a very big disappointment indeed.

So here’s the question: why are these discounts so big? 

Are the agents not able to estimate market value and expected selling price any better than that?  Or are the Sellers not listening to their agents and overriding them? 

At what point does the listing agent walk away and let the Seller find a more compliant agent to list the house at a visibly above-market price?  Or does the agent take the listing and hope to work it down over a span of time, perhaps several months.  

Maybe this Disappointment Index is higher right now because both Sellers and agents are having trouble adjusting to current prices levels that are significantly lower than a year or so ago.  But it certainly does impede sales by leading to longer times on market, and lower buyer confidence in what the price really should be.

Moving to Seattle – Bridges and Traffic

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Feb2006Storm4185

Thinking about moving to Seattle? Wondering what the traffic is like around here? Before you look at homes on the internet, I strongly suggest you study the Transportation Layout of the Seattle Area.

Often where you live, involves which side of “the bridge” you work on. This Seattle Area Traffic map gives you an excellent broad overview of how you get to and from. Study the “black traffic clog points” on that map for a two week period at various times each day during that two week period. That will give you a pretty good idea of normal traffic patterns, except for the few times each year when the bridge is closed.

Take a long hard look at Lake Washington. It’s HUGE and worthy of due consideration as to how you are planning to get over or around it.

My perspective centers more around the 520 bridge, and around the north side of Lake Washington, with occasional travel over the 1-90 bridge. Locals always refer to this bridge as “The 520 Bridge”, but if you are looking for info on it,  you will find it under “Evergreen Point Floating Bridge” in wikipedia, even though the name was officially changed to “The Governor Albert D. Rosselini Bridge-Evergreen Point” in 1988.

Sometimes people will simply say “the 520”, but more often they will say that when referring to the part of that road that is on The Eastside, vs the floating bridge portion of that “road” going over Lake Washington.

One of the reasons I decided to write on this today, is because I was reading updates to the Pontoon Construction Project posted on The Washington State Department of Transportation website. On a good day, travelling back and forth across the 520 Bridge is not a huge deal. On a bad day (when the bridge is closed or partially blocked by a stalled vehicle) one would have been wise to consider the alternative travel options, when deciding where to buy a home.

My general advice is to buy a home on the side of the bridge where you work, unless there is a really good reason not to do that. Very often my first question of someone who calls me about buying a home here in the Seattle Area, especially if they are moving here for a new job, is “Where are you going to be working?”

The Federal Reserve’s proposed changes to Regulation Z (Truth in Lending)

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benb

If you’ve been following Ben Bernanke’s testimony on the Hill this week, you may have noticed him hinting about significant proposed changes to Reg Z and changes in how mortgage originators are compensated, leaving many of us in the industry wondering “what now”.   Don’t get me wrong, Reg Z could use some tweeking…it’s just that the mortgage industry is in a state of constant change (evolution?) with a deluge of new forms and/or regulations including MDIA, HVCC and the new Good Faith Estimate which goes into effect on January 1, 2010.

From this morning’s Press Release:

“Our goal is to ensure that consumers receive the information they need, whether they are applying for a fixed-rate mortgage with level payments for 30 years, or an adjustable-rate mortgage with low initial payments that can increase sharply,” said Governor Elizabeth A. Duke. “With this in mind, the disclosures would be revised to highlight potentially risky features such as adjustable rates, prepayment penalties, and negative amortization.”

Closed-end mortgage disclosures would be revised to highlight potentially risky features such as adjustable rates, prepayment penalties, and negative amortization. The Board’s proposal would:

  • Improve the disclosure of the annual percentage rate (APR) so it captures most fees and settlement costs paid by consumers;
  • Require lenders to show how the consumer’s APR compares to the average rate offered to borrowers with excellent credit;
  • Require lenders to provide final Truth in Lending Act (TILA) disclosures so that consumers receive them at least three business days before loan closing; and
  • Require lenders to show consumers how much their monthly payments might increase, for adjustable-rate mortgages.

The Board will also work with the Department of Housing and Urban Development to make the disclosures mandated by TILA, and HUD’s disclosures, required by the Real Estate Settlement Procedures Act, complementary; potentially developing a single disclosure form that creditors could use to satisfy both laws.

In developing the proposed amendments, the Board recognized that disclosures alone may not always be sufficient to protect consumers from unfair practices. To prevent mortgage loan originators from “steering” consumers to more expensive loans, the Board’s proposal would:

  • Prohibit payments to a mortgage broker or a loan officer that are based on the loan’s interest rate or other terms; and
  • Prohibit a mortgage broker or loan officer from “steering” consumers to transactions that are not in their interest in order to increase the mortgage broker’s or loan officer’s compensation.

Clarity and transparency for consumers is a must with the mortgage process.   I’m not sure what to make of this line:  “Prohibit payments to a mortgage broker or a loan officer that are based on the loan’s interest rate or other terms“.     Mortgage rates are increased or decreased based off of paying points which includes the mortgage originators compensation.    Perhaps the FOMC would like to see mortgage originators be paid hourly instead of based off of rate…I’m all for that!  🙂

Collaboration: The important DNA in any small business

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Collaboration:  Do you have this DNA in your small business?  Is it part of your mission statement or mantra?

This is not so much an insight into how a successful real estate transaction comes to fruition as much as it is a testimony of what makes any task, job, objective or goals conclude with a positive outcome.  Whether you are in the military and command a small unit of soldiers or, what I commonly describe the role of  a Realtor as,  “the Conductor

Mukilteo Real Estate: #10 best community in America by Money Magazine

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This past week I retrieved my latest issue of Money Magazine from the mailbox and was pleasantly surprised to find that Money Magazine ranked the seaside community of Mukilteo as among the very best communities to live in.   Ranked number ten in the country by the magazine,  the town offers spectacular views of the Puget Sound, the Olympics, and the Cascades if your home is situated to look east.   Among the reasons to consider living in Mukilteo were the good schools and lower property taxes when comparing to other communities in the study.

In today’s market, when you consider the housing price pullback, community, schools, employment and intangibles, Snohomish County offers some of the very best real estate in the Northwest.

I can certainly attest to the spectacular setting in Mukilteo.  While waiting for the Ferry to sign some clients on Whidbey Island this past Spring (one of the perks of being in the escrow business is traveling to different communities)   I took some pictures of the “glass-like” water scenery (can be very rough) in the morning.  I’ve never seen any portion of the Puget Sound water so calm.

Mukilteo Ferry Landing

Mukilteo Ferry Landing & Lighthouse -Photo Copyright Tim S. Kane 2009

Mukilteo Ferry & Ivars

Mukilteo Ferry at Ivars Fish Bar - Photo Copyright Tim S. Kane 2009

Mukilteo Ferry & Fishermen

Mukilteo Ferry & Fishermen - Photo Copyright Tim S Kane 2009

Loan Mod Firms: Attorney “Backed” or Attorney Representation

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A story today in the NY Times contains interviews with salespeople who worked for an attorney-backed loan modification firm in California that is now under state investigation for defrauding desperate homeowners. 

“Despite making promises of relief to homeowners desperate to keep their homes, FedMod and other profit making loan modification firms often fail to deliver, according to a New York Times investigation based on interviews with scores of former employees and customers, more than 650 complaints filed with the Better Business Bureau, and documents filed by the Federal Trade Commission in a lawsuit against the company. The suit, filed in California federal court, asserts that FedMod frequently exaggerated its rates of success, advised clients to stop making their mortgage payments, did little or nothing to modify loans and failed to promptly refund fees…For fees reaching $3,495, with most of the money collected upfront, they promised to negotiate with lenders to lower payments on the now-delinquent mortgages they and their counterparts had sprinkled liberally across Southern California.  “We just changed the script and changed the product we were selling,

Seattle – What’s Happening “today”?

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newsseattleTwitter is fast becoming the best source of “What’s Happening?” in any given area, on any given day. If you are one of those people who thinks it is “silly” to record “What are you doing?”, think about it from the perspective that you might be doing what someone else would consider doing, if they knew it was happening.

You become the “news” source for local events, when you report your whereabouts at a local event. You become the restaurant critic when you tweet from a local restaurant about the food and service.

Like it or not, the collective “we” values real information from people on the street, having the experience and noting that experience in “real time”.

So what IS happening in Seattle? Twitter has a “search box” into which I will now put the word “Seattle” and this is what we learn:

@MyWashingtonSt tells us “The Bite of Seattle” Open til 9pm tonight!! Premier Food Fest FREE ADMISSION www.biteofseattle.com

Now that we know that there is an event today called The Bite of Seattle and that it is open until 9 p.m., we might want to know if it is “worth” going to? What do people who are actually there have to say about their experience?

To dig deeper into real time info on the event, change the words on the search box to the event title. In this case I change “Seattle” to “Bite of Seattle” and find:

@Mr10K: We will be reporting to you live from the bite of seattle today people. The Neema taste tests will show no mercy on any booths today!

Maybe you and Mr10K don’t have the same tastes in food, but at least you know you can get a “merciless” review of the booth offerings by him throughout the day, so you can try to hit the “best” booths when you head out to “Bite of Seattle” later today before 9 p.m.

“Using Twitter” is not simply about telling people what you are doing at any given moment. It’s a huge and growing way for people to get the news THEY want at any given moment in time, and pretty much just about any where.

Using Twitter is not all about “I have an appointment at 2 to show a house in Bellevue” from @ARDELLd 🙂 It’s a way for people to use search terms to help them get a glimpse at what other people are doing, that they themselves might like to join.

Twitter has become my news source. Twitter reported that Michael Jackson passed, before CNN could “confirm” that. Twitter told me that Walter Cronkite passed away. Twitter told me that I could catch a radio show with Jeff Turner @respres, 5 minutes before it aired so I could turn on the audio while continuing to work.

Twitter can make you more productive and keep you on top of everything that is happening. You can control how much or how little “noise” you want, by limiting the people and news sources that you choose to follow, or by using a “sort” application like TweetDeck (just one of many).

The search box opens a door to over 2,700,000 people talking about…and you choose which topics are of interest to you, when you pick a search term.

If you have never, ever been to Twitter and have decided you are not going to…it may be time for you to think about why…and what that says about you vs. Twitter.

Snohomish Kla Ha Ya Days festival this weekend

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If you like any of the following then make time to visit Historic Snohomish this weekend during the Kla Ha Ya Days Festival:

  • Music
  • Friends, people watching
  • 80 degree weather
  • Parades
  • Historic downtown shops and eateries
  • Hot-Rod cars (Sunday event)
  • Food (Salmon, Fish n Chips, Burgers, Ice Cream, Pizza, Thai food etc…)
  • Aircraft
  • Hot-Air balloons
  • Skydivers
  • absolutely gorgeous Snohomish Valley
Snohmish Car Show

Car Show - Photo by Brian Thompson Photography

Harvey Airfield

Harvey Airfield

Tonight (Friday) offers a treat for family night at Harvey Airfield featuring “Balloon Glow-Fire in the Sky” event with live Bands and a fireworks show at 10pm.   So, pull out the Harley Davidson from the garage and bike on over to Snohomish for the Kla Ha Ya Days  (schedule) festival going on full throttle this weekend.  It’s a great community and one that residents and future residents are sure to enjoy.

Saturday is the grand parade sponsored by my friend and fellow Seattle Pacific University Alum, Brad McDaniel of Snohomish’ McDaniel’s Do-It-Center.

Snohomish Valley Summer 09'

Snohomish Valley Summer 09' - Courtesy Snohomish-Today.com

Tonight watch the Fire in the Sky Hot Air-Balloon event at Harvey Airfield and at 10pm you will be dazzled by a fireworks show.

Snohomish Skydivers - Courtesy Snohomish-Today.com

Snohomish Skydivers July '09 - Courtesy Snohomish-Today.com

Mortgage Disclosure Improvement Act: New Waiting Periods on Mortgage Transactions

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In an early post, Ardell wrote about the significance of a buyer being able to close quickly…new regulations may put a damper on that.   With mortgage applications taken after July 30, 2009, waiting periods will go into effect with regards to when and how disclosure forms are provided to the consumer.   The Mortgage Disclosure Improvement Act (MDIA), which modifies the Truth in Lending Act (TILA), was originally going to become effective on October 1, 2009, however the effective date was moved up two months which may catch some real estate professionals by surprise.

Here are some of the details:

Good Faith Estimate and Truth in Lending Disclosures….required waiting periods.

Under MDIA, early disclosures are required for “any extension of credit secured by the dwelling of the consumer.”    Three business days from application, the consumer must receive an initial Good Faith Estimate and Truth in Lending (unless the borrower is denied at application).   

The earliest a transaction can possibly close is seven days after the initial disclosures have been issued by the lender (delivered in person, mailed, emailed, etc.).    This is assuming no re-disclosure is required.

Re-disclosure (waiting periods after the early disclosure and corrected disclosures) of the GFE/TIL are triggered if the fees and charges are more than 10%; if the APR is more than 0.125% or a change in loan terms.   Three business days must pass in the event of re-disclosure.   Re-disclosing is nothing new, it typically happened at closing–this will no longer be acceptable.    Mortgage originators “should compare the APR at consummation with the APR in the most recently provided corrected disclosures (not the first set of disclosures provided) to determine whether the creditor must provide another set of corrected disclosures”.   Double check those APRs prior to doc!

From MortgageDaily.com:

“The Commentary added by the MDIA Rule expressly provides that both the seven-business-day and three-business-day waiting periods must expire for consummation to occur.  The seven-business-day waiting  period begins when the early disclosures are delivered to the consumer or placed in the mail, and not when the consumer receives the disclosures.  The three-business-day waiting periods begin when the consumer actually receives or is deemed to receive the corrected disclosures.  If corrected disclosures are mailed, the consumer is deemed to receive the disclosures three business days after mailing.  If a creditor delivers corrected disclosures via email or by a courier other than the postal service, the creditor may rely on either proof of actual receipt or the mailing rule for purposes of determining when the three-business-day waiting period begins to run.”

Consumers have the right to waive or shorten the MDIA if “a consumer determines that an extension of credit is needed to meet a bona fide perosnal financial emergency”.  

No monies may be collected from the borrower with exception to a “bona fide and reasonable” credit report fee until they receive the initial disclosures.   This may cause a delay of when an appraisal is ordered.  Most lenders require an upfront deposit to cover the cost of the appraisal.    The collection of fees rule may also cause potential issues if a borrower is doing a certain type of lock (some with float down or extended lock periods require an upfront deposit).   NOTE:  HVCC requires the borrower receive a copy of the appraisal at least three days prior to closing.

Tim Kane can attest that there is nothing worse than a borrower learning at signing their final loan papers that the fees are significantly higher than what was originally disclosed.  I’d like to think that all mortgage originators redisclosed WHEN modifications to the transaction/fees take place…obviously, this has not been the case.  

DFI covers MDIA here. 

Re-disclosures could become a “holy hand grenade” to quick closings.