That blog post title isn’t a typo – I’m giving away free forms! When my real estate firm left the NWMLS, I had to find an alternative to the forms that it provides to its members. So I got to work! And now I’m happy to share them with anyone who needs them. If you’re interested, go to the Added Equity blog post about Free WA Real Estate Contract Forms, download the license agreement, and you’ll be off and running!
Craig is the founder and Managing Broker of Added Equity Real Estate. Added Equity charges a 1% fee to list and sell a home, total. Not 1% plus another 3%. Added Equity is different than any other firm. This is Craig’s blog series exploring why and how most realtors don’t talk openly and frankly about the actual fees they charge, keeping real estate agent commissions at their longstanding level.
First Installment: Real estate agents – intentionally or not – hide behind the law to avoid revealing their commissions.
Real Estate Broker Commissions Kept High with Secrecy
It goes without saying that real estate brokers benefit by high commissions. It also need not be said that those commissions will go down only when the prices are effectively communicated to consumers so that they can make informed decisions. By keeping commissions secret, real estate agents can keep them artificially high. How will consumers know of a better deal? They won’t. As a result, real estate agents have a strong personal incentive to “go along” with the system, charge the same high commission as anyone else, and keep it all from the public’s view.
Real Estate Agent Commissions Are Subject to Anti-Trust Law
The Sherman Anti-Trust Act is a federal law that is nearly two centuries old. Passed during the great reform movement that began in the late 19th Century, the law bars unfair business practices. Today, the government still uses the law to make sure businesses and entire industries don’t misbehave and trample on the fair workings of the market. Thanks to the Sherman Antitrust Act, the only legal monopoly in this country is the board game.
Around the same time as passage of the Sherman Act, the real estate industry formed as a cooperative business model. It worked well for the first hundred years or so. But the industries’ business practices did not subsequently evolve with the times.
In the early 21st Century, the U.S. Department of Justice began using the Sherman Antitrust Act to crack down on real estate agents and bring their practices up to modern standards. The DOJ believed that some realtors worked to keep their high real estate agent commissions. But even before that, the government charged real estate brokers with felony price fixing in 1977. Because of this longstanding legal oversight, real estate agents today have huge concerns with any discussion of the commissions they charge.
Realtors Hide Behind the Law to Avoid Discussing Realtor Commissions
Ostensibly as a result, real estate brokers almost always invoke the “it’s illegal to discuss!” shield whenever anyone wants to talk about their commissions. It is the routine, standard response on blogs, social media, and everywhere else.
It turns out that the fear is almost entirely misplaced. So says Brad Inman of Inman News, a reputable source to be sure. As he notes about any discussion of commissions on social media, “Someone utters the word ‘commission’ and there is a pile-on from Realtors who say ‘no-no-no.'” It’s a veritable Code of Silence, enforced by members of the club. One new agent commented on the “standard” treatment: “I have been a real estate agent all of few weeks now, and I have been cautioned about anti-trust law violations no less than a dozen times, NOT including actually learning it in class.”
But it simply isn’t true. Generally speaking, the law bars conversations between just brokers about the commissions that they charge, if they then act together in setting those commissions. A conversation that includes consumers on social media – where many, many conversations these days occur? Not even close.
It is, however, in brokers’ interests to keep these conversations out of the public view. Any discussion of commissions quickly leads to the conclusion that the seller almost always pays the buyer’s agent a 3% commission. A commission on top of the additional “listing commission” paid to the seller’s agent. Brokers would far rather focus on just the listing commission – after all, they’re likely to represent a buyer down the road, so why jeopardize that future big payday? The 3% buyer agent’s commission is best left unspoken. For brokers, anyway.
So agents routinely hide behind the Sherman Antitrust Act, instead of openly discussing their real estate agent commissions so that consumers can make informed pricing decisions. It is a huge irony, of course. The DOJ wants the market to exert price pressure on commissions. But the law used to make sure that pressure exists, and is exerted? The same law used by real estate agents to keep their high commissions concealed from the market. They’ve turned the consumer’s shield into their own sword.
Updated 9/13: Quill Realty is now Added Equity Real Estate – but everything else is as true today as when I wrote it! 🙂
I am loving life at the forefront of change in the real estate industry. My firm Quill Realty left the Northwest Multiple Listing Service on July 1. Since then, we’ve picked up some listings and sold a few houses – our first non-MLS sale closed Friday. Congratulations to this beautiful family!!!
So we’re selling houses at a dramatically reduced cost to our seller clients. In other words, the model appears to be working. Exciting times!
But it begs the question: Is Quill the only non-MLS broker in Seattle? Or are there others, such that a synergy might begin to build. To date, I have yet to find one. I even have a friendly wager with a title representative. He knows lots and lots of people in the local industry, and so far he’s struck out.
Is that right? Is Quill the only voice calling for change in the MLS-bound wilderness? If you know of any others – in Seattle, or Western WA, or even the USA – I’d love to hear about them. Please leave a comment, and thanks much.
I could not be prouder today. Quill’s first Single Broker Listing is live and looks great! On the Quill Blog, on Zillow, on Redfin – heck, it looks great EVERYWHERE!! By my estimation, this is what the future of real estate will look like: One broker marketing a property directly to buyers via multiple channels, without offering to pay the buyer’s agent’s commission (so no MLS number). Exciting times here at Quill!!
Today, my real estate firm Quill Realty is announcing its imminent withdrawal from the Northwest Multiple Listing Service [Quill Press Release 5/19/15]. We have some current inventory we need to clear. But by July 1, and likely sooner, Quill will withdraw from the NWMLS.
Why? Because that is where the future of real estate lies. For a long time – 10 years – I have been working on developing a better business model in real estate. It’s been apparent that real estate simply would have to change given the ongoing information and technological revolutions that have changed pretty much everything else. Yet 10 years on, and nothing has changed much at all.
The real estate broker system, with its hallmark of cooperation between brokers, has been around for more than a century. A hundred plus years ago, the term “marketing” didn’t exist, and the only way to sell a house was to have folks talk it up, literally. So today, just like 100+ years ago, a seller must hire two brokers to sell the house: the listing broker; and the cooperating or selling broker who often represents the buyer.
Notwithstanding the fact that listing brokers today take pride in their marketing abilities and are more than capable of selling the home themselves. Or that the internet allows for easy and widespread dissemination of market information. Or that nobody – nobody – “brings a buyer” to the sale anymore. Buyers usually find the home themselves, and very few – if any – buyer’s agents today actually “sell” a house to their client. Buyer’s agents today simply are not, either legally or ethically, “selling” brokers (a fact long recognized by Ardell).
So why do sellers continue to pay a selling office commission? Because it is a requirement of entry into any MLS (understandably so, given their cooperative nature). And for whatever reason – conspiracy theories abound! – sellers today continue to pay at least 2.5% and usually 3% to buyers’ agents. So the price of admission to the MLS is steep.
Meanwhile, the ability to market a property off of the MLS has continued to grow. The FSBO market has been around for a long time, and today there are more opportunities than ever to list a home in places other than the MLS.
This of course allows the seller to skip paying the selling office commission. Today, non-MLS listings appear on Zillow and Redfin, two very large and very popular real estate web search sites, as well as elsewhere across the web. Plus, in this seller’s market, does a seller even need that sort of high tech marketing? A professional yard sign and a couple of open houses are likely enough to get full market value in this historic seller’s market.
So Quill will be withdrawing from the NWMLS. We will be the very first and only broker in Seattle – as far as we know – to offer “single broker listings.” It’s a brand new term to refer to a listing contract with only a single broker. That one listing broker then has the opportunity to sell the house and earn the commission. Until today, sellers only had access to “multiple broker listings,” notwithstanding the fact that there is no longer any actual reason for or benefit to such a listing, other than that is simply how the system works.
Surely we can do better. Ten years on, and I feel like I might finally be making progress. Single broker listings will of course not appear on any MLS. They will, however, appear in many other marketing channels where buyers are looking (like Zillow, and Redfin). Plus the broker has access to every other marketing tool: a yard sign; high quality flyer; open houses and tours. And what about social media? Surely that offers an untapped opportunity for marketing a home. In other words, sellers simply don’t have to pay a cooperating broker commission in order to sell their home for market value, if they get the professional services of a real estate broker. So that is where Quill is headed.
What do you think? Is there a future in single broker listings? Or is Quill doomed to scuffle along like every other alternative brokerage, staying in business but neither getting rich nor changing the world?
Zillow Talk: The New Rules of Real Estate, by Spencer Rascoff and Stan Humphries
Reviewed by Craig Blackmon
This book by Zillow’s CEO and Chief Economist, respectively, is a wonderful advertisement for Zillow. It’s also a good book. It’s easy to read – really easy, clearly written to appeal to the broadest spectrum of readers – and very informative. It does a good job of illustrating the power of data and how it can be harnessed to make the most informed investment decision possible when buying a house.
But the book aims higher. It concludes with some stirring language about the power of data (don’t worry, this doesn’t require a Spoiler Alert): “Numbers don’t lie. And they won’t lead you astray. Indeed, they’ll help you find your way home.” (The same expression dominates the Zillow home page.)
Ah, home. The term is associated with so many wonderful things: family, laughter, love, shelter, protection, and on and on. “Home” is not just a place. It’s a very special place, a destination that is both more common and more unique than any other.
Is this book going to help you find your way to your home? Probably not. In fact, I hope not. Home requires more than a well-researched financial decision. Much more. Besides, any prediction of the future is just that, a prediction, and in the meantime life marches on. A good life needs a good home, regardless of the financial future.
With its focus on the trees and not the forest, the reader is left with a sense that it is much ado about nothing. The book relentlessly promotes the web site, implicitly and explicitly, from start to finish. You’re left wondering: Is that it? Has Zillow really changed real estate? The web site provides useful insight, sure. But it hardly upends real estate, an industry that continues to operate on a 19th Century model. Does Zillow show us the final, evolved real estate industry of the modern, technological, information age? I mean, nobody uses a travel agent or a stock broker anymore….
The answer is revealed by a closer examination of Zillow and the people behind it. I believe Zillow is an ongoing project that will change dramatically as real estate evolves. And it will be instrumental in that evolution. But Zillow itself cannot lead the change. And in the meantime, it uses a business model that keeps it in business, biding its time until the eventual evolution.
This book is a “must read” for investors and real estate brokers, but not homeowners
In other words, folks who make a business out of real estate will benefit from reading this book. It does an excellent job of demonstrating how data – available via zillow.com, a constant underlying refrain throughout the book – can be used to calculate a property’s current and future value. So if the primary and essentially sole reason for purchasing a house is to make money (or if you sell houses yourself), this is a great book. It’s loaded with a lot of great insight.
For example, did you know that proximity to Starbucks is a good indicator of better appreciation? (Chapter 4) Or that you should list your home between March Madness and the Masters if you want the best chance at the best price? (Chapter 12) Fascinating stuff and worth considering when you are investing hundreds of thousands of dollars. A slightly better percentage return, thanks to in-depth analysis of the available data, can lead to quite a bit more money.
But if you’re looking to buy a home, don’t bother with this book. It’s myopic focus on dollar values simply doesn’t foster a good decision when looking for a home. Should you take into account financial considerations? Of course. But the primary focus should be on finding the right home for you and your family. So, while good schools may be an indicator of future value (Chapter 6), that shouldn’t be the focus. Rather, look for good schools so that your kids get a good education. This is a home. Not just an investment.
Zillow Is Setting the Stage for the Future of Real Estate
In its current iteration, Zillow doesn’t really do much in terms of bringing the real estate industry into the 21st Century. As the book makes clear, Zillow simply wants to attract as many visitors to its web site as possible. Why? Because Zillow makes money as a lead generator for today’s real estate brokers.
In other words, Zillow currently complements and feeds off of traditional real estate brokers. The more people who use the Zillow site, the more leads that Zillow generates, and thus the more money it makes. Zillow is built on web traffic, nothing more. And it doesn’t do anything to disrupt a long-standing traditional industry, because that industry is it’s target market. Even though that same industry is ripe for disruption.
Which is weird. Because the guy who co-founded Zillow previously co-founded Expedia. The web site that put travel agents out of business. Rich Barton is a widely recognized and highly regarded “disrupter.” His motto is “power to the people.” He believes that the internet can empower consumers in new ways that lead to better and more efficient ways of doing things. According to Mr. Barton, his companies Zillow and Expedia have “created new opportunities for new professionals to make new businesses for themselves.”
Except that Zillow hasn’t. Not yet, anyway. It’s merely expanded existing opportunities (lead generation) for a long-standing professional industry that allows it to sustain it’s dominant market position. Nothing new there.
But what if Zillow is a work in progress? What if, in only the highest level strategic planning documents, there is a plan for Zillow 2.0? That would start to make some sense.
What the Future of Real Estate is Going to Look Like
Today, there are two ways to sell your home: FSBO, or using the traditional cooperative real estate broker system. Home sellers can market their properties via many different channels other than the local MLS. Including, of course, Zillow, which shows both “Make Me Move” and true “for sale by owner” listings. So an owner is empowered by the internet and can forego using the real estate broker system, which includes payment of a commission to a cooperating agent.
But what if the home seller wants the professional insight and counsel of a real estate broker? From advice on preparing the home to market, to staging, to keeping the seller informed and educated, a real estate broker provides substantial value. And the broker is a trained marketing professional who will efficiently and effectively utilize the full array of marketing channels available in the 21st Century: yard sign, flyer, and open houses and tours, of course; but also web sites and social media.
Today, that real estate broker can exist, thanks to Zillow. With its brand recognition and size, it is used by a large number of home buyers. A “listing” on Zillow can lead buyers to the home, without paying for other agents to bring them. So a home seller can sell for a fraction of the cost, as they will no longer need to pay the 3% buyer agent commission.
In other words, Zillow has positioned itself to be one of the successors to the multiple listing services maintained by cooperating real estate brokerages all over the country. And by positioning itself there, it provides the platform necessary for meaningful change in real estate. But until that change happens, Zillow will sustain itself (and its shareholders) by working within the existing system.
Ardell recently posted on this subject. She noted there really isn’t that much out there about this now-common aspect of buying or selling a home (common, that is, for MLS-listed homes, you can avoid the frenzy by looking for homes on MLS alternatives). She and I then engaged in some typically spirited discourse, which in turn helped me to further frame and analyze the issues raised.
Multiple Offer Situation and Bidding War defined
First, some definitions. A “multiple offer situation” is where a seller receives two or more written offers on the property. A “bidding war,” in contrast, typically refers to oral negotiations between the listing agent and two or more of the buyers’ agents. A bidding war typically erupts, if at all, after the seller has received several written offers. The listing agent then “shops” the best offer in an attempt to negotiate the absolutely best contract possible. (Note that a listing agent can also “shop” the first offer received and before receipt of others, particularly where the seller will not be looking at all offers on a specific date.)
Sellers encourage multiple offer situations by telling buyers that the seller will look at all offers on a particular date in the future. In response, most buyers will submit an offer that includes an escalation addendum (which automatically escalates the offer amount above some competing offer) as well as waive some or all of the usual contingencies (inspection, financing, title, and information verification). So the seller can expect to receive better offers that bid against each other, resulting in a winning offer at the highest offer amount. The seller can sign the winning offer, and the house will be under contract.
If you’re looking for information about how to win a multiple offer situation or bidding war, I’ve written about the topic on the Quill blog.
When a Multiple Offer Situation becomes a Bidding War
Sometimes, the seller might counter one of the buyers in an effort to get even slightly better terms. If it stops there, not a bidding war. But if the seller – or more accurately the listing agent – then calls ANOTHER buyer’s agent and gives THAT buyer the chance to beat the first buyer… Well, that’s a declaration of “war.”
It sucks to lose a multiple offer situation. For the losing buyers, of course, but also their agents who invested time and effort in the now unpaid endeavor. Bidding wars? That’s acid in the face of buyers and their agents. They are inherently unfair, as not every buyer is included in the bidding war negotiations. So buyers and their agents frequently cry “foul!” when they are subjected to a bidding war.
So is a Bidding War legal? Or ethical?
But is it a “foul” for the seller to instigate a bidding war? No, it is not.
First, the law. A real estate broker owes very few legal duties to the other parties to the transaction. And a broker has no legal obligation to keep the amount or the terms of any offer confidential. So can a listing agent legally shop an offer? Absolutely. Can a listing agent legally call one buyer’s agent, then another, then another, revealing details along the way in order to extract the best offer possible? You bet.
OK, well, what about ethical considerations? Does a broker have a professional ethical obligation to not shop an offer, or not instigate a bidding war? Nope, no formal ethical obligation either.
In the world of real estate, professional ethics are generally set by the National Association of Realtors. Most – but not all – real estate brokers are members of this association, thus earning the title “Realtor.” It is generally accepted that the NAR Code of Ethics sets the parameters of professional ethics.
The NAR notes that offers “generally aren’t confidential.” The Code of Ethics requires a broker to protect and promote the interests of the client. Thus, a seller may “even disclose details about [a buyer’s] offer to another buyer in hope of convincing that buyer to make a ‘better’ offer.” While the Code requires honesty in dealing with others, it does not require “fairness” given that term’s inherent subjectivity. On the other hand, the preamble to the Code notes that the title “Realtor” has “come to connote competency, fairness, and high integrity.” So at least arguably, if a broker discloses the facts of an offer to one buyer, the broker should disclose to all buyers, particularly if that broker is a “Realtor.” [All information in this paragraph pulled from linked sources.]
But that’s a long way from prohibiting a bidding war in the first place. So in fact, there is no legal or professional obligation to avoid a bidding war. Instead, if the seller so instructs the listing broker, the broker has an obligation to instigate one.
So why doesn’t every multiple offer situation result in a bidding war? First, because there are strong informal professional ethics in play, as well as personal ethics. Almost all agents represent both buyers and sellers at various times. So we’ve “walked in the shoes” of a buyer’s agent, and we know first hand how unfair a bidding war can be. And since most of us are in the industry for the long haul, we may need to work with the same agents again down the road. If we treat them poorly today…. Plus, most folks just have a general distaste for this sort of ruthless negotiating.
Second, and perhaps more importantly, bidding wars – like any war! – can end in disaster. If the listing agent shops the offer but all of the buyers are turned off by the aggressive negotiating, then the seller will have wasted the momentum of the multiple offer situation. So there is a good argument to be made that a bidding war, being so exceptionally aggressive, isn’t in the seller’s best interests.
I hope you found this information useful! And if you’re a buyer, hang in there. While inventory is unlikely to improve much today, it certainly will over the next year, or two or three. And if you must buy in the meantime, recognize that it will be a tough row to hoe. Best of luck.
One of the great challenges of being on the “bleeding edge” of change in any industry is identifying the words to be used in discussing the new model. The real estate industry is, at more than a century old, steeped in history and culture. So it’s even more of a challenge to create a dialog that accurately captures the essence of a particular innovation and the characteristics that distinguish it from the old way of doing business. It’s hard to create new meanings for words that have long-standing and well-understood definitions.
One term used to describe real estate firms that are working to change the industry is “alternative.” But absent some definition, the term is meaningless. So what is, exactly, an “alternative brokerage”? And who would be an “alternative agent”?
Does use of the internet define Alternative Brokerage?
One possibility: A firm that leverages the internet to more efficiently provide client services, and passes at least some of the savings back to the consumer. The second clause is important. Every real estate broker by now has leveraged the internet, in particular by sharing their listings not just with other brokers but with the public via the internet (a change driven by anti-trust efforts of the Department of Justice). So simply using the internet cannot be considered alternative.
But passing the savings created by this efficiency back to the consumer? Now that’s new. On the other hand, though, there are lots of brokers out there now who will negotiate unique fees with their buyer clients and who will then rebate the balance of the seller-paid commission to the client at closing. These brokers recognize the fact that most buyers now do at least some of the home search themselves. Does that make their real estate firm an alternative brokerage?
No. If that’s the case, then the term “alternative” doesn’t begin to describe the many distinctions between the new business models that are emerging in the real estate industry and the traditional way of doing business. Agents (legally now called brokers, previously licensees) have been independent contractors, each largely responsible for their own real estate practice (independence is the hallmark of being an “independent contractor”). Every agent must be licensed through a managing broker, who remains responsible for the agent’s conduct. That agent then either pays a flat fee to the managing broker (i.e. a desk fee), or splits in some percentage with the managing broker (and firm) the commissions earned. One managing broker can be responsible for two hundred or more agents in the office. Each and every one of those 200+ agents is responsible for finding their own clients and generating their own income.
So the traditional model is defined in part by independence for the agents and limited oversight. If one agent in the office decides to charge a lower fee, does that make the whole office “alternative”? Clearly not.
It’s more than the internet. Modern business principles define an Alternative Brokerage
Therefore, the definition needs to be expanded. Here’s another possibility: A real estate firm that operates as a modern business and passes some of the savings realized by those modern efficiencies back to the consumer. This definition still captures “leveraging the internet,” clearly a hallmark of operating as a modern business. But what about the notion of branding and efficient marketing? In the 21st Century, there are more efficient means of advertising the firm’s services and acquiring new clients than making each agent responsible for their own business.
Finally, a modern business is more likely to value the brand and the resulting need to provide high quality service every time to every consumer. Many of the new real estate models employ their agents. This gives them a far greater degree of control over their agents’ conduct and the services they provide. While generalizations cannot be drawn about any particular agent, there is no dispute that the bar to entry into the profession is quite low. A modern business structure reduces the risk generally that a consumer will be poorly served by a real estate agent.
So operating as a modern business, and passing the savings realized by the resulting efficiencies back to the consumer, seems to define an alternative brokerage. Which begs the question: Can an alternative agent only work for an alternative brokerage? I think so. Otherwise, we once again define “alternative” way down, such that it’s only a shade off traditional. In today’s real estate industry, where there lots of alternative brokerages – as defined here – that definition just doesn’t convey reality.
What say you, RCG community? What is an “alternative brokerage“? Who is an “alternative broker”?
2015 Home Buyer Class
Free Home Buyer Seminars offered by Alternative Brokerage in Seattle
Are you thinking of buying a house in Seattle in 2015? Or perhaps it’s time to sell your home? Either way, you’ll learn some great information at Quill Realty’s free House Buying Seminars for 2015. We ‘re offering a free home buyer class – great for sellers too – on the fourth Wednesday of every month through June, from 7p – 9p here at the Quill office in Georgetown. Whether you’re a first time homebuyer or a seasoned veteran looking to “move up,” you’ll learn something valuable at these free real estate classes. Topics will include the current and anticipated future of the real estate market, common real estate legal issues (including from the seller’s perspective), and real estate search tips for finding “the one” (and other good marketing tips for sellers). All from the unique perspective of a consumer-driven, alternative real estate brokerage. Continue reading
Buying or selling a home is a legal transaction. Real estate brokers are able to engage in the limited practice of law needed to put together contracts for real property. But brokers certainly aren’t lawyers. And buying or selling a house is usually one of the biggest financial transactions in someone’s life.
So “forward thinking” consumers – both buyers and sellers – might consider using a lawyer instead of a broker. This allows them to save money while getting superior legal services. Other consumers will go the traditional route, but end up wondering whether they should also hire a lawyer to assist them in the transaction. If that describes you…
You should hire a lawyer in a real estate transaction when the legal risk outweighs the cost of a lawyer.
What is “legal risk”? For a seller, it means possible liability for someone else’s financial losses. So there are two parts to “legal risk.” First, what is the possibility of being held liable? And second, what is the probable amount of that liability? A 98% chance of owing $100 is a very different legal risk than a 2% chance of facing a cool $1m liability.
What sorts of issues might create liability? On the seller side, there are two general obligations: disclosure obligations, and title obligations. An attorney will help you to understand these obligations, what you need to do to comply with them, and the possible amount of liability if you fail to do so and are held accountable. In other words, by hiring a lawyer, you’ll be able to identify – and then reduce – legal risks.
On the buyer side, “legal risk” means the possible hassle and costs associated with some condition of the property. In other words, a buyer engages in due diligence specifically to identify the legal risk of completing the purchase and owing the house, usually under the title contingency and the inspection contingency. If there are land use concerns or landlord/tenant issues, an attorney will really help. And regarding title, only an attorney is qualified to analyze a title report. For example, if a neighbor has a driveway easement across the property, you’ll want to know that. Based on what you find, you might have the ability to renegotiate the contract to account for the defect. An attorney can help there too.
And of course you need to know the cost of an attorney. As a general rule, expect to spend $1-2k on an attorney if you need to rope one in for some legal analysis and counsel.
At the end of the day, it simply makes sense to hire both a lawyer and a broker if you are a prudent consumer. Why? Because…
Every transaction has risk. A lawyer reduces it.
Those two statements are simply not debatable. And as a long-time practicing attorney, I have lots of examples of the risks associated with buying or selling a home, and how a lawyer will reduce those risks. Here is one such example.