FSBO will not take over the world

And with a title like that, I might just eat my words. There was an interesting story in New York Times story about FSBO yesterday. It describes a (ugly!) FSBO online service in Madison Wisconsin that has grown immensely over the past few years. I feel a little like a curmudgeon when I say this, but I agree with the sentiments of the real estate agents quoted – FSBO sites don’t directly threaten the real estate brokerage industry. That said, the real estate agents are just as wrong about their own business if they think that margins won’t drop and market conditions won’t dramatically change over the coming 10 years.

As I see it, this is a great illustration of a large scale change that the real estate industry (and many other industries) is undergoing right now. Consumers today have vastly more information available to them, which means they rely less and less on a realtor to guide them through the process. Imagine (as I must) what it was like 15 years ago as a home shopper; you either drove around the entire city to see what was for sale or asked a realtor to essentially do it for you. The realtor held the cards and had the computer system with all the information. You, as shopper, really couldn’t make a short list of 5-10 houses you were really interested in without the help of a realtor. Today sites are springing up left and right to give consumers lots of information.

Today, home shoppers can (but don’t necessarily) figure out exactly what they’re looking for, sellers can get an approximate value of their house with free tools (like by site, ShackPrices.com) and in the end, are real estate agents really do not provide the same service they once provided. Supporting my assertion is Steven Levitt’s research that shows the extra amount that real estate agents make on sales of their own home versus the homes of their clients has dropped over the past 10 or so years (which I maddeningly can’t find a link to now); customers today can much more accurately assess the value of their home without a real estate agent.

Ms. Miller and Ms. Murphy, however, built a separate and alternative listing service – a parallel market, much like the Nasdaq, which rose in recent decades to challenge the New York Stock Exchange’s dominance and sparked competition that eventually reduced transaction costs for all stock investors.

This is an interesting, but misleading comparison, at least for the time being. Consumers can look up Nasdaq and New York Stock Exchange quotes from the same place and can buy those stocks from the same people. In fact, your broker will be happy to sell you stocks from either market. My real estate agent will not be happy to sell me a FSBO property and I certainly can’t look them up on Windermere’s web site.

These cracked me up:

To real estate agents, “for sale by owner” conjures up some cranky tightwad trying to sell an overpriced, ramshackle house. Agents utter FSBO as if there was something foul stuck to the bottom of their shoe. “It’s a commission-avoidance scheme,” said Sheridan Glen, manager of the downtown Madison office for Wisconsin’s biggest real estate broker, the First Weber Group.

Kevin King, executive vice president of the local Realtors’ association, runs the multiple listing service but says he pays no attention to FsboMadison. “It’s not important; I don’t follow it,” he said. “I don’t even know the people.”

First – commission avoidance scheme!? That’s like saying the classifieds are a low trade-in value avoidance scheme for cars. This looks much more like a agents-aren’t-worth-six-percent scheme. The problem seems to be that even the discount brokers aren’t doing a good job at covering the market; Madison effectively has a (usually) 6% commission market and a no commission market. The future is probably somewhere between, with most agents working on a flat fee model (Steven Levitt agrees).

Agents swear up and down that they’re worth every dollar they charge, but is that usually the case? Here’s a scenario: A friend of mine moved to Seattle last year and decided he wanted to buy a home with his girlfriend. They looked at a few places and decided they would buy a townhouse that wasn’t yet finished. They picked the place they wanted after doing much research on their own and then hired an agent to do the paperwork and cover the details. They effectively worked out a flat-fee agreement, which the agent was happy to sign.

FYI: the NYT article really struck a chord and has been the most emailed story for the past two days now.


4 thoughts on “FSBO will not take over the world

  1. Great post. I agree with many of your comments. The role of agents is changing. I wrote a related response to the New York Times piece on my blog. Also linked it to your post.


  2. Nice post. Here’s the address for the Levitt piece that examines the dynamics of the agent/client relationship: http://pricetheory.uchicago.edu/levitt/Papers/LevittSyverson2004.pdf. I’d add that, rather than hiring a real estate agent to “do the paperwork,” you should consider hiring a lawyer. While agents can engage in the limited practice of law by filling in blanks on a preprinted form, a lawyer can handle any legal issue that may arise. If you want assistance with the real estate market, it makes sense to hire a market professional. However, if you only want help with legal issue, why wouldn’t you hire a legal professional?

  3. Yes, it might make sense to hire a lawyer. I figured that for the simple stuff, a real estate agent is probably cheaper and sufficient. However, I don’t mean to give lawyers short shrift.

  4. This piece has struck a cord with so many people because real estate is such a hot topic and the comments of the agents quoted in the article don’t make you exactly want to go out and hire them. For example, many agents talk about (even in this article) that they know the market, they know prices trends, etc… but the agent quoted is stating that they he does not even “know who they are”… hmmm, if a competitor had 20% market share, I would know them very well.

    Also, buyers look towards their agent to provide them with information to “all available” homes for sale and to represent his or hers best interest. I don’t think they would feel that their agent is representing their “best interest” if he or she is neglecting to show 20% of homes available for sale in the area. Again, real estate agents do not look good in this circumstance as not in their “be$t intere$t”.

    The real issue for most agents is that they cannot justify the cost of the service they are providing. Considering that everyone (1 of 300 people are realtors according to the NAR) knows at least one or two friends that are REALTORS, they know that many (of their realtor friends) have no clue or have become “professionals” the moment they became licensed.

    The real problem is that real estate community made a big mistake in marketing their services as “free” to buyers because now it is difficult to back-track and tell the buyers that need to pay 2.5% to get shown a house, write a contract, etc. This is reason why they cannot ask for commissions directly from the buyer and why they won’t show FSBO’s.

    The real estate community now needs to start a new spin campaign to educate buyers as to the value of their services to buyers (especially in a turning buyers market) and that they (the buyer) will now need to pay a commission for the realtors services. If this happens, a large portion of buyers will also want to save the “commission” and try to go direct to the owners or look for cheaper alternatives.

    Even the NAR’s own data which states that 70% of buyers select the “agent” based on who call’s them back first. This tells you the buyers don’t really care who they use, they just need someone to let them in the home and if they happen to love it, they will use that same agent to write the offer because it’s convenient and “free

Leave a Reply