Saturday, June 24, 2006

Real-Estate War Traps Consumers in the Middle

Found this article this morning. The points I found important - the percentage of consumers using discount brokerages has increased from 2% to 11% in just a few years. That the new trend of buyer discount firms that offer to just do the paperwork and don't actually show you any houses (the listing agent shows the home) has a major flaw. But most importantly, the dispute between the discounters and the full service companies puts our industry in a bad light in the eyes of the media, and consumers...

Real-Estate War Traps Consumers in the Middle
The Wall Street Journal Online
By James R. Hagerty

Full-Service Brokers' Tactics To Rebuff Discount Rivals Sometimes Hurt the Customer

In the fight between traditional real-estate brokers and their discount rivals, some consumers are getting caught in the crossfire.

With house prices surging in recent years, a number of people are seeking ways to cut commission costs, which are based on a percentage of a home's selling price. More home buyers are turning to discount brokers that offer to rebate a portion of the commission if you are willing to do much of the work in finding a home. And sellers are hiring discounters who, for a flat fee of a few hundred dollars, will include your home in a multiple-listing service, a database on houses for sale used by agents.

About 11% of home sellers last year used "alternative" brokers (ones offering flat fees or other forms of discounting), up from less than 2% in 2002, according to surveys by Real Trends, a publishing and consulting firm.

The competition from discounters has prompted some traditional brokers to use a variety of tactics to fight back, and this can end up hurting consumers. The controversy will get a public airing Monday when the Consumer Federation of America, a nonprofit research and advocacy group, releases a report on "how the real estate brokerage industry functions as a price-setting cartel."

The stakes are high. People selling homes typically pay commissions of 4% to 6% of the price, which is split between brokers representing the buyer and seller. Residential real-estate sales generate more than $60 billion a year in commissions. Full-service brokers say that in exchange for the commissions they provide expertise and an array of services that help consumers navigate the housing market.

For consumers, the clash among brokers underlines a need to be wary. Buyers hoping to get a cash rebate from the commission earned by their agent need to be aware that they might meet resistance from agents representing sellers. They should check whether there are any conditions attached to the rebate offer and make clear when viewing homes that they are represented by an agent. And sellers using flat-fee listing services sometimes find that agents for buyers shun their homes.

Most real-estate agents are ethical, says Albert Hepp, the owner of BuySelf Realty, Bloomington, Minn., who helped create a new national association of brokers that charge home sellers a flat fee for a limited range of services. But some full-service brokers step out of line, putting their interests ahead of consumers, he says, adding: "The best analogy I can use is a high-school classroom when the teacher walks out of the room."

One area likely to stir up more disputes involves the discount firms that offer rebates to buyers. The practice got a boost this year with the launch of two ambitious companies, BuySide Realty Inc. and Redfin Corp., which are promoting this concept heavily as they try to build national brands. Both encourage buyers to do part of the work in finding a home; they don't offer the free car rides from house to house provided by most traditional agents.

Andrew Calloway, a financial analyst in St. Louis, decided to use BuySide because that firm rebates 75% of the commissions it receives to the buyer. He recently agreed to pay $200,000 for a three-bedroom home in Glen Carbon, Ill. He expected a rebate of $4,500.

But Mr. Calloway says Karen Malench, an agent for Coldwell Banker Brown who represents the sellers, tried to dissuade him from using BuySide. He says she offered a rebate of $2,000 to him if he dropped BuySide and used her firm instead. He declined and went ahead last month with his offer through BuySide. Then he learned that Coldwell plans to refuse to give BuySide a share of the commission on the ground that Coldwell, not BuySide, showed Mr. Calloway and his fiancee, Rebecca Collins, the house and made the deal happen. If BuySide doesn't get a slice of the commission, it isn't obligated to pay a rebate to Mr. Calloway.

"The thing that really upsets me is that the listing agent smiles to your face and puts a knife in your back," says Mr. Calloway.

Ms. Malench, the listing agent, declined to comment. Gerry Schuetzenhofer, president of Coldwell Banker Brown, a franchisee of the national Coldwell brand, says that Ms. Malench denies having offered him $2,000 to drop BuySide. Mr. Schuetzenhofer says Mr. Calloway and his fiancee didn't make clear that they were working with another broker when they first viewed the home. Mr. Calloway says he did make that clear.

Joseph Fox, BuySide's chief executive, says this is the first time his young company has encountered such a commission dispute. He says he is trying to work out a solution with Mr. Schuetzenhofer. The latter says Mr. Fox tried "to intimidate me into accepting his demands. I don't believe he would have done that if he was on sound footing." Mr. Fox retorts: "He'd rather think about his pocketbook and not the best interests of the client." One option for the parties is to seek mediation or arbitration through a local arm of the National Association of Realtors, a trade group.

BuySide currently has operations in California, Florida, Illinois and Georgia. The company plans to cover 39 states by the end of 2008.

Cem Sibay, a business-development manager at an Internet company in Seattle, sought a rebate through Redfin. Mr. Sibay says he and his fiancee, Tam Pham, arranged to see a condo about six months ago. The agent representing the seller, Ron Waxman of Coldwell Banker Bain, was initially friendly and helpful, Mr. Sibay says. But Mr. Sibay says Mr. Waxman's attitude changed when Mr. Sibay mentioned that he planned to use Redfin as his agent. Mr. Sibay says Mr. Waxman then refused to show the condo to the couple again and said he would advise his client not to consider any offer they made.

Mr. Sibay and Ms. Pham gave up on the idea of bidding for the condo.

When reached for comment Wednesday, Mr. Waxman said, "I don't remember that at all." He said he stopped working as an agent last year; then, a few minutes later, Mr. Waxman acknowledged that he was still working as an agent and declined to comment further.

Bill Riss, the owner of Coldwell Banker Bain, says his agents sometimes "push back" against discounters like Redfin because they believe such firms don't do their share of the work. But he adds that his firm's policy is to work with any member of the local multiple-listing service, including Redfin.

Mr. Sibay kept working with Redfin and last month agreed to buy a different home in Seattle. He expects to receive a rebate of about $10,000 when the transaction is completed.

Glenn Kelman, chief executive officer of Redfin, says resistance from traditional agents will abate as his company completes more deals and becomes more established in the market. The company began operating in Seattle in February, recently opened up offices in the San Francisco Bay Area, and plans to expand to San Diego and Los Angeles and perhaps Washington and Boston by year end. In what Mr. Kelman calls a "charm offensive," Redfin recently began sending $100 gift cards to the listing agents when a Redfin buyer completes a purchase. "We need to turn these agents around one at a time," he says.

Discounters representing sellers also are meeting resistance. Jeff Kermath, who owns Amerisell Realty, a flat-fee broker in Saline, Mich., says one of the multiple-listing services he works with, Realcomp II Ltd., in the Detroit area, discriminates against firms offering discounts for limited service. For instance, Realcomp, owned by local Realtor groups, doesn't send limited-service listings to popular home-search sites like Realtor.com. And the default search setting for agents using Realcomp excludes limited-service listings, meaning fewer potential buyers hear of them.

5 Comments:

At 8:07 AM, Anonymous erin said...

When mp3s first became popular, the music industry moaned that they would be bankrupted by people stealing the music. But it eventually adapted and found a way to flourish through iTunes and other music stores. Traditional Realtors who complain about discount listing agents should do the same - adapt and find a way to make it work instead of acting childish and penalizing buyers/sellers who don't use them. If you can't adapt with changes, you're in the wrong business.

 
At 8:48 AM, Blogger Sara MacLennan said...

Thanks for your comments Erin. I totally agree that the industry needs to adapt. In comparison to the music industry, from what I see it is the artists, not the record labels that have suffered in the end. The labels just spend less money and sign fewer artists. It is the consumers that suffer paying more for CDs and having less choice. Just as I feel the consumer suffers in real estate when they think they are saving money and in the end it actually costs them money.

 
At 10:54 AM, Anonymous Bart said...

Realtors can not have everything there way. In B.C. realtors hardly do anything to sell a house right now, yet they still collect a fat commision. Discount brokerages just keep everyone honest.

 
At 9:33 AM, Blogger Sara MacLennan said...

Hi Bart, I totally agree. The fact that so many discounters exist and are succeeding is proof that many agents have gotten lazy and don't deserve those fat cheques. If we as an industry did a better job and provided more value for our clients' money (as our little company strives to do) there wouldn't be a need for discounters. We regularily sell our listings so high above the area average, our fees are negligible since our clients' make so much extra selling their homes. That's a topic for another day though. Thanks for visiting and commenting on our blog!

 
At 1:02 PM, Anonymous San Antonio real estate said...

Competition from discount stores have some traditional brokers to use a variety of tactics to attack-cons which may ultimately harm consumers.

 

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