One of the Best Ideas I've Heard in Years

A thought provoking commentary was posted by Scott Einbinder over on Inman News today, "The Real Estate Listing, Redefined." Scott talks about the "listing" as the holy grail of real estate agents, and how many agents take them whether or not they really believe they can sell them, because the more listings you collect, the more bait you have out there to attract potential buyers. Then he goes on to posit a very interesting idea — "Imagine a world where a seller said, 'If you are so confident that I will be happy with your results, you can purchase my listing for $1,500. I will then credit you the $1,500 against your total commission due. However, should you not satisfy me and achieve the goal of selling my house, I will keep the $1,500.'

That sure would cut down on the number of overpriced listings cluttering the market. Agents might also offer different upfront amounts based on where the seller was willing to price the property, e.g. "Ms. Seller, if you want to price your property at $249,000, I'll only pay you an upfront fee of $250, but if you take my professional advice and price it at $199,000, I'd be willing to fork over an upfront of $1,000." And with some skin in the game, agents might be more motivated to get that property sold rather than just put it in the MLS and hope somebody stumbles across it and buys it.

Comments

[CF]

David - thanks for posting this great idea. I think it ranks up there with your suggestion that gas drilling accidents be investigated as vigorously as airplane accidents - where no expense or time is spared determining the cause - instead of viewed as a minor problem that a minimal fine can address.

It's simple, easy to implement, and makes a lot sense to consumers.

[GmcK]

Great idea.

From my experience, most listing agents in Sullivan would balk at that notion and wouldn't put their money where their mouths are.

But, it's a terrific idea.

In fact, I think I'll try it!

GmcK

[ar]

If a major brokerage like McKean did it, Freda and the other majors would be forced to follow suit.

[Nick]

I think this one suffers from the reverse problem as the buy-side dilemma you've mentioned before. Sure it kind of "makes sense" but in reality it creates some perverse incentives and would have a hard time getting traction.

One of the biggest problems in real estate, just in general from an academic standpoint, is that they're classic "unequal-information" transactions. The amounts of money are large, by definition the principals in the transaction are likely to have little experience (how many houses does a private individual buy in a lifetime?), the condition of the primary asset is drastically more well known to one party than the other.

And then there's the related principal-agent problem, where the incentives for the agent are not necessarily the same as those of who they represent. And, lastly but fatally, a moral hazard issue you could drive a truck through. That's where this trips up .

Specifically -- at the beginning of the arrangement the seller and agent likely don't know each other that well, in both directions. That makes it really hard to enter a binding contract already as we know, this makes it harder. Same problem as the idea of charging for time as a buyer's agent. I agree that it's worth it to hire you, but I don't know about the next guy, I'd insist on trying out a new buyers agent with some shopping trips (for free) before committing to anything.

On the other side, the example above, same problem. Biggest issue (and I think fatal) is that the seller's motives are unknown. What if I could make $1500 putting my nice property up for sale at a very reasonable price and then turn down all offers that come in, even above asking price, because there's some deal term or buyer issue I "discover" each time? Yay! Free money. Let's list my renovated farmhouse at $175,000, I could use that listing money to buy a table saw in six months when it "doesn't sell" after all.

OK, so you write into the contract that the seller can't just turn down offers like that, but how do you write that up? Quickly the moral hazard flips and the agent has a couple grand to make if he can find cousin Bill who's hopelessly unqualified for financing but willing to submit a formal offer and get the agent his listing money back.

I like the idea in theory.... but the thinking behind the idea is to try to have some formal mechanism to get sellers to stop being insane about asking prices, and for listing agents not to list junk at high prices and just wait around for the seller to figure it out. That formal mechanism might be talk therapy sessions for the seller to be honest.

Though I bet there must be some way to further the goal. For example you could charge escalating fees to list in the MLS without price reductions. So if you drop the price by, say 10% or more, the listing fee stays the same, you can have it for sale for years. But after say 6 months or something, the cost per month to list jumps sharply. That's off the top of the head but some variation on that theme I think is where the solution lies. You're never really going to break into the no cash exchanged until a transaction tradition that dominates agency deals. The parties don't trust each other enough, and shouldn't. But you could create incentives to the agents, the professionals, who list these properties, that make it a bad deal to just "throw things out there" -- via escalating listing fees, penalties for missing a ratio of listings to closings, you name it. That's where the action is.

In my humble opinion of course. ;-)

[ANM]

David - An excellent idea!

I would also reform the MLS as suggested on the blog. Currently, buyers have to do a lot of investigation in order to make informed buying decisions. Comps, listing and sale histories should be freely accessible. Buying a home is the biggest financial decision people make and the consequences of poor decisions can have serious repercussions especially in this market. Most people are not knowledgeable and sophisticated in housing and brokers play on inexperience, ignorance and misinformation.

While the current system is seller-centric, sellers are not immune from unethical and poor professional practices. In my recent search for a property, I was amazed about the amount of personal and confidential information that is trafficked on the broker-agent grapevine. People should be very careful about what personal details they divulge especially in a system designed to trap the unwary.

[Ken]

Nice idea but I think you're all dreaming if you think something like this would actually happen in any of our lifetimes. I hope someone proves me wrong on that!

Real estate is a large dollar transaction with buyers and sellers that often have no experience in it. That just opens the door wide open for corruption. I think it's safe to say that most people don't know what an appraisal should cost, or an inspection or filing some records with the county or any number of other junk fees that suddenly show up on the closing table. It would be awesome if the government would just come in and regulate all the junk fees (as well as the legitimate fees). I'm not a fan of big government but there are times when this sort of thing is necessary to protect consumers. The losers would be your agents brother that did the inspection and your attorney's nephew that did the appraisal and so on.

Massachusetts, years ago, had run away car insurance costs. The state came up with a formula and said here's what your rates are. Plug in the form fields and here's the result. Same rate regardless of what insurance company you buy your insurance from. Lots of insurance companies whined, prices dropped by over 50% and the consumer won. Just one success story in government regulation......

[ar]

Nick's moral hazard criticism of the plan raises, for me, an interesting point. I'd agree with him completely if we were talking about implementing the plan in New York City (or, for that matter, in any number of other places). But my experience in Sullivan County over the past six or so years leads me to a less cynical view of people up here, especially in the more rural communities. My sense is that these people generally -- emphasis on generally -- place a premium on dealing in good faith with one another. They take their contracts seriously, and they take their non-legal commitments just as seriously. They are often politically conservative and proudly self-reliant, but at the same time there is an almost incredible degree of old-fashion integrity when it comes to interactions among members of the community. I'd call it quaint, but that wouldn't do it justice. Not in all individuals, and not in all situations, but deeply and widely engrained enough that there's a difference between here and the city. Nick's moral hazard argument depends upon an assumption that sellers (or would-be sellers) will decide to grab the money and screw the broker by refusing offers at the target price, essentially acting in bad faith. Passing the dubious proposition that for a lousy $1,500 someone would go to the trouble of opening their home for repeated phony "showings," I just don't think the risk is as great as he suggests. That is, not great enough to forego the experiment.

[ANM]

I agree Ken! Many of reforms are idealistic but maybe a few people who go onto this site will be alerted before they jump into this market. You are absolutely correct about the fees and the cosy, nepotic nature of the business. If only people were better informed and the market was better regulated. Here's to dreaming...

[David Knudsen]

Ken, you need to update your frame of reference. The appraisal ordering process is so arms length now under new HUD and Fannie Mae rules that it's actually become bizarrely unworkable. I've written about it a few times on here before, that lenders are so terrified of any perception of inappropriate influence on the appraisal process that they farm appraisals out to large AMC's (appraisal management companies) who often send out appraisers from a pool who have no knowledge of the area. There is virtually no chance that an appraisal for residential under Fannie Mae guidelines can be funneled to 'the attorney's brother.'

Regarding inspections, I give my clients a short list of home inspectors that I've worked with, have observed their inspections and think they do a good and thorough job. A buyer doesn't have to select one of my recommendations. And sometimes they don't, because they may think I'm 'stacking the deck' and they want someone who 'works for them' and 'isn't beholden to any Realtor.' Over the course of my career, I've been present at a number of home inspections conducted by home inspectors found and selected by the buyer, not recommended by me. I've only been impressed by a few, and underwhelmed by many. I've seen acts of showmanship that wow the buyers, but are way low on the 'this is important' scale, while grazing over items that I consider more critical. I've seen home inspectors not adequately disinfect a faucet prior to taking a water test, and others who refuse to let the buyers follow them and ask questions. Guess what? If I see a problem during an inspection, or point out something I think the inspector may have overlooked, that 'government' that you want to have protect the consumer basically says I can't. Because if I do, the courts have ruled that I can then be seen as 'supervising' the inspector and therefore assume some liability for the inspection.

And you may not be aware that real estate agents and brokers are so TOTALLY prohibited from getting kickbacks from ANY service provider we refer you to. The rules on that are very tight. You'll probably say you don't believe me, that there may be rules but agents are taking kickbacks all the time. I beg to disagree. I'm sure there are instances of it, but certainly up here I've never sniffed a bit of that.

Regarding fees for items related to closings, the government has been phasing in the Real Estate Settlement and Procedures Act, and it took full effect on Jan. 1, 2010. The idea behind RESPA is to provide buyers with firm closing estimates, but because of lender lobbying, it doesn't have the teeth it could have. But it's a good start.

Overall, I think real estate is quite regulated. But there is a difference between the process being regulated, and prices being fixed. You're really saying you want settlement costs to be fixed. Be careful about what you wish for. Title insurance rates in New York state are fixed. There is no shopping around for it. And it's damn expensive, in my opinion, because of that. There's no need for a GEICO Gecko when prices are fixed. I expect that if you could shop for title insurance the way you can shop for car or homeowner's insurance, competition would being those prices down.

One way to deal with all of these perceived conflicts of interest would be to eliminate commission-based brokerage. You want to go out with me to look at houses for an afternoon, pay me $150 an hour. You want to pay less, find a less experienced person who will schlep you around for $60 an hour. You want my opinion on value to shape an offer? Start the clock running. Face it, shelling out $600 for an afternoon of house hunting would go over with buyers like a lead balloon. I've floated different compensation ideas over the years to potential buyers, and anything that asks them to put some skin in the game upfront falls flat. The current system may be flawed, but I don't think there's a whole lot of motivation to change it.

[CF]

Regrettably, ar's Capra-esque view of doing business in the country doesn't always hold up when put to the test - sure, maybe there would be less outright deception than more metro areas, but what about unintentional sabotage by not staging the house appropriately, not returning calls, or just doing a less than stellar job of faciliating the sales process? If an agent would have to pay for a listing, then the agent has higher expectations of the seller, and from my experience, that is setting oneself up for disappointment many times. Without wanting to seem too harsh, high expectations is one of the first thing to go when doing business up here. Exceptional experiences become highly prized.

Like adjustable rate mortgages and interest only loans, the idea to charge for listings probably has good place in the game, but probably among more sophisticated sellers or those that sell repeatedly, or have multiple relationships with local real estate professionals.

[Ken]

Dave, I agree with you that it's not a total free for all. By the way, you're one of the good ones. I just don't think that your degree of due diligence and responsibility is "normal" in the real estate business. I refinanced my house a few years ago and technically did not need an attorney. I hired one anyway. She sat at the closing table and knocked about $1500 in fees off the closing. I paid her $800 so it worked out in my favor. If she wasn't there making phone calls to god knows who on everyone of those padded fees then I would have just signed everything. I'm not suggesting everything is a kickback. This closing agent guy was just a sleezebag. Unfortunately he's not alone.