Effect of DOJ Settlement Already Years Old

Originally Published June 5, 2008

Since the DOJ ruling opening up the MLS’s to discount brokers, I have read no less than 25 articles from sources ranging from the Wall Street Journal and New York Times, to bloggers posting their thoughts. Almost all of these articles claim that commissions will be dropping as a result. I don’t disagree that commissions are more negotiable than they were ten years. But I disagree that this will be the defining moment in dropping prices. The media is missing out on one small thing.

The article I read today was a bitter diatribe of why Zillow is smarter than a realtor, and why Craigslist will save the day. And the author finishes off his article with the statement that entrepreneurs have been waiting for this day so they can begin offering discount fees.

Thats odd… In Charlottesville we have had discount brokers for years. One will help you sell your home, but won’t put it on MLS (even though they have full access to it), one will put it on the MLS but won’t talk to you (unless you pay cash up front in the amount of $2,500), one that rebates 1% at closing to the buyer and states that they are full service, one that has fixed price seller transaction fees (but they don’t provide nearly the level of marketing exposure that many agents do). The point being that, even in a county and city of only 135,000 residents we are already full of the discount brokers. And yet, none of them has created a dominating presence.

All of these firms have had the same access to the MLS that I have. They can list, show, and sell property just like I do. So, what exactly is the DOJ ruling going to change here in Charlottesville?  Yes, competition drives down prices, and that is good for consumers. Oddly, it’s also good for realtors. If there are 1200 agents in Charlottesville currently, and only half of them can provide for their families selling real estate in the “new economy” than those 600 strong agents who survive will produce more business at a lower income per transaction, but more transactions.

I think what I find amazing, is that the media and these dozens of articles acknowledge discount brokers, but act like they haven’t been able to operate before now. Perhaps there are markets where this is true. But it’s not Charlottesville. If anything, we have been more open to competition than even the DOJ settlement requires.

VOWs and Real Estate

Originally Published on May 28, 2008
Earlier this week, the National Association of Realtors and the Department of Justice came to a settlement regarding access to the Multiple Listing Services or MLS’s around the country. The case centered around Realtors denying access to an MLS by non-full service brokers who typically discount their fees. One of the specific changes deals with a group of providers who operate Virtual Office Web sites or VOWs. What they are and why they exist may surprise you. It certainly is not to lower the transactional costs of real estate.

In the CNN report that I read first, the DOJ settlement sounds like little more than an agreement to stop bad mouthing limited service agencies. In fact, there are no punitive aspects of the settlement and no admission of wrongdoing. If you can survive a DOJ inquest with this outcome, I’d say, “Well done.” However, the other reports that I have read discuss who will benefit from the settlement, and I find the answers to be rather odd.
One company Sawbuck Realty claims that they have a new way of saving money for real estate buyers. I have gone through their web site and can’t quite figure out where the big savings are, and certainly can’t see where the service is or the advantage. But it is an interesting enough model to discuss here.

A full service real estate agent is one who represents you through the full process of buying or selling a home. In buying a home, this includes being prepared to talk with your or refer you to someone who can handle the financial questions regarding qualifying. It includes educating a client about the market, the neigborhoods, the builders, the schools, everything. For persons moving from another city, this is enormously important. The full service agent helps to cull the data so you don’t have to. Previewing property is but one thing an agent does for his or her client. Being able to provide information about homes already sold (and not just prices and square footage). The full service agent helps to understand the right price to offer on a good home once it has been identified. In contract negotiations, the full service agent creates a Chinese Wall to keep the buyer at a distance from a listing agent or seller and maintain control. Once a contract is obtained, the agent is responsible for helping find the professionals for the home inspection, the insurance companies, further negotiations on agreed repairs, etc… Clearing the attorney and getting through closing with financing in place.

A limited service agency is not necessarily a discount broker. The term discount broker simply refers to someone who charges a lower than traditional rate for transactions. These may be set fees, they may still be a percentage commission. In some sense, all agents are discount brokers in that commission schedules are always negotiable. For instance, clients that list a home and purchase a home with me always receive a rebate at the second closing.

In limited service agency, real estate agents or brokers provide an a la carte menu of services and charge for them. One broker in particular will list a home on the MLS for a set low fee. However, in the contract it states that if you call and talk to an actual agent, there is an automatic $2,500 fee assessed. For sellers who believe they can do everything themselves and do not need any representation, this is not always a bad option, and money can be saved.

But now on top of full service and limited service agency enters a no service agent on a Virtual Office Web or VOW. Sawbuck Realty is just such a company. Their web site discusses why agents are important, and then incorrectly discusses kickbacks that they claim take place in the market. It is illegal in RESPA to take a kick back from a mortgage lender or a settlement company, so fact is, nationally, this isn’t happening. Real Estate firms are indeed forming separate companies that own mortgage brokers or settlement fees, and those relationships are spelled out very clearly, and agents are not allowed to be compensated on their use. The advantage to the agent and consumer is that many of these mortgage brokers answer almost exclusively to a single firm, and thus their customer service and committement is higher to those agents. It is not a monetary thing for the agents.

Sawbuck has formed relationships with companies and in return have negotiated lower fees. Interestingly, agents do this all the time, but Sawbuck seems to ignore this. I work with prefered lenders all the time on new construction projects, but never are clients required to use them. It is always at the discretion of the client.

The Sawbuck model is simply a web site to collect names and e-mail addresses. They actually provide no service at all. They interview agents who they claim are experts in their markets; however, nowhere do they define the requirements for these experts. You fill out the web registration and your name is SOLD to an agent in your area. It’s that simple. It is nothing more than a referral site. Wonder how much you were sold for? If you are buying a $400,000 home, you were just sold for around $3,000. (Full disclosure here: I do not work with Sawbuck, and they may take less than the industry norm…. or maybe even more… There are plenty of corporate relocation companies that take $4,200 on this size transaction.) Now when you meet with your agent, you have no ability to negotiate a fee. Keep in mind the agent just lost $3,000 of their commission. This was the buyer’s money. But they never knew that they were going to pay a fee. In fact, the web site says that their service is absolutely free.

Working with any agent buyers and sellers must always keep in mind that fees are negotiable. Unfortunately, signing on with a VOW gives your negotiating power away. If interviewing agents is all Sawbuck does, I’d Google for some questions to ask agents and move on from there.

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