KB Homes Slashes Commissions

Congratulations to home builder, KB Homes.  Effective March 15, they are cutting commissions to real estate brokers to two percent.  At least here in my market.  Here is the email announcement:

So why congratulations?

Well let's ask the obvious question:  How much should a real estate commission be?  Or, how much is a broker's service worth?

Of course, it's debatable.  And brokers can charge whatever they like.  But that does not mean that buyers and sellers have to pay whatever the broker likes.  Sure, some brokers are worth more than others.  And some deals are easy, some are difficult.

Nevertheless, after a lifetime in the business, if I had to put a number on it, I would say that on average a real estate transaction should pay one percent to each side, plus expenses.  That is, one percent to the seller's agent and one percent to the buyer's agent.  Plus an accurate accounting of expenses related to the transaction.  For the seller, these expenses should only include marketing costs of the property involved and not any other marketing expenses of the broker.  For the buyer, only the search costs, and not the marketing expenses of the broker.

Most brokers will find this pretty radical.  But I am simply trying to match brokers' fees with their actual value proposition.

And just to be clear, I am NOT talking about any form of discount brokerage.  No, I am talking about full service.

But brokers are consistently paid much more than this.  Why?  Well they have perpetuated the myth that they are worth more.  And have frightened buyers and sellers into believing that if they pay less, something bad will happen to wreck their transaction, or otherwise cost them even more money.  It is a sham.

Let me quote from The Competent Broker:

I will tell you what many brokers will never admit:  Many of the services offered are commodities and should be priced as such.  And as we have discussed, many brokers offer only the illusion of Lexus-level service.  Their value proposition is minimal.  This certainly applies to almost all real estate marketing.

Also, and there’s no getting around it, this industry dynamic involves an element of work ethic.  Or lack of work ethic.  It is easy to get fat and lazy at six percent.  If the industry average commission was dramatically reduced, brokers would have to really hustle.  There’s a lot more hustle at Walmart selling household goods than there is at Nordstrom selling high-end handbags.  Now sure, Nordstrom has luxury offerings and a refined atmosphere and unmatched service.  But what you have in the real estate business is Walmart brokers waiting for (and insisting on) handbag shoppers.  They need to cut their prices, roll up their sleeves, and get to work.  Yes, really.

I also think that reduced commissions would lead to a more professional class of broker across the board.  With six percent commissions, what you find is many marginal brokers remain in the business who would otherwise have to find a real job.  If we dramatically reduce commissions, these people would be forced to leave the business.  Those remaining would be the true professionals.

But the real question is:  Why do sellers continue to hire these brokers?  It is, I think, a combination of factors that we’ve discussed.  The pretense of competence and authority.  The widespread, and often valid, stereotype of brokers.  And the illusion of high service.

There is also an element of fear.  Some sellers fear that if they hire the wrong broker, the broker might make an expensive mistake that the sellers cannot afford.  I get that.  But brokers prey on this fear.  So many of them are little more than snake oil peddlers preying on the nervous, uninformed, and credulous consumer. 

So with this book, I hope to convince you that six percent does not guarantee competence or integrity.  In fact, it might even reduce these sought-after qualities.  I have mentioned this a couple of times and I will again here:  If we want better brokers, the only way we are going to get better brokers, is for consumers to demand better brokers.  Please.

So with the above announcement, KB Homes is paying the buyer's agent two percent.  Double what I think it is worth.  But okay, what I think is only one opinion.  You decide for yourself.

In any case, I'd say KB is taking a step in the right direction.

Update:

Just for kicks and grins, I looked up the commission payouts from other new home builders.  Lennar, Pulte, Taylor Morrison, and Dan Ryan are also paying two percent.  Maybe it's a trend.  In this huge seller's market, how long before lower payouts reach the re-sale market?

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A Few Thoughts on Zillow

Zillow Buys ShowingTime.  Realtors Silent.

Last month I sent a question to an email group of North Carolina brokers:

What is to stop Zillow from opening dotLoop and ShowingTime to consumers directly?

Crickets.

No one wanted to even discuss the possibility.  Why?

Well the Realtor associations have scared brokers into silence.  The Realtors point to Article 15 of their Code of Ethics.  Let me quote it here:

REALTORS® shall not knowingly or recklessly make false or misleading statements about other real estate professionals, their businesses, or their business practices.

Does asking or speculating about a firm's possible future business model violate this article?  And even if it does, should we care?  Let's come back to this.

I am generally supportive of new business models in the real estate industry.  As long as they are honest, bring them on.  Because what this industry needs more than anything else is to be turned upside down and given a good shake.

Zillow currently allows homeowners to claim their property and then "list" it for sale on the Zillow website.  What's to stop them from adding a button to the property page that says Schedule a Showing.  Scheduled with whom?  Well, it could be the listing broker of course.  But it could just as easily be the homeowner.

With dotLoop, Zillow has a system for managing all the paperwork involved.  So again speculating here, why couldn't Zillow develop a system for negotiation between the buyer and the seller?  That is, under their Schedule Showing button, we might find another button:  Make Offer.  Again make offer to whom?  And again, it could be the listing broker of course.  But it could just as easily be the homeowner.

I included a whole chapter on how this could work in The Competent Broker.

Such a system would put the whole industry, as currently configured, at risk.  And you know what?  I'm all for it.  Even in 2021, we have way too many six percenters and way too few everything else.

Is this the path that Zillow is taking?  I have no idea.  But I have been writing about the possibility for over ten years now.  Zillow always denies it.  Why?  Well they make money selling both ads, and now with dotLoop and ShowingTime, services, to real estate brokers.  We brokers are giving Zillow the gun that they will ultimately use to shoot us.  Money.  That is, we are the ones paying them.  For now, Zillow's revenue comes almost entirely from the brokerage community.

But that is not all.

By refusing to talk about the possibilities and what Zillow may or may not be up to, we Realtors are giving Zillow cover to put this system in place.  Right before our very eyes.  And we have absolutely nothing to say about it.

The Code says shall not knowingly or recklessly make false or misleading statements.  I'm not sure whether my speculations cross this line.  But I can tell you that, in practice, Article 15 is used to shut down any discussion whatsoever.

And would not such a discussion be valuable?  Let me ask a final question:  Could it be that one reason our industry is so highly resistant to change is that we don't allow ourselves to openly discuss alternatives?

This is not a case of cognitive dissonance.  I want Zillow to succeed whatever it's up to.  I want a stronger, more competitive, and more consumer-friendly industry.  I think Zillow has a role to play.  Likewise Redfin, Opendoor, Move, and others.  But I also want the rest of us to have a chance to succeed as well.  We won't get that by sticking our heads in the sand.

The Realtor Code of Ethics?  It's really a Code of Silence.

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How Many Brokers Can One Person Manage?

In North Carolina, real estate firms are supposedly supervised by a Broker-in-Charge.  Each office of every firm is supposed to have a BIC who is responsible for ensuring the office meets NCREC requirements.  The NCREC requires BICs to supervise Provisional Brokers much more closely than Full Brokers, but that is to be expected.

But here is a question:  How many brokers can one BIC supervise effectively and responsibly?  I truly do not know the answer to that question.  But here is a Broker-in-Charge with 900 licensees under her supervision.  No, that is not a typo, and if you click the link, give it a minute because it takes the database a few seconds to bring up the whole list.  That is more than six percent of the entire count of MLS-subscribed brokers in our market.  Imagine that.

She must be some sort of management wizard!

Or...Could it be that she has absolutely no idea what all 900 of her brokers are up to?  Maybe it does not matter?

Really, I am just wondering....

Look, I know there is some structure there.  I see names on her list who are also BICs.  So I suppose those brokers are running their own teams, out of their own offices.  Nevertheless it does seem odd that someone would assume that level of responsibility and liability, and the firm would assume such a shaky risk management structure.
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The Wholesaling Scam

A Note on Real Estate Wholesaling

Here is the wholesaling business model as I understand it:  

The wholesaler identifies a property that might be purchased for less than market value.

The wholesaler approaches the owner to discern interest level in a sale.

The wholesaler's goal is to find a property that he can purchase under market value from a less than savvy seller.

The wholesaler and the seller reach a deal for the property at a less than market value price and place the property under contract.

The wholesaler then approaches buyers (often investor types) who may purchase the property at or near fair market value.  Or at least closer to market value.

The wholesaler and the buyer go under contract at or near fair market value often using a buyer corporate entity (LLC, corporation, etc).

There may be a double closing, but it is certainly not necessary.

At closing, the buyer is introduced as a partner or associate of the wholesaler.  The buyer's entity acquires the property at market value, the seller gets the originally agreed less than market value price, and the wholesaler keeps the difference.

What actually takes place is the buyer acquires the property at the originally agreed less than market value price, and pays the difference to the wholesaler as an assignment fee.

Of course, there are variations of this.  But in any case, it's all pretty nifty, but for one little problem:  Transparency.  Three questions:  Does the seller go into this transaction fully understanding what the wholesaler wants to do?  Does the seller understand what is happening along the way?  And finally, at closing, does the seller understand how the deal is structured?

Another question:  If the answer to these three questions is yes, why would any seller agree to it?

Also:  Does the seller understand that the wholesaler has no intention of purchasing the property himself?  And can terminate the contract if he fails to find a buyer?  And here's a question that I really do not know the answer to:  If the wholesaler truly has no intention of purchasing the property and this is not made clear to the seller, is the wholesaler not in breach of his contractual duty to act in good faith?  Yes, there is such a thing:  There is a covenant of good faith and fair dealing implied in every contract.  Imagine that.

Look, I am not terribly interested in foolish sellers.  My heart does not really bleed for sellers who fall for this nonsense.  Although maybe it should.  No, rather, I am concerned with the wholesalers and their business model.  It is a business model designed to take advantage of the ignorant and perhaps the unfortunate.  It is a model of bad faith.

It's really theft.  The wholesalers are stealing equity from unknowledgeable and unsuspecting sellers.  This is who wholesalers are and this is what they are doing.  I am not calling for more laws or regulation, but I do think we should shine a light on the practice.

Real Estate Wholesalers:  Modern day, small time con men.

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The Competent Broker has been published

Click to find The Competent
Broker at Amazon.com

The Competent Broker:  Seeking Competence and Integrity in the Real Estate Business

The Competent Broker has just been published on Amazon, in both paperback and Kindle eBook formats.

The Competent Broker  Competence is a choice.  In the business of real estate brokerage, this is an absolute.  Brokers have a duty to their clients to be competent.  A duty of competence.  So competence is a character trait and a function of integrity.  It is not that brokers choose to be incompetent.  But they do choose to focus their attention elsewhere.  Competence simply falls by the wayside.  Unnoticed and unattended.

The purpose of this book is to help readers find and identify competence and integrity in an often murky and counterintuitive business.  We start with Competence is a Choice and a Code of Competent Conduct, which we expand into sections on Brokers, Buyers & Sellers, Fees & Business Models, Marketing, and Negotiation.

   

There are a few different and sometimes overlapping potential audiences:  People thinking about entering the real estate market either as new buyers or sellers, or perhaps those with a less than ideal experience in the past.  People thinking about getting a real estate license or newly-minted brokers just finding your way.  And finally, disaffected brokers seeking a better way.

Visit our Competent Broker page for a chapter-by-chapter summary.

I look forward to your comments and questions.

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