[Concluded from yesterday’s Part 1.]
By: David A. Smith
Yesterday’s post about the demise of real estate brokerage, using as our text a recent New York Times article, You Don’t have to Pay It, showed that, via the internet, the broker’s business model – predicated on a high-capital-cost infrastructure model – has been devalued virtually to zero. That same internet has also raised an Army of Davids who look at the dissolution of physical infrastructure as a breach in the guild wall.
Keep them out! They’re not licensed!
Still, for some sellers, a commission of tens of thousands of dollars to sell a property seems too steep, especially as they cannot expect to make as big a profit as they might have a few years ago — if any at all.
What you make is irrelevant except emotionally – yet, as we’ve seen before, the home is a person’s most emotional asset. Moreover, with underemployment hovering at 18-19%, a truly frightening figure, many home sellers would like to take their idle time and turn that into money.
Even vampires can’t get enough work
Debra Pohl and her husband, Daniel, opted to list their two-bedroom Morningside Heights apartment last January with an agent who offered an alternative to the standard commission. The agent, Keith Burkhardt, the president of the Burkhardt Group, charged the Pohls a flat rate of $1,000 to submit their listing to real estate databases. The couple handled all the open houses, showings and deal negotiation themselves.
Debra and Daniel Pohl, with Derek, 2, paid the Burkhardt Group $1,000 to submit their listing to real estate databases. Then, like Ms. Gray, they did a lot of the selling legwork on their own. Copyright 2011 The New York Times Company
In effect, the Pohls went into the brokerage business for themselves, using their proprietary knowledge of the home they wanted to sell, and outsourcing only the data broadcasting function.
“We sold our place for $520,000,” Ms. Pohl said. “At 6%, that would’ve been over $30,000, and we did it for $1,000, so the savings was really, really important to us.”
Although they advertised that they would pay a buyer’s agent a 2.5% commission, all of their offers came from people who were not working with brokers.
Let’s assume that in fact the Pohls put in 300 hours between them; they were paying themselves $100 an hour, non-taxable, which equates to a salary of about $150,000 a year.
Ms. Pohl said she and her husband had sold a previous home in New Jersey themselves but decided to list their apartment with Mr. Burkhardt because at the time, Web sites like StreetEasy did not allow for-sale-by-owner listings. It has since changed its policy.
Of course StreetEasy changed its policy – by-owner sellers are its logical customer base! Excluding them is so nonsensical I can conclude only that StreetEasy originally feared broker backlash.
That time has passed.
She said she did not believe that a full-service agent could have secured a higher price — one of the main arguments brokers make to sellers.
Although Ms. Pohl is naturally invested in believing that she did as well as a broker would have, she has one datum supporting her perspective.
“We ended up selling our apartment for slightly more than the bank evaluated it at,” she said, “so we feel we did pretty well. That tells me that we couldn’t have gotten more with a broker.”
Nobody knows. Brokers live and breathe the absence of a counterfactual.
I shall consider it, Captain
The Pohls also worked with Mr. Burkhardt last year when they bought an apartment for $750,000 on the Upper West Side.
Five years ago, I wrote that brokerage was a waning profession:
As a business, classical real estate brokerage is facing the kind of big-bang price drop that confronted stock brokers when Charles Schwab and others introduced first discount and then on-line brokerage.
A rapidly expanding business model
In real terms, fees are likely to drop, and the service is going to reinvent itself from seller representation to buyer advocacy.
Sure enough, it’s happening.
They went with him then because he offers buyers a rebate of up to two-thirds of his commission, based on a similar self-service model.
The restructured business arrangement also reveals an important shift in the service’s value proposition. Buyer and seller is a one-time relationship – one transaction, one outcome, and no further contact.
Usually happier than this
Such transactions lend themselves to fixed fees or standardized compensation structures. Against that is seller and broker, where the relationship takes weeks or months (or even years) to nurture into a consummated transaction.
The former is a one night stand; the latter is parenthood.
Clients search for apartments and visit open houses on their own, putting Mr. Burkhardt’s name down as their broker, and he helps out by booking other appointments and offering advice during negotiations.
Mr. Burkhardt has reinvented the profession.
Business inventor Burkhardt
These days, Mr. Burkhardt considers himself mostly a buyer’s broker, describing his niche as that subset of real estate enthusiasts who are glued to sites like StreetEasy and don’t need a lot of hand-holding while visiting Sunday open houses, a task that can take up a lot of a broker’s time.
“They’re doing, let’s say 60% of the research themselves,” he said, “and they want to be compensated for that.”
By moving to this model, Mr. Burkhardt has dramatically lowered his organization’s overhead costs. Boiling out these fixed costs reduces ecosystemic entropy, and Mr. Burkhardt and his client split the resulting savings.
He acknowledged, however, that setups like his had yet to catch on in a big way.
“People like to complain about broker commissions,” he said, “but they’re afraid to break ranks with the status quo and go with a firm or a model that is different than what everybody accepts.”
That is changing rapidly.
You never know what they’ll look like next
Mr. Burkhardt’s business is likely to last longer than the intransigent six-percent model – but will his be the model that predominates?
Another company offering a hybrid service is RealDirect, which charges sellers $395 per month, or a 1% commission, to distribute a listing to major real estate databases; owners handle open houses and showings themselves.
RealDirect changes the business model even further. It shifts from a contingent payment to a fixed payment. That’s a great trade for the broker, who has a reliable income. It’s a good trade for the seller who seller knows the property will sell, or who is willing to be reasonable in the sale. And it’s a great risk-mitigant for the broker, who needn’t worry whether the seller is motivated: $395 a month will concentrate the seller’s mind.
Sellers can pay a 2% commission for what RealDirect calls “broker-managed service,” including pricing and staging advice, and the handling of negotiations.
In effect, RealDirect is menu-izing brokerage – smart in an age of smart networked consumers. His business model, however, is emergent and may well undergo further tweaking:
Doug Perlson, the chief executive of RealDirect, said 3 of the 13 apartments listed through the company, which started last summer, had sold or were in contract.
One of those properties is a one-bedroom Greenwich Village apartment owned by Colleen Gray, which is scheduled to close in mid-February. The listing price was $920,000.
Colleen Gray, eschewing a traditional agency, sold her one-bedroom through RealDirect.
Ms. Gray said she listed her apartment with RealDirect in late October after having tried to sell it herself for about a month. She went with RealDirect because she did not feel her previous real estate agents had earned their commissions.
So Ms. Gray started with a traditional broker, and found it too expensive and presumably inattentive; then she tried doing it herself, and found that lonely and unfamiliar.
RealDirect offers clients some professional backup, an advantage over the lonely sale-by-owner transaction if things go amiss (Mr. Perlson is a member of the Real Estate Board of New York).
So she settled on a balance – hiring the broker for particular expertise and doing the spadework herself. In effect, she subcontracted herself to RealDirect as a highly motivated, highly localized agent.
“I have a very desirable apartment, in a good building, and I work from home,” Ms. Gray said, explaining that these factors made it easier for her to opt for a no-frills agency.
Accessibility matters too.
“I was available at the drop of a hat for a showing.”
I’m available
Her move makes excellent sense – but she couldn’t have created this synthetic service package had there not been place-independent services like RealDirect. The technology is driving the business revolution.
“Realtors, on the other hand, have their own schedule.”
It’s all a question of what you need done and what you’re willing to pay for.
D. J. Jaffe, a retired advertising executive, is selling the two-bedroom apartment at West 27th Street that he has owned for 20 years. He chose RealDirect for reasons similar to Ms. Gray’s: he has the time — and the enthusiasm — to do some of the work himself. He is asking $899,000.
D. J. Jaffe, left, a RealDirect client, shows his Chelsea apartment to Stephanie and Kent Vogel. The do-it-yourself open house is a common way to save on the broker’s commission. James Estrin/The New York Times
Like Ms. Gray, Mr. Jaffe may be his best marketing agent, or he may not be. Experience and presentation potentially matter as well.
At an open house in early January, Mr. Jaffe welcomed a steady stream of prospective buyers, talking up the apartment’s features (which walls could be altered, where a second bathroom could be added) and the neighborhood’s appeal (good transportation, a Whole Foods), as well as playing with visitors’ dogs (the building is pet-friendly).
I congratulate Mr. Jaffe and Ms. Gray – such work would wear me out.
That’s me, all right
All three sellers who declined the standard commission model said anyone considering this option should be prepared to invest a lot of time in the sale, and to develop a thick skin for comments made during showings and the back-and-forth of negotiations.
It’s just business
It’s a business, and you have to treat it as such.
The business models are still mutating, with some clinging to the brokerage agency platform:
Rutenberg Realty follows a different model, with agents paying $99 per month to be part of the company, then $1,000 on deals involving properties that sell for $1.5 million or less and $2,000 for sales above that amount. This arrangement gives agents more flexibility to set their own commissions, since they don’t have to get approval from a manager, Ms. Braddock said, though she stressed that Rutenberg does not consider itself a “cutting commissions” firm.
Ms. Braddock doesn’t have to stress that – the economics speak for themselves.
Doug Heddings, who started the Heddings Property Group in 2009 after working at Prudential Douglas Elliman, says commissions “have always been negotiable.”
But now that he is an independent broker, he said, he has more freedom to set his fee than when he worked for a large firm.
Evidently Mr. Heddings broke away from PDE because its overhead costs were no longer supportable in an internet-brokerage age.
That’s HeDDing, not HeNNing!
Mr. Murray of Real Trends said he believed cultural reticence about haggling had helped to preserve the traditional broker commission.
“Will we see more options? Yes,” he said. “Will consumers take advantage of them? Some will. But I think a lot of Americans don’t have the personal skills or even the desire to negotiate a deal.”
Watch us learn.
