Brokerage’s baby bang
A while back, in giving a blog interview, I commented:
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. In real terms, fees are likely to drop, and the service is going to reinvent itself from seller representation to buyer advocacy.
As usual in the blogosphere, things happen before you can verbalize them. Scarcely had I typed the words when comes this New York Times story describing a for-sale-by-owner (FSBO) Web network that has cracked the business model of overturning the broker’s guild:
Once upon a time, wine brokers had a guild too.
Christie Miller, left, and Mary Clare Murphy in a garage with sale signs. Their Web site charges $150 to list a home and throws in a sign.
Ms. Miller, 38, a former social worker who favors fuzzy slippers, and her cousin, Mary Clare Murphy, 51, operate what real estate professionals believe to be the largest for-sale-by-owner Web site in the country.
Their site, FsboMadison.com (pronounced FIZZ-boh) holds a nearly 20% share of the
The site, which charges just $150 to list a home and throws in a teal blue yard sign, draws more Internet traffic than the traditional multiple listing service controlled by real estate agents.
With real estate brokerage increasingly moving to the Web, why hasn’t anyone done this before? For the extraordinarily simple mercantilist reason that the Realtors control access to the Multiple Listing Service:
Elsewhere, [some] advocate forcing the Realtors’ association to share control of its established listing services. Those critics seem to view the listings as an unassailable monopoly.
Unfortunately, network monopolies are always assailable, if not economically, then judicially. One could analogize from other business areas, where telephone lines were opened up to multiple carriers, and a hundred years before that, railroads became a common-carrier utility. (If memory serves, these were the seminal cases in US antitrust policy.) Networks are expensive to build and pointless to duplicate, so those who build one should capture a royalty, but should be required to allow other carriers equal access. Government can compel this … but if has the political capital.
Through lobbying, litigation and legislation, the Realtors’ group has managed to keep control of the crucial listings.
There’s another way to take the Maginot Line: parachute over it.
Ms. Miller and Ms. Murphy, however, built a separate and alternative listing service - a parallel market, much like the Nasdaq, which rose in recent decades to challenge the New York Stock Exchange’s dominance and sparked competition that eventually reduced transaction costs for all stock investors.
Observe the destabilizing effect: even if the new vendor model doesn’t immediately capture business from the incumbent, it ruins the incumbent’s claim to moral superiority and the harrumphing dismissal (”Impossible, people don’t do such things”). Instead, it forces the brick-bank incumbent to justify itself by better performance.
“Justifv myself by my performance!”
The price competition is startling. FsboMadison listed about 2,000 homes in 2005 and said that about 72% of its listings sell.
If 28% of properties fail to sell, that’s a very poor batting average. But even so, it’s a big dent in the commission structure:
If those 1,440 houses averaged $200,000 per sale, the real estate commissions under the 6% system would have been about $17.3 million. Ms. Miller and Ms. Murphy collected about $300,000.
If you’re scoring at home, that’s a 98% cost drop for the 72% successful — how do you think that makes the remaining 28% feel? Meanwhile, where’s the business model for FsboMadison?
“They don’t care - they’re not profit-driven,” said Francois Ortalo-Magne, an associate professor of real estate at the University of Wisconsin who has studied residential sales in
Here we see the data paradox in action. FsboMadison cannot economically sell the data it compiles, for to do so places it squarely in the same business model as the MLS, with none of the incumbency advantages. As they say in their Frequently Asked Questions:
“Why don’t you offer the MLS?”
We are not real estate agents. The MLS (Multiple Listing Service) is owned and operated by the real estate profession and you must be a realtor to list a property on it. The MLS has been very effective in controlling the transfer of property from one owner to the next. Before I bought my first home in 1991, I had a vague sense that it was somehow illegal to sell your own property.
Our mission differs by 180 degrees. The typical 6-7% commission required for the services of real estate agents has inspired a powerful cadre of sales people seriously interested in getting your property under their control. We are interested in “leveling the playing field” and supporting fsbo sellers and buyers via this locally owned and operated business.
Instead, FsboMadison builds its visibility by giving away information (how blog-like!) and charging a modest fee to post it (how Blog-Ad-like!). They also enhance the info’s value by rendering it comprehensible, as in their animated map of listings.
“I don’t think we’ve done anything unusual,” Ms. Murphy said. “We are not out to take over the market, to eliminate the real estate world. We’re just here to offer this service.”
The service, you see, has been reinvented from a transaction to an information model. That’s very significant, for as I said in my blog interview:
This is consistent with other internet-driven reversals, where high bandwidth means narrowcasting specialist content providers like blogs, and the scarce commodity is not the content to display but the eyeball to see it.
FsboMadison is capturing eyeballs. And those who would like to borrow those eyeballs will pay to display themselves:
Advertising on their Web site costs $150 a year - $250 with a corporate logo.
There’s their business model: narrowcasting.
Of course, scratch an incumbent and you can find a dinosaur:
Agents utter FSBO as if there was something foul stuck to the bottom of their shoe. “It’s a commission-avoidance scheme,” said Sheridan Glen, manager of the downtown
Yes, precisely. And your point is? After all, who does a broker really work for?
Mr. Glen ticks off the tasks that real estate agents handle: using market expertise to price a house; advertising and showing it; negotiating an offer; organizing the paperwork for closing. “We do a good job,” he said. “We deserve six or seven percent.”
If that’s true, then the marketplace will justify it, and Fsbo will fizzle. But let’s test it by unpacking the services a broker provides:
When unpacking brokerage services, use only proper tools.
Services provided by real estate brokers
1. Preparation. Aiding a seller in positioning a property for sale.
2. Presentation. Presenting the property to best advantage.
3. Pricing. Advising on an initial price and later pricing strategy. (But this one is suspect, because the broker’s motivations differ from the client’s.)
4. Prospects. Recruiting buyers.
5. Process administration. Walking prospects through the property and otherwise handling the administration of a listing.
6. Process management. Assisting in preparing the Letter of Intent (LOI), purchase and sale (P&S), and closing documents. Here the brokers eventually give way to lawyers.
Which of these services are value-additive?
Which are so conditional that they should be compensated on a contingency?
Which have a cost structure that asymptotically approaches zero with the internet and a self-organizing network? Isn’t that the definition of a marketplace: a self-organizing network of buyers and sellers who, when they transact, are speaking truth to one another? (Cluetrain manifesto)
William A. Black, a lawyer for the Wisconsin Department of Regulation and Licensing, says he does not think consumers who bypass real estate agents are missing much. “The majority of residential transactions are very simple: 99% can be done without a broker. And the 1% screwed up - the broker couldn’t have prevented it.”
Moreover, an open-source market attracts boutique specialist vendors:
A robust for-sale-by-owner operation has also helped open the
Stuart and Sheri Meland, both 28, put their graduate studies on hold in 2002 and started a business that offers sellers a spot on the traditional multiple listing service, plus a yard sign, for a flat fee of $399.
If I were a broker and heard this, I’d say, Uh-oh, because now the price of MLS access has been cut from 6-7% contingent to $399 up-front.
Most sellers agree to pay a buyer’s agent a 3% commission, show the home themselves and either negotiate on their own or hire a lawyer.
The old guild-style business model is collapsing.
“We need more hot air to defend the business model ….”
By the way, what does this have to do with affordability? Several things, all of them good;
- The market for housing intermediaries is changing. Instead of being about seller advocacy (current business model), it is becoming buyer-seller information exchange (fizz-boh model). The latter business model survives only by making the market more efficient.
- Faster info flow compresses transaction costs. When that happens, two good things happen:
· Buying power increases (so housing becomes more affordable).
· Market activity increases (so does market efficiency, and therefore pricing improves).
For brokers, do not ask for whom the mouse clicks, it clicks for thee. As T. S. Eliot might have said it:
This is the way your guild ends
This is the way your guild ends
This is the way your guild ends
Not with a bank but a web site
“Let us go then, you and I/ when the market’s good for you to buy.”
– The home page of J. Alfred Prufrock
