Identifying the real "friction" in the system.

Identifying the real "friction" in the system.

During the Federal Trade Commission's recent public whipping of the real estate industry, disguised as the report "Competition in the Real Estate Brokerage Industry", the American Bankers Association was allowed to deliver its own stern rebuke to the industry: "With individuals assuming more of the responsibility to gather and assess information, less time and effort is required by real estate agents in assessing market conditions (for sellers) and in identifying and showing houses [for buyers]. The cost of an agent’s service, therefore, should go down reflecting this shift in burden.”

This thinking is popular among special interest groups and others who don't understand—or would prefer not to understand—the way the agent and the Internet complement each other. It's a classic example of the controversies and misconceptions dogging the real estate industry these days.

They include:

Axes which must be ground. Current regulations prevent banks from operating real estate brokerages. When the American Bankers Association spoke at the workshop which birthed the FTC's May 2007 report it was in a role that bankers rarely assume: as advocates of lower fees. This was a stretch, but the potential rewards were worth it. According to the bankers, "the real estate industry needs competition and we're the boys to give it". Except that once Big Banks get into real estate, there won't be any competition, except maybe between Big Banks. Well, it's been a while since Big Banks have had the little guy squarely under their thumb. Clearly Big Banking is feeling nostalgic. Maybe the little guy is too?
Penetrating observation through the wrong end of a telescope. You may be surprised to learn that economic analysis comes from academics who have no experience in the field they analyze. "How does that work?", you ask. Grad school has taught them all they need to know: how an industry "should" work. Grad school has taught them nothing about how an industry can and does work. Plenty theory, zero practice, and not a whole lot of common sense either. Maybe this is why real estate continually mystifies the real estate economist. Then again, maybe I'm giving the real estate economist too much credit.
The second-coming-of-Christ approach to selling the Internet. Don't get me wrong: the Internet is swell. I know this because I spend way too much time on it. And whenever someone is selling some aspect of the Internet, I don't mind him laying on a certain amount of good old American hucksterism. I'd be naive to expect objectivity from marketing types. What I do mind is the Messianic "this changes everything" smoke-blowing that's obscured the real benefits of the Internet since it first reached public consciousness in the mid-1990s. I've seen miraculous claims for the 'net that would cause a faith healer to blush.
A simplistic understanding of what the real estate agent does. Because so much of an agent's job goes on behind the scenes, and because the good agents don't let their clients see them sweat, even buyers and sellers with fairly extensive experience—with as many as two, three, even five transactions under their belts—have something less than a complete understanding of what their agents do and how long it takes them to do it. Of course, some agents don't do anything, but that's a topic for another day.
Good old reliable wishful thinking. "Golly, I think it should be this way, therefore it is." The kind of stuff you can apparently build an academic career or blog around.
Discounters who dress up their business models as the Next Big Thing. If discounting, online or otherwise, is really the wave of the future, and not just a way to keep mediocre agents employed, then why not let the future take care of itself? I'm all for early adapting, but I think you discounters might be jumping the gun. Especially when full-service full-commission agents can still make a good living. In the meantime, spare me the sanctimonious bleating about how you're the last honest men in real estate.
An almost complete lack of industry credibility. It took me years to realize that only the real estate industry really knows what's going on in real estate. But no one outside the real estate industry believes the real estate industry. Therefore no one outside the real estate industry really knows what's going on in real estate. This is a slight—but only slight—simplification.

In the past I've responded to the idea that the Internet changes everything! in the buyer-agent relationship with the tired generalization that the Internet delivers information, not knowledge. I've said that information is nothing more than data that must be sorted out by someone with experience before it becomes knowledge. Knowledge comes not through a Web browser but through training and experience. The more complex and nuanced the subject, the more training (classroom or on-the-job) and experience is needed to make sense of information. And that's assuming the information on the Internet is always correct, not just in general but for your specific market, and that it can be turned into something that makes sense.

But generalizations go only so far. Just today I had a real-life experience that proves that information isn't knowledge.

Right now I have the pleasure of working with some very sharp, very savvy buyers. Both are mature and accomplished professionals. These buyers get it—whatever "it" is, they get it, quickly and completely.

They've just moved here from a nearby city. We've talked about their goals, and we've gone out looking at homes. By now all of us are pretty sure we know what they want: a nice small house in a nice neighborhood, within easy commuting distance of one of the most expensive cities on the planet, and in a price range that keeps them out of most of the neighborhoods that fit the bill. It's a stiff challenge, but they know that.

Today they emailed me five homes they think might work. They'd like to see them this week-end.

House 1 is a fairly nice home in a decent and interesting neighborhood they've just begun to explore. I've always liked this neighborhood but it's a little frayed around the edges and not for everyone. I saw the home on broker's tour Tuesday morning and was going to suggest we see it. Which reminds me: if I'm working with you regularly I'll never show you a house I haven't "previewed". No good agent will. We try to avoid unpleasant surprises. Clients appreciate this. But previewing removes the "efficiency" the Internet was going to bring to the agent-buyer relationship. Because it's not saving me time. I still have to spend hours looking at houses to see if they'll work for my clients.

House 2 is unusual in two respects. First, it has only one bedroom. In this area, even old economy housing almost always has at least two bedrooms. Second, it's made of cinderblock, typically a cold and drafty material, and around here used more often for garden sheds and retaining walls than houses. Which makes me wonder if maybe this house was someone's week-end project. It's on a humble street some might call quaint, and in a humble neighborhood some might call marginal. Why "marginal"? Because the small grocery store a block away made the local headlines two years ago by being robbed repeatedly. By real robbers, with real guns and real getaway cars. The home's "40-year resident" has just moved out, so I'm not expecting granite countertops. In this neighborhood I'm not expecting countertops. The house is described as having "a good floor plan". I'm wondering how a one-bedroom house can have any floor plan. Right now the sellers are doing "painting and minor renovations". I sure hope so, because it's priced at about what my clients could pay for a two-bedroom wood-frame house only a few blocks away, a house with the gorgeous top-end finishes you usually find in homes costing twice or three times as much. Think maybe that rough one-bedroom house might be a little pricey? Maybe more than a little pricey?

Which reminds me: it's a FSBO (For Sale By Owner) paying a commission to the buyer's agent. Another FSBO who, thanks to the miracle of the Internet, don't need no stinking agent to tell him how to price his house: at way more than what it's worth. Hallelujah! I can feel that "friction" melting away!

House 3 does have granite, and cherry cabinets, and crown moldings, and a flagstone patio, and a "park-like setting", and even a new white picket fence. And its list price is a whopping 17% lower than that one-bedroom house they're hosing out right now. It's even got twice as many bedrooms. Luxury! And it's even in the same city. So what's the catch? This "bargain" is in a neighborhood where window bars are de rigueur. It's in a neighborhood where inventory has been stacking up like airliners over O'Hare since subprime lending dried up.

My buyers don't know any of this. But I'll show it to them.

House 4 is a small "shotgun" (long and narrow) home surrounded by apartment buildings and on a major commuter route with double train tracks across the street. I've been halfway thinking of showing it to my buyers, just as a data point, but there've always been much better homes to show. This home is a very affordable way to get great schools, but my buyers don't need or want great schools. The want quality of life. With this house, you give up quality of life to get great schools.

But I'll show it to them.

House 5 is a pleasant and fairly sizeable home, professionally landscaped, that's squarely in my buyers' price range. It's also on a commuter route that narrows to two lanes about where the house is, so that at certain times of day you can't get into or out of your driveway unless your Hummer has push bars.

But I'll show it to them.

So how about all that "friction" the Internet is eliminating, right now, for these buyers and this agent?

Yes, they've managed to find five homes without me. Five homes that look like they might work. Except that I know that only one of them might work.

And it's the home I've already seen. I'll show them the others, even though I know they won't work. So here I am, still spending time, still putting on miles, like the Internet didn't exist. And gas is currently $3.81 a gallon.

If this kind of information is the best these buyers can wring out of the Internet, then this is the best any buyers can get. Sooner or later, after hours spent searching the Internet and more hours spent looking at the wrong homes in the wrong neighborhoods, buyers eventually get it. Let the agent do the scouting. He's better at it than we are. It's a valuable service, one well worth paying for. [By the way, shortly after this was written, I showed these buyers a home they hadn't found themselves, and in an area they hadn't even considered. It fit the bill better than anything else they'd seen, and they bought it.]

The bankers aren't going to get it, because they can't afford to. Ditto the economists: they need an "inefficient" industry to rail against. Ditto the discounters: this might be their chance to come in from the cold. Ditto the FTC: this is their chance to look vigilant, make some news and stake out new turf.

It just struck me. Maybe all these interest groups are the real "friction" in the system!