Realty Reality - Continued

The Multiple Listing Service (MLS) has come under attack recently by people who have no clue about why it exists or what it does to help create an orderly marketplace for real estate transactions. In addition some of the people attacking it are real estate brokerages who do not want to "pay the freight" and follow the rules that apply to all members.

Myth #2: The MLS is exclusionary and doesn't allow all real estate brokers access to all of the inventory of houses for sale.

Realty Reality: This is absolutely false. The MLS system was set up in the 1950's because the real estate business was totally inefficient. A buyer would have to go to every single real estate office in town to find out what was for sale at each office in order to see the entire market. In addition, the real estate brokers had no way to expose their inventory of homes widely to each other and to the buyers interested in that area.

The Multiple Listing Service was started to bring order to a chaotic marketplace, much like the New York Stock Exchange did for the securities market. The stock exchange created memberships for those brokers who wanted to participate in an orderly method of marketing stocks. The stock exchanges charge a fee for membership, and there are strict rules that must be followed, not only by the stock brokers, but also by the companies who list their companies on the Exchange. Today, companies have many choices of markets: they can choose to list on the NYSE, or on the NASDAQ, or they can be traded "Over the Counter", or they can choose to sell their stocks themselves to private investors only.

Real estate brokers have similar options: they can choose to be members of the MLS in their areas, or they can choose not to. Home sellers also have many options: they can choose to list their homes with brokers who are MLS members, or they can choose to list their properties with brokers who are not. They can also choose to market their properties themselves without using a broker. Depending on the choices they make, the methods of marketing the property will vary.

If a real estate broker chooses to be a member of the MLS, he or she must pay membership fees, and follow the rules, just like a stock broker must as a member of a stock exchange. Those memberships are not restricted to certain types of brokers in either industry; Charles Schwab, as a "discount" broker can be a member just as Morgan Stanley can. In the real estate business it is the same; Help-U-Sell can be a member of the MLS just as a Realty Executives broker can. They all must pay the same membership fees and play by the same rules.

The MLS system allows a broker to be the best advocate for their sellers by protecting their rights to a commission no matter who buys the property. This makes it possible to be aggressive in marketing the property to the entire world without hesitation.

Anyone who thinks that the MLS system is hindering the marketing of properties or is excluding brokers from the marketplace, is just plain ignorant of the facts and history. Without the MLS, buyers and sellers would have limited access to homes and buyers, and would not get the advantages of the free market that determines the true values of the properties they are selling and buying.

The MLS is open to any broker no matter what business model chosen by the company. However, all members must pay the same fees and play by the same rules. Any real estate broker who complains about MLS access is most-likely too cheap to pay the fees to participate in an orderly market, or has a business model that has failed to account for the true costs of doing business.

Realty Reality

The recent article in the New York Times authored by Damon Darlin (referenced in my previous posting) contains many statements that are common myths about the real estate process. In my next few entries I will point out those fallacies and hopefully bring to light the "reality of realty."

Myth #1: (Stated in several different ways) "The Internet has radically changed the way consumers buy books and airline tickets, trade stock and learn news." "You can find out more about an Ebay Beanie Baby than you can about a $1 Million house." "Buying a home online is not too different from ordering a book at Amazon.com or a computer at Dell.com."

REALTY REALITY: People are forgetting that an airline ticket, a book, a share of stock, and computers are commodities. That means that there is no real differences among many of them. For example, a plane ticket from Dallas to San Francisco on American Airlines is virtually the same as a plane ticket from Dallas to San Francisco on US Airways, or Southwest, or Delta, or United. 100 shares of Oracle stock is the same whether it is purchased from Etrade or from Morgan Stanley. If you buy a copy of "The Da Vinci Code" from Amazon or Borders, no one would know the difference.

However, a resale 3 bedroom, 2 bath house with a fireplace IS NOT A COMMODITY! One is usually significantly different from the other - even if they are in the same subdivision by the same builder. It takes market knowledge and personal experience to understand the differences in those products. The differences could be in the locations, or in the improvements made by different owners. One may have white carpeting and the other may have hardwood floors. Perhaps one property is in a flood zone and the other is not. One may be in a different school zone than the other. One may have had a fire in it and the other one didn't. One has a kitchen window that faces east into the morning sun, and the other has no kitchen windows at all. It takes an experienced person to have the market knowledge and understanding to know if the values of the properties are valid and in line with the specific differences unique to each house.

Also, if something breaks on the Dell computer you bought on the internet, or Amazon shipped you the wrong book, it is pretty easy to return them for the right things...Try that with the house you bought over the internet. You might then discover why the good real estate professionals get paid what they do.

The internet is a great tool for buyers, sellers, and real estate professionals. It helps everyone get information more quickly and narrow down possible properties for buyers, and exposes sellers' homes to those buyers. However, that does not lower the true costs of a real estate transaction.

The Biggest Fallacy of Real Estate on the Internet

Here we go again...the media is jumping to conclusions again about what is true about the process of buying and selling real estate.

On Sunday, September 3rd, the New York Times published an article by Damon Darlin, titled "The Last Stand of the 6-Percenters?" In it, Darlin proceeds to talk about some new internet-based real estate firms whose models are to rebate commission dollars to buyers. What Darlin doesn't say is that this practice has been going on for years. Price Club, now Costco, has offered this for a decade or more. This is nothing new; why does it warrant such ink?

The writer prolongs the colossal fallacy that so many people, unfortunately, now believe - that available information on the internet actually reduces the cost of a real estate transaction. This is utterly UNTRUE. In fact, Redfin, the subject of the article, came to this conclusion, too, when it admitted that it isn't a technology company, but is a real estate brokerage. It had to increase its overhead by renting prime space in the "stylish" part of town because the customers preferred meeting the agents in person.

The truth is that real estate commissions will never be lower unless the customers want to do most of the process themselves (research tells us they don't), real estate offices and personnel are not needed (research and Redfin's experience says they are), and most importantly, buyers and sellers take responsibility for their own non-disclosures, mistakes, and changes of mind. (In my 30 years of experience in the real estate business I have found that many buyers and sellers want to blame the real estate brokers and agents for most every thing that can go wrong in a transaction, even when those things are due to the buyers' and sellers' own actions or inactions.)

It is this last item that generally causes disputes and lawsuits. Until buyers and sellers are willing to take on the liabilities for things that can go wrong in a transfer of real estate, commissions will always reflect those potential costs.

My guess is that any of the "commission rebate" real estate companies that get sued for problems created by buyers or sellers will either go out of business or change the way they charge for their services.

Look also at my post on January 19, 2006 titled, "Why Do We Charge a Percentage of the Sales Price?" for further input.