Ripe for Reform
Though Professor Hsieh’s criticisms of real estate are bold, he does not deny that real estate is a valuable profession, one defined by fierce competition and filled with finely-trained individuals who genuinely enjoy their jobs. In fact, after Hsieh accepted his current position at the University of Chicago, he voluntarily used the services of an agent to sell his home in Berkeley, where he lived when he taught for the University of California. Indeed, there are numerous real estate transactions, from FHA-approved condo sales to REO and short sale transactions, where an agent’s perspective and expertise will forever remain a necessity, and though NAR’s most recent survey of home buyers and sellers found that 88 percent utilized the Internet to find a home, 89 percent reported using agents and brokers to find the home they eventually purchased.
Yet, real estate itself remains an industry “ripe for reform,” Hsieh says, and he has numerous ideas for how to go about doing it. One would involve the nationalization of the MLS system, and opening to the public all of real estate’s data. If information were more readily accessible, Hsieh suspects, the fees associated with a transaction may not be so high. Another idea would involve a compensation system like that of the legal profession. Whereas hundreds of divorce attorneys exist in Chicago’s market, they all charge different hourly fees based on their skill sets, reputations and resources – why can’t real estate function in the same way? Why can’t Realtors charge different fees for different skill sets, such as an agent specializing in REO sales in Schaumburg charging a different fee from that of an agent with an acute understanding of luxury markets in Lincoln Park or Hinsdale?
“What we need is a true innovator that will change the underlying business model,” Hsieh says.
So what does the future of real estate hold? What new, emerging business models will the industry bring? And who will be the one to usher in a bold new model and dramatically change how the industry functions? Whatever may happen, Patrick thinks that in light of the Koenig & Strey’s buyer fee, the heat is on for new, progressive approaches to the tried-and-true business models.
“Other brokerages are in exactly the same boat [as Koenig & Strey],” he says. “They are looking for ways to retain the agents they have, offer competitive splits and offer services the agents are looking for – and remain in the operational black.”
Mark Reitman
Redfin
Regional Director, Central U.S.
773-308-4896
mark.reitman@redfin.com
Chang-Tai Hsieh
University of Chicago
Phyllis and Irwin Winkelried Professor of Economics
773-834-0590
chsieh@chicagobooth.edu
George Patrick
Koenig & Strey Real Living, Chicago
Real Estate Broker
312-475-7750
George@GeorgePatrick.net
Joe Stacy
Koenig & Strey Real Living, Schaumburg
Managing Broker
847-874-6731
joe@joestacy.com
Jackson Sanderson
Koenig & Strey Real Living, Libertyville
Vice President and Managing Broker
847-557-1601
jsanderson@koenigstrey.com
Kudos to K&S for taking a step in the right direction for Illinois Realtors. Too often realtors get stepped on by the general public and are not always seen as professionals with standards. Personally I have maintained a minimum fee for all transactions which averts myself and my agents working at minimum (or less than minimum) wage on a transaction. Some clients turn their back on the proposition, but most understand that our time is worth money too.
Agree wholeheartedly with this. It should end up becoming state law that it is published in each office. Too many lookee-loos think we get paid a salary to be in the office.
How often do people call us or stop by an office and want to know about buying a home? They then go to another and another office. They seem to think that if they ‘work with’ more than one agent they will get more information than the MLS has.
If they want to pay $250. up front to each of us, they can work with as many agents as they want!
I can appreciate Koenig & Strey’s approach to buyers. I believe that the State of Illinois needs a new law requiring buyers contracts as they do listing agreements. Some buyers do not understand that their agent typically works hard and only gets paid if something is purchased.
Listen to a salaried tenure guy like Hsieh and you’d think Realtors are Romney. Making a lot of money for doing nothing. He misses the point like trying to catch a bullet with a net.
It’s an extremely personal, nuanced and skilled service with risk/reward that can result in a transaction where a lot of money is exchanged. For instance, does Hsieh have any idea where all the data on an MLS comes from and who pays to aggregate it? Agents, maybe? But the data doesn’t get a transaction done. Does he understand why commercial real estate information is so splintered?
Pro agents know how many well-tended deals fall out. It makes you wonder if any residential real estate would ever get sold without us.
Maybe a lot of college professors are lousy teachers because they’re disincentivized by tenure. Are agents getting a salary complacent like them? A commission agent has less incentive to service a client? If that last fallacy has to be refuted on an agent web site, we’re all wasting our time.
The old commission model doesn’t work when some properties are selling for $40,000 or less. Buyer’s that are serious and want to work with an experienced agent will pay the fee.
Interesting to see Chang-Tai Hsieh heavily quoted here. It was a 2002 paper of his that led me to my current business model, similar to Redfin but with true full service. As he says the biggest inefficiency in real estate is the prospecting. Agents spend a disproportionate amount of time prospecting, which is why I give my agents the leads I generate in order to improve their productivity.
The other problem is the clients that waste our time, which is why I recently introduced an hourly model for buyers with a 100% commission rebate as well. At first agents don’t know what to make of it but once they try it they really like it. And serious buyers like it also.
Excellent article. Well researched.