The Changing Business of Real Estate (Part 1)

Like it or not (and the NAR doesn't like it one bit) the business of buying and selling a home is changing. While a slowdown in home sales may be cyclical, changes in the nature of how people buy and sell homes is going to be permanent. These changes will dramatically affect the current real estate commission structure and who benefits.

I had the pleasure of talking to Joseph Fox, CEO of both BuySide Realty and its sister company IggysHouse about the nature of these changes. Let's take a look at each side of the transaction.

The Buy Side

In the typical relationship at present, a person finds a home with or without the help of a Realtor, makes an offer, and commissions on the sale are split between the buyer's agent and seller's agent.

Those commissions are usually in the 5-6% range. Historically the split has been 50-50 between the buyer's agent and seller's agent but given the current slowdown the buyer's agent now gets as much as 4% of 6% commission.

The question is "for what?"

Joe Fox said the percentages in Iggy's Facts come straight from the NAR. So if 64% of home buyers find a home without the help of an agent (24% online and the rest driving around neighborhoods or by other means), exactly why should a substantial commission be paid to some lucky real estate agent for essentially doing nothing but presenting an offer?

It is that very question that was the foundation for BuySide Realty. The idea came about when Mr. Fox and his brother Avi flew to California a couple years ago to look for a house. On arrival, a Realtor had them look through a bunch of online listings to see if they liked anything. "Why fly to California to look at images on a computer?" asked Fox. "Our trip was symptomatic of a totally broken business model". Joe Fox and his brother scrapped the idea of buying a house and spent the entire rest of the trip formulating the basis of BuySide Realty.

BuySide Realty operates on the principle that people who find the home they want to buy should get paid for their effort. So BuySide actually shares with the buyer 75% of the commission it receives. This commission sharing can be substantial. On a $500,000 home with a 6% commission spit equally, BuySide Realty would return $11,250 to the buyer of the house. If the commission was split 4% to the buyer's agent (not uncommon in this market) BuySide Realty would return $15,000 to the new home buyer. The largest rebate so far was $40,000.

In 2006, the average BuySide customer received over $11,000 that they otherwise would never see. BuySide keeps the other 25% for providing expert advice from the offer through the closing.

The current perception that BuySide is attempting to change, is that one needs substantial help from a Realtor to buy a house. Mr. Fox offered the following comment about those perceptions: "The NAR has done an excellent job of convincing the consumer they are too stupid to buy a house on their own accord even when their own facts show otherwise".

Just to see how the process works, I registered online and there are plenty of homes right in my own neighborhood to see. Unlike classified ads in places like CraigsList, the homes on BuySide Realty are the same ones you would see in any Realtor's office. BuySide Realty pays fees to the MLS for access to those lists.

Once you register you can print out a business card to hand to the agent at any open house you attend. BuySide will also arrange appointments on your behalf. That is the way to assure you that 75% of the seller's agent commission benefits you rather than unnecessarily padding the pockets of some random agent. Here is an image of the card for Illinois.



Another interesting fact about BuySide Realty's business model is that BuySide agents are paid a regular salary as opposed to the commission based structure in the NAR model. Furthermore the BuySide bonus structure is based entirely on customer satisfaction goals as opposed to sales price. Thus BuySide agents have no vested interest if someone buys a house for $200,000 or $750,000. Instead they have a vested interest in making sure their customer is completely satisfied. "We have had incredibly good feedback from customers" said Fox.

Contrast the BuySide model with the average real estate agent whose primary goal is to get you to buy his listing, listings with the highest commissions, and/or listings with the highest prices.

In the NAR model, given the enormous housing inventory glut, some sellers have resorted to upping already absurd commission rates. I have even seen this advice offered as a tip by Realtors in many articles. Of course those agents are then all too happy to show higher commission generating houses first. "This is just another symptom of a business model broken beyond repair." said Fox. "In contrast, our model is based on service, customer satisfaction, and trust".

The key word in that sentence is trust. How can there be any trust in a model where someone can hop to the front of the showing line simply because they are willing to offer the listing agent a higher commission? A home buyer in the existing NAR model always needs keep this fact in the back of their head at all times.

Another distinguishing feature of the BuySide model is pre-approval not just pre-qualification. Before scheduling a private showing on any listing in their system, a buyers must be pre-approved. If someone can not afford a house they want to look at, it simply will not be shown.

Currently BuySide is doing business in 5 states: Illinois, California, Florida, Virginia, and Georgia. A person in one of those states can save a lot of money by finding a house oneself. BuySide will be rolling out additional states soon and eventually plans to be in all 50 states.

For at least 64% of the population buying a home, there is simply no reason to fork over huge commissions to a real estate agent when that person can instead pocket those commissions himself. When Buyside expands to all 50 states, that is going to result in a big dent in the pockets of real estate agents as buyers flock to take advantage of BuySide's significant improvement over the current business model.

Consider the situation from the point of view of the NAR. Many real estate agents are already stressed over declining sales and falling prices. The rollout of BuySide Realty in all 50 states is going to significantly compound the problems those commission based agents are facing. In California alone one out of every 55 working age adults in California who is a real estate agent. Where are those next commission checks going to come from?

But the problems with the NAR model do not stop there. Tomorrow we will take a look at the sell side of the equation from BuySide's sister organization known as Iggys. I will have some final thoughts at that time as well. Stay tuned.

Note: This post originally appeared in Minyanville along with this announcement.

Minyanville is proud to introduce the newest professor to the mix, Mike Shedlock. Mike Shedlock, or Mish, is a registered investment advisor representative for SitkaPacific Capital Management, an asset management firm. Mish has his own blog called Mish’s Global Economic Trend Analysis, currently the 4th top rated economic blog in the country.

It's a distinct pleasure to be able to join Todd Harrison, the rest of the professors, and all of the critters (especially Sammy and Snapper) at Minyanville. The professors at Minyanville have helped me both personally and professionally. I hope to return that favor to others.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/