The Changing Business of Real Estate (Part 2)

This is part two of the changing business of real estate. Part one took a look at the business of real estate from the buyer's perspective primarily through the eyes of BuySide Realty. This part will look at things from the perspective of the seller through the eyes of BuySide's sister company called IggysHouse.

The Sell Side

Nearly everyone has the capability to find and buy a house on their own accord. Selling a house may be trickier. However the rewards of doing so successfully are substantial. At the current 6% commission rate, one can save $30,000 in commissions on a $500,000 house by selling a house oneself.

One of the costs associated in selling one's home by oneself is getting access to the MLS. Of course one can bypass that step and just post a sign on the front lawn or subscribe to a service like CraigsList. The problem with the former is that the sign will only be seen by those who drive by and the problem with CraigsList is that only readers of CraigsList will see it.

There are alternatives services that will post your listing on the MLS but those are fee based. Compare and contrast those alternatives with what comes free at Iggys.

Iggys Free Services

• List your home on the MLS (Multiple Listing Service).
• Place your home on REALTOR.COM®, the world's largest database of homes for sale.
• Place your property on AOL, MSN, The Wall Street Journal and other popular sites.
• Provide you with your own web site to post as many photos, videos, and details as you'd like to showcase your home.
• Give you a toll-free number and voice mailbox for every MLS listing.
• Send you instant notification of any inquiries from buyers.

I am not purposely trying to plug either Iggys or BuySide Realty. I am simply looking at what alternatives people have and the relative merits of each alternative. Clearly it makes no sense (at least in my mind) to pay someone to list your home on the MLS when Iggys will do it for free.

While on the subject of free vs. not free, I gave BuyOwner, the leader in For Sale By Owner services since 1984 a call. As part of their fee based service they will put your listing in Buy Owner Magazine. For an optional fee they will place your house in the MLS. Hmmm. Buy Owner Magazine vs. a free listing in the MLS, which should one choose? Hopefully the answer is obvious. As it sits, I see a substantial threat to the "Thanks Buy Owner" business model.

Do It Yourself

There was an interesting article in the LA Times called An Internet boost for do-it-yourself home sellers.

Without paying a penny, sellers who go the FSBO (for sale by owner) route can add their houses to a Multiple Listing Service in California and 19 other states via a new online realty broker, http://www.iggyshouse.com.

The MLS — the biggest, most encompassing listing database of homes for sale — has long excluded those who try to sell their homes on their own, with few exceptions. The service remains important for sellers because agents routinely depend on its information, and Multiple Listing Services provide listings for many online sites, including the widely used http://www.realtor.com , which is owned by the National Assn. of Realtors.

The Realtors group has established guidelines for an MLS associated with its constituency — member agents and brokers. Most agents are members. Privately governed, an MLS is not required to accept listings from nonmembers.

"It's not a public utility," said NAR spokesman Walter Molony. The result is that sellers who want their properties listed must either agree to pay an agent's commission — generally 5% to 6% of the sales price — or patronize a business that provides an MLS listing for a flat fee or as a part of a package.

But IggysHouse, which expects to be in all 50 states by year's end, Fox said, is the first Internet site to allow sellers to list on an MLS at no charge.

"How is he going to make any money?" NAR spokesman Molony asked.

NAR Comments by Molony

1. "The MLS is not a public utility"
2. "How is IggysHouse going to make any money?"

In Regards to #1, the statement made by Molony appears questionable. The combination of BuySide Realty and IggysHouse has the effect of making the MLS a public utility. What else can you call it when someone allows free listings on the MLS as part of their business model?

In regards to #2, there is arguably not much money to be made offering free listings to the MLS. But remember there are two sides to the coin. For ever buyer there is a seller. Anyone with enough gumption to sell a house by himself/herself clearly has enough gumption to buy a house in the same manner. BuySide will take 25% of that transaction while passing 75% back to the consumer. This is clearly a win-win model for both the consumer and BuySide Realty.

While returning 75% of commissions to the home buyer might seem excessive, it will enable BuySide to capture a far bigger piece of the real estate transaction pie at a much faster clip than otherwise. Customers will like that ratio as well. From a business model perspective, given the sister relationship, BuySide Realty will be able to fund Iggys for perpetuity as long as the overall corporation makes money. So the real question is not "How is IggysHouse going to make any money?" but rather "How the heck are members of the NAR going to deal with lost commissions?"

But it is not just the NAR that is under attack by Iggys. Check out the following list of sites.

Under Attack

• At e-ListState.com California sellers pay $249 for a six-month listing.
• At For Sale by Owner $349 is the fee for Illinois. Other states may differ.
• At Internet Home Services there is a flat fee that varies by area.
• At housepad.com services also vary by location. The listing shown is for Cook County Illinois (Chicago area) and the cost is $299 for 6 months, and an additional $140 for a virtual tour.
• At Redfin if you are a buyer and find your own home they refund 2/3 of the buyers commission in contrast to BuySide's return of 3/4 of the commission. On the sell side, the Fee is $2,000 upfront or $3,000 at closing for an MLS listing, sign, lock-box, fliers, photo & staging partners.

While everyone is focused on the problems in subprime lending (tightening credit standards , falling home prices, and mortgage rate resets) few are actually looking at how the business of buying and selling a home is changing. The former is arguably a cyclical problem (although I think we are witnessing a major secular shift), while the latter is undergoing a trend change that is off nearly everyone's radar.

Given the nature of the housing expansion (a 20+ year boom in many places) there is every likelihood of a secular change in two trends simultaneously (housing prices as well as the business model itself). The impact of those trend changes are bound to be enormous, especially to dinosaurs at the NAR.

Winners & Losers

• Buyside and Iggys are going to be a big winner if their model pans out as I expect it to. But the big winner in this battle is the consumer. Any business model based on performance and service instead of fees and commissions is going to go over very well (given time and proper execution) especially when significant sums of money is returned straight into the hands of the almighty consumer.
• The big Loser is the NAR. The commission based model of the NAR has faced challenges before, but nothing like this on a national scale. Traditional commission based real estate agents are not completely going away, especially on the sell side. But the numbers of agents needed and the commission structure itself are both under heavy attack. Many real estate agents will not survive the transition.
• Another loser in this battle will be small for sale by owner (FSBO) type operations. When you are charging $300-$2000 for something that someone else decides to give away for free, your business model is in deep trouble.
  

In a service based economy where service seems to degrade every month, where personal contact has been by replaced by an endless array of automated voice response menus, when it is next to impossible to get a hold of a real live person for almost anything, it is refreshing to see anything that actually rates to improve service. Not only is Iggys/BuySide Realty committed to improving service but they will do so at a far lower cost structure than the existing model, returning in excess of $10,000 to the average customer. I cheer this new model and wish them success in carrying out their goals.

Note: This was my second post on Minyanville as a "professor". For those that missed the announcement last week, it follows.

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.

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