Uncoupling real estate commission: 10 Megatrends pointing towards Tipping Point in 2006

Uncoupling the traditional two-sided real estate commission

10 Mega-trends leading towardsTipping Point in 2006

OverviewTwo-sided fee: Linchpin of 900 MLSs

Barrier to price competition

Goal: separate agents / separate fees

Consumer savings: $10 billion annually

10 trends = tipping point/break point?

1. Subagency disappearing

Realtors moving away from subagency

Buyer agents negotiating own fees

Historical basis for two-sided commission becoming obsolete?

2. Rebate models pressuring

Lending Tree, ZipRealty, & others

Rebates moved into mainstream

Chipping away at two-sided commission

But not going far enough

3. Old Biz models experimenting

DeWolfe New England, leading RE firm

DirectDirect.com: separate commissions

“More logical if each paid”

“Equitable, straightorward, honest, & revolutionary”

Purchased by NRT/ Cendant, Fall 2002

4. MLS Listing entry only proliferating

Hundreds of listing entry only options

Flat fees: under $500 to 1%

Some require 2-2.5% coop fees

Undermines ability to maximize savings

Fear listings will be boycotted

5. 103 - 107% financing

Allow buyers to finance 3% closing costs

Another 4% to pay-off consumer debt

Why not allow buyers to finance fees?

6. Banks competing

Proposal 1st made by Fed in 2001

Brookings Institute endorsed in 2005

Increase competition in industry?

Likely to uncouple fees, offer financing

Rising foreclosures will minimize fees

7. Fee-for-service unbundling

Menu of service / real estate a la carte

NAR: business model of the future?

Potential partners with banks

National Assoc. of R.E. Consultants founded in 2000

8. Widespread consumer dissatisfaction

Gomez/Inman @ 2000:

CBSMarketWatch: Most overpaid jobs

CNN/Money: Brokers overpaid

WSJ: consumers pay $24 billion / yr. more than European counterparts

9. Regulators looking at barriers to competition

GAO congressional study overlooked

Brookings made repeated reference

FTC seeking recommendations on how to uncouple

10. Real estate bubble shrinking home equity

Prolonged downcycle following bubble?

Home prices stagnate or fall

Home equity shrinking/negative equity?

Seek alternatives to preserve equity

Minimize transaction costs, both sides

Time for a change1991 CFA: “decouple commission”

1996 Former NAR economists: “next major revolution replacing commission”

2000 Inman / Gomez: “1 in 4 buyers, 1 in 3 sellers wants full service, full fee”

2005 agent: “outdated system...Stop telling me how much I must work for...”

Regulatory intervention

Why is the industry still built on two-side commission?

What obstacles need to be removed before...

Buyers & sellers hire own agents

Determine what services are worth

Compensate independently

Policy change necessary

Goal: finance fees independently

Fannie / Freddie hold the key

Change could be implemented rapidly

Billions in consumer savings annually

Local experimentation

Agents & sellers fear being boycotted

A few innovators are experimenting

MLS require offer of compensation

BYOB: Bring your own broker

Minimal fee offered/buyer pays extra

Currently no easy way to finance

Involving consumer groups

Back to the future: CFA reform @ 1991

2005: CFA return to real estate?

Push overdue reform past tipping point

Help millions of buyers and sellers save billions of dollars annually

Build coalition to lobby Fannie / Freddie

Discussion:What series of actions needed next to break-

up the two-sided commission?What series of actions needed next to break-

up the two-sided commission?

Prepared by Bill Wendel, The Real Estate Cafe. Comments?Email RealEstateCafe@gmail.com or 617-661-4046 to discuss / give feedback