The real estate business model, part 1: friend or foe?
When the real estate business model is your best, and maybe only, friend: “I’ve decided I really want to buy a house. Well, you know, I really should buy a house. I mean, everybody I know has bought a house, or is looking at houses, or is talking about buying a house. And the woman who does my taxes says I really should buy a house. It’s just what you do when you’re my age.
I can afford it. I’m pretty sure I can. I haven’t actually talked to anyone about getting a loan, but I have a good job. I’m sure I can buy a nice house. I wouldn’t live in anything else.
So I’m working with this agent. Actually he’s my ninth agent. They keep disappearing. I don’t know why. Well maybe I do. I’m pretty particular, you know. I haven’t found anything I really like, and I’ve been looking for four years. It’ll have to be perfect, but when I see it by golly I’ll buy it. I’ve just got to keep looking. If I keep looking I’ll find something. But agents are so pushy. They want you to buy right away, and when you don’t, they lose interest.
But it’s always easy to find another agent. I find mine at open houses. If they’re friendly and have a nice smile, I give them my name and phone number. I don’t worry about references or qualifications. Honestly, it doesn’t take much to be in their business. Not nearly as much as it takes to be in mine. Besides, all agents are the same. I’ve never met one that stood out like I stand out in my own field.
Actually, I’m working with three agents right now. I read about that somewhere. Yeah, that way you cover your bets. That’s why I couldn’t find anything before, ‘cause I was using only one agent. Anyway, it just makes me feel good knowing I have three agents working for me.
Doesn’t cost me any extra, of course. In fact, none of my agents ever cost me a dime. All that time I spend with them, on the phone, in their car. They even make special trips to see homes before they call me. Gosh that makes me feel special. I don’t know how they do it. I hear they’re on commission but that can’t be right. They must get a salary. But hey that’s not my problem.
When I go out with an agent I always have such a good time and end up feeling better, no matter how my week’s going. Sometimes we talk about real estate but mostly we talk about my work, my hobbies, my health issues, my cat, maybe just what I’ve done that day. They’re always so interested. A lot more interested than anyone else.
I’ll really miss my agents when I buy a house. I know. I’ll have them all over for dinner one night.”
And when it’s your foe: “I bought the second house I saw, the first day I went out with my agent. I’d been looking on my own, of course. I was doing my homework, going to the open houses, checking out neighborhoods, making sure what I could afford. All the things you do.
But I wasn’t going to make a career out of it. I’m pretty decisive and, anyway, after a few weeks you know what’s out there in your price range. Besides, I knew I wasn’t going to find the perfect house.
So when I was ready to buy something, all I had to do was find an agent I felt comfortable with. I really wanted to work with an agent someone could recommend, but I didn’t know anyone in the area then so I just called up one of the big real estate companies and figured I'd take my chances. If he sounded like a loser I'd hang up, but he turned out to know my market. So we met at a condo I was interested in, and when I decided it wasn’t right for me, he knew a place that might be. We went there, I loved it, I made an offer and got it. My agent says that's the first time he's seen someone buy a house that quickly. He says it usually takes his clients months and even years to find the right home.
Yeah, now that you mention it, it does frost me that I had to pay my agent full commission, even though I only took up one afternoon of his time. I know, the buyer supposedly doesn’t pay a commission, but the home I bought would’ve been 3% cheaper if the seller didn’t pay my agent. Oh well, I wouldn’t have known about the place if wasn’t for him, and I might not have gotten it—another buyer wanted it too. My agent helped me write an offer that blew the other buyers away. But still, it was easy money for him. That’s just how it works, I guess. Maybe I should go into real estate.”
When the business model is your friend: “So when I decided to sell I called every agent I could think of. Mainly it was the agents who’d mailed me stuff. They’re all the same, so I called whoever’s postcards I had laying around. I must have gotten ten of them to come out and look at the house.
It was great. Man all these agents were telling me what my house was worth, giving me ideas about how to sell it, just handing out lots of really good information. And it was all free! They all told me my house was wonderful, and you bet it is—worth a lot more than any other house in the neighborhood, that's for sure!
I told them I’d use the agent that promised me the highest price and the lowest commission. It was funny to see them agents stumble around, bumping into each other trying to get my business, cutting their commission, promising they’d pay for stuff. I haven’t had that much fun since I took my dog to vet to get him fixed. Ha! What a bunch of dumb clucks. Can't take too much brains to be in that business.
Well, a couple of ‘em were willing to cut their commission so much I can’t see how they could make any money, but that ain’t my problem. Sure is a mighty funny business. Ain’t no business at all, just a whole lot of smoke and mirrors. I could see that soon as I hired my agent. He’s had my house on the market for six months, open every week-end, showing it all the time, ads in the paper, and the loser still can’t sell it, even though I let him price it way too low.
What a racket! When this listing expires, I’m going to sell it myself.”
And when it's your foe: “When we sold, I called the agent who'd helped us buy our home. I’d talked to a few other agents at open houses around the neighborhood, and I knew a few people who are agents, but we’d had a good experience with her and that’s what counts.
She came over and gave us a few suggestions for getting the most money. The work took about a week, she put it on the market and sold it ten days later. We got a great offer, even more than we'd hoped for, and a quick close. We were really happy. Just thrilled. It couldn’t have been more than five weeks from the time I called her to the time our house closed escrow.
We paid her full commission, which I guess is okay because things went so well. But my neighbor’s house is for sale for a lot more money than we got and he’s bragging about how he got all these agents to compete so he wouldn’t have to pay full commission. Yes, we did sell our home and he hasn't, but he told me a few days ago that he's not going to sell unless he gets his price. His home's been on the market maybe six months, I guess, and I see his agent’s car over there all the time. He sure is getting a lot more attention than we did and for a lot less money than we paid. In fact, it’s all been free so far. Somehow that doesn’t seem fair.”
Okay, let's break for discussion.
First, you'll notice that in all four cases the current real estate business model, whether friend or foe, delivered what's called a social good. All four interviewees got what they wanted. One—let's call her Fastsell—sells her home. In fact, Fastsell sells her home quickly and for top dollar, which is as good as it gets when you're a seller. Another, Fastbuy, buys a home. In fact, Fastbuy beats the competition and gets the proverbial hot property. And because she's the first and only "Internet-Empowered Consumer" to actually show up empowered and ready to buy, the agent who helps her buy gives her a discount two years later when she sells. Great service. Much client satisfaction all around. Even Nobuy and Nosell, who've turned real estate into a casting call for Death of a Salesman, get what they want: control and attention, at no cost or obligation.
Maybe that's why the current business model—the one economists, self-appointed consumer advocates and other critics light-years outside the model call a rip-off—still flourishes. It has something for everyone. Whether you want to buy, sell, or just play games.
But you'll also notice that in only two cases does the current business model deliver an economic good. Because in only two cases does a transaction occur and money change hands. Yet scarce economic resources—time, money, expertise, agent goodwill toward man—are expended in all four cases. In fact, scarce resources are expended in two cases where not only did no transaction occur, but where there's a snowball's chance that a transaction will ever occur. In fact, the two cases that didn't and most likely will never lead to a transaction (and a commission check) have absorbed far more resources than the two that did.
Hmm. What kind of business model is this?
Next, Part 2: let's see that train wreck again, in slow motion.