50 Ways to Derail Real Estate Industry

The National Association of Realtors® is distributing a study it commissioned from thernSwanepoel T3 Group which we expect will generate a lot of discussion among itsrnmembers.  Despite its rather hokey name, Definitive Analysis of Negative GamernChangers Emerging in Real Estate or D.A.N.G.E.R Report, the lengthyrndocument is a pretty eyes-open examination of the industry’s near-termrnchallenges.  </p

Author Stefan Swanepoel compiled the report from a review ofrnover 200 reports, surveys, focus group reports, journals and other academicrnsources coupled with a survey of nearly 8,000 Realtors and face-to-face interviewsrnwith 70 CEOs and other senior executives from the largest franchisors,rnbrokerage companies, REALTOR associations, MLS organizations and a variety ofrnlarge service providers. He cautions his report is not arnprediction and the future is not “doom and gloom” but should not bernunderestimated.  “Change will absolutelyrnhappen,” he says. ‘Some risks or threats identified in this report may buildrnslowly through incremental changes while others might be overnight surprises.”</p

The 50 dangers he identified are ranked with a so-called PTIrnindex which weights and characterizes it by the (P)robability it will occur,rnits likely (T)iming, and its potential (I)mpact. A “Critical” danger has arnrange of 81 to 100, and at the highest point has a 100 percent probability, arnmaximum timing of one year and the impact of game changer.  A “Low” danger (0-20 points) has a maximumrnprobability of 20 percent, is 10 or more years out, and is projected to have nornimpact. Dangers are sorted into the group it could most impact:</p<ul class="unIndentedList"<liAgents</li<liBrokers</li<liNAR</li<liState and Local Real Estate Associations</li<liMultiple Listing Services</li</ul

We will quickly summarize Swanepoel characterization ofrnthose dangers facing agents and brokers in this article.  The dangers facing the institutional levelsrnof real estate will be covered in a subsequent summary. </p

Real Estate Agents</p

1.  rn Masses ofrnMarginal Agents Destroy Reputation (PTI=100)</p

Swanepoel says this is the most critical of the agentrndangers, with a 100 percent probability, immediate timing and a game changingrnimpact.  He identifies a large knowledgernand competency gap among agents “due to low barriers to entry, low continuingrneducation requirements, and the lure of quickly making big dollars.”  </p

The opinion within the industry about its professionalism isrnnot shared outside the industry he says.   While most professions require thousands ofrnhours of study and some trades require hundreds, it takes an average of only 70rn(and in some states much, much less) to become a licensed real estate agent.  Further, there are no meaningful educationalrninitiatives on the table to raise the national bar for agents.  “While this lack of agent knowledge is arnsignificant danger itself, when combined with a lack of basic competency itrncould be destructive and harmful to both the industry and the consumer.” </p

2.     rnCommissions Spiral Downward (PTI=87.5)</p

Commissions have risen along with home prices and consumersrnare increasingly pressuring agents to lower them.  New generations of agents and brokers couldrnfacilitate new business models and/or pricing structures leading to commissionsrnapproximating the 1-2 percent common in much of Europe.</p

3.     rnAgent Teams Threaten the Survival of Brokerages</b(PTI=70)</p

7.        <bThe Housing Finance System Fails (PTI=48)</p

Home buyers would be severely limited in their ability tornbuy if lenders move away from the mortgage business because of regulationsrnor increased risk.</p

8.        <b The Commoditizationrnof Real Estate (PTI=42)</p

REITS and other large investors have discovered therninvestment potential of real estate.  Thernsingle family market could eventually become like the multifamily market with arnlarge percentage of rental homes owned and managed institutionally, changingrnthe market dynamics of neighborhoods.</p

9.     rnCommissions Concentrate into Fewer Hands (PTI=40)</p

Even more than is common today a small number of agents mightrncontrol and profit from the vast majority of closed transactions.</p

10.  Thernagent is removed from the transaction. (PTI=31.5)</p

A tech company could “crack the code” and eliminate the needrnfor agents. FSBO doesn’t necessarily mean without assistance and consumers arernavailing themselves of alternative options for search and research. </p

Brokerages</p

1.     rnRegulatory Tsunami Hits (PTI=100)</p

The author cites the creation of the Consumer FinancialrnProtection Act and the fear that RESPA might actually be enforced to warn that,rn”Regulatory creep and large financial penalties [could] increase compliancerncosts.”</p

2.     rnPaper Brokerages Create Disruption (PTI=80)</p

These entities are gaining MLS membership but do not offerrntraditional brokerage services. They operate with little or no overhead andrnsome existing large brokers have become vulnerable to seeing their ownrninformation used to generate leads for other brokerages. </p

3.     rn Brokers LosernControl over Data (PTI=72)</p

There are a multiplicity of sources collecting andrndisseminating real estate data. This goes beyond listing information to includernschool performance data, credit reports, mortgage, insurance, criminal activity,rnand tax information, and credit reports. rnSo now the industry is focused on controlling the consumer searchrnprocess. </p

4.     rnA Consumer Brand Crashes the Party (PTI=64)</p

With Sotheby’s and BH&G already making inroads it wouldrnnot be a stretch to see Home Depot, a big bank, or HGTV expand into residentialrnreal estate.</p

5.     rnNew Business Models go mainstream (PTI=63)</p

New models affecting broker-agent relationship have constantlyrnevolved but the next one could be technology powered, agent-centric, using a flatrnor transaction based fee or a salaried, or auctioneering model.  </p

6.     rnBrokers Simply go Broke (PTI=56)</p

Agencies are undercut by outsiders offering the samernservices at lower cost.</p

7.     rnTechnology becomes a Run-Away Train (PTI=48)</p

The financial resources required by technology outstriprnsmall brokerages’ ability to remain competitive.</p

8.     rnFSBO Develops into a Do-it-Yourself Model (PTI=42)</p

With so much technology and information at their fingertipsrnit is easier than ever for consumers to buy and sell real estate.  The question is whether or not DIY willrnbecome a major disruption with companies marketing services to accommodate itrnor just continue as a minor factor in the industry.</p

9.     rnSales Tax on Commissions Threatens Marginsrn(PTI=40)</p

10.  PortalsrnThreaten Lead Generation Domination (PTI=36)</p

The industry has a whole was a late adaptor to technologyrnbut fortunately many of the early business models that tried to take advantagernof this were themselves flawed.  Therndangers outlined by Swanepoel pretty much boil down to whether agents andrnbrokers can accept that technology has stripped away their ability to, asrnagents always like to say, control the keys and move on to new ways of doingrnbusiness.  This will be equally apparentrnwhere Swanepoel talks about the institutional end of the business.

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