Chapter 1. How Did We Get Here
I should have known better. Even with over 25 years of marketing experience I made the same assumption that millions of home owners who want to sell their home have made. My mistake was assuming that real estate agents know how to market a home.
In 2000 my wife and I divorced. She bought my share of the company we ran together and I found myself with a little money in my pocket and nothing to do. I wanted to invest in something that could produce a decent living and engage me in something I was interested in.
After a couple of false starts I stumbled onto a classic flip opportunity. It was a townhouse condo that was built in the late seventies. It was large and very avant garde for its time with five different levels and lots of glass on the back with a deck and forest views. The price was right and credit was available for the purchase.
It also gave me a chance to revive some skills working with my own hands that had been dormant for many years. Almost 25 years earlier, my architect/woodworker grandfather had helped my brother and I buy our first piece of real estate, a duplex in rough shape. We renovated it and lived in one apartment and rented out the other.
Best of all, this same brother was at a similar juncture in his career as I was and was available for most of a summer to work with me on the complete redo of this property. It was a blast and probably the most satisfying work experience I’ve ever had…until it wasn’t any more.
The camaraderie we enjoyed, the chance to be our own bosses and plan and carry out our project on our own schedule was the realization of every entrepreneur’s dream. Freedom.
He would drive down from his home 5 hours away and work with me all week and drive back Friday afternoons. I was putting in 50 or 60 hours a week at the condo doing construction and lots of paperwork and planning back in my home office.
Finally, we drove the last nail, swept up the last bit of construction dust and hauled away the last of the debris. Everyone that saw it agreed that it was spectacular. We were very proud of ourselves. I called the real estate agent who had sold me the home and immediately put it on the market…where it sat…for…a…long…time.
When it finally sold for $30,000 less than I originally hoped for, it was break-even at best and only if you didn’t assign any value to our labor. Sitting at the closing table as the seller, I realized that the only one that had made money on 4 months of my sweat and effort, to say nothing of my brother’s, were the two real estate agents. Each of their firms got checks for about $6,000. My agent kept all of that as her commission and I have no idea what the buyer’s agent kept but it was probably about 60%. I’d be willing to bet that neither of them had a full eight hours invested in the sale.
I vowed right then and there that the next time I did a renovation I was going to be the listing agent. There were two obvious reasons. The first was to save paying a commission to a listing agent. The second was try my hand at what seemed to be a terrific entrepreneurial opportunity. There are very few ways to invest less than $1000 in education and start up expenses with so much in potential earnings as becoming a real estate agent.
A third and less obvious reason was that I saw it as a chance to round out a long marketing career on the front line, doing sales. Over almost 30 years I had been involved in almost every marketing discipline there is. I started in product development and product management, I managed advertising, I did public relations and government relations in some contentious public policy arenas. I’ve done fund raising counseling and designed market research. The company my ex-wife still operates manages the trade show marketing programs for major business-to-business marketers.
But I had never done what my father had done for most of his working career, commission sales.
It turned out, I’m not terribly well suited for it. As a dear friend tells me, a tiger can’t change his stripes. I never fit the model that the industry looks for. I’m not the gregarious backslapper and networker that sees business opportunities in every church meeting, cocktail party or supermarket check out lane. I often forget to carry my business cards and I can’t hang around very long with people I don’t like. The best sales people are usually extroverts who get their energy interacting with other people. I’m a borderline introvert and other people wear me out quickly.
When the owners of the brokerage where I’d hung my new real estate license asked me to stop selling and help them manage the company on a salary, I jumped at the chance. I’d been struggling to get by living off of crumbs they and some of the more experienced agents left on the table and didn’t want to spend time on.
Managing the group gave me a chance to look closely at a lot of transactions and I became very familiar with the mechanics of the business and the technology evolution the entire industry was undergoing.
When I left to start my own company I was buoyed by a part time consulting gig with a firm that was developing lead generation software for buyer agents and competing with some of the giants in this industry that will be mentioned throughout the book. These situations provided a very broad perspective of the residential real estate industry and the trends that are making a difference.
Even ten years after my financially disastrous condo flip, I’m not sure I’ve fully absorbed all the lessons that could be gleaned from that experience but many of them are now crystal clear and are the subject of this book.
The Shifting Market
Residential home marketing does not operate in a parallel universe anymore where raging demand covers a multitude of sins and a lack of serious marketing skills. We have gone from a classic sellers market where there were more buyers than sellers to one where there are far fewer qualified buyers and lots of homes for sale. It will be a long time before the market ever booms again with high demand and low inventory, if it ever does again.
One implication of this shift is that not all real estate agents will adapt easily to the new market reality. In fact, many are woefully unprepared for the shift, as we shall see.
A different market requires different skills
Unfortunately there are a whole lot of real estate agents out there that aren’t very good. For many years, the barrier to entering the business was getting a license which involved a few hours of instruction and passing a test. The purpose of the license and the testing had nothing to do with preparing prospective agents to market homes. In fact, the sole purpose in most states is consumer protection, that is, to keep the new agents from doing anything so stupid or egregious that they could violate the laws or regulations in ignorance.
Even at the height of the real estate boom, the 80/20 rule applied to real estate sales. That is, 80 percent of the business was done by 20 percent of the agents. In fact, it might have been more like 90 percent of the business was done by 10 percent of the agents. The average for all agents was about 4 transactions per year. Unless those are all million dollar homes, that does not provide a very good income. And most agents have not, and never will, sell a million dollar home.
Maybe you already understand these things. What you may not understand is that many experienced agents who have participated in hundreds of transactions may not be very good at marketing a home either. Success can breed bad habits and if success is too easy, you may not even know that what you’re doing will not work when market conditions change.
During boom times product marketing wasn’t necessary.
The most successful agents during the boom times did not necessarily have any inherent product marketing skills, and they almost certainly didn’t have any home marketing training.
Yesterday’s Keys to Success
In the good old days success was based on one or both of the following factors:
- Transaction facilitation. Real estate transactions can get complicated. Good agents have provided a very valuable service to their clients…whether the clients are buyers or sellers…coordinating a number of service providers that can include lawyers, inspectors, appraisers, mortgage brokers, contractors, insurance carriers, and, if you’re terribly unlucky, specialists in things like soil remediation and mold removal. The good agents would also usually demonstrate great skill in negotiating prices and repairs.
- Finding clients. When most real estate agents think of marketing this is what they have on their mind. One of the leading companies in the field of real estate marketing is a group called Hobbs-Herder. As I write this late in 2012, you can still go to HobbsHerder.com and click on the “Marketing Solutions” tab and the headline is:
“Lesson One: You are the Product”
“Lesson Two: Market the Product”
Their formula, in spite of all the changes in the industry, still places the emphasis on finding clients. Of course, according to them, it’s all easy when they provide agents “branding” through brochures, websites, public relations plans, etc. Both these functions are important to be a successful real estate agent. For an agent that focuses primarily on buyers, they are still the path to success. In fact, with fewer buyers looking and qualifying, they may have to turn up the heat even more.
But there has been a fundamental change in the market that has left many agents with no skills in an area that is now critical…product marketing.
I remember vividly going through a marketing plan “checklist” for a new listing with my first mentor in real estate. The list contained items like “enter in MLS,” “print MLS sheets to use as flyers,” and “put sign in the yard.” These were things that any reasonably tech savvy high school student with a drivers license could do and took no particular marketing skill. The closest thing to staging a home was rearranging the furniture some when the office went on “caravan” to view new listings on Tuesday mornings after the sales meeting.
I laughed when I saw that checklist but my mentor did not see anything funny in it.
Again, most of my professional life has been in marketing. About 30 years at the point I saw that checklist. Many of those years had been in product development for large regional banks as banking was going through the first wave of deregulation and suddenly had some flexibility in services and pricing. While I was a marketing director at a regional bank in the Research Triangle area I also taught a marketing class offered by the BAI (Bank Administration Institute).
Although I was astounded at the lack of sophistication in home marketing I also finally realized it was just about the right level for where the market was. The simple fact was you really didn’t have to do much home marketing and if you tried you were just going to take time away from the more important activity of finding clients.
Putting a home in MLS and sticking a sign in the yard was just about all you had to do and almost any home would eventually sell. The closest thing to a marketing decision you might have to make would be to lower the price if you weren’t getting offers or showings. But it wasn’t all rosy, even in the boom years.
What do you get for the money?
At the height of the boom the residential real estate industry was facing two related challenges to its continued prosperity. The first was that consumers were beginning to wonder exactly why they were paying a 6% commission when it was apparent that it didn’t take much effort to sell a home. The most striking example I saw of that was with my condo flip but I was seeing other evidence of it too.
Paying an agent $12,000 to sell a $200,000 house seemed a little over the top. When questioned about it most agents would (and most still do) explain how half went to the buyer’s agent and up to 50% of what was left went to the listing agent’s broker for running a weekly ad in the paper, maintaining a nice office, paying staff, and other overhead. The less sophisticated might accept this explanation. But many also wondered why they should care what the agent’s overhead was.
I made many mistakes doing the flip. For many years I believed the worst mistake was that I completely overdid the renovation. Although it sold for substantially more than any other unit in the complex ever had, it still had to be reduced tens of thousands of dollars and be repainted inside to get sold. To add insult to injury, I had to pay the agent 6% on top of the 3% she had gotten when she sold the unit to me. So I lost my butt and she made about $12,000 for a few hours of work.
What kind of advice did she give me when I was planning the renovation?
What did she do to promote the “specialness” of the unit to justify the price?
She used the same checklist that I mentioned earlier. She put the property in MLS and included it in the weekly ad that the company ran in the newspaper. She brought her office through on “caravan” but it was an agent from another company that eventually brought a buyer.
Since getting a license at the time involved less than 60 hours of classroom time and about $400, I took some of the money I still had left and got my license. My two primary motivations were to save the commission if I ever did a flip again and the other was to see if I could work that same easy-money magic.
But I was the exception. A lot of sellers aren’t looking for a career opportunity, just a way to save money and more and more began asking why they needed an agent at all.
The fact is that if you are reasonably savvy, can devote a little time to it, have a house that is easy to price, and the type and condition of your property puts it in high demand, trying to sell it yourself can be a really good call and save you a significant amount of money. There can be pitfalls to this, but it can be done.
The Rise of the Discount Brokers
Some brokers also noticed this trend and realized that it wasn’t an either/or proposition. Entrepreneurs in the real estate industry began popping up who lowered their prices to get business. They kept their overhead low which meant no fancy offices or huge staffs to create an image of success. Instead they provided a basic level of service at prices that seemed to make sense. As All American as this sounds to most people, the majority of brokers and agents within the industry considered this positively traitorous.
There were attempts to restrict access to the Multiple Listing Services which would essentially put the “discounters” out of business. This brought legal actions and the attention of the U.S. Justice Department.
To the surprise of many, maybe even some agents, there is nothing in law or regulation that dictates a 6% commission for selling a home. Nor is it required that it be split equally between the buyer’s broker and the seller’s broker. Quite the contrary, in fact. Compensation doesn’t even have to be a commission or percentage of the sale. The seller’s agent also doesn’t have to offer any compensation to the buyer agent, although that is one of the two primary reasons for a Multiple Listing Service. More about that in a later chapter.
What had evolved was a real estate distribution system where company policies of cooperation where encoded in MLS agreements. To the entrepreneurs that challenged the status quo, it looked like an opportunity. To the Justice Department it looked like price fixing.
Like most real estate agents I backed into the business.
I didn’t go to college to study real estate and I didn’t grow up wanting to be a real estate agent. After a long career in bank marketing and my other long gigs in public relations and event marketing, I was looking for something new to do. When my flip proved to be a financial disaster it seemed only natural to look closer at selling real estate myself.
Once I had the license hung on the wall, I realized that selling real estate was one of the easiest entrepreneurial opportunities around. The barriers to entry were minimal and once you got a license companies where more than happy to “show you the ropes” for 50% of any commission you generated.
While I was still a novice my broker asked me to help with some of the management of the company. I was glad to do this because managing was something I knew how to do and it meant a modest salary to supplement the occasional commission check. It was then that I began focusing on some of the issues described above.
In many respects I was totally clueless.
In spite of all my marketing experience, to say I was naive in real estate would be an understatement. Over the years a small industry had arisen to train people to be successful in the real estate industry. One of the founders of the Keller-Williams national real estate franchise wrote a book entitled The Million Dollar Real Estate Agent. The Hobbs-Herder organization mentioned earlier conducted seminars all over the country to teach agents how to be successful. The book was a smashing success and the Hobbs-Herder seminars were both entertaining and useful for the agents really committed to building a business. There were also a number of “legendary” trainers who ran a circuit of seminars that were both motivational and designed to sell their books and tapes.
Rather than follow their direction I decided I knew better.
I starting looking for something that would give our firm a marketing edge in attracting listing clients. I concluded that the product (the home, not the agent) should be the focus of our marketing program. Using some analysis from my product development background, I created something I called the Certified Home Program.
It was based on the same idea that BMW uses to market previously owned BMWs. By “certifying” the cream of the trade-ins through inspections, repairs, maintenance and guarantees, they turned used BMWs into something special. They appealed to potential customers who weren’t ready to invest in a new BMW but could consider a used one. They took a lot of the uncertainty out of the purchase of a used car. Customers who were attracted to the brand but could not purchase a new one saw the inherent value in the offer. Now, many dealers besides BMW “certify” their used cars successfully.
The Certified Home
Since the bulk of the residential real estate industry runs on “resales” or used homes, I figured you could piece together a legitimate “certification” using readily available services including inspections, appraisals, and home warranties. There were some other elements but these were the key ones.
The problem was that several of the key components of this certification required cash up front. Since there are few agents that will fund this kind of marketing themselves, to induce potential listing clients to front the costs I proposed offering alternatively a lower commission or a “rebate” of some of the costs to the seller at closing. I figured that even if each certified listing generated a little less income we could easily make it up with additional volume or higher prices.
When I presented this idea to a roomful of experienced real estate agents the reception was muted. I did a lot of this kind of presentation to top executives when I did product development in banking and I thought I was pretty good at it. So the reaction I got was a little disappointing. I wasn’t sure whether they just didn’t “get it” or it was me.
Nobody actually challenged my analysis but nobody was embracing it either.
In subsequent weeks what was wrong with it gradually emerged. A real estate lawyer I consulted wouldn’t give it a blessing. The real estate commission wouldn’t give me an opinion. And then the real concerns of my fellow agents started to emerge. The partners in the firm complained that if we offered this to some clients we’d have to offer it to all of them.
I had to think about that for awhile but then it dawned on me. What they were telling me indirectly was that we had a good thing going that we needed to milk as long as we could.
In other words, we shouldn’t rock the boat.
Don’t try to fix something that isn’t broken. We could all make a living doing things the way they have been done for years. In their view raising the consciousness of consumers to options does not lead to bigger or more commissions.
They were right…but then…everything changed.
Not too long ago if you wanted to sell your home you might have the name of an agent that helped a friend or one you’d seen on a sign or someone who had sent you a Halloween card with a recipe you would never use.
Or maybe you’re in a neighborhood where there’s a “go to” agent that you see at the country club…or PTA meetings…or church. Many good agents (in the old sense) have built their careers networking in one realm or another.
Maybe you’ve spent some time online researching the web sites of potential agents and have formed some conclusions about the best ones in your area.
However you got your prospective candidates, you have two or three folks that you want to interview. Before I describe how that process might go let me tell you that you are already the exception.
Most people don’t have a plan and hire the first person they talk to.
All agents know this and it is why the good ones will knock themselves out to “brand” themselves and make you aware of them. There are three reasons why so many sellers aren’t more careful about who they select to market their homes.
- They just want to get the home on the market as quickly as they can.
- They don’t really know what to ask or how to evaluate one agent in comparison to another.
- They don’t believe that there is really much difference between agents.
Agents are told that the most important thing you have to do is establish “rapport.” Why? Because it is absolutely true that that is usually the deciding factor even when there is competition for the listing. And if you hit it off with the first one you meet, what’s the point of talking to anyone else?
But suppose that you don’t believe all that and are committed to interview several agents. Maybe you are also considering going the FSBO or For Sale by Owner route. What exactly should you be looking for?
Let’s take a look at a typical listing presentation.
In the conventional world of residential real estate sales, the listing presentation is where the true salespeople shine. Here the agent really is doing sales, which, as we will see is just a subset of marketing. In the pre-bust environment this was the crucial interaction with the listing client. If you were effective in selling yourself and walked away with a listing agreement, you could almost start spending your commission. It wasn’t a matter of if you were going to get one, it was how much and when.
Typically the listing presentation is made at the home to be sold. After the agent is greeted at the door and proper introductions are made, a quick tour of the home is usually in order. Then everyone sits down, maybe in the living room or at the kitchen table. She (women do dominate this industry) might have a flip chart or other presentation device and would take you through it. The primary topics would probably be how many homes she has sold and how many designations she has and how many company awards she has won. She might talk about the company and the marketing support provided. If it was a large company, she would talk about the advantage that provides by “exposing” your home to lots of agents.
Making a decision.
When you had talked to a number of potential agents you would sit down with your spouse and go through the pluses and minuses of each and decide who you wanted to use.
In most cases you would choose the one you liked best, the one you felt comfortable with going forward. Again, rapport is what agents are taught to achieve during these listing presentations.
When things were simple that was usually the best thing to do. In fact, it didn’t really make much difference who you choose because they were all going to do the same thing to market your home. And that was pretty much…nothing.
There would be a pricing recommendation that was based on a few homes that had sold in the area recently and in good times there were plenty to choose from. Many agents will listen closely for hints…or even ask directly…what the client expected to get for the home and keep that in mind when putting together their recommendation.
Consistent losers in this game would complain that successful agents “were buying the business” by taking listings priced much higher than they would ever sell for and purposely misleading clients.
The truth is that pricing is both more complicated and simpler than that.
We will devote a full chapter to pricing but what is important to understand now is that how an agent approaches it in the post-boom market is very important to your pocketbook and your sanity.
In the pre-bust market it was safe to assume that eventually everything would sell.
If a home was priced too high initially you would soon know it if there were few showings and no offers. Unfortunately, that habit is hard to kill…but much more about that in the chapter on pricing.
During much of the boom in real estate and especially in some areas of the country, homes were appreciating…or increasing in value…so quickly that if you were in no hurry eventually you would probably get your price. Once you and your agent were wrapped in rapport and a price was established…you just waited for it to happen.
Then the fun began.
Basic information about the home would be put into the Multiple Listing Service system. This would include a few lines of free-form description or “copy.” The system probably allowed 10 pictures that the agent snapped herself.
A sign would be placed in the yard with the agent’s phone number and maybe a picture of her. There might be a flyer box with copies of the MLS information. Once a week in the newspaper’s real estate section you would see a tiny picture of your home among the firm’s other listings with maybe 50 or 60 characters of description. The agent’s picture might be there too. Hundreds of tiny heads and tiny houses.
Unless there was something terribly wrong with your home this was enough to get the home sold. In a few weeks you would have an offer or two to consider and your agent would guide you through the process of negotiating a contract and repairs.
Before you knew it you would be sitting at a closing table collecting whatever was left over after your mortgage was paid off, a few closing costs were paid, and your listing agent took her company’s half of the commission. The other half went to the buyer’s broker for her role in bringing you a buyer.
As we observed earlier, if you hadn’t paid attention before, you might be surprised to see what a big chunk the commission took out of those proceeds. Suddenly you realize that besides your car and the home itself, paying for the agent’s services was the biggest expenditure you had ever made.
But the proceeds check you had in your hand was a bigger number…maybe. Besides, it’s a little late to do anything about it and you have been made keenly aware that this is the way it’s always been done…so you get on with your life.
Why this doesn’t work as well any more.
As we’ve shown, the cracks in this system began to appear well before the real estate bust.
If you had questioned the agent before you signed the listing agreement she would probably have patiently explained to you how half of the commission goes to the buyer’s agent and 40% of what is left goes to her broker who has lots of expenses like offices with the nice conference rooms, the weekly ads in the paper, the staff, etc. She would explain that she has association dues to pay which provide access to the MLS which she also pays for every month. She would explain that she also has various tech fees and others that she pays per transaction to her broker.
This may make you feel better but it may also leave you with a vague sense that you’re missing something. If you have ever listened to a good politician respond to a question that they didn’t want to answer you know the feeling. The really good ones ignore the question and deliver with great authority a short speech on a topic of their choosing.
In this case your question is not about her expenses but about what you got for the big checks the agents took with them at the end of the transaction.
So, what’s different now?
A lot. There’s good news and there’s bad news. The bad news is that the home market is much weaker. The good news is that it isn’t dead…at least not everywhere.
The biggest shift is titanic. During the boom there were more buyers than there was property to buy. In some inflated markets homes were being bought sight unseen on the speculation that they could be flipped with no effort and for a great profit.
In a heated market 5 to 10% annual appreciation was normal and time on the market was less than 90 days for most homes.
The most important thing to understand is the shift in the nature of competition in the real estate market.
In the booming residential real estate market the heated competition was among agents for clients.
In the post-boom market the important competition is among sellers for the few ready, willing and able buyers that are out there.
This book is how you, as a seller, can get an edge…legal, ethical and moral…in the competition with your neighbors to sell a home.