Dear Clients and Friends,

Over the past decade, professional service businesses including stock, insurance and mortgage brokerages and even travel agencies have confronted massive changes in their business and pricing models. Much of this change has been influenced by technology, and in particular, the internet.

Although the overall business environment is in a period of significant evolution, real estate brokers and agents have largely been spared the discomfort of the speed of changes that other industries have been forced to endure.

Numerous startups are attempting the dis-intermediation of the broker and/or agent. Companies that enter the marketplace with business models based on lower pricing of goods and services is nothing new, including within the residential real estate industry. With lower cost, web-based service and data solutions available, why hire a real estate agent at all?

Is real estate so special that it would be immune from the competitive pricing structures that any other industry faces? Why would buyers and sellers support the expense of a real estate agent when they can complete transactions on the web for less money? Where is the value of a real estate agent?

This letter is intended to address these questions.

First, allow me to go out on a limb, here. Contrary to much of what is put forth at real estate and real estate technology forums, the future of competent real estate professionals is much more secure than many believe.

The operative word, here, is "competent." For the sake of this letter I'll briefly describe a competent agent as one who is experienced, educated, ethical, self-motivated and technologically savvy.

With the dominance of the local MLS as well as the role of the traditional broker under attack from numerous sources, brokers must collectively and individually identify who their real allies in the business are, buy, merge or form solid alliances with them, and stay very clear on the long term objectives.

If you'll excuse the comparison, I suggest viewing the scenario like the competition of wolves and the large musk oxen in the Tundra. If the herd of musk ox doesn't stay nimble or band together when necessary, one by one they get picked off by the wolves following the herd. Don’t be surprised to see large firms fall by the wayside for failing to choose their strategic alliances wisely or for failing to stay nimble (competent).

Frequency: Buying or selling a house is not an easy task. According to research from the National Association of Realtors® * (NAR), people typically venture into the housing market once every six or seven years. Consider how much any business has changed in the past six or seven years then consider the inherently high stakes of real estate transactions. The lack of familiarity with current business practices, legal/disclosure requirements, financing trends, available or recently sold inventory and market dynamics would certainly prompt the prudent buyer or seller to consider retaining the services of a competent agent.

Although novelty firms like Zillow.com are providing free pricing data, their broad brush approach is of little value at the three critical points when this matters most… i.e. the actual buying, selling or financing a property.

Objectivity: Smart lawyers don't represent themselves, they hire another attorney to represent them. Surgeons typically don't operate on family members, they bring in another practitioner to perform the procedure.

This occurs because the dilemma at hand is sufficiently close with stakes that are sufficiently high that there's a risk of losing objectivity and making poor decisions. Even as experts in their field, they'll bring in another individual for their objectivity.

It's not easy to buy and sell houses. Assuming everything is managed perfectly, emotional stress is a long-recognized element of buying and selling a home. A good agent will minimize the stress by providing objective input for buyers and sellers in a real estate transaction.

Third Party Representation: Regardless of how good an individual may be at scouting out buyers or properties to buy, when it comes time to negotiating the deal, competent third party (agent) representation makes good sense and is cost-effective for the principals.

There are lots of cues, both verbal and non-verbal that can reveal too much of a buyer’s or seller’s motivation. Experience shows that the more a buyer says in a direct conversation with the seller, the more they pay. The more the seller says to the buyer, the less they get. Competent agents acting as third party negotiators will create a buffer that protects their client's best interests.

Liability: There is extensive and increasing financial and legal liability when conducting real estate transactions. Whether you are buying or selling, there is risk. Correcting mistakes in the context of real estate can easily require tens or hundreds of thousands of dollars. After 36 years of licensed, real estate business activity including many years of providing expert testimony in real estate litigation, it is my experience that the presence of an ethical and competent real estate agent reduces the risk of litigation.

Effectiveness: Qualifying prospective purchasers before they get in to your property is an important function of real estate agents. Competent agents will screen out people who are incapable of purchasing your property. As they work with a buyer, competent agents learn their clients' needs. The presence of an agent decreases security risks and the amount of time spent preparing the property to show. Productive agents aren't likely to spend much time with buyers who are not qualified or well suited for a property. Agents typically minimize the amount of time it takes to buy and sell houses.

NAR research indicates that sellers perceptions of Realtor® performance is that more than half of a sample group (1,000+) of consumers stated they believe their agent helped maximize the ultimate selling price of their listing. Buyers in the sample group stated they believe that their agents simplified the process and shortened the time that it takes to complete a purchase.

Concluding Comments: The internet is generating businesses that can shorten the time it takes to process the paperwork of a real estate transaction. These companies may even be able to bring mortgage rates and processing costs down. But in terms of the benefits provided by real estate agents as described above, it will be very difficult to replace skilled agents with technology-based alternatives.

Buying and selling real estate is a localized business. Transactions involve more dollars spent and a higher debt commitment than most other purchases in our lives. Liability issues have only grown more complex over the years. It just makes good sense to bring in a competent agent to assist with the process.

Nationally implemented information and transaction services on the internet may help the participants in a real estate deal, but for the bulk of buyers and sellers who come into the market once in six years, it is clearly a wise decision to enlist the services of a competent, knowledgable and local real estate professional.

NAR suggests that agents will evolve from the role of information provider to provider and interpreter. For those agents willing to embrace technology, continually learn about the process, laws and inventory, the future looks bright. Buyers and sellers are still willing to pay for and thus, deserve, top-notch professional service from their agent. It's not easy to buy and sell houses.

Regards,

Robert E. Rothstein





* Special thanks to Ms. Liz Johnson from NAR's Public Affairs office for her assistance in gathering NAR research. Please note, however, that the opinions expressed here are those of the author and may, or may not represent any put forth by the National Association of Realtors®.