50 Ways to Derail Real Estate Industry

The National Association of Realtors® is distributing a study it commissioned from the Swanepoel T3 Group which we expect will generate a lot of discussion among its members.  Despite its rather hokey name, Definitive Analysis of Negative Game Changers Emerging in Real Estate or D.A.N.G.E.R Report, the lengthy document is a pretty eyes-open examination of the industry's near-term challenges.  

Author Stefan Swanepoel compiled the report from a review of over 200 reports, surveys, focus group reports, journals and other academic sources coupled with a survey of nearly 8,000 Realtors and face-to-face interviews with 70 CEOs and other senior executives from the largest franchisors, brokerage companies, REALTOR associations, MLS organizations and a variety of large service providers. He cautions his report is not a prediction and the future is not "doom and gloom" but should not be underestimated.  "Change will absolutely happen," he says. 'Some risks or threats identified in this report may build slowly through incremental changes while others might be overnight surprises."

The 50 dangers he identified are ranked with a so-called PTI index which weights and characterizes it by the (P)robability it will occur, its likely (T)iming, and its potential (I)mpact. A "Critical" danger has a range of 81 to 100, and at the highest point has a 100 percent probability, a maximum timing of one year and the impact of game changer.  A "Low" danger (0-20 points) has a maximum probability of 20 percent, is 10 or more years out, and is projected to have no impact. Dangers are sorted into the group it could most impact:

• Agents
• Brokers
• NAR
• State and Local Real Estate Associations
• Multiple Listing Services

We will quickly summarize Swanepoel characterization of those dangers facing agents and brokers in this article.  The dangers facing the institutional levels of real estate will be covered in a subsequent summary.

Real Estate Agents

1.    Masses of Marginal Agents Destroy Reputation (PTI=100)

Swanepoel says this is the most critical of the agent dangers, with a 100 percent probability, immediate timing and a game changing impact.  He identifies a large knowledge and competency gap among agents "due to low barriers to entry, low continuing education requirements, and the lure of quickly making big dollars." 

The opinion within the industry about its professionalism is not shared outside the industry he says.   While most professions require thousands of hours of study and some trades require hundreds, it takes an average of only 70 (and in some states much, much less) to become a licensed real estate agent.  Further, there are no meaningful educational initiatives on the table to raise the national bar for agents.  "While this lack of agent knowledge is a significant danger itself, when combined with a lack of basic competency it could be destructive and harmful to both the industry and the consumer."

2.      Commissions Spiral Downward (PTI=87.5)

Commissions have risen along with home prices and consumers are increasingly pressuring agents to lower them.  New generations of agents and brokers could facilitate new business models and/or pricing structures leading to commissions approximating the 1-2 percent common in much of Europe.

3.      Agent Teams Threaten the Survival of Brokerages (PTI=70)

Teams of agents that function independently within brokerages can develop their own brands that can become more powerful than the parent brand.  They may establish their own standards, use their own technology and greatly expand the broker's potential liability while distorting the brokerage's economic profile. 

4.         IRS Forces Exodus of Independent Contractors (PTI=63)

State requirements for broker supervision of agents often conflict with labor laws and there are issues between IRS and National Labor Relations Board rules. A court decision ending independent contractor status would require the complete reorganization of the system.

5.         The Decline in the Relevancy of Agents (PTI=60)

The role, function, and perceived value of agents deteriorates as agents fail to properly assess and respond to changing consumer demands and expectations.

6.         The Agent-centric Era Ends (PTI=52.5)

The disproportionate power of top producers will end as consolidation and economies of scale change the paradigm.

7.         The Housing Finance System Fails (PTI=48)

Home buyers would be severely limited in their ability to buy if lenders move away from the mortgage business because of regulations or increased risk.

8.          The Commoditization of Real Estate (PTI=42)

REITS and other large investors have discovered the investment potential of real estate.  The single family market could eventually become like the multifamily market with a large percentage of rental homes owned and managed institutionally, changing the market dynamics of neighborhoods.

9.      Commissions Concentrate into Fewer Hands (PTI=40)

Even more than is common today a small number of agents might control and profit from the vast majority of closed transactions.

10.  The agent is removed from the transaction. (PTI=31.5)

A tech company could "crack the code" and eliminate the need for agents. FSBO doesn't necessarily mean without assistance and consumers are availing themselves of alternative options for search and research.

Brokerages

1.      Regulatory Tsunami Hits (PTI=100)

The author cites the creation of the Consumer Financial Protection Act and the fear that RESPA might actually be enforced to warn that, "Regulatory creep and large financial penalties [could] increase compliance costs."

2.      Paper Brokerages Create Disruption (PTI=80)

These entities are gaining MLS membership but do not offer traditional brokerage services. They operate with little or no overhead and some existing large brokers have become vulnerable to seeing their own information used to generate leads for other brokerages.

3.       Brokers Lose Control over Data (PTI=72)

There are a multiplicity of sources collecting and disseminating real estate data. This goes beyond listing information to include school performance data, credit reports, mortgage, insurance, criminal activity, and tax information, and credit reports.  So now the industry is focused on controlling the consumer search process.

4.      A Consumer Brand Crashes the Party (PTI=64)

With Sotheby's and BH&G already making inroads it would not be a stretch to see Home Depot, a big bank, or HGTV expand into residential real estate.

5.      New Business Models go mainstream (PTI=63)

New models affecting broker-agent relationship have constantly evolved but the next one could be technology powered, agent-centric, using a flat or transaction based fee or a salaried, or auctioneering model.  

6.      Brokers Simply go Broke (PTI=56)

Agencies are undercut by outsiders offering the same services at lower cost.

7.      Technology becomes a Run-Away Train (PTI=48)

The financial resources required by technology outstrip small brokerages' ability to remain competitive.

8.      FSBO Develops into a Do-it-Yourself Model (PTI=42)

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

9.      Sales Tax on Commissions Threatens Margins (PTI=40)

10.  Portals Threaten Lead Generation Domination (PTI=36)

The industry has a whole was a late adaptor to technology but fortunately many of the early business models that tried to take advantage of this were themselves flawed.  The dangers outlined by Swanepoel pretty much boil down to whether agents and brokers can accept that technology has stripped away their ability to, as agents always like to say, control the keys and move on to new ways of doing business.  This will be equally apparent where Swanepoel talks about the institutional end of the business.