Be rational in your optimism, critical in your analysis

Though optimism is crucial, it must be tempered with rational thought and brokerage conduct. Optimism does break the bonds of inertia, but it alone does not create successful activity.

Rational thought must be informed by experience, education and a critical mind. Agents would be wise to be realistic in their optimism if they want to avoid failed expectations and disappointment. The best way to avoid unfounded optimism is for agents to be critical in their interpretation of the economic data upon which they base their opinions and form their conduct, as they must.

As all good agents know, real estate is local. No national real estate market exits, even though it is discussed by the media. National data cited in a study or article is almost always inapplicable to California, except for interest rates. California has numerous characteristics which set it very much apart from other states and the rest of the nation at large, such as higher home values (and prices), a very low percentage of homeownership, world-renowned geography, extremely diverse and well educated population (in spite of its bottom-rated K-12 schools), and a disproportionately large percentage of underwater homeowners who owe significantly more on their mortgages than their properties are currently worth. Thus, agents must seek out news which is California-specific in order for it to be relevant to their professional practice.

Additionally, agents should be wary of articles which exploit numbers or data by applying them out of context, or without a broader timeframe necessary to clearly exhibit a long-term trend. Data presented without an eye on the larger picture can be non-instructive or even worse, deceiving. Month-to-month changes in data, or differences in the data for a particular month compared to that same month one year earlier, are not at all instructive of the larger trends without further analysis (read: more data and information).  Current trends could be swinging up or down while the monthly change could well have moved in the other direction.

Median price figures, mathematical abstractions at best, deceptions at their worst, are dutifully reported monthly by major news sources. They are irrelevant – and the public needs to know so. The median price represents no single property, has no predictive power and sets no trend that represents probable activity. At their core, median price figures are little more than pure mathematical alchemy; half below, half above. Of more use to an agent would be a careful study of the pricing trend over several recent months within his particular area of practice – for example, data on similar houses within the same tract and pricing within the tiers of low-, mid- and high-end properties.

Agents must also consider the source of any published data. All sources are biased to some extent, and some have specific policy stances on the news items and concepts they report (this publication included). Trade unions are notoriously biased and meddlesome in efforts which would produce changes, as it is their agenda to maintain the status quo and avoid a drastic sea-change in practice, for better or for worse.

Editor’s note – The refusal of trade unions to adapt to the needs of their membership is largely why union membership numbers across the nation are consistently shrinking year over year. So are the populations of states and the strengths of businesses subjected to the strongest unions.

Finally, brokers and agents should give the bulk of their attention when gathering real estate and financial information to articles and studies that are forward-looking in their application of data. If the study is concerned only with the past, it is a mere history lesson; a feel-good reminder of times past that are now certain. Future-minded publications provide brokers and agents with the knowledge they need to influence their conduct and provide pragmatic advice that puts money in their pockets. [See the first tuesday journal online.]

Educate, educate, educate!

An employing broker can only profit as much as the conduct of his agents allow.

An employing broker can only profit as much as the conduct of his agents allow. Thus, it is in the broker’s best interests to share his knowledge with his agents to ensure they have a firm grasp on real estate fundamentals and are current on the recent developments which are shaping real estate practice. Brokers who assert their employer status and comply with oversight obligations educate agents on how to best perform their fiduciary duties while maintaining the proper standards of conduct in their relationship with the clients who employ them.

A broker can most effectively inform a large volume of individuals through the use of print and digital publications. Publications are the most efficient means of transmitting a wealth of information and data to the most individuals possible, keeping them better advised of their discipline and vocation. Agents must be experts in every facet of the real estate acquisition and financing process of the transaction they are authorized to engage in, as they are duty-bound to guide their principals through all the nuances and difficulties that arise. The agent who best informs his client – through advice and counseling – will be remembered years later when the same client needs representation in another real estate transaction or if the client is asked by others to recommend an agent.

Additional things to consider in the new paradigm

Towards the end of Looking through the window towards recovery: a real estate paradigm shift – Part I, we at first tuesday provided a list of practical tips to ensure success under the new real estate paradigm. In Part II, we will provide some rational predictions about the coming market conditions California will experience in the post-recessionary years.

1) The Great Recession caused a massive drop in property values that has denied owners, as well as agents, the ability to sell due to their lack of equity in the property being sold. Also, the price of property will not likely move upward at a rate beyond inflation for the next five or more years once prices actually bottom out. Thus, to produce acceptable net sales proceeds after the payment of transaction expenses and broker fees, resale and acquisition costs will need to be kept to a minimum.  Thus, for sale by owner (FSBO) and buyers without brokers (BYWOBs) transactions  will likely return with a vengeance in the coming years.

Assisting in these FSBO sales devoid of an agent will be transaction coordinators (TCs).  These TCs will be similar to the numerous paralegal servicers that came into existence in the ‘70s and ‘80s to perform licensed legal services, such as the preparation of disclosure documentation, worksheets, tracking paperwork sources, and coordinating service providers while not interfacing with the buyer directly.

TCs will likely return in the coming years and their strength as a marketing tool for sellers will depend on how brokers and their agents step forward to effectively minimize the task and cost of matching property and buyers, a reversal of the popular industry trend to make it more difficult for sellers and buyers to independently get together on a deal (consider the trade union’s massive, legalistic purchase agreement and numerous attachments designed with the intent to keep the uninitiated [read: FSBO participants] out of a real estate sales transaction).

Similarly, we may witness an expansion of the role escrow officers play during FSBO transactions.  Escrow can and will work directly with sellers and buyers to prepare the contract which will serve as the purchase agreement and escrow instructions – as the law permits this two-in-one treatment of instructions. While the seller and buyer sit with the escrow officer and respond to the officer’s inquiry about the terms of the sale, the seller and buyer will work out the details and finalize their negotiations so the instructions can be drawn to form a binding contract between both parties – all in a day’s work for an escrow officer in the new real estate paradigm.

2) Greater public awareness of the practice of real estate. In prior years, multiple listing (MLS) services, controlled by the local trade unions, were secretive and had an extensive history of keeping all listing information quarantined from the public.

In the ‘70s and ‘80s, MLS information was physically printed in listing books with dire warnings of the consequences to membership for letting the material fall into the hands of buyers and sellers.  However, with the birth and widespread adoption of the internet in the ‘90s, hidden MLS information suddenly became public.  Websites such as Craigslist, Zillow, and Redfin made crucial real estate data, such as a property’s address, square footage, ownership and prior sale price public knowledge, all without a whimper from brokers. Under the new real estate paradigm, savvy brokers will use this published listing information to collect listing and sales leads and produce calls for professional expertise as buyers inquire into whether listed property is suitable.

Similarly, news blogs have flourished in the ashes of the Millennium Boom and have increased the flow of information and communications between all members of the public, including agents and their prospective clients. This will improve transparency in managing readily available property data and information, allowing more light to shine on agent conduct in the marketing of properties.

Finally, the most efficient way to learn anything is to have firsthand experience. During this national financial crisis and real estate recession, the public has learned at lot about real estate financing, pricing and expectations. These sometimes difficult personal experiences will not be soon forgotten.

Additionally, researchers have recently lavished attention on the economic issues that shape real estate ownership decisions, and the media has done a decent job of making the findings and analysis of these researchers better known.

3) Flat rate fees by brokers listing mid- to high-tier properties will likely become more common as flat rate fees produce more listings and thus generate more fees for the brokers who charge them. In the ‘90s, fees were set by the real estate industry at 5% or 6%. However, in the era of a more informed (and cost-conscious) public, sellers listing homes will not feel a 5% or 6%, or possibly even a 4%, fee is appropriate for what has become publicly perceived as a more mechanical and routine event.  It is the selection process that is unique, and active agents are positioned to be better at it than the public.

Theoretically, it should take the same amount of time and effort to sell a low-tier property as one that is high-tier, and thus the compensation for servicing the seller or buyer of either should be the same. Otherwise, it is argued, sellers of expensive homes at a standard percentage rate are subsidizing brokers who charge the same rate on the sale of low-tier housing.  Also, agents may even need more experience to sell low-tier property as these sellers and buyers tend to be less informed, have less experience, and require more patience (read: time) and greater assistance to select their first home and obtain financing.

Those agents who perfect the flat fee arrangements will make very good money.  Those who argue against changes in fee arrangements (which they still call commissions) will earn less and diminish in numbers, if not entirely disappear in time.  Percentages for setting payment of services have always been viewed suspiciously, in law and in the mind of the public.