The Great Real Estate Broker Rip-Off?

Cutting costs...and service

by Tom Adkins
05/16/05

The Department of Justice is on the warpath. For years, Real Estate brokers across America prohibited fly-by-night and cut-rate Internet agencies from infiltrating the real estate industry. And the DOJ has seen enough. In April, they filed lawsuits and sent nasty letters to countless real estate commissions across America, including the National Association of Realtors, demanding two things: all brokers must be allowed to offer cut-rate service and prices, and regardless of service quality, all brokers must offer full professional cooperation to each other, with no restrictions, including access to the Multiple Listing Service, the shared database of listings realtors use to help buyers find homes. Fearing the wrath of the DOJ, realtors are scrambling to knuckle under. Now, with their most expensive investment at stake, American home sellers and buyers will soon discover the cost of cut rate service.

Cut-rate realtors essentially offer sellers a deal: We’ll put a sign on your lawn, and list your house in the Multiple Listing Service. And that’s all. But instead of the typical 4-7% commission, we’ll charge you as low as a couple-hundred bucks. To someone with a $500,000 home, that sounds like a bargain.

But any real estate agent can tell you, listing is easy. The gauntlet begins after the contracts are signed. Who screens buyers? Who warns you that dream home backs up to a proposed strip mall? Who deals with a nitpicky home inspector? How do you pay the buyer agent? How about if the mortgage goes bad? Or the well test fails? What happens when something goes wrong at settlement? Or after settlement? And how do I keep myself from breaking the labyrinth of real estate laws? When service is cut away, who saves the day when the walls are falling in, especially if your agency is located in cyberspace?

If you want to see how internet service in the real estate industry works, consider the mortgage industry. Realtors shudder with dread when a buyer proclaims, “Don’t worry- I found a mortgage company on the internet!” Web-based mortgage companies are notorious for miserable service, rarely cultivating business or trust relationships with anyone. They are fearless and virtually impervious to their disastrous failures. If they screw up a deal in Texas, who will know in Oregon?

Almost every agent has a story about a cyber-mortgage that failed to materialize at settlement, causing a chain of immense, expensive chaos for innocent families. In fact, many builders and agents demand cyber-mortgage buyers apply and get approved with a local mortgage company just in case.

Now, imagine bringing that level of unaccountability to the real estate industry. How will you track down the minimum-wage order-taker who screwed up your listing from 2,000 miles away?

And we only have to consider the Department of Housing and Urban Development rules to see what happens when government runs amok in real estate. For instance, you can’t advertise a home has a “nice view” because it might offend blind people. More aggravating, agents cannot comment on crime stats or schools. Somehow, this discriminates against black people, who HUD apparently believes must demand homes with bad schools and high crime.

And who regulates the newly exposed MLS? If I’m a criminal looking for an easy score, it wouldn’t take long to figure out that a single woman selling a home with wheelchair access in a remote area is a prime target.

When the predictable mayhem ensues, the usual response is, “Just sue ‘em!” Sure. After they’ve moved halfway across the country. And that will take what…3 years? Five years? And cost how much money? Will you actually win? Meanwhile, where do you live? Professional DOJ attorneys may consider lawsuits a viable solution, but what about in the real world? Consumers must eat any problems agents don’t catch. And with a bare-bones brokerage, you can count on an orgy of lawsuits as incompetence leads to a multitude of deals gone bad.

The Department of Justice is about to screw up a system that works rather well. After all, despite stigmatized reputations, realtors haven’t done a bad job of regulating themselves over the last decade, progressively weeding out part-timers and license-hangers. And while prices skyrocketed, average commissions dropped from 6% to 5% over the last decade. So where exactly is the consumer suffering?

You can bet the house on one thing: if money and regulation are taken away from real estate agents, the best and brightest will leave. Realty will change from a service business to an order-taking business, with the same competence. It’s a matter of time until the following conversation will take place at the settlement table: “The buyer for my house didn’t get his mortgage, and his moving van is parked in my driveway with his family. I have $75,000 on deposit at my next house, which I lose if I don’t settle in an hour. The seller hasn’t moved out yet, my wife and kids are on the lawn, and my moving van is in that driveway. Mr. Real Estate agent, what should I do?” And the agent’s response will be, “Would you like fries with that, Sir?”

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