Denver Real Estate

Most Brokerage's business models don't benefit the Agent

February 1, 2007 by Spencer Barron

I’ve always been interested in sustainable business models and have noticed that there are very few in the real estate industry. Except for that of the brokerage. The business model of the brokerage is not the same as that of the agent. Brokerages make money from agents, agents make their money from transacting real estate.

Before I made the decision to pursue real estate full time, I had considered getting into the mortgage business. What I found was just about anyone would ‘hire’ you on as a mortgage broker. Why? Because they would provide almost no support for you but take half of what was made on a loan. They knew that in most cases, a mortgage broker would come on, refinance their friend and family then wash out of the business. So they attempt to capture a larger share of the market with a networking through expansion method.

I can’t help but think many large real estate brokerages are doing the same. For example, I recently talked to an agent in a large brokerage who said that they shared an office with less than 20 desks with over 300 agents. This office represents a small area of Denver, so I would assume that there is alot of overlap between the agents. Most businesses in sales don’t have that many agents for a small area. It wouldn’t be fair to the salespeople. They would limit the number of agents so their agents would be as busy as they would like to be while still achieving saturation. But the truth about real estate is that brokerages make a lot of money off the agents themselves through various fees. They also know that the new agent will immediately go after their friends and family who might not otherwise use their company. So on top of the fees, there is perhaps another $10,000 to $20,000 to be made simply by bringing on another agent who may even be paying you to be there. Of course, most agents won’t be successful but the brokerage doesn’t really care. Most brokerages provide general training and services to make it appear that they want an agent to succeed but the truth is their business model is at odds with that premise.

To establish yourself in real estate requires time. If you’ve been in the business long enough, you have made the contacts and have the client base to pull from to sustain yourself. If you’re new to the business, you need to build your business in the face of a vast and entrenched competition. But the brokerages tell you you shouldn’t drop your commissions. They then proceed to charge you enough or split the commission in such a way that you agree, “There’s no way I could work for less.” There is no way that these agents that have no momentum will ever gain a foothold against the entrenched agents who are actively marketing in a neighborhood. So the new agents are left to help their friends and family (assuming there are not more agents in the family) then slowly fade away, back into the careers they came from.

Technorati Tags: Denver, Real, Estate, Brokerage, Business_Models

Filed Under: Business, Denver, Denver Real Estate, Marketing, Realtor

Just because I was fast doesn't mean it was easy.

January 30, 2007 by Spencer Barron

Picasso portrait Portrait de Francoise I first came across this Picasso legend a few years back with regards to valuing someone’s time. I believe the moral also applies to the valuing of services in real estate. After all, real estate is a business.

Legend has it that Pablo Picasso was sketching in the park when a bold woman approached him.

“It’s you — Picasso, the great artist! Oh, you must sketch my portrait! I insist.”

So Picasso agreed to sketch her. After studying her for a moment, he used a single pencil stroke to create her portrait. He handed the women his work of art.

“It’s perfect!” she gushed. “You managed to capture my essence with one stroke, in one moment. Thank you! How much do I owe you?”

“Five thousand dollars,” the artist replied.

“B-b-but, what?” the woman sputtered. “How could you want so much money for this picture? It only took you a second to draw it!”

To which Picasso responded, “Madame, this took me my entire life.”

It’s always amazing how the public views what you get paid strictly by the amount of time you spend on something. Truth is, it’s not that simple. There are costs and risks that are above and beyond the time itself that you spend. Not to mention that nothing can replace the experience you gain going to more closings in a month than most people do in their entire life. There is definitely a line you have to draw with clients when it comes to valuing your time. The public wants a Realtor’s opinion, access to people’s homes, and access to the database that Realtors have been maintaining for years. But few want to pay you for it. I’m not here to argue the point of how much an agent should make. Should it be flat fee or a percentage? I don’t care. But when it comes up, each agent needs to decide what the best long term approach should be for his or her business. There are still good agents out there that bring real value to their clients. I’m sure every Realtor who reads this will feel that statement applies to them. We aren’t offering a free public service. Sooner or later you need to decide what your time is worth and let those that want to ‘go it alone’ do just that.

Technorati Tags: Realtor, commissions, picasso, real_estate, buying, selling, home

Filed Under: commissions, Denver Real Estate, FSBO, Realtor

What should be in a Comparative Market Analysis and how long will it be accurate?

January 24, 2007 by Spencer Barron

What should be in a comparative market analysis (CMA)? A CMA shouldn’t be just a list of solds or actives. It should reflect the current conditions of the market. I was recently asked how long I felt a CMA was accurate and personally, in this market, I don’t think I would want to blindly price a home off a CMA I completed even two months ago. In most cases, my paranoia leads me to double-check solds and similar active listings even an hour before driving over to take a listing. There is a huge disparity in home pricing mainly because brokers use a wide range of largely ineffective models to determine pricing.

What I would look for in a Comparative Market Analysis (CMA).

New Sold Comps – This one is obvious but probably one of the most overrated when it comes to pricing. I don’t think this is the most important factor in pricing, but it’s important because once buyers have found that they liked your home more than the competition, this is where they will look to see if you’re worth it. You don’t have to be priced less if you can justify it, but both the initial offer and the appraisal will be based on this. Because of this, and to make sure you will appeal to the buyers in the market, you need to be priced in the ballpark that your buyer is looking in. Be prepared with a list of sold comparable homes and a justification of the price based on the homes’ differences. Sold data will likely not show a significant change over a short time frame and usually one low or high sale isn’t enough to support pricing.
New Competition - How many similar homes are you competing against? What does it cost to buy the other home? How do you compare to what is currently for sale? Lots of competition? It can have a huge effect on time on market and how much you’ll get for your home. If another seller comes on the market and prices below your home it will reduce your ability to compete at a higher price. Unless, of course, your home is truly different in a substantial way, this is not very likely when your home was a new construction home in a subdivision full of homes just like yours. How you compare to other homes that your potential buyers will be looking at is the most important factor in determining price.
Changing Absorption rates - This is a measure of how long the current inventory would take to sell if no new homes were added to the mix. Demand varies seasonally and as the result of the weather (super obvious) and the school year, as well as economic pressures and even poor media coverage of the market. Supply also varies greatly, peaking in the summer in most cities. It’s a great indicator, especially when applied directly to the homes of similar type.
Change in Days on Market before a sale – It’s also much easier for most people to grasp when compared to other indicators, but it’s one of those pieces of information that gets abused. Unfortunately, just because something sells quickly doesn’t mean it was under-priced. It could have just been the best home that the buyer was able to get an offer accepted on when they were looking. (see #2) There are too many variables to use the fast sale of a recently-sold property to support the idea that your home should sell for more. I find that of the homes that sell quickly, they usually don’t sell to some new buyer that just wandered by. Most new listings sell quickly when they are priced right when compared to what’s available. Buyers usually look around before they’re ready to buy. The homes that sell quickly likely sold to someone who was looking for a while already and recognized that the home was priced appropriately.

What is most disturbing though is the vast majority of sellers already have a price in their head that they want. Of course, I’m usually willing to hear why the seller thinks his home is worth the pie-in-the-sky price. They are usually trying to compare their home to homes with extra bathrooms, a finished basement, or more square footage. Even worse, many work backwards from how much they want to walk away from the closing table with or what they owe to arrive at their number.

For me though, I believe that the CMA’s should give you a range of what pricing will be acceptable to the market. It should also indicate where offers are being accepted when compared to the list price and what concessions (if any) are common. For Denver, as a general rule, most Denver homes homes sell within 2-3% of their current list price and buyers get less than 1% in concessions. Most also sell within 10% of their original list price of the current listing period. That means most homes priced more than 10% higher than what comparable homes would sell for usually end up expiring without a sale. In case you missed it, most Denver Homes are overpriced on average of 20% when compared to the average list price of the solds.

In the end, it comes down to the feeling you get walking in the door. The same feeling the buyer will get. Look at the competition and know what price can be justified. That’s the only way you can nail down the real value.

Also see: How to sell your home quickly for top dollar.

Technorati Tags: Denver, Real, Estate, CMA, Selling_A_Home, Pricing

Filed Under: Denver, Denver Real Estate, Featured, FSBO, Marketing, Realtor, statistics

Don't Take Their Word For It

January 19, 2007 by CurtisBarron

Have you tried to find an answer on the Internet? That is perhaps a dumb question. The real question is, is the information you find good information, reliable information? How do you know what is credible and what isn’t? Even the good intentioned aren’t always accurate sources. Hopefully, you don’t believe everything you read on the Internet. (Except for what I write, of course…)

But with the rush to the Internet instead of to the library to do research these days, the issue needs to be considered. Young people especially tend to ignore the library and focus on googling the Internet, and I confess I have done the same when I could not get to the library. But, depending on the relative importance of information accuracy, this may not be the best thing to do.

An excellent article, “Evaluating Credibility of Information on the Internet”, by Ronald B. Standler, gives some good suggestions to those doing general research. I will not belabor the points he makes about trusting what you read.

An experience I had today, though, highlighted for me the importance of validating information that is of importance. I was researching the small town of Pratt, Kansas, about 70 or 80 miles west of Wichita, population a little over 6000, with regard to a possible move. I was using Neighboroo, a very interesting Web site that gathers information on life, people, housing, environment, and real estate development for American cities. For example, …

Filed Under: Denver Real Estate, Internet, trust

Money Magazine – Buyer's agents co-ops and how to get a better deal buying or selling a home.

January 17, 2007 by Spencer Barron

Money Magazine - Is your Realtor on your Side? How about that. I actually got quoted in Money Magazine. Albeit my statement appears a bit truncated, it is not incorrect. I’m quoted as saying “People offer higher commissions because it works”. I’ll stand by that. Offering a higher commission to a buyer’s agent does help sell your home. It doesn’t necessarily help you get a better price but it will get you slightly more traffic. I’ll explain, but first, this is what I’m talking about. The February 2007 Article entitled “Is your Realtor on your Side?” by Stephen Gandel discusses the value of having a buyer’s agent. More than that, it actually gets into the morality of the strategies some homeowners and builders are using to sell their homes.

Steve’s seems to be trying to get his fingers on the pulse of real estate but can’t seem to get past the waiting room. I spoke with Steve on the phone after he wrote an article in the December issue of Money Magazine, “Best Ideas for 2007″. I had disagreed with him on many of the assertions he had made regarding strategies buyers could use to get a better deal. To be fair, I agreed strongly with his suggestions for sellers. In our conversation, he admitted that he ‘doesn’t have access to the same information that agents have’. Thus he has to “rely on other people” in order to write these real estate articles. He’s essentially trying to analyze data from hundreds of markets and collate that into advice that could be applicable nationwide. He’s not an expert in the sense of personal experience but rather is forced to rely on so-called experts from across the country to give him accurate information regarding the stories he researches in order to make the valuable conclusions. I’m honored that I can fall into that category. Unfortunately, I disagree with some of the advice in the latest article. It seems the article plays more to what buyers would want to believe rather than the truth about what will help get you a better deal. But then again, who knows what agents across the country tell him. This is how it works in Denver and what I disagreed with…

(If your not sure what commissions are and how they work, check the end of this post)

Why would offering more money to a buyers agent work? Because brokers want to make a living and will be more likely to show your place in among others of the same type. This is often true in the case in newer condos or builder-owned homes where there is often a lot of competition. If you have ten other condos in your building that are essentially the same home at the same price, and then there are lots of other condos in other buildings, most agents want to narrow down what building their client wants before showing them everything that is available in one building. There are literally hundreds of condos that are similar. Do you want to go view all of them or would you like someone to help narrow it down? Most people would like some help here. Well, if I have to pick which one to show first, and they appear all the same, why wouldn’t I pick the one that pays me better, especially if they’re are all priced the same? That’s just good business.

Unfortunately for sellers, this doesn’t seem to bring them a higher price, it just gets you more showings and helps to sell your home faster. From all the home sales I analyzed to prepare my information for Steve, I noticed that of the homes that had higher commissions sold slightly faster than homes that didn’t. It’s not obvious when looking at homes offering co-ops slightly higher than the average because often that money is being offered to get brokers to overlook the obvious problems with the home and bring someone by. While it might not have been as clear in the ‘slightly more’ group that higher commissions bring faster sales, it definately becomes clear in the ‘slightly less’ group. When you offer less than the average commission, there is a marked difference in time on market.

I took a look at this and noticed that time on market goes up immediately when offering even slightly less than the average co-op. Days on market increased by 12% when agents offered less than the average co-op. This can affect the sale price since a long time on the market is viewed poorly. …

Free Direct Mail Marketing for Realtors

January 15, 2007 by Spencer Barron

HGTVLowescover I recently started taking advantage of Lowe’s realtor benefits program. They send direct mail 10% off coupons to your clients. They recently added a DVD option from HGTV’s “Designed to Sell” for clients that will be selling soon. They have a number of different options and let you personalize the products somewhat. It’s a great way to stay in front of your clients and provide some additional savings to your clients. Anytime you can save a little money on marketing and add a benefit to your clients seems like a good idea to me.

Technorati Tags: Realtor, Marketing, Lowes, Benefits

Filed Under: Denver Real Estate, Marketing, Realtor

Buyer's Remorse – They accepted my first offer!

January 11, 2007 by Spencer Barron

Happiness in homebuying for most people is not about whether they got a great deal. It’s about their perception of how great of a deal they got. The best deal in town will be passed over because of a buyer’s inability to get the seller to come down slightly in his price. Ego gets in the way of happiness. Sometimes though, even when you “win” in getting a home for the price you want, you’re still not happy. Buyer’s remorse can set in, causing the buyer to second-guess their decision. I see this most often when you have your first offer accepted.

Psychology calls this counterfactual thinking. For example, bronze medalists at the Olympics are usually happier than silver medalists. Bronze medalists are happy just to get a medal while silver medalists will forever ponder what might have been. Studies (Dissatisfaction of having your first offer accepted - PDF) have been done that accurately predict that if the first offer is accepted, the buyer will be less likely to be happy with the outcome. They feel they left something on the table….

Filed Under: Denver, Denver Real Estate, FSBO, Negotiations

How many showings did you get? Showing data can help determine home value.

January 11, 2007 by Spencer Barron

You can learn as much about a home’s value by looking at active listings as you can by looking at solds, if you know what to look at. Keep track of showing data to get a rough idea of how the public is perceiving your listing. It’s reasonable to expect that if you’re getting alot of showings, you’re priced appropriately. At least on paper, you look pretty good. Few showings or even no showings could be an indicator that the public and Realtors view your home as being overpriced.

Fix the problem or drop the price.

In Denver, 80% of homes listed sell because of the efforts of a cooperating buyer’s agent. With this type of exposure on the MLS, the reaction to an MLS listing can certainly be an indicator of the interest in the house and the likelihood of an eventual sale. …

Filed Under: Denver, Denver Real Estate, FSBO, MLS

Most Denver Homes are Overpriced

January 8, 2007 by Spencer Barron

That’s not new though. Buyer’s market, seller’s market, blah blah blah. What does it mean really? Homes are always overpriced. Always have been.

Most homes are overpriced. Through good and bad, sellers usually overprice their homes. The average active list price for a single family home in Denver for 2006 was 20% higher than the average list price of the homes that sell. That’s why in a typical month between 5% and 10% of all listings on the market expire without selling.

Sellers need time to soften up. Most sellers don’t let their home go for much less than the asking price in Denver. A typical Denver home sells for 2% less than the list price.

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Filed Under: Denver, Denver Real Estate, FSBO, statistics

Timing the market – Real Estate Slow Stochastic

January 5, 2007 by Spencer Barron

Just for fun, I wanted to take the pricing data stats from my previous post about market timing and apply a slow stochastic to the prices.

Here’s essentially how they work with stocks.

On the lower part of the image is an example of a slow stochastic. A buy signal is interpreted when the %k (green line) crosses up over the %d (white line). This is most important when value is crossing up from 30. A sell signal is the opposite. When %k is crossing down over %d from 75 (numbers on left). Go ahead and ignore the right numbers and red line for now. Essentially stochastics are trailing indicators of price trends. Trading decisions should never be made entirely from an indicator. It’s just an illustration of a trend over a time period. Depending on the time period you’re looking at, long-term and short-term trends can be identified.

Now, that being said. Here’s a slow stochastic showing short term (seasonal) market trends for the Denver Real Estate Market.

The stochastic demonstrates the change in price trends

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