Pam MacKenzie on real estate

How loud does money talk?

2008-02-12T13:09:00.000-08:00

Today I received the following notice from the National Association of Home Builders:

STATEMENT FROM NAHB PRESIDENT BRIAN CATALDE


ORLANDO, Feb. 12 - Brian Catalde, president of the National Association of Home Builders (NAHB), today issued the following statement regarding disbursement of PAC money to federal congressional candidates:

"Today, the National Association of Home Builders' Political Action Committee, BUILD-PAC, and its 150-member Board of Trustees representing all 50 states, agreed to cease all approvals and disbursements of BUILD-PAC contributions to federal congressional candidates and their PACs until further notice.

"This extraordinary action was taken because the NAHB BUILD-PAC Board of Trustees felt that over the past six months, Congress and the Administration have not adequately addressed the underlying economic issues that would help to stabilize the housing sector and keep the economy moving forward. Housing and related industries account for more than 16 percent of the Gross Domestic Product. More needs to be done to jump-start housing and ensure the economy does not fall into a recession. This action will remain in effect until further notice."


Okay, now I ask you, do you think that by withholding their PAC money for Congressional elections, the builders are going to get Congress's attention? Or are the members of Congress going to think the builders are being unreasonable and just look elsewhere for financial support.

What's your opinion?

The National Hispanic Mortgage Association sends an official reply

2008-01-22T06:36:00.000-08:00

Your blog question is a good one. But, it already has been answered along time ago and continues to be answered in the affirmative.

ITIN mortgage loans have been originated via old school underwriting by many institutions, wherein the identity of the mortgage applicant is fully verified. These old school institutions abide by what the rest of the industry seems to have ignored, the basic idea of "know your customer". Legitimate ITIN lenders can not afford to violate this basic tenet, otherwise they would have disappeared with alot of the "traditional" mortgage players who have vanished as a result of our current mortgage crisis. ITIN loans perform better than the rest of the market because the applicants are thoroughly assessed with respect to their credit worthiness while the applicants' income capacity is fully verified. Hence, by definition, our national security interests as well as our economic interests are promoted and furthered by standardized ITIN mortgage lending.

As a matter a fact, in light of the current state of the mortgage industry and economy, the last thing we should do is prevent anyone (who is not pretending to be someone else) from buying a home. Furthermore, the last thing our nation should do is to drive huge segments of our population towards an underground economy. Underground economies have historically never been good for legimate industries and we should not give any opportunity for unscrupluous lenders to gain a foothold in one of the only consumer markets where loans are actually being paid on time and performing well.

Thank you.

Best,

Ron Jauregui

Senior Vice President for Community Alliances

Hispanic National Mortgage Association

401 B Street, Ste. 625

San Diego, CA 92101

Ph: 619-795-3679

Fax: 619-546-4189

Ron.Jauregui@hnma.com

www.hnma.com

ITINs and mortgages: Should undocumented aliens get mortgages?

2008-01-19T03:00:00.000-08:00

Last summer, the Gonzalez Group, a Texas-based national consulting firm that advises Realtors how to effectively market themselves to minority groups, included a story in their newsletter about lending money to undocumented aliens. They said that Wells Fargo in southern California and Deutche Bank and some other bankers were lending money to people who didn't have Social Security numbers. Instead, they were using "ITINs" -- Individual Tax Identification Numbers -- to process the applications.

I called George Hellerman at the IRS about this. Many of you know George without knowing you know him. He does our weekly Median Home Prices Chart in the Sunday Real Estate section of the Courier News. We don't pay him enough to live on, of course. His real job is at the IRS. And since ITINs are issued by the IRS, I figured he'd know something about it. Actually, all he could do was confirm that they issue them. He's not really authorized to talk to the press about this stuff, but he did refer me to someone who could. And that guy told me that ITINs are issued to people who want to pay taxes but don't have and can't get a Social Security number. The official IRS policy is that they do not issue ITINs for the purpose of official identification for anything other than paying taxes.

It turns out the most obvious and common reason why someone needs an ITIN is that they are here without papers. "Undocumented alien" is a polite way of saying "illegal alien."

Now it turns out that undocumented aliens in the white-collar sector actually earn substantial amounts of money and are usually somewhere in the process of becoming legal. They came here legally and overstayed the time permitted on their visa. Maybe they came as a student and found a professional job here, so they stayed. And they're applying for permanent residency or citizenship, and while they're in the lengthy application process, which can take years, I'm told, they get an ITIN.

I'm not making a value judgement here. I'm not Lou Dobbs. I'm just telling you that your federal government has found a way to process the income taxes of people in this predicament: The government lets them stay here and gives them ITINs. If you don't like this, then talk to our representatives in Congress. That's another issue.

Back when mortgage money was flowing freely, as recently as this past summer, it was fairly easy for someone with an ITIN to get a mortgage in New Jersey. I only bumped into this fact in late July, early August, just before the subprime mortgage crisis hit. So when I started calling banks to get more information about it, at first, they would talk to me. But then they clammed up. One Realtor in Plainfield, Monica Caballero at Exit Realty Eagles, told me that her company had been selling homes to people with ITINs. She told me that after June, though, it got harder because in June, banks generally stopped lending money to people with no downpayments. She said I should write a story about how we need more programs for people who can't afford to buy because they have no downpayment.

Of course, that was in early August, before the subprime crisis hit, and now no banks are doing loans with no downpayments. And frankly, nobody admits to doing ITIN loans anymore, so I gave up on writing the story.

But maybe I should revive it. In Friday's HomeGuide, I printed a very lengthy statement from the CEO of Fannie Mae, one of the two government-sponsored enterprises in the mortgage business. You probably didn't read the whole thing. I admit it was overly long. But if you stuck with it or skipped to the end, you saw that he was advocating ITIN loans for new Americans. He actually capitalized it as "New Americans," but we used the lower case "n." He wants to find funding for undocumented aliens again.

The other side of the coin
When I was researching this story last summer, I talked with a spokeswoman from Wells Fargo Bank in Red Bank about their program. I don't have her name handy, but she's the "Emerging Markets" officer for this region, and she's very knowledgeable. She told me that Wells Fargo set up their ITIN program in southern California as a pilot program and that they had expected to make hundreds of loans. They made less than 10. The reason is, Wells Fargo insisted that if someone was applying for a loan using an ITIN instead of a Social Security number, they had to provide some proof that they were in this country legally. She told me that most people who are here illegally will get phony Social Security numbers to pay their taxes rather than use an ITIN. She also said that Wells Fargo was thinking of dropping the program.

Deutche Bank wouldn't talk to me. Oh, someone in the PR department answered my phone calls, but the she could never get the bank officers involved in funding mortgages for applicants with ITINs to talk to me. And when I told her I wanted to know if, as a bank owned by foreign nationals, they were selling securities backed by ITIN loans overseas, she told me they'd never answer that question anyway. The only message I got was that she didn't think they'd actually securitized any blocks of these loans yet.

I talked to a spokesman at the National Hispanic Mortgage Bankers Association, a group that had an agreement with Deutche Bank to fund these loans. If I remember correctly, the association was going to get its members to make these loans, and then the association was going to sell these loans to Deutche Bank who would securitize them--sell bonds secured by these loans. He was very enthusiastic about the program, but when I asked him to give me the name of a member or two in Central Jersey whom I could interview, he never did. He said he would, but he never did. Maybe they weren't making any loans here anymore by that time.

All I can say is that by the end of August, the mortgage bankers who would talk to me were telling me loud and clear that the money had dried up for these loans and it was no longer a story.

Fannie Mae could change all that
That's why it's so significant that the head of Fannie Mae is saying that his organization would look favorably on funding ITIN loans. If his organization is willing to back such loans, then undocumented aliens will be able to buy homes here again. This practice will become more mainstream than ever before.

Personally, I'm not sure how I feel about this. The spokesman at the National Hispanic Mortgage Bankers Association pointed out that the ITIN loans have had a very strong performance record, that they outperform the market as a whole, meaning that the people who get these loans pay on time and very rarely default. From a banker's point of view, they're a good investment. And a lot of bankers I talked to have said that bankers should not be in the business of judging a person's right to be in this country. One guy said, "We're not the Department of Homeland Security." And while that might seem like a laughable statement, I guess I really don't see my local bankers as Homeland Security or Immigration officers.

But if Fannie Mae starts funding ITIN loans, and thousands of illegal aliens start buying homes in this country, is that really the best thing for our economy and national security?

What's your opinion?

Foreclosure and bankruptcy

2008-01-14T09:13:00.002-08:00

Back in 1991, when the economy in Massachusetts collapsed, my husband and I lost our home. We thought we were deeding it to the bank, but the bank recorded the title transfer as a foreclosure, even though they did not have to fight us in court.

Here's what happened. In 1988, my husband lost his executive job as a property manager. He held a series of retail jobs while he interviewed with commercial realty companies for another property-management job. Within a year, many of the realty companies he was interviewing with were out of business. Then in 1990, I lost my job. By then, Massachusetts had lost 125,000 jobs in 12 months. We couldn't find jobs that paid as well as the ones we'd had. And, my husband was showing some very alarming signs of mental duress -- we thought it was depression, but it turned out to be early-onset Alzheimer's. So in the spring of 1991, already several months behind in our mortgage payments, we moved in with my mother in NJ, found new jobs here and volunteered to deed our Massachusetts home to the bank.

I should point out that the home was no longer worth the balance on our mortgage. But we would've stayed til the real-estate market bounced back if we could have. Our house was across the street from the ocean, and we loved it. We were looking forward to raising our son there. I still look back on that home as the best one I ever had.

We left because the economy collapsed and our resources collapsed with it.

A lot of people are afraid this is going to happen to thousands of people in New Jersey. I hope it doesn't. But foreclosures are up dramatically, and if the economy really does go into a recession (many people already believe it has), there will be a lot of people out of work and unable to make payments. This is in addition to the folks who have subprime mortgages that are resetting to monthly payment amounts that they can't afford.

Last week at RealEstate Connect, an annual conference about the real-estate industry hosted by Inman News (www.inman.com) in NYC, NYU professor Nouriel Roubini made some dire predictions about the national economy. He said we're in a systemic financial crisis that is severe and massive. "It's going to take years to adjust," he said.

So what do we do about it? I don't have answer. I know personally that I am spending less money, trying to pay down the credit cards and hope for the best. I've delayed needed home improvements.

But if you find yourself sliding toward foreclosure or bankruptcy, what should you do?

Experts say that it's smart to approach your creditors early and see what you can negotiate with them. Perhaps you can get new terms. Perhaps you can offer your mortgagor equity in your home in exchange for patience with your inability to make all the payments.

Jack Guttentag, who writes our Mortgage Corner column on Sundays, has had some good advice about how to negotiate with your mortgagor. You can reread some of his stories by becoming an Inman News subscriber and going here.

We run other advice from banks and Realtors in our Sunday Real Estate and Friday HomeGuide sections. If you would like to have copies as we publish them, e-mail me at pmackenz@c-n.com">pmackenz@c-n.com.

The important thing is to get pro-active. Believe me, I know the shame of falling into a financial hole. To this day, I have phobias about money because of the emotional stress we went through 18 years ago. But the stronger you can be in championing your own cause with your creditors, the more likely you are to fare well in the long run.

Hang in there.

Blogging again

2008-01-14T09:07:00.000-08:00

I'm back.

A lot has happened in real estate in the last three months. But the main reason that I have not been blogging, aside from the fact that I've had plenty of other things to do, is that I was frustrated that the blog didn't seem to be going anywhere.

Last week, I attended the Real Estate Connect conference in NYC, and I learned a few things about blogging. One is that it should be a conversation. I've always wanted this to be a conversation with readers. But more than that, it should be a conversation with other bloggers.

So in the future, look for links here to other blogs, other stories, other Web sites. Look for my personal take on the news, and I hope you post your comments and criticisms as well.

Pam

Should you buy a home now?

2007-10-31T02:59:00.000-07:00

Should you buy a home now if you need one?

Remember the Beanie Babies?

Back about 10 years ago when my son was in elementary school, all the kids (and their moms) were crazy about Beanie Babies, the bean-bag toys from Ty. We were all so crazy about collecting them that we stopped seeing them as toys and started seeing them as investments. I remember one mom telling me that her daughter had an original Beanie Baby – I think it was a dark blue elephant, but maybe it was an octopus – that was worth $1,400.

Eventually, the Beanie Baby market crashed, just as the Dutch tulip market crashed hundreds of years ago and the housing market crashed recently. Every market that escalates dramatically because demand outstrips production will crash when the demand falls off or when a new and cheeper way is found to produce the product.

So what’s my point?

Stop seeing your home as primarily an investment. It’s your home. It’s the place that sets the tone and style for your life. It’s a statement about you. And oh yes, maybe when you sell it, you will make some money. But stop making that the sole factor in deciding when you’ll buy a home. If you need a home this year, buy one. It’s much better for your tax returns than renting. There are so many desperate sellers out there that you will probably find an excellent price on a home you really like. And if you have good credit, you will probably not have trouble getting a mortgage.

In fact, most banks are very eager to lend you money if you have good credit. They want a larger downpayment now than they did before the subprime meltdown, and you won’t be able to find a mortgage with no money down. But if you can make a downpayment, go out and get that house now. And enjoy it.

Will the market dip a bit more before it recovers? That may depend on the town where you decide to live. But most economists are projecting a recovery sometime next year. So think about it. Are you planning to sell six months from now? Then maybe you should get a short-term rental instead of buying. But if you’re looking to put down some roots and start a family, or if you’re thinking about trading up or downsizing — and the bank says you can afford it — go ahead.

The more people who make this decision, the more stable the real-estate market will get. And eventually, we’ll see modest, sustainable appreciation again. In some towns, we’re already seeing it. This is a great time to buy.

A correction

2007-10-30T04:27:00.000-07:00

Someone recently pointed out that it takes 75 hours of classroom time, not 175, to complete the pre-licensing course for a real-estate salesman license in New Jersey. Maybe it just seemed like 175 when I took the course back in the 70s. I apologize for my mistake.

Demographics: the hidden force in real estate

2007-10-30T04:26:00.000-07:00

A few years ago, I attended a conference in Trenton sponsored by the NJ Department of Labor about how aging baby boomers are influencing our state’s economy. As a real-estate editor, I was struck most by the work of Dr. James Huges, dean of the Bloustien School of Planning and Public Policy at Rutgers.

He and his colleagues had studied the real estate boom (this was in 2003) and concluded that we were not yet in a bursting bubble, but that things would take a downturn if we had appreciation of more than 11 percent for more than five years. He also came up with a stark reality that I had never considered before. The size of generation X, the first wave of the baby boomer’s children, is just a little more than half the size of the boomer generation. So as the boomers turn 65 and start downsizing their homes out of economic necessity, we are going to find that there are fewer buyers for the homes that the boomers are selling.

More recently, I discussed this phenomenon with Jeffrey Otteau, the East Brunswick-based appraiser and guru of market statistics who tracks prices in every New Jersey town in detail. He believes that when the first boomes turn 65 in a couple of years, we will see a dramatic effect: who is going to buy the McMansions when the boomers start selling them off?

To be sure, builders are already shifting many of their resources away from McMansions to build active-adult communities, just to address this phenomenon. But that’s not enough. If you look at the homes constructed in the 1990s and 2000s, the majority of them are large homes on fairly large lots that burn a lot of energy and may be unsustainable in the future. Oh, there will probably be buyers for some of them, but they will sit longer on the market and not appreciate as quickly, or perhaps they will depreciate more rapidly, after that 2009 to 2011 threshold when the boomers begin downsizing in earnest.

And yet, when I go to real-estate conferences, and I usually attend two or three each year, very few economists or professional real-estate brokers will even look at this phenomenon as they project market forces. In fact, the downsizing has already begun for some boomers, and nobody looks at this as a serious market force.

I don’t like to be a harbinger of doom and gloom. But I think buying or building an extravagant home in New Jersey will increasingly be a lifestyle statement, not an investment in the future. Think about it.

Is the DoJ out to get NJ Realtors?

2007-10-15T12:21:00.000-07:00

Last week, the Department of Justice's anti-trust division launced a new Web site, http://www.usdoj.gov/atr/public/real_estate/index.htm.

The purpose of this site, according to the Department of Justice, is to encourage more competition in the real-estate marketplace, thus creating market forces that will lower commissions and help consumers.

In theory, I suppose this sounds good. When you look at all the pressures on real-estate companies that have come since the maturing of the Internet, though, I have to wonder if this is really what will happen. Numerous referral systems, the costs of developing ever-more-sophisticated Web sites, expensive training, giving agents a bigger share of the commission, the growing cost of omissions-and-errors insurance and many other other costs and pressures have taken a lot of profit out of the real estate buisiness for the broker-owners. When market forces force people to work on ever narrower margins, what usually happens is that the big guys find a way to survive and the little guys don't. The little guys sell out to bigger companies or they quietly go away. And what does that do to competition?

The thing that disturbs me most about this federal push to break Realtors, though, is that they want to open the business of representing sellers to any cowboy or yokel who can create a Web site or a referral system, regardless of their ethics.

Long ago, New Jersey created a Real Estate Commission.The Real Estate Commission requires anyone in this state who represents homesellers or homebuyers to have a real estate license, and in order to take the test to get the license, you need to take 175 hours of instruction about real estate law. I took the class back in the 1970s after the licensing course, which I think in those days may have been about 150 hours (any of you old-timers in the business are welcome to jump in with a comment and correct me). It wasn't necessarily the best preparation for how to negotiate a sale, but it did cover a lot of basic law and math. We learned how to calculate acreage and sales commissions, and we learned about fair housing law. I have to say, I think that licensing has been a good thing. It's not a fool-proof protection for consumers, but it certainly helps.

Well, the all-knowing federal government, in the form of the Department of Justice and the Federal Trade Commission, is taking a different view. In a FTC memorandum earlier this year and this new DOJ Web site now, the federal government seems to think that the Realtors are restricting trade, with the help of their state Real Estate Commissions. The idea of protecting consumers from unscrupulous, ignorant people isn't that important anymore. The size of the commissions is.

I got an e-mail this morning from a disgruntled Foxtons client in Staten Island. She's upset because Foxtons refuses to release her from her listing contract, but whenever she calls them about the sale of her house, they are not available. Nobody answers her calls, nobody has helped her negotiate. Some other Realtor came up with an offer on her house and negotiated it without Foxtons' help or participation. She has no intention of paying Foxtons any commission and considers them in breach of contract.

Yes, Foxtons is a licensed company that should be bound by the real-estate commissions in the states where it operates, and in this case, the licensing process didn't protect this woman in Staten Island. But, I continue to maintain that Foxtons had an unrealistic business model, one that never made enough from each sale to remain profitable. Foxtons never bought the idea that people need good service -- maybe some of its agents did, but the company's overall record of customer service was abysmal. It seems to me that if the FTC and DoJ have their way and we get a lot more discounters in the market place, we're going to see a lot more of this kind of discomfort from people who work with unlicensed cowboys who are in the business for a quick profit, poor service and worse results.

But I digress. The DoJ names 12 states that are particularly egregious for not allowing rebates on commissions. New Jersey is one of them.

Now I ask you, what is the point of this? Can anybody negotiate the size of a sales commission in New Jersey? Of course they can. In fact, every real-estate agent is required to say that every sales commission is negotiable.

What's the difference between an agent saying "I'll sell your house for a 5-percent commission" or an agent saying "I'll sell your home for a 6-percent commission, but I'll give you a 1-percent rebate at the closing?"

The difference is, the straight 5-percent commission is easier to understand. And with the rebate, you have to ask the guy to clarify if he's giving you back a 1-percent of the selling price or a 1-percent of the commission, which would actually leave you paying more than 5 percent.

This whole idea of removing the controls created by the state real-estate commissions and opening the market up to anybody without a license smacks to me of the same idea of de-regulating the savings-and-loan associations. Remember where that got us?

What's your opinion?

Why discount commissions can hurt you

2007-10-03T06:32:00.000-07:00

When you hire a real estate agent, the law says you are free to negotiate the commission. There are some very fine agents out there who routinely work for less than 5 or 6 percent of the sellling price. But if you engage such an agent, there are some things you should keep in mind.

First, when you engage someone for a lower fee, you may not have the right to expect the same amount of service you would get from someone who wanted a higher fee. For example, I knew a RE/MAX agent in Morris County who used to routinely take listings at 4 1/2 percent commisisons. And based on the amount she would make on each sale, she calculated how much she could afford to spend advertising that house. I distinctly remember her telling me that one of her clients had reached her budget limit, but that client was still expecting the home to be advertised aggressively. It wasn't going to happen.

If you are expecting an agent to advertise your home a lot, don't expect a broker or an agent to be willing to do that for a reduced commission.

Likewise, if you want a listing agent with great capabilities on the Web, including virtual tours and the ability to tell you how many times people looked at your home on his or her Web site, don't be surprised if you won't get those services from a discount broker.

Last week, Foxtons declared bankruptcy. Why did that happen? Because their business model was flawed. They thought they could make their money on volume sales, and originally, they wouldn't even cooperate with other brokers on their 2-percent commission listings. Yes, they put every listing on the Web and gave it a virtual tour, but that wasn't enough to sell every house. But Foxtons -- it was called YHD or Your Home Direct in those days -- couldn't make a profit collecing only 2-percent commissions on each sale unless they didn't have to share that commission with another broker.

Then, when that model didn't work well enough, I believe YHD had to get an investor. Foxtons -- a British real-estate firm -- came in, ostensibly to give YHD the money to expand to other states. A lot of industry leaders I know were skeptical that YHD was making enough money to not need that infusion of capital here in NJ for its original offices, but that has never been proven. What I can say is that after Foxtons came in, the 2-percent commission finally disappeared and eventually even the YHD name disappeared. Foxtons took over, modified the business model somewhat and tried to make a go of it at 4-percent commissions.

Do a Google search of Foxtons, as I did last week, and you will read postings from hundreds of people who regretted listing their home with Foxtons because of the terrible service they got.

When Foxtons declared bankruptcy, we got an e-mail from another discount broker, Thomas Fisher, of HouseEpress.com in Bridgewater. I think what he has to say is worth quoting in full:

"The current downturn in the real estate market was only half the story concerning the recent demise of Foxtons real estate.

"Foxtons business model of discount commissions charged to home sellers is viable. Our own discount business has been in existence since 1998 and continues to be profitable.

"Foxtons' failure is due to their bombastic and competitive relationship with competing real estate firms. Their advertisements mocking the higher fees charged by other brokers won them no friends. In essence, the residential real estate community wanted to see them fail.

"Secondly they ostracized themselves further by cutting the amount of commission paid to the selling broker from 3% or 2.5% to 1%. In essence Foxtons did not want to share their listings with other brokers as they wanted to sell the house themselves in order to keep the entire 3% they were charging the homeowner. This hurt their sellers' chances of receiving offers from buyers working with other brokers. Clearly Foxtons wasn’t looking out after the interests of their own clients."

Which brings me to my last point for today. The most powerful tool for selling a home is the Realtors' Multiple Listing Service. This is a database of all the homes listed by brokers in a given area, and the brokers and their agents agree to show each others listings. This is a win-win situation for everyone: the sellers get the best exposure, the buyers get the best possible selection and the agents get a large inventory of homes to show. As long as the brokers cooperate with each other, it works pretty well. But when brokers like Foxtons think that they can treat other brokers unfairly, it doesn't work to anybody's advantage.

At the opposite end of the scale is a broker like Rick Weidel (Weidel Real Estate). A few years ago, he took a look at the trend for brokers to reduce their commissions, and he came to a different conclusion than most: he decided that to compete effectively, he should insist that his agents take 6-percent commissions on all listings. He reasoned that the best way to motivate his own agents and agents in other companies to sell Weidel listings was to offer a 3-percent selling commission (the listing broker gets 3-percent and the selling broker gets 3-percent). His motto is "Everyone loves to sell Weidel," because everybody likes to make the big commission. His program has been successful enough that he's been asked to show other brokers around the country how his company does it.

As I said, there are many fine brokers and agents who will often work for a lower commission. And if you engage one of them to sell your home, you may be very satisfied with their service. But before you engage them, make sure they will provide you with the level of service you want and deserve.

How do real-estate sales commissions work?

2007-09-27T09:26:00.000-07:00

When it comes to real-estate sales commissions, not all Realtors or realty agents are created equal. Depending on which company you are talking to, you will find that some agents are more willing to negotiate the rate of their commission than others. If you know how a broker handles the commissions in his or her company, you're in a better position to know how much "wiggle room" you might have as you choose an agent to list your house. And once you know this, I also want you to understand why, especially in today's sluggish real-estate market, you may be disappointed with a less-than-full-service agency, even if you have negotiated a great commission deal for yourself.

Traditionally, real estate agents in NJ generally asked for a 6% commission. Yes, they have always been required to say that you're free to negotiate with them, but for many years, commissions other than 6% were the rule. When a sale closed, the listing agency generally got half that commission, or 3% of the sale, and the selling agency got the other half. The agency would split the commission they got with their agent, usually on a 50/50 basis. So the selling broker would end up with 1.5% , the selling agent got 1.5%, the listing agent got 1.5% and the listing broker got 1.5%. This was a general rule of thumb. Eventually, some of the larger brokers would reward the most productive agents by giving them a larger split, say 60/40.

Then companies like RE/MAX came along based on a different model. RE/MAX decided it could make a great profit by attracting the industry's best agents, the ones with the greatest number of sales, and letting them get a huge split, say 90 to 96% of the company's share of the commission. In exchange, the agents themselves are responsible for their own advertising. Many RE/MAX agents saw this as an opportunity to undercut competition by reducing their commission. I knew a RE/MAX agent in the '90s who routinely asked for 4.5% sales commissions on her listing presentations. She could do this because most of the commission was going to her anyway--she could still make a good living at the lower rate because her broker was getting less. Realty Executive franchises work on a similar model. They charge their agents a monthly desk fee, and the agents control the whole commission.

In the late 1990s, YHD or Your Home Direct was born in Red Bank. This company thought they could change the real estate industry by charging 2-4% commissions. At that point, a lot of real estate brokers felt the pressure to cut their commissions to stay competitive. YHD paid their agents salaries instead of sharing commissions with them. In theory, it all sounded good. Most people I talked to in the industry at the time said that in the long term, YHD would fail because there was no way that a broker could provide sufficient service, including a dynamic Web site, other advertising and professional marketing, as well as maintain errors and ommissions insurance and other business necessities on a 2% commission. In fact, YHD actually seemed to be discouraging brokers from other companies from showing their listings because YHD couldn't afford to share the commissions on those sales. And this wasn't in the sellers' best interest. Eventually, Foxtons, a British company, invested heavily in YHD, originally to help the company franchise new offices outside New Jersey. Then, Foxtons took over the company and dropped the "YHD" name altogether. Was this because YHD was in financial trouble?

Today, Foxtons declared bankruptcy. It looks like all those industry experts I talked to when YHD was born were right.

Tomorrow, I will discuss why you should seriously consider paying a 6% commission if you are selling your home with a Realtor.

Welcome

2007-09-26T12:17:00.000-07:00

Welcome to the Courier News real estate blog. Please be sure to share your thoughts.