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The Role of Real Estate Agents in this Economy


									Proceedings of ASBBS                                                        Volume 16 Number 1

           The Role of Real Estate Agents in this Economy

                                        Peyton, Reginald
                                  Christian Brothers University

                                          Lewis, Gilda
                                  Christian Brothers University

                                           Sarah Pitts
                                  Christian Brothers University

 The Real Estate industry is shifting from traditional broker and typical customer relationship that
previously provided for individual home ownership to more of a real estate servicing mode that involves
working for a different customer base. The downturn in the housing market has affected the careers and
subsequently the incomes of many real estate companies and real estate agents. The current economy has
caused the retooling of the technology skills of many agents and real estate companies that depended
completely on the typical homeowner purchase transaction.

The era of REO (Real Estate Owned) by banks or other institutions is a prevalent manner of sales in this
economy. REO’s provide the realtor a challenge in mastering the technology utilized by the REO as well
as the following revenue results: 1. BPO (Broker Price Opinions) which gives the realtor’s assessment of
the current value of the property based on recent sales and the current condition of the property with
repairs or without repairs. 2. Listing of the property by the realtor in an as is condition for sale on the
open market. These types of properties were considered prime for investors to buy and sell at a higher
price until the recent credit freeze.

Can the real estate professional employ traditional marketing methods that work for typical
entrepreneurs or do these times create the need for a shift in marketing tactics to ensure that the realtor
entrepreneur stay financially secure?

The Housing industry provides employment to a myriad of professions. Construction workers, insurance
agents, pest control workers, appraisers, real estate professional organizations, landscapers, real-estate
broker agencies, real-estate agents and the list goes on of the professions affected by the past years and
current housing crisis. This list does not include the governmental jobs affected by the state of the

ASBBS Annual Conference: Las Vegas                                                  February 2009
Proceedings of ASBBS                                                        Volume 16 Number 1

housing industry. According to the U. S. Department of Commerce (Los Angeles Times)i for every job
lost in construction, real estate or banking, three other positions will disappear.

 Real estate salespeople have suffered during the latest blow of the housing crisis. The normal methods
 and influencers of estimating the sales person’s income will be examined as well as a hypothesis of what
 affects the income of today’s realtor in this paper. It is apparent that the downturn in the mortgage
 industry has affected the number of brokerages and the number of agents making a living as a real estate
 agent. The Real estate industry has been characterized as an industry with high turnover, low per capita
 income and increasing competition (Johnson, Dotson and Dunlap 1988)ii. This is even more evidenced
 by the escalation of the use of technology, which has created an era of new competition. The various
 web applications such as having a firm’s website, the Multiple Listing Service (MLS), the number of
 third party websites on which the firm’s listings can appear has created new competition for the real
 estate brokerage industry.iii Since 2005, Internet usage has magnified and the real estate technology
 landscape includes agent’s websites, government sites that reveal taxes and other information that is
 useful to the public and the real estate industry, and sites that are used by Banks and other institutions
 that own foreclosed properties.

Without a doubt, the Internet has made the MLS (Multiple Listing Service) a tool that has replaced the
need for printed materials to     sell a property. In the late 1990s, a study was conducted in Ohio (Bond,
Seiler, Seiler and Blake 2000). iv In this study, 249 Ohio real estate brokerage firms were asked if they
maintained their own web site. Only 40 of those surveyed maintained their own websites, 80 of the
remaining 208 firms listed their properties on someone else’s server. Those that did not have a web
presence indicated that they were planning to add a web site, or they thought that websites were too
expensive, and unprofitable and unnecessary. Fast forward to 2008 and the story is entirely different.
Most if not all firms have a web presence. Most ISP have links to third party web sites that offer
mortgage loans, homes for sale searches and government links to records about homes.

Banks and other institutions that own foreclosed properties use the internet exclusively to valuate the
property and to provide the information that is needed to expedite the foreclosure and the subsequent sale
of the property. Organizations such as Fannie Mae, Freddie Mac, and HUD have websites that are used
to gather information about homes from contracted brokerages or agents. Many of the banks and other
institutions that require Broker Price Opinions (BPO) use the internet to acquire this information.
Contracted agents represent the owner of the foreclosed property and send information concerning the
valuation of the property through the internet. This information typically includes pictures of the
neighborhoods of the property, comparisons of the homes for sale in the neighborhood of the property,
interior and exterior pictures of the property. The condition of the property is also noted and comps are
prepared to send to the company that has taken the property and the internet is the only means by which to
send this vast amount of information.

Is the BPO method of producing income acceptable to the majority of experienced realtors? According to
the National Association of Realtors (NAR), the typical Realtor in 2007 was 51 years old and works 40
hours a week, and has been in the business for seven years. Realtors with two years of experience or less
earned a median of $15,300 with the median for all Realtors was $47,700, which was down from $49,300
in 2004. Is it possible that the experienced realtor with dues and other promotional expenses can exist on

ASBBS Annual Conference: Las Vegas                                                  February 2009
Proceedings of ASBBS                                                         Volume 16 Number 1

the BPOs income that result in a $50.00- $75.00 fee being paid to the Brokerage? The agent gets 70%-
85% of that fee.

Promotional activities in the past often included an advertising budget by the most successful real estate
agents that funded pictures on buses, gifts and loyalty schemes. Today some markets have gone so far as
to offer the buy one get one free home promotional scheme. Schemes of this type could result in a sale but
the cash needed was insurmountable for the average homeowner. This type of promotion was tried in
California and gained national exposure. Builder bonuses are also a current method to reach the current
available market of new homebuyers. This shows that the market is desperate for sales, even at the
expense of making the commission. Typically, the real estate brokerage compensates the agent on the
commission form of income. The commission structure is standard which means that most sales of
residential property nets the agent a six % commission. For instance, the property sells for $500,000, the
real estate agents grosses about $30,000. This type of commission structure lured many into the industry
when the housing market was in the boom years of 2004-2005. Making the lure of home buying and
selling more attractive was the availability of mortgages. The impact of the higher the price of the home
the more money was to be made. This led the real estate agent to push the more expensive homes to those
that could not afford them. Thus the era of creative financing was formed. This creative financing
included the mortgage lender who also makes more money on the higher priced homes. Home prices shot
up astronomically and the gullible homeowner believed in the sales agent and the mortgage lender.

The cause for the gullibility of the homeowner was the promise of the re-finance of the mortgage within a
few years when their income supposedly would more than compensate for the Adjustable Rate Mortgage
(ARM) that the homeowner was led to believe was the way to get into the dream home. Instead of getting
into a home within their income range, the buyer was led by the agent, who has become a trusted advisor
away from the traditional fixed rate mortgage into the dream home of the ARM. ARM’s have led to the
home nightmare as the note for the home became impossible to pay for those whose incomes did not rise
as promised by the mortgage lender. These agents were eager to make the sale and the subsequent
commission from the home sale. During the 1980’s and the early 1990’s 7% was considered the standard
full service commission rate in many large metropolitan areas. During the late 90’s and into the housing
boom years, average commissions dropped steadily. One key reason was the relative ease of selling
houses at ever-billowing prices, in the hottest markets buyers lined up and waged a bidding war.v
Additionally there is a relationship between the brokerage and their affiliate, which increasingly rely on
the capture rate, which is the percentage of home sale transactions that use the brokerage’s title,
settlement, and mortgage business. Any method to earn more income in these times is often times being
used in this declining market.

The correlating value of income takes into account the expenses that the real estate agent incurs when
pursuing this profession. Expenses in the current market include “Premium Positioning” which means
that the web site operator is paid extra to ensure that the listing pops up prominently whenever consumers
shop the web site. Other expenses include the professional staging of every listing, professional
photography, and color According to some agents, you also have to have incentives such as
higher co-op commissions for the buyer’s agent. These expenses are the listing agents’ but before
becoming an agent the outlay of money includes: fees to take the initial exam, fees to join the Realtor
Association and to gain access to the local multiple listing service, and the normal costs of starting a new
business such as ordering business cards and starting a web site. Generally, it costs between $1500 to
$2000 to get set up as a Realtor.

ASBBS Annual Conference: Las Vegas                                                   February 2009
Proceedings of ASBBS                                                            Volume 16 Number 1

Other dynamics of the market place include the emergence of online web-based real estate companies that
operate on a set fee structure. These discount firms offer rosters of options from basic online listings to
personal guidance from brokers. Buyers are, increasingly performing time guzzling research that used to
be an agent’s responsibility.vii This further attributes the role of the Internet in today’s market place of
selling homes. According to the National Association of Realtors, about 80 % of buyers use the Internet
as opposed to just 2% in 1995.

The number of foreclosures on the market is directly responsible for some realtors making some money.
However, the rational regarding the amount of income is directly correlated to the number of houses sold.
Real income in the real estate industry comes not in the number of BPOs performed by the agent but by
the number of homes sold. There is a credit crunch for new mortgages. This absence of approved
mortgages is definitely affecting the once booming mortgage lending business. The number of approved
buyers is shrinking and with a foreclosure on the credit report what are the chances of being able to apply
and gain approval for a loan? The homeowner becomes a renter, and the supply of rental units is growing
in most sectors of the country.

A direct result of these factors is the exiting of real estate agents from the field. According to the National
Association of Real Estate Brokers, membership increased by 163,000 in 2005 and grew by only 6,000 in
the first 6 months of 2007. If taken into account the numbers of job elimination of 3 jobs for every 1 job
in the real estate industry, the unemployment figures are just the tip of the iceberg. Chang-Tai Hseih, a
professor of economics at the University of California, Berkley said that he was not surprised that agents
were getting out. “When the price of housing goes up, you have people jump in and when the price of
housing falls, people jump out. There is the 80 /20 rule, that 80% of the work is done by 20 % of the

Investors prefer to hunker down these days in front of their fireplaces instead of the stock quote pages.
Several recent polls show investors overwhelmingly preferring real estate to stocks. According to the
National Association of Realtors in 2001, median home prices increased 7.5 % and there was an
anticipated 6.6 % increase in 2002. Likewise, a CBS Market Watch/CBS News national investor’s poll
found 84 % of investors viewed real estate as a safe investment.ix In the span of 5 years the tables have
turned. Not only has the stock market awakened to the fallacy of the real estate investment, real estate
investment has started down a steep slippery slope.

The subprime mortgage crisis spilled over into commercial real estate because the same investors make
both residential and commercial investments, according to Joe Rubin, principal transactional real estate
practice Ernst & Young, New York, he also said that if residential gets bad enough, it would affect the
whole economy and commercial funds would be impacted.x AIG, which was buoyed afloat, is now more
likely now to spin off its real estate investment management business, other financial institutions that are
expected to sell real estate securities and residential properties include Lehman Brother Holdings and
Goldman Sachs and Morgan Stanley. According the Buchanan Street estimate the reduction could
amount to $5 trillion. Accordingly there will be some fabulous opportunities in this because there will be
folks who are forced to sell because they cannot refinance. There will be more sellers than buyers and
purchase prices will decline. However, there is speculation that money managers are sitting on billions of

Accordingly, the well-informed real estate agent is taking stock of the market place and making real
estate property investments during this time. Why? There is a stock of inventory and that presents a great

ASBBS Annual Conference: Las Vegas                                                     February 2009
Proceedings of ASBBS                                                        Volume 16 Number 1

opportunity for personal investments for realtors. Similarly, home prices have fallen in many areas but
rents have not followed suit. xii


Hong, Peter, (2008) “Real Estate Downturn Leaves a Barren Economic Landscape”, Los Angeles Times,
        ,2008 Business Desk, Part C 1
Johnson L.L., M.J. Dotson and B.J. Dunlap,(1988) “Service Quality Determinants and Effectiveness in
        the Real Estate Brokerage Industry “ Journal of Real Estate Research 3:2, 21-36
Benjamin J. D., Peter Chinloy, G. Donald Jud, and Daniel Winkler, (2005) “Technology and Real Estate
        Financial Performance” Journal of Real Estate Research Vol.27 No.4-2005 409-426
Bond M. T., M.J. Seiler, V. L. Seiler and B. Blake (2000) “Uses of Websites for Effective Real Estate
        Journal of Real Estate Portfolio Management 6:2, 203-210.
Harney, Kenneth (2007) “Full Commissions Make a Comeback” The Washington Post June 9, F01
Pothier, Mark (2007), “Talking About a Revolution, Who Needs a Traditional Real Estate Agent in These
Days of
        Discount Brokerages, Easier Access to MLSs, and Sell It Yourself Firms” The Boston Globe
Magazine 34
Hafner, Kathie (2007) “In Reality, Cues for an Exit” The New York Times September 7, Business,
Financial Desk 1
JFP (2003) Journal of Financial Planning, January 2003 “Investors Hunker Down Home” p.26
Jacubus, Arleen (2007) “ Commercial Realty is Next to Feel the Pain; Subprime Mortgage Woes hit
        Highly Leveraged Properties” Pensions and Investments March 19, Real Estate pg.1
Jacobus, Arleen (2008) “Real Estate Impact to be Massive” Pensions and Investments September 29,
News p.1

Evans, Marilwyn, 2008 “Tips for Investing During a Downturn” Realtor

ASBBS Annual Conference: Las Vegas                                                 February 2009

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