Property Grunt

Tuesday, January 03, 2006

The FSBO Wars: Battlefield Madison

In past entries including The Perfect Storm and FSBO Wars I have often written about FSBOs and how they are going to play a piviotal role in the real estate industry. I still strongly support the argument that they will become more prevalent in the real estate industry especially if the market completely tanks since sellers will want to cut as many of their costs as possible.

Jeff Bailey of the New York Times has written an excellent article about two cousins who own and operate FSBOMadison which is the biggest FSBO site in all of Madison, Wisconsin. I know what you are all thinking. Wisconsin. Who cares? All they have is cows and cheese. If you are a seller you should care since this means there will be other options that will cost less. If you are broker you should be concerned because sites like FSBOmadison are going to take a very big chunk out of your revenue stream.

Below is my analysis of the article.

January 3, 2006
Owners' Web Gives Realtors Run for Money
MADISON, Wis. - Across the country, the National Association of Realtors and the 6 percent commission that most of its members charge to sell a house are under assault by government officials, consumer advocates, lawyers and ambitious entrepreneurs. But the most effective challenge so far emanates from a spare bedroom in the modest home here of Christie Miller.

Ms. Miller, 38, a former social worker who favors fuzzy slippers, and her cousin, Mary Clare Murphy, 51, operate what real estate professionals believe to be the largest for-sale-by-owner Web site in the country.

The site, which charges just $150 to list a home and throws in a teal blue yard sign, draws more Internet traffic than the traditional multiple listing service controlled by real estate agents.

Madison is home to the University of Wisconsin and a city where the percentage of residents who graduated from college is twice the national level. It is also a hotbed of antibusiness sentiment, which turns out to be the perfect place for a free-market real estate revolution. Bucking the system is a civic pastime here.
"It may be an extension of the 1960's, when we stuck it to the man by protesting the war," said Mayor David J. Cieslewicz, who notices all the FsboMadison signs around town. "These days we stick it to the man by selling our own home - and pocketing the 6 percent."

Elsewhere, the Justice Department, free-market scholars, plaintiffs' lawyers and countless entrepreneurs are vowing to make real estate more competitive and to bring down sales commissions. To do that, they advocate forcing the Realtors' association to share control of its established listing services. Those critics seem to view the listings as an unassailable monopoly.

And who can blame them? Those 800-plus local listing services, controlled by local branches of the Realtors' association, help dole out about $60 billion a year in commissions to real estate agents and the firms that employ them. Despite numerous attacks, the association has been remarkably successful to date at protecting its turf. Through lobbying, litigation and legislation, the Realtors' group has managed to keep control of the crucial listings.

Ms. Miller and Ms. Murphy, however, built a separate and alternative listing service - a parallel market, much like the Nasdaq, which rose in recent decades to challenge the New York Stock Exchange's dominance and sparked competition that eventually reduced transaction costs for all stock investors.

This is what I would like to call the “A League Of Their Own Model”. Instead of fighting for the content that has been acquired by realtors, Miller and Murphy simply created a separate environment that would attract the content to their site therefore bypassing the need for access to the MLS.

The price competition is startling. FsboMadison listed about 2,000 homes in 2005 and said that about 72 percent of its listings sell. If those 1,440 houses averaged $200,000 per sale, the real estate commissions under the 6 percent system would have been about $17.3 million. Ms. Miller and Ms. Murphy collected about $300,000.
"They don't care - they're not profit-driven," said François Ortalo-Magné, an associate professor of real estate at the University of Wisconsin who has studied residential sales in Europe and the United States.

That lack of profit motive - big profit, anyway - may be the reason FsboMadison is succeeding. Most entrepreneurs want to quickly grab a piece of that $60 billion in commissions by offering a price lower than what most real estate agents charge to attract consumers. Ms. Miller and Ms. Murphy, working patiently, are focused on providing a place for buyers and sellers to meet and exchange information.

The paradox of business is that it’s primary objective is to make a profit. However the most successful businesses ignored profit and focused on providing the service or product to their customers which is what Ms. Miller and Ms. Murphy have done.

Obviously they could have made more money from their business by charging higher rates but that would require providing more services to fulfill the higher expectations of their customers. Leading to more paperwork if they were to accept these responsibilities, which would require more resources that would prove overwhelming to this two person operation. I think Ms. Miller and Ms. Murphy have the best deal in town considering that their overhead is quite low and besides $300,000 in Madison Wisconsin is like a million dollars in Manhattan and it goes a long way in their hometown. And all they did was setup a website and manufacture some signs which even they agree is not that special.

"I don't think we've done anything unusual," Ms. Murphy said. "We are not out to take over the market, to eliminate the real estate world. We're just here to offer this service."

To real estate agents, "for sale by owner" conjures up some cranky tightwad trying to sell an overpriced, ramshackle house. Agents utter FSBO as if there was something foul stuck to the bottom of their shoe. "It's a commission-avoidance scheme," said Sheridan Glen, manager of the downtown Madison office for Wisconsin's biggest real estate broker, the First Weber Group.

Mr. Glen ticks off the tasks that real estate agents handle: using market expertise to price a house; advertising and showing it; negotiating an offer; organizing the paperwork for closing. "We do a good job," he said. "We deserve 6 or 7 percent."

It is not a scheme. The FSBO is another business model and brokers need to accept the fact that the FSBO is becoming more prestigious and attractive to consumers. There is no doubt that brokers work very hard for their commissions but it is up to the seller to decide if they want to exclude the broker from the equation.

The Justice Department sued the Realtors association in September, claiming that its rules for listings unfairly disadvantage online brokers who might stimulate price competition in the business.

Agents take comfort by reminding themselves that FSBO and other alternative sales methods blossom in an up market and tend to wither in market downturns. The market is slowing now. And they note that owner sales, which have been around as long as property rights, have always accounted for something less than 20 percent of home sales.

Don't take too much comfort in that notion. As I have stated before if the market takes a big enough hit, sellers will be looking for ways to lower their overhead and the first cost they will look to trim is the commission.

Kevin King, executive vice president of the local Realtors' association, runs the multiple listing service but says he pays no attention to FsboMadison. "It's not important; I don't follow it," he said. "I don't even know the people."

This type of dismissive attitude is going to cost Mr. King a lot of money and unfortunately it is a very popular sentiment among brokers. Which they will certainly regret.

But times have changed. Most consumers are now accustomed to executing large transactions, including airline tickets and investments, over the Internet with little or no assistance. Buyers and sellers are now far more comfortable dealing with each other through Web sites like eBay. And it is far easier to find the FSBO offerings on a single Web site with photographs and property descriptions, not unlike the official multiple listing service. Do-it-yourselfers were hard to find among the classified ads and makeshift yard signs.

This is the future of real estate transactions. Eventually closings will be done online. It can no longer be ignored.

A robust for-sale-by-owner operation has also helped open the Madison market for other alternatives to real estate agents. Jason A. Greller, a lawyer, charges a flat fee of $600 to help a buyer or seller on a house transaction and handles about 200 a year. Many of his clients find a house on FsboMadison and also see his advertisement on the site.

Stuart and Sheri Meland, both 28, put their graduate studies on hold in 2002 and started a business that offers sellers a spot on the traditional multiple listing service, plus a yard sign, for a flat fee of $399. Most sellers agree to pay a buyer's agent a 3 percent commission, show the home themselves and either negotiate on their own or hire a lawyer.
William A. Black, a lawyer for the Wisconsin Department of Regulation and Licensing, says he does not think consumers who bypass real estate agents are missing much. "The majority of residential transactions are very simple: 99 percent can be done without a broker. And the 1 percent screwed up - the broker couldn't have prevented it."

I concur with Mr. Black on his opinion. Brokers are no longer the gatekeepers of information. Consumers have more resources available to them thanks to the internet and are more savvy on how real estate works.

Alternative listing services would need to reach a combined 50 percent to 60 percent of a market to topple a multiple listing service, Steve Murray, an industry consultant, guessed.
That is what David B. Zwiefelhofer, Webmaster for FsboMadison, would like to see, and he constantly encourages Ms. Miller and Ms. Murphy to expand. "I think this is the one place in the country where FSBO could overtake" the multiple listing service, he said.

From my experience in the field and from what I have I heard on the wire, customers are getting most of their information from online resources. Seeing people running around with the New York Times Classifieds tucked under their arm is starting to become a rare site. This is just the beginning of the FSBO based operations that will be popping up all over the country. I do forsee Mr Murray's guess becoming a reality in the near future. The technology and information are readily available for an army of entrepeneurs who are out to invade the broker empire.

For those of you who are thinking of throwing your hat into the FSBO ring remember that it has taken FSBOMadison 7 years to get this point. And simply copying their business model will not ensure success. What works in Madison may not work in Manhattan. But only time will tell.