Property Grunt

Tuesday, September 05, 2006

What's next?

The end of the labor day weekend is considered the start of the sales season, however we are entering a very uncertain period. Recently the New York Times present 3 possible scenarios of where the market will go.

Regardless of whether we are facing a soft landing, a prolonged slump or a crash, there are certain realities that will reveal themselves as the market proceeds to go the the downward spiral.

6 percent Swan Song

My perspective on brokers and the 6% commission is no secret, as far as I am concerned is an artifact of days past in the residential real estate industry.

Damon Darlin's recent article The Last Stand of the 6 Percenters gives an update of the current developments in online and discount brokerage and the building tension with traditional brokers and those who utilize non-traditional.

“If you give people freedom, you can’t take it away,” Mr. Kelman said. “A consumer force has been unleashed.”

This situation has been brewing for quite awhile but it is in my opinion that this could be the end of days for the 6% fee. Buyers and sellers are more open to other options that do not rely on the traditional broker. Particualrly in our current market, people will be more apt to cut their costs in any way possible. Even it means cutting out the selling agent.

“You have to play by their rules until the value to the customer drives the change,”
Mr. Fox, the chief executive of BuySide

Brokers, particularly Manhattan brokers, will not yield one inch to these developemtns. But it's not up to them. It's up to the customer.

Sticking to their guns

There will be a significant number of sellers in New York City who will sit on their property until a buyer meets their price. These sellers have built up a tremendous amount equity in their homes and even though they have missed their window, they refuse to believe they will not cash out as well as their fellow sellers.

Unlike the distressed buyer these sellers can afford to hold their own because they have the income or they have passive income coming in from their investments. Who are these sellers? They range from business owners, soldiers in the army of FIRE (Finance, Insurance and Real Estate) or simply the super rich that are described in 740 Park Ave. These people are not going to play hardball. They don't need to. So meet their demands or f**k off.

Because they are sitting on the catbird seat, I wouldn’t be surprised if they decide to pull their homes off the market until a later date.

Circling the drain

The distressed seller will be more distressed than ever. With interest rates rising and the uncertainty of our economy, the people who took the approach of buy now pay later are really paying for it. With higher monthly payments and taxes, there will be a growing number of distressed sellers who just want out of the game.

These desperate sellers will do everything they can to move their property and to cut their overhead they will enter fsbo territory putting up signs and using craigslist.

Canon Fodder

There will be massive amounts of turnover in the real estate brokerage community. From floor to ceiling no one will be left unscathed whether it is voluntary or involuntarily. Obviously those people who are not making deals will simply decide to pack it in and look for another gig. Instead of focusing on the green they will be looking for the bennies. There will be those who decide to stay in real estate but enter the administrative arena as secretaries or assistants. Its not glorious nor is it a lot of money but at least they won’t have to worry about medical insurance. And if that doesn’t work there is always Starbucks.

Even good earners will be affected by the turnover and I am not talking about agents but managers also. Brokerages will engage in an internal review to determine who goes and who stays. Obviously the main reason is to cut people loose is to lower the overhead of their operations.

The second reason is to create momentum. In real estate brokerage stillness is death. Agents need to be constantly hustling. Considering that brokers are no longer propelled by the current market it is crucial that they do not become stagnant. If it means whacking a couple of agents, shutting down an office and consolidating agents or even replacing a manager who has an impeccable record, then so be it.

The philosophy of the broker is that the deals are out there and there is money to be made but current market conditions demand that brokers need to work harder for those deals. So by taking a couple of successful brokers and placing them in offices that are waning in sales the logic is that the infusion of winner circle's blood will infect the pack. Or at least scare the crap out of the flock to get do their jobs.

All of these factors are going to put a ton of pressure on agents. So expect more incidents of brokers ripping off other brokers, buyers and listings being stolen. Tension among brokers who have their own groups could possibly become very high as assistants may ask for advances on future deals or demand more compensation for their work.

There will be a ton of broker switching among buyers and sellers and to make it worse, sellers will attempt to negotiate the 6% commission.

I urge everyone during this time of change to relax and roll with the punches. Yes it will be rough. For some it will be a complete nightmare. But getting our emotions involved will only make things worse for ourselves.