In the real estate business, a deal is not always a done deal.
There are a variety of factors that can derail a home sale, and the failure rate tends to accelerate in an environment of slumping sales and prices. That is bad news for agents, as they may invest money in marketing a home for sale with no guarantee that they will recoup that investment if the home does not sell.
Online real estate site RealtyBaron is seeking to provide more certainty to agents by building a system that allows them to hedge the risk that they will lose money if the home does not sell.
RealtyBaron, launched in 2004, is a real estate agent rating and review site that also offers an online system in which agents bid for business by adjusting their commission rates and rebates.
Marc Dugger, RealtyBaron founder, said the new ListingHedge system, launched last week, is using play money — called "BaronBucks" — during this testing period, but the plan is to offer a hedging system that uses real money within a year.
"The BaronBucks accumulated by agents during the beta period will be exchanged for shares in RealtyBaron Inc. after the beta period," the company announced on Tuesday. "This allows agents to experiment with hedging risk while earning ownership in a Real Estate 2.0 startup."
In an example provided by the company, a home sale with a $4,500 commission share for the listing agent could lead to a total profit of about $3,000 for that agent after considering total marketing, materials and other expenses of about $1,500 for selling the home.
If the agent hedged the home-sale deal, the hedge would have cost an estimated $300 (depending on market conditions and the agent’s past performance), for an estimated $2,700 profit if the deal was completed and a profit of $1,200 if the deal was not completed, according to a company description of ListingHedge.
"A lot of times a listing can fall through, especially in markets like we’ve been in recently, whether it’s because the listing just simply expires or a seller withdraws the listing," Dugger said.
Agents must be ranked at the RealtyBaron site in order to be considered for the commission hedge, he said, and that ranking is based on a variety of factors such as client reviews and sales history.
"The higher the agent rank you have, the less expensive it’s going to be for you to hedge the listing," he said, noting that the model is similar to that of insurance.
While there are companies that offer to pay agents’ commission income in advance when transactions are pending, Dugger said that he does not view those sites as competition because the ListingHedge system is designed to allow agents to hedge at an earlier stage in the process.
"I’m a little further upstream … (when the) agent is still considering taking a listing."
He said the system will likely take several months to test, and the plan is to "flip it over to real money" next spring. "It all depends how many agents have been practicing (with the system). We are allowing them to get used to it and allowing us to calibrate the system."
Dugger said he anticipates that a larger company will be backing up RealtyBaron in the implementation of a real-money system.
The system caters directly to agents, and factors in the share of commission that the listing agents are paying out to any cooperating brokers on the buyer’s side and also the amount paid to the listing agent’s broker.
Dugger said he has concluded based on his own research that the ListingHedge platform is compliant with existing laws. "I haven’t uncovered anything to suggest that this product wouldn’t be allowed," he said.
One potential use of the hedge would be in cases where prospective clients asked an agent to accept a lower fee than the agent asked for. The agent could ask for a small fee from the consumer in exchange for a reduced rate to list the home for sale, Dugger said, and then use that fee to hedge against the risk that the deal will fall through.
Earlier this year Dugger announced the launch of AgentRank.com, a site that allows consumers to search for agents based on agent location, client endorsements and sales history (see Inman News).
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