Editor’s note: Inman News has compiled a list of 10 reforms for the real estate industry. The list incorporates ideas shared by readers in our Roadmap to Recovery project, in which we asked you for your input. We were overwhelmed with the response. The compilation below is our best effort to summarize these reforms. This mold can be reshaped with your input. It is a starting point for evolving discussions. We invite your views on how it can be improved. We will offer in-depth, focused coverage on topics that appear on this list over the course of the year to surface ideas, insight and innovations that we hope will assist you in your business. You can view our plan for future coverage in an editorial calendar that is published online. Through the month of February, for example, we engaged in a discussion about real estate compensation. Readers shared their views about various compensation models, including the traditional commission-based pay structure, services based on hourly fees, and an employee vs. independent contractor model.
It was a painful exercise for some: Discussions about compensation in the real estate industry are akin to talking politics. There is tension and emotion. The conversation makes some industry participants defensive, with some others going on the offensive. We wore some of you out with the dialogue — some said there is plenty of choice and the compensation system is working just fine for them and their clients. Our purpose here is not to add to your pain but to identify a variety of business strategies and tools and let you decide which ones make sense for you. In March, we will offer focused coverage on the form and function of real estate offices and explore virtual-office technologies (see “Beyond brick and mortar“). We seek your continued feedback and participation as the industry moves through this historically difficult time.
The 10 Points List
1. Create a more effective regulatory framework for real estate and mortgage professionals. From licensing requirements to continuing education to enforcement, the rules governing real estate and mortgage professionals are too relaxed. In the boom, too many unqualified professionals were proffering poor advice. Since they play such an important role in this large consumer transaction, they should meet a much higher professional standard.
The federal government should pass minimum national standards to ensure that real estate and mortgage professionals receive a level of training that truly prepares them for work in the industry and weeds out the treasure-seekers and scam artists. States would then be allowed to pass tougher rules.
A strict set of examinations should be required and on-the-job apprenticeships, while not mandatory, could be counted toward fulfilling the minimum licensing requirements.
Progressive companies and trade groups may require performance disclosure forms that clearly state to clients a detailed transaction history and references including past clients.
A centralized, national licensing database for real estate and mortgage professionals will help consumers understand the work history and complaint history for all licensees, regardless of which states they have worked in, and to view details about past and pending complaints. There must be improved mechanisms to report and record complaints, and adequate budgets for investigations and enforcement actions.
Trade groups also must improve their systems for reporting bad behavior and revoking membership for violations. Consumers need to know when there are companies and individuals with extensive rap sheets and other bad marks.
2. Reform the mortgage origination process.
The mortgage origination process must be more transparent to consumers, and loan originators should not be rewarded for placing them in riskier, costlier loans. The new standardized loan disclosure forms and procedures being implemented under the Truth In Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA) are a step in the right direction, providing some protection for consumers from risky loan features and helping them shop around for the best deal.
The Federal Reserve and U.S. Department of Housing and Urban Development must come to an agreement over the treatment of yield-spread premiums, rebates paid by lenders when borrowers take out loans through a mortgage broker with higher interest rates than they might otherwise qualify for. When borrowers choose to take out a higher-rate loan, yield-spread premiums should go toward their closing costs — not in the mortgage brokers’ pockets.
Disclosures should allow consumers to make an apples-to-apples comparison between offers from banks and independent mortgage brokers.
3. Promote a more efficient real estate industry, reducing costs and promoting services that favor the consumer.
Too many parties are involved in the real estate value chain — directly or indirectly earning sales commissions, in some cases disguised in fees. This adds expense to the transaction, discourages sales in a low-inflation housing market and creates confusion for the consumer.
The down market will winnow out many of these inefficiencies but more must be done. Tort reform and aggressive enforcement of the settlement between the U.S. Department of Justice and National Association of Realtors should create more competition and allow for one-person broker shops to operate more efficiently.
Technology adoption allows for agents and brokers to conduct business virtually, and can eliminate the expense of office space. Online home-shopping tools can help consumers narrow the focus of their home searches even before contacting an agent.
The current broker model is in disrepair and should not be fostered by broker inaction and industry enablers.
Brokers who run “body” shops — warehousing agents, no matter the skill level, in massive offices — must slim down their agent pools to the best and brightest. This is for survival’s sake. Those brokers who provide true value in their services will have an easy time recruiting quality.
Wasteful advertising spending also contributes to the cost of the transaction and could be minimized by improved measurement around successful online ad investments. Agents should be encouraged to adopt social media and mobile technologies into their businesses to communicate more instantly and transparently with consumers.
4. Ensure competition and transparency in the way real estate agents are compensated.
The current reward-based compensation model has many advantages, as sellers can transfer all of the risk: They can walk away from a deal and an agent without paying a dime. And buyers can do more or less the same. Even so, the industry must ensure that consumers and real estate professionals have the widest possible variety of options.
Rebuilding trust is essential to a better-functioning real estate market. The dominant compensation model represents a glaring area of public mistrust and confusion. Some consumers believe that agents are overpaid and that the sale price does not reflect the time and effort that goes into a sale, nor does it reflect on the quality of the agent. Allowing the listing broker to set the buy-side compensation is a blind offer of payment that does nothing to distinguish the quality of the broker representing the buyer and the effort that broker puts into the deal.
A compensation marketplace based exclusively on a percentage of the sale price of a home leaves the consumer with a narrow number of choices. The variance in home prices across the country points to the problem. It may take a similar amount of time, effort and marketing dollars to sell a $100,000 home in a given market area as it does to sell a $1 million home in another market area. Also, real estate professionals may receive the same compensation while investing different amounts of time, money and energy to market and complete a sale on homes of the same price but in different market areas. Compensation options should be available that are based around the actual cost of providing real estate services and the quality and variety of the services provided.
The industry must embrace a robust marketplace with a range of pricing options, including full commission, flat-fee and reduced commission models; hourly fees; and a low fixed fee with a success bonus if certain agreed-to benchmarks are met. Restrictive pricing rules and practices — that have no obvious benefit for consumers and seek or serve to squelch competition — should be banned, including anti-rebate rules and boycotts of companies with alternative pricing models. Buyer’s agents should work directly with buyers to negotiate compensation for their services.
Real estate agents should be required to provide up-front, detailed disclosures on how they are compensated in the real estate transaction process, and the best agents should demand and command more money for the quality of the services they provide.
5. Consolidate MLS information into a single national database.
Accessible data helps create a more transparent and better-functioning housing market. Existing MLS boundaries do not serve consumers or real estate professionals, nor do overlapping jurisdictions and conflicting rules for neighboring MLSs. Federal antitrust law enforcement agencies will have an easier time policing MLSs when there are fewer sets of rules and there is a self-policing ethic built into MLSs. The industry, in partnership with third-party companies or on its own, must free the data — both to ensure it remains the most relevant source of real estate information to consumers and to allow real estate agents and brokers to refocus on the core services they provide to their clients.
The force of innovation will ultimately bypass the current MLS structure if the industry ignores the needs and demands of consumers, agents and brokers.
There are few technology barriers to prevent a transformative national system — perhaps a network of massive regional or statewide MLS systems — from seizing control a within a matter of weeks if those tied to the current structure fail to budge. Data standardization and rapid consolidation are key. Those MLSs that seek to preserve isolation will find that stance a self-fulfilling prophecy. A common complaint by industry professionals is that consumers have better access to real estate data through third-party public online sites than real estate professionals have through industry channels.
The Houston Association of Realtors in Texas and the Washington, D.C.-area regional Metropolitan Regional Information Systems (MRIS) MLSs offer up models for investing in public-facing Web sites, which can be beneficial for consumers and industry participants.
Relaxed VOW rules and new VOW innovators should ensure that more data gets to the public. The CALMLS statewide database effort in California may quickly grow up as a model for a national database.
And in improving the structure of the MLS system, the industry should maintain a broad and diverse MLS oversight group to ensure that consumers’ rights and interests are not overlooked. The industry must be mindful of the trust that consumers instill in real estate professionals when they open up their homes to the world.
With universal data access, innovation and competition should be encouraged among traditional companies, the National Association of Realtors, local trade organizations and online real estate firms.
6. Real estate professionals should provide buyers and sellers with vastly improved market analytics.
Despite the availability of property information, consumers are not receiving enough detailed data and sophisticated real estate data analyses before entering a transaction. Like the format in a well-done appraisal report, real estate professionals should provide each buyer and seller with a set of comprehensive real estate reports that detail costs and valuation trends, quantify risk, and account for market conditions.
The reports should be updated as conditions change. Real estate professionals should stand by the analyses and be held accountable for claims about the market and for unqualified forecasting. Tech companies that provide robust qualitative information at the micro-level should partner with MLS organizations, brokers and other tech companies to give consumers robust market data analyses.
7. Reform the mortgage securitization process.
A functioning, healthy secondary mortgage market is a prerequisite for a housing recovery. While the government will continue to play a direct role in the securitization and guarantee of loans for some time through Fannie Mae, Freddie Mac and the Federal Housing Administration, there is a proper place for for-profit companies in the secondary market.
A major cause of the loose lending practices and price inflation of the housing boom was the ability of mortgage originators to divorce themselves from the risks involved with the loans they arranged, transferring that risk to secondary market investors. Although loan originators cannot be expected to retain all of the risk of the loans they make — this would limit the number of loans they could arrange, and defeat the purpose of having a secondary loan market — they should not receive greater rewards for placing borrowers in higher-risk loans.
Secondary-market investors also need better transparency in the process, so they can demand rewards that are commensurate with risk. This could be accomplished by changes to the way rating agencies are compensated and limitations on the complexity of the investments mortgages and mortgage-backed securities can be packaged into. Investors can more readily assess the riskiness of mortgage-backed securities that contain a relatively homogeneous pool of home loans than a collateralized debt obligation that depends on a number of underlying assets.
8. Reduce settlement services costs, regulate bundling of services to prevent price gouging.
Lawmakers and regulators should take steps to insure that title insurance and settlement services are marketed to consumers, rather than real estate brokers and others in a position to steer consumers to a particular provider. The new RESPA rules — which allow lenders to offer home buyers a competitive package of settlement services with loans — are a step in the right direction.
The sales infrastructure of title companies adds to the cost structure and should be overhauled from top to bottom. New lower-cost title policies should be promoted and an environment for more competition should be fostered.
Bundling of title, mortgage and real estate services is a black box that should lead to a simpler transaction but in some cases hikes costs, confuses consumers and can spawn fraud.
Affiliations among industries that are not straightforward can steer business based on company benefits, not consumer choice and savings. There must be disclosure to explain to consumers when companies playing a role in the same real estate transaction share a roof or are active partners.
While the bundling of services in a real estate transaction may not inherently inflate costs, consumers need better online methods for comparison-shopping. Standard terms and the rationale for the costs must be better explained and better policed.
The various fees that consumers pay in closing a real estate transaction must be standardized, with better estimates of closing costs and enhanced enforcement of laws to prevent illegal kickbacks and affiliations that harm consumers.
9. Ensure affordable housing, smart development.
Commit funds and preserve truly affordable housing options for those who cannot otherwise afford housing. There must be housing options beyond rental units for teachers, firefighters and nurses alike to enable them to live in the communities they serve. Community groups and government agencies should expand spending and other incentives to encourage affordable housing developments and programs. Some of the sprawl-to-sprawl developments that built up during builders’ latest housing “Gold Rush” are now modern ghost towns. In addition to promoting more redevelopment projects to ensure an adequate and varied housing supply near job centers, communities should work to actively limit overbuilding that has led to fallow fields of foreclosed homes.
A substantial segment of the population will be banned from homeownership for a time after foreclosure and bankruptcy — we need to consider clemency as they seek new housing, and make sure those unable to buy again have an ample supply of affordable rental units. Those former renters who lost the roof over their heads through foreclosure must have housing options. Building codes must be relaxed to make it easy for owners and developers to convert condos to rental units, and for homeowners to add second units and complete remodeling projects to make room for unemployed family and friends.
Builders are looking for things to build. There is an opportunity for local governments and community groups to act quickly to develop programs to convert vacant, foreclosed properties and empty, stagnant lots from axed construction projects into affordable housing or other projects and prevent a foreclosure domino effect from gutting entire communities. This can be facilitated through grant money and other forms of assistance.
With more energy crises in store, growth and urban planning should concentrate on population centers and public transportation corridors. So-called “green” building techniques that promote energy efficiency and conservation will be more about economic realities than environmental-mindedness among consumers.
10. Remove barriers to alternative business models.
Innovative new companies break the mold of tired real estate practices — from experimenting with low-cost title policies and new business models for real estate sales, to pushing money-saving technologies. These companies need to be encouraged at every step of the way. Both federal and state governments should vigorously police industry antitrust behavior that restricts innovation, while keeping safeguards in place to prevent fraudulent practices by newcomer ne’er-do-wells.
The industry culture must embrace and promote innovation. The National Association of Realtors should promote policies that allow for greater innovation among its members and affiliated organization. Innovators should step up to leadership roles within the industry to be a part of the decision-making process.
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