Real Estate in the Age of the Internet Volume 8

Critique of Traditional Real Estate Brokerage Compensation Model

Given the apparent paradox between real world endurance and academic/political criticism the current real estate brokerage compensation model, a review of recent literature on the topic provides a structure for parsing out the relative merits of the current percentage-based split commission model as well insights as to how it may evolve in the future.

In their 2007 paper, “Is the Compensation Model for Real Estate Brokers Obsolete?” authors Miceli, Pancak and Sirmans (2007) argue the traditional percentage-based split commission model for brokers has become obsolete, given contemporary legal agency relationships and technology-driven information availability. As a result, they conclude buyers and sellers experience substantial transactional inefficiencies during the two primary phases of the real estate transaction, matching and bargaining. They then proceeds to mathematically model the existing compensation model and identify alterations, which would mitigate the inefficiencies he describes. Finally, Miceli et al. (2007), proposes a list of policy actions, which if undertaken, could facilitate the emergence of the compensation model they propose. This paper reaches some useful conclusions in terms of policy actions, however some of the assumptions upon which the supporting argument is made, may neglect certain functional roles of real estate brokerage. In addition, the proposed the compensation model, while elegant, does not address the fundamental basis for why real estate brokerage services, have, up until this point in time, been delivered wholesale. Never the less, Miteceli at al. (2007) is an useful in formulating a vision of how compensation in real estate brokerage may evolve.

The main assumption Miceli et al. (2007) make upon which their central argument is made, is in oversimplifying real estate brokerage services into two all encompassing functions: matching and bargaining. While doing so allows Miceli et al. (2007) to formulate an economic model of broker compensation, it excludes many of the functions brokers perform, which have economic value, but which have here to fore lacked independent pricing due to the existing bundled service model.

As discussed previously, the agent provides a range of services, not only subsequent to the matching and bargaining phases, but within these phases as well, which are omitted by Miceli et al. (2007) in the interest of modeling broker compensation. For example, decisions regarding pre-listing activities such as level of property fix-up (requiring monetary investment) and home staging decisions are often critical in the matching phase and can have substantial impact on the final sales price. Alternatively, decisions involving choice of appraisal company can influence property valuation, thereby influencing the probability of a successful a bargaining phase. In the Miceli et al. (2007) model, these types of services are essentially considered to have zero economic value, as Miceli et al. (2007) advocate for a collective listings aggregations model in lieu of the process by which brokers search for listings: “we will argue however, that unlike an unimpeded search for buyers, competition for listings is unproductive in that it does not increase the likelihood of a sale…” Miceli et al. (2007). It is precisely within this process that brokers and agents market their skills (compete) in the aforementioned examples and affect sale price. The underlying supposition in the Miceli et al. (2007) analysis is that all seller brokerage services are commodities.

Another potential weakness in the Miceli et al. (2007) broker compensation model, is in their economic overvaluation of the role of the broker during the matching phase as associated with property search. Miceli et al. (2007), argue the emergence of information technologies has allowed buyers to search through property listings information independently of the real estate agent, which they juxtapose to the era when agents controlled access to such information. Their argument posits that free and unfettered public access to listings information should have resulted in a reduction in broker compensation, to reflect the reduced value add of the broker: “The traditional compensation model for brokers has not evolved to reflect their diminished role in the matching stage” Miceli et al. (2007). In reality, the persistence (growth) of the traditional percentage-based split commission compensation model in the face free listings information on the internet and disaggregated real estate service providers reveals a fundamental truth: for-sale property listings information in and of itself has little economic value; access to information was used as an inducement to enter into a formal agency relationship, during which value added services were provided. It follows from this, that use of traditional brokerage service would remain steady and no reduction in broker compensation would be seen when such information is made freely available. And in fact, this has been the case, as is demonstrated in the reduction in the rate of FISBO’s seen since 1987 and persistence of brokerage commission rates over the same period. “Between 1998 and 2005, the real median real estate broker commission per transaction grew by 25.5%. However, commission rates remained relatively stable during that time irrespective of market conditions, home prices, or effort to sell a home (US Government Accountability Office (GAO), 2006).”

Perhaps the most instructive oversight in the Miceli et al. (2007) argument is in their lack of treatment of the true economic justification of the current compensation model, which is based on risk and reward. Currently, in real estate brokerage, agents and brokers assume 100% risk in the transaction purchase sale and sale process. They incur tangible and intangible expenses throughout the entire process without guarantee of payment. Buyers and sellers on the other hand assume no risk and only make payment upon successful consummation of a transaction. In this respect, the real estate brokerage model exhibits attributes of an insurance model, with wholesale payment for services rendered upon successful transactions required to compensate for expected losses on unsuccessful transactions. In order to justify his compensation model, Miceli et al. (2007) make the leap to a future point in time when the provision of disaggregated brokerage services are proven to be independently economically feasible and more importantly, to when the provision of such services does not undermine the structural “insurance” dimension of real estate brokerage; the attribute which allows buyers and sellers to incur no upfront expense in the purchase and sale of real estate.

The traditional percentage-based, split commission compensation model in real estate brokerage is still prevalent today because it crudely, yet none the less effectively, compensates brokers and agents for their direct and indirect expenses. While there is evidence the industry has engaged in anticompetitive behavior on an institutional level, these actions are a rational given the potential unintended consequences associated with undermining the economic underpinnings the industry. However, while anti-trust proceedings continue to move forward, the very same trends the industry has sought to curtail, such as unfettered access to MLS listings by the public and the emergence of limited service discount brokerages, have taken place none-the-less. And yet, wholesale real estate brokerage remains the dominant business model and the percentage-based, split commission compensation model continues to endure. The main conclusion which can be drawn from these circumstances is that the primary value agents and brokers bring to the real estate value chain is not associated with information control but rather, with information management. In the long and complex real estate transaction, agents and brokers collect, analyze, interpret, and transmit data. Given the relative infrequency of sales transactions, the public at large does not attain the collective skills to engage in these activities, wholly or partially. The risks and costs associated with engaging in these activities motivate the public to contract with traditional wholesale brokers and agents as opposed to experimenting with alternative models.

Top Economic Reasons To Consider An Online Home Based Business To Make Money From Home

There is a mega trend forming right now in the home based business industry. Many Americans have been laid off from their jobs, and they are looking for suitable alternatives to create and earn income from home. When the economy dipped into recession it had many effects, of which unemployment was one of the worst. Fortunately many people have been able to see the greatness of a home based business through experiencing the pains of a faltering economy. The alternative income generating vehicles that are afforded by many home based business opportunities are second to none in terms of compensation, thus a reason so many people are choosing to take advantage of owning their own business.The internet is ever evolving, and when these mega trends start to emerge in society, they are often amplified and reflected in the virtual world. Right now, there is a trend emerging which shows that people are moving away from shopping at brick and mortar retail locations, and they are replacing their buying habits with those that benefit a business who is a frequent participant in the online marketplace. Through the power of internet commerce, coupled with the demand for home based income, we have seen exponential growth in the amount of business opportunities that allow people to make money online.Here are the top economic reasons to consider and online home based business:1. Residual Income – A residual income stream is built by doing work one time and getting paid for it month after month and year after year. One of the cornerstones of an exceptional home based business is the ability for the business owner to create a residual income based upon the size of his or her organization, and the amount of production that the team creates. In a tough economy, it is extremely important to have income streams that do not dry up; hence they are working when you are not.2. Low Overhead – A business that is run out of the home, which markets products and services to a worldwide audience requires very little business expenses compared to owning a retail location. Having low overhead expenses is a major advantage during an economic downturn. Most retail businesses that closed during the 2008-2009 recession were forced to do so because their overhead expenses skyrocketed.3. Worldwide Customers – We live in an age where everyone on the planet can be potentially connected via the internet. People are integrating the net into their lives at an astonishing rate, and we are now able to market products and services to people all over the world like never before. A solid company will position themselves to take advantage of the new and expanding marketplace that the internet offers, and any home based business worth its weight should do the same.Any business that is poised to take advantage of these top economic factors will experience tremendous success in the years to come. A home based business can allow you to take advantage of these economic factors as well.

Effective Marketing Strategies in Product Creation

Marketing includes matters such as pricing and packaging of the product and creation of demand by advertising and sales campaigns. There are other options, of course, like product creation, resale rights marketing, joint ventures and the likes, but they are merely secondary to the above.

If you take the freelance route, it is important to ensure that all rights to profit from the final product, or any materials produced in its making, remain yours. Bookkeeping, physical product creation or delivery of goods can be done better with specialized help. Determining the purpose of the product is vital in niche product creation.

Implementation of Methodology – The choice of implementation of Six Sigma methodology depends on whether development is required on existing processes (DMAIC) or on new process/product design creation (DMADV). Determining what you really want to sell, something that you can be relaxed selling is the first step at the creation of a niche product. With the technological advancements in the hosting industry, from automated control panels and scripts that simplify creation of accounts; to complete turnkey solutions, there is no excessive need to worry about spending time on the actual product sold to the customer.

For instance, you should be prepared to either perform yourself or to subcontract the completion of the following tasks:- Product idea research (are there any existing products or patents already existing for this idea)- Product specification document training (what it will do, how it will look, how will it be powered, and how the user will interface with it)- Marketing study (what it will be named, who would buy this, how much would they pay, how will we get customers to purchase the product)- Schematic or electronic circuit design process- Creation of a bill of material or BOM and an approved vendor’s list or AVL for each component in the design, preferably with multiple sources identified, with a BOM and AVL for each assembly level in the product- Printed circuit board layout design process (single sided board, double sided board, or multilayer board; size of the PCB; board material)- Mechanical packaging design with user interfaces (displays, buttons, switches, key. This removes all product creation costs from your budget as a marketer.

No other database of affiliate programs offers such a possibility for profit on either the affiliate side or the product creation site. Your chosen niche should allow for the creation of more than one product or service.

There are several marketing strategies that are necessary in the creation of a successful e-commerce web site – Email marketing (broadcasting) of prospects/customers – Effective use of auto responders (generate automatic email messages) – Online Newsletter – Online Form / Survey to capture your prospect’s email address – Electronic Product Delivery (if you sold a digital product) – Advertisement (Ad) Tracking – Back End Sales – Affiliate program etc.