Government vs Realtors

Government vs Realtors

Where Will the Dust Settle?  (January 2010)

To kindle favour with the electorate, Stephen Harper’s Conservative government has taken direct aim at the real estate industry.  Perhaps it is nothing more than saber rattling, but right now their sabers are stabbing at the very heart of the industry’s MLS (Multiple Listing Service) system. They are demanding that Realtors open the system to the public for direct low cost access to the MLS marketing system. At present, it can only be accessed through Realtors. Using the Competition Act as a lever, they are suggesting the MLS system is a monopoly which Realtors are using to demand exorbitant commission rates, and in so doing, driving up house prices. 

Government Bullies

The real estate industry is very concerned.  They are very proud of the MLS system.  Our perception is that government, to garner favour (votes) with the electorate, is trying to bully their way into a system that has taken decades and millions of dollars to create.  Indeed the Canadian MLS system has evolved into the most sophisticated property marketing system in the world.  It is so successful that it is estimated to be involved in 90% of all residential real estate transactions.  Yet it’s a huge stretch to suggest that those sales would not take place were there no MLS.   

The Multiple Listing Service began in the fifties.  At that time, Realtors were disorganized.  Their ethics were often questionable.  The opportunity to swindle the public existed with each transaction.  Competition for listings was fierce.  A Realtor who sold in the 1950’s once told me that he came out of his office to attend a listing appointment only to find his tires deflated. He suspected the culprit was the agent who signed up the listing while he was fixing his tire.  Real estate agents, they weren’t called Realtors then, sometimes supplemented their commissions by buying houses from unsuspecting sellers for low prices then selling them for big profits.  From my research, it was not a pleasant business.  In fact, A.E. Lepage would not call himself a Real Estate Agent at that time because of the reputation of those then working in the business.  Real estate before MLS was mostly competitive compared to the cooperation there is between Realtors today.  There was less advantage for agents to be cooperative.  It was the advent of MLS that provided the platform for the seamless, uncomplicated, safe, educated and ethical real estate industry we have in Canada today. 

A Competitive Cooperative Paradox

MLS for realtors is more than just a catalogue for houses.  It is at the very hub of the competitive-cooperative nature of their business.  It is a paradox that may exist only in the real estate industry.  Realtors compete with each other for customers, but cooperate to find those customers homes. 

MLS leveled the competitive playing field for Realtors by creating a catalog of available listings and archives of historical comparable data for establishing value.  Prior to this, it was a much more hit-and-miss process.  Buyers would have a difficult time finding comparable data to support their offers and could be easily manipulated into paying too much.  Sellers were often left wondering if the sale price was fair as the only source of sale information was the Provincial Land Registry Offices.  Before MLS, it was a lot of work to keep track of sales and search their titles for details of the terms of sale.  Unscrupulous real estate agents could easily take advantage of an uninformed public. 

Today, the public is much more likely to be aware of fair value as all current MLS listings are only a few clicks away on a computer.  Sold information could be readily and inexpensively made available to the public through Provincial Land Titles data which is also accessible through their computers. 

Do Realtors Make Too Much Money?

            We believe that government has taken an unreasonable stance against the real estate industry because Realtors are easy targets - especially when inflation is driving up house prices and there is little government wants to do to prevent it.  Yet it still wants to look like it is doing something to curb rising prices.  Rising prices and the high incomes of top real estate sales producers (5% maybe) tend to add to the perception that Realtors make too much money.  One is lead to believe that all Realtors’ incomes are right up there with bank executives, CEO’s, lawyers, doctors, CA’s and

Bay Street

brokers.  Shots have been taken at all at one time or another to win favour with the average voter. 

The Price for Making the Big Bucks

Very few Realtors make seven figure incomes, more make six figures but most make five figures or less.  The bottom 20% makes less than four figures and usually don’t survive as Realtors.   This Darwinian remuneration philosophy and continuous education contribute to the high degree of expertise among those who ultimately prove successful. Those Realtors who make the big bucks do so because they have spent years developing a clientele, creating and funding a marketing strategy, educating themselves and most of all, dedicating countless hours to their profession, often working seven days a week with many ten and fourteen hour days.  The top producers in real estate work hard for their executive incomes.  The bottom 20% of salespeople who make little or no money are not a burden to taxpayers as they cannot collect unemployment insurance. 

Government Smoke and Mirrors

There’s a little smoke and mirrors going on here as well.  Have you ever wondered how real estate prices can increase by 20% in one year yet the CPI remain less than 2%.?  It’s because house sales are not included in the CPI.  If house prices were included interest rates would be much higher already as government responded to their pledge to keep inflation below 2%.  Government is the institution responsible for driving house prices into bubbles and beyond affordability for many buyers.  Government policy has evolved to magically make the cost of housing disappear from the Consumer Price Index.  Yet more than sixty percent of consumers own one.  We feel that Mr. Harper is living up to that old adage - If you can’t dazzle them with brilliance, baffle them with bulls---.  Instead of letting the public blame government for sky high real estate prices that will ultimately strangle a generation, let’s blame the Realtors for rising prices. 

           

More Harm than Good

Realtors are concerned that public access to the MLS system will result in incorrect or misleading information being included on listings.  Who will protect the buying public?  Would sellers have to pay fees for services like advertising, MLS administration, appraisal, consulting even when their house did not sell?  Would errors made by uninformed buyers working with uninformed sellers result in costly litigation?  Would the whole process return to the chaotic days before MLS existed?  Whether public access to the MLS system would slow price increases is unstudied by government and may increase the cost of selling a house. 

Have You Ever Been Gazumped

            Our government can not turn to any other jurisdiction in the world and say its system of marketing real estate works better than ours.  England has very low commission rates by North American standards.  On the other hand, they have gazumping.  It allows a seller after making a contract with one buyer, to cancel it at any time prior to closing in favour of another offer.  You can expect to be moving into your new home tomorrow only to find someone offered a higher price today – one that you can’t afford.  Would you go for that even if commissions were lower?  

Discount Brokers Already Exist

The real estate industry found common ground when discount brokers were allowed onto Real Estate Boards.  Commissions can no longer be set by real estate’s Federal or Provincial associations and there are many low commission companies (discount brokers) from whom to choose.  Those who charge low commissions are hoping to capitalize on a large volume of listings offered by sellers who don’t want to pay higher rates of commission. 

Some argue that discount brokers are systematically squeezed out by full service Realtors.  The fact is their failure is more the result of poor business practice, sales skills and marketing.  Those whose listings are slow to sell should not blame others in their profession but look to their own sales tactics.  In fact, a strong case can be made for the exposure gained by offering more commission being well worth the cost. 

Common Ground

The real estate industry found common ground before with government policy and they will compromise to find it again.  Regardless of the outcome, one thing will remain regarding commissions.  Those with the greatest skill, knowledge and experience who offer a valuable service to their customers will always be in demand. 

Zero Interest Sales Strategy

Hot House Sales Strategy

Recently a friend called.  She had inherited a Condominium.  It had been for sale (not with Coulas Real Estate) for several months with little activity as the market was changing from favouring sellers to favouring buyers.  She had the property listed on MLS for $275,900.  The last sales of similar condominiums were in that range.  Yet the only offer she had received was for $239,000.  Her Realtor was suggesting she should take it as the market was declining and she might not see such an offer again. 

She asked me what she should do as the remains of a reverse mortgage, maintenance and taxes were taking their toll on her financial resources.  She added that she was tempted to accept the low offer and be done with it.  There are many reasons why I counseled her against a fire sale in spite of the emotional relief it might give.   I told her I had a plan, a strategy that would get her fair market value quickly. 

I explained that people buy the various features of a house.  Some are tangible like the condition, layout, lot size and extras included in the sale.  Others are not so tangible like future potential or financing.   I suggested that the property was just one of several similar homes for sale.  None were attracting much attention from buyers.  We had to make her property stand out but we were limited because we could not alter the tangible features of the property.   My instincts told me we should be looking at creative financing. 

She was surprised when I suggested she hold a three year interest free first mortgage.  I suggested that if the listing promoted an interest free first mortgage she would likely find a buyer willing to pay near her list price and her property would be the first to sell out of all the others in the market.

I knew she intended to invest the cash proceeds from the sale into a GIC.  The rate of return would be 2.4%.  However the proceeds get taxed as passive income leaving her a net income of 1.25%.  For a $200,000 investment over three years she would lose only $7,500.  I told her many buyers would be happy to pay $7,500 more for a house offered with an interest free first mortgage.    

Buyers Benefit Big Time

An interest free mortgage is an extremely attractive feature to a prospective buyer.  If the buyer had to arrange the mortgage he would pay perhaps 4%.  He’d pay more if he had any blemish at all on his credit report. Simplified, a two hundred thousand at 4% would cost him $8,000 per year interest, $24,000 over the three year mortgage.   Because he would have to pay with after tax dollars he would likely have to earn $48,000 over the three year term.  A financially savvy buyer would realize quickly that he could turn his mortgage interest savings into overdrive by investing into an RRSP or something similar.  

Happy Ending

          My friend called her realtor and had him make some changes to the MLS listing reflecting her willingness to hold an interest free first mortgage.  At that point the home had been for sale for six months.  Within one week she had an acceptable offer very close to her list price.  She could now see an end to the monthly tax, maintenance and utility costs that were eating her savings.  She felt very relieved from the stress of selling. 

Creative Financing Can Sell The Unsellable

This strategy can apply to many situations and is very effective for marketing property that buyers have ignored.  Our tax structure and low interest rates have combined to create an unparalleled opportunity for both buyer and seller to win. 

Of course both parties will want some professional advice.  The sellers need to be careful about the buyers’ ability to pay the mortgage principle.  The sellers need to get sufficient down payment to provide a secure foundation to their mortgage investment.  The buyer needs to be certain that the house really does suit her needs and that she is not buying it just because of the attractive financing.  A good Realtor can help both to attain their goals. 

The Coulas Real Estate Advantage

The agents at Coulas Real Estate have been handling real estate transactions for decades.   Our skill knowledge and experience allows us an insight into the marketing of real estate that can only evolve through experience and practice.  We continue to offer the same high level of integrity and personal service our clients have enjoyed for years.   We have learned that real estate is a dynamic industry under constant change.  Our marketing strategies have to change with it. 

The marketing strategy presented here can be a great benefit to our sellers.  If you know someone who might benefit from this creative financing advantage please pass along our newsletter or get them to call.  We can help.