Let me start by stating that this blog post is not expressing an opinion of the Real Estate Institute (REINZ) – nor is it endorsed by the Institute. It is an opinion by a person who works in the real estate industry, running a website for the industry as a commercial business. It is for this reason alone that I am moved to bring to task the writer of the front page article of this week’s Listener magazine – Gareth Morgan.
Unfortunately the Listener does not provide a website that publishes the full content of the article, for that you will have to wait until the 8th November, or resort to rushing round to the local dairy. I therefore will judiciously quote from the article so as not to infringe the copyright, however I believe in doing so I will not stray from the context of the article.
Let me say that 90% of the article “Avoiding Armageddon” is well researched, well written and what I would judge to be a fair assessment of what will likely pan out from the current crisis in the next few years. Further I take no exception to Gareth Morgan’s assertion as to the likely trend and scale of property price falls. He is a respected and intelligent economist. No; my challenge to him is over the 3 paragraphs written as one of 2 possible scenarios in which “the real estate market might adjust if this global slump just keeps rolling”.
The paragraphs in question are these:
This is a buyers’ market now and so seller and real estate agents are on the back foot. Agents are commission salespeople, so naturally they want the highest price possible for the property, as that maximises their profit. Sellers also want the highest price, whereas this is absolutely in conflict with the buyers objective. This is why in this very inefficient sector – where to transact a house the fee typically is 3% compared to under 1% for shares or bonds – real estate salespeople have been able to exercise undue market influence.
For instance, in a bull market, common unethical practices of real estate agents include having their mates make false bids in auctions, buying properties and then on-selling them to unsuspecting clients, and running closed tenders to deliberately suppress transparency and capitalise on buyer disadvantage. In New Zealand, their industry body has been outstanding in its defence of these tactics to exploit buyers and manipulate market forces.
But in a falling market, property sellers and their agents will find the shoe on the other foot, and buyers will find opportunities to at last turn the tables. Agents will have to work a little harder to procure sales for their clients and will not worry at all about stitching buyers into contracts for overpriced properties. That is very easy to achieve in a collapsing market and they’d be quite happy to see a buyer catch the falling knife of a weakening price, such is their vested interest.
These comments are in my view disrespectful, ill informed and gross generalisations of the people who work in the real estate industry. Let me explain why.
- Real estate agents are commission sales people – self employed and looking to earn a fair dollar – not unique as there are many other commission based sales people – selling carpets, air conditioners, life insurance etc. All have one motivation – to close the sale. So to say that real estate agents want the highest price for a property is too simplistic – yes, a higher price earns more commission, but a sale is what they want, and more than that they want a satisfied buyer and seller, after all their livelihood is based on reputation and referral. Look at the reality of a real estate agent – they list and want to sell a $400,000 house – do they work with the buyer and seller in challenging circumstances today to try and facilitate a sale today at say $360,000 or do they in Mr Morgan’s view hold out for a $400,000 sale? The reality is that in terms of cash-in-hand the difference to an average salesperson of these two amounts is (after tax) just $320. So in their shoes do they work to facilitate the sale at $360,000 and earn $2,895 today or do they sit around waiting for months in the hope of earning $3,215?
- To say that the real estate market is inefficient and in the same breath compare the typical 3% commission with 1% for shares and bonds is again over simplistic. The real estate market is very open, transparent and highly competitive – every year competitive models appear – last year The Joneses tried valiantly to reinvent real estate, there are operators in this country charging 1% – in the US it is 5.5% on average. To transact shares and bonds is no more than digits on a screen, to transact real estate takes a lot of speculative unpaid time on the part of agents in the hope of firstly winning the account and then closing the sale. The fact of this industry is that in the past 12 months the total value of all sales by agents is $26.5 billion representing a commission of say at 3% of $794 million. Now given the average proportion taken by a single agent of the gross commission is around 50% that means that with around 15,000 agents the average gross earnings for each agent in the past 12 months was $26,500 – that amounts to just $13 per hour!
- The phrase “common unethical practices” is used in the article – the definition of common practice is “something that is usually or regularly done” – I therefore feel that this is a case of a gross generalisation. There are around 15,000 agents operating in NZ (many are leaving this industry every day as the property market continues to collapse), but to say that these people “commonly practice “unethical practices” is clearly not the case. There have been a few cases where this has happened but take any industry that employs 15,000 people and transacts business worth $26 billion dealing with 100,000+ customers and sadly you will find unethical practices – not all of the time, but all do – you only need to look at the heart of the credit crisis and the greed of financiers to find examples.
- Lastly to say that “Agents will not worry about stitching buyers into contracts for over priced properties” is again ill informed. Agents do not go knocking door-to-door trying to stitch up buyers – buyers come to them. In today’s web-empowered world the power is firmly with the buyers and seller – not the agent. The agent acts for the seller – their role is facilitation and negotiation, they do not force anyone to buy anything – leave this practice with the door-to-door salesperson.
The facts are clear. This is a very depressed property market – a year ago the total annual sales in the preceeding 12 months was 98,905, a year later it is 63,366 a fall of 36% – thousands of agents have left this industry, many more will follow. Real estate offices are closing. The agents that remain are staying because they know they can provide a great service, many have been in the industry a long time and have built up a strong reputation. This industry may not have a high regard in general terms, but ask 100 people in the street today if they were going to sell their property – would they use a real estate agent? and how do they view their last transaction ? – I know the answer to the first question is 74% and the second answer would probably be pretty satisfied. So why should a good economist choose to knock these people who are just carrying out their chosen career and in so doing providing a good service?
Alistair Helm
CEO – Realestate.co.nz Ltd
Thank you Alistair for standing up and speaking out on behalf of Real Estate Sales People. We have been getting some terrible press ever since Clayton Cosgrove started slamming us last year. All of it based on the actions of a very small minority of sales people. Most of us are used to receiving lots of thanks and praise for a job well done by our clients – buyers and sellers, but these same people seem to be very quiet when it comes to singing our praises in the public arena. It would be great if a few more people would speak up in our defence. There is not much point in our speaking out as some very vocal detractors have shot our public credibility!
I wonder how Gareth feels about contributing, through such a negative article, to the potential huge loss of a homebuyers equity/savings.
How would you feel if you were a first home buyer who purchased in November and now articles such as this could contribute to you losing $30,000, $60,000 or $90,000 if you paid the median price back then. (ie a 10%, 20% or 30% loss in value, let alone equity – pretty scary if you only had a 10% deposit in the first place)
Oh that’s right Gareth has a company http://www.gmi.co.nz that will invest your money for you so he has a vested interest in you NOT buying a house – I wonder how his 2008/2009/2010 performance will look compared with prior years – can he guarantee that nobody will lose money if they invest it with his outfit? If not will he give them a refund?
Alistair -
This is the very thing I have been speaking to you and others about in the last few weeks and this just goes to prove the fact.
In this economic climate it is clear that people will be protecting their vested interests. But to do so, so many are slagging of other professional sectors and its not on!!
Who gives this Gareth guy the right to speak about Agents and our market in this light and then publicly publish it in a slaggy magazine. Do you see any of us slagging him or his industry off. Im sure there have been many people in the past done dirty dealings in the industry he deals in.
To be honest I am sick of it and its about time it gets taken to task. This country is to negative and to hyped up by media gossip. We need facts and we need to work together!!! Bashing other professional industries has got to Stop. NOW!
Dear Gareth Morgan, many of the people who sell their homes through me choose to do so on average once every seven years. Like you, I run a business of sorts, I do a good job and get paid about 3%, as you have correctly state. I have a question for you. If I invest $1million in some of your managed funds, let’s say for seven years, could you please let me know (a rough estimate will do), what will be your fee per year? I might be wrong, but my rough estimate is that you will earn a minimum of $10,000 per year and in some cases up to $20,000 or more per year in fees for your hard work and recognised expertise. Please let me know if you still stand by your comment that the real estate industry and fee structure is inefficient. You are saying that your fee structure and industry are more efficient, aren’t you?
Whilst I think it is natural to be frustrated by the attitudes and commentary by some in the media and through the media in regard to the real estate industry, I think it is important to retain a professional distance, and not get drawn into personal attacks.
This industry has many talented, successful and articulate individuals who should use the opportunity to demonstrate a very different and high professional face than that wishing to be profiled in such articles as the one sighted above.
Also I would not always jump to shoot the messenger, as I said in overall terms the content of the article was excellent, representative of what is a very well researched and written publication – a shame it was so unnecessarily damaged by the comments in regard to the real estate industry.
I am so fed up of having to defend myself and my colleagues from these disgraceful and if personally directed, possibly slanderous comments by so called industry experts. It’s always easy to hop on the gravy train by climbing on the backs of the guys who laid the tracks. Well done Alistair for an independent response to an article which on the whole is informative but ultimately stoops to the lowest common denominator of widely accepted yet rabid public antipathy toward an industry and it’s professionals who on the whole carry out their obligations with decency, humanity, and complete honesty.
Don’t you love these guys. Have to be polite as my dear old Mum might read this.
Such warm, loving, heartfelt concerns for the misguided masses. As I write this post tears flood my key board as I am in awe of such kindness and compassion. Like our politicians such caring individuals are a valued blessing to our country and I now trust we all we will be saved from our foolish erring ways.
When your not so busy slagging off at others Gareth perhaps you could give me a call and suggest a good fund manager as I’m selling our properties to invest in Kiwi Saver. It’s a long shot but I bet you can recommend someone who will be really great … and of course, free of any of that nasty vested interest.
Just in passing, did you hear the story about the guy at Lehmans who was getting paid $17000 a day. I think he was a banker or was he a financial adviser? I heard a rumour that he’s now selling real estate and making twice that figure. I’ve written to Clayton and George to warn them as we certainly don’t want people being stitched up.
Undeservedly yours.
It might interest investors to know that to transact managed funds the brokerage fee typically is under 1% but then yearly management fees typically take (every year!) 1% to 2% of the total amount of funds invested. Not only this, but most sellers of shares/bonds/managed funds won’t tell you that of the thousands of Australasian active managed funds available (including Morgan’s Kiwisaver funds), probabaly less than a handful have ever outperformed (long-term) most Australasian index funds that charge fees often as low as 0.15% per annum. If you find a financial advisor telling you to buy index funds (or similar low fee products with proven long term success) instead of active managed funds, tell them they should be selling real estate. We need good honest agents.
Alistair Helm you will like this line of thought.
Ironically Gareth Morgan has actually done very nicely largely in part due to real estate agents! Let me explain – real estate agents put tens of thousands of listings on trademe thereby boosting the profits of trademe which was then sold for almost $700 million $47 million of which headed Gareth’s way.
On the 22nd of August 2008 Fairfax Media said it recently paid an extra $45 million to the original Trade Me shareholders, after Trade Me made operating profits of $70 million this year – up 39 per cent. Gareth gets 7% of this payout – almost $3,000,000!
Trademe was sold based on a multiple of earnings that set it’s value at around $700m so the multiplier applied to the real estate portion of those earnings would have been very significant indeed.
So the 86,000 properties currently placed on trademe by the real estate industry have helped line Gareths pocket very nicely indeed in the last few weeks.
Now if only my son could come up with an idea as bright as trademe! I could do with $50,000,000 myself!
In his defence Gareth does use his payout to fund his charitable organisation, but oh to be in such a privileged position eh
OMG!
How many agents out there actually care about and defend the position that Gareth has stated. Why is there always a conflict of interest in everything.
Nurturing credible brand values such as being trustworthy and knowledge rich is very good for business and what time than now when the public seek guidance and reassurance from experts. The integrated marketing strategically deployed by Gareth Morgan via seminars, blogs, TV interviews, websites, feature magazine articles, philanthropic cause related marketing etc, should inspire the real estate sector. Property is a hot topic and with so many commentators cutting and dicing the raw data REINZ needs to take the lead position and avoid being third cab off the rank behind QV New Zealand, Bank economists and the bevy of experts that key media rely on for a 360-dregree perspective.
Nothing in paragraph one is untrue, its economic theory of market inefficiencies and the profit maximising motivation shared by all businesses, i believe Dr. Morgan is just analysing the situation from an economic viewpoint rather than having a dig at agents. Paragraph two is not clear if common unethical practices is actually refering to it being common practice amongst agents or that these are the common methods of few agents and then going on to describe the practice. Paragraph three he refers to agent integrity being substandard which i can understand would be upsetting to some in the industry. ‘Agents…will not worry at all about stitching buyers into contracts for overpriced properties…and they’d be quite happy to see a buyer catch the falling knife of a weakening price, such is their vested interest. but really, you all seem to be a bit sensitive about a small section of an apparantly good piece of writing…. But it is good to see some comments again in this blog, it’s been a bit slow lately.
Great comments Andrew – I agree with you 100% I think the we are being a bit overly sensitive with what has been said in the article. Everyone is entitled to their interpretation of the facts. I tend to agree with a lot of what he said in that article.
Sorry I’m still banging on about Gareth’s 3% versus 1% comment in para 1. To clarify, real estate’s 3% fee is a fee for service (no goods exchanged and the seller pays the fee) and the 1% he mentions covers the cost or brokerage of product delivery (goods exchanged and the buyer pays the fee). His para 1 is misleading because he compares apples with pears in an attempt to make himself look better. Agree Andrew Burns?
Alistair, you have articulated Morgan’s inaccuracies beautifully. In the media, he should stick to his knitting. I would like to see his paragraphs re-written by you in the Listener, it would be so totally “real” without the self-interest inspired spin we see from Morgan.
Hi Steve.
I know I mentioned that I agreed with a lot of what Morgan said in that article, however on this particular point I agree with you completely.
There is a lot that goes on brokering a real estate deal that does not go on in brokering a share buy/sell. For example how many share brokers do you see marketing the shares they are brokering?
Sure they market their firm, but so does a Real Estate firm – they then have to spend money marketing each individual property.
‘This is why in this very inefficient sector (where to transact a
house the fee typically is 3% compared to under 1% for shares or
bonds)real estate salespeople have been able to exercise undue
market influence’.
The point of the sentence is not between the brackets, i believe
he is refering to the inefficiency of making an exchange
due to unclear price signals and differing expectations between
buyer and seller, compared to going to the shop and buying some pears
or apples for example.
Keep it in context Steve. This is just three paragraphs out of an
entire article, which i havn’t read, but given that Alistair
believes it is well researched, well written and a fair assessment,
i doubt the point of the article was not to make himself look better.
Andrew,
The point here is not in itself the article, it is the article as a symptom of the blasé way that commentators and experts so naturally stereotype and pigeonhole the real estate industry and the people in it with so little regard to the reality of the market overall.
Clearly the media as ever sensationalise the few incidents that have occurred, however unlike as in other industries where such examples of unethical activities occur and then that industry moves on and is not forever tarred with the brush of disrepute, the real estate industry keeps being pummeled.
Now maybe you may say it is of its own doing – if it as an industry had tried a little harder to establish a professional, consistent voice and profile, them maybe this situation may not have been such an issue. That maybe the case. I hope that will be the case under a new mandate to have an industry body that can present a new face for the industry – a challenging and vocal advocate of the majority, rather than an apologetic covering of the few.
intelligent people realise that the media sensationalise everything and the evidence being that most people still use agents.
Your last question: “So why should a good economist choose to knock these people who are just carrying out their chosen career and in so doing providing a good service?”
What’s the first line of defense Alistair? While one industry is busy pointing the finger at another they can avoid facing up to their own involvement and taking any responsibility.
Can any of you agents then tell me if this is a good deal, done with honesty, humanity, decency? And one that satisfies both seller and buyer.
Lets say you have owned a farm for forty years. Beautiful sea views, and worth a bit if developed. Now lets role play and I’ll be the real estate agent from a very reputible agnecy in NZ. Note here, it is I the agent that initiates the process, not you the land owner.
Here is my deal. Your land is worth, lets say $5m. I’ll pay you $5m for it as follows. You sign over ownership now. Sale is dated now. I’ll pay a deposit of $400k in a months time. Annually I’ll pay $400k for 4 more years with the balance in 5 years time.
Also note, you will not have a security over the land, as first ranking security will be held by the financiers for development purposes.
Oh, almost forgot. As the seller you also have to pay my fee.
Now this is a real case. Would you sign for a deal like this?
Real estate and the credit market are inextricably linked and “How a catastrophic collapse scenario might play out” …… 2comments, someone having a dig at agents…20 comments. It’s a funny old world
I would set the dogs onto anyone who presented a deal like that to me Kelvin.
Andrew
Or as seen from another perspective.. contextual relevance.
Original post of “How a catastrophic collapse scenario might play out” – 71 comments on Interest.co.nz and “In defence of real estate agents” on Unconditional blog – 22 comments.
my apology Alistair, i overlooked your invitation to post comment on interest.co.nz
I have had a good laugh reading thru the replies. Thanks everyone for making my afternoon cup of tea and a read so enjoyable.
Alistair – well written. couldn’t have said it better my self.
I just wanted to pick up on one of the “common unethical practices of real estate agents”, namely Closed Tenders.
I can fully understand and sympathise with people trying to buy a home under a Tender system. They are provided no information regarding an owners price expectation and have to rely on good ole common sense, some ground work regarding recent comparable sales, and then follow up with a punt in terms of the price they are going to put on the tender form based on how much they want the house.
Gareth appears to not like tenders either. I wonder if he has ever sold a home in a sought after location. How does one price a home that is unique, or where there is huge demand, or where the market is leaping ahead, or few comparable sales?
He suggests that tenders are used “to deliberately suppress transparency and capitalise on buyer disadvantage.”
Having run many Tenders over the last ten years. It is a process that doesn’t work on all homes. But is usually chosen as a favourite form of selling in some of the situations mentioned above. There are also times where the need or desire for privacy in the selling process on behalf of the seller needs to be upheld. Not all selling scenarios are positive. Divorce, bankruptcy, old age, and death are some of the reasons why the sellers or sellers family decides in favour of a Tender.
Tenders are used more often in times of flux where prices are more fluid and therefore, harder to define even for real estate professionals and valuers. Allowing the marketing period to be extended out for a few weeks allows fair exposure of the property instead of it being sold often in the first few days (or hours!), it also allows the buying market the dignity of coming to their own conclusions regarding price.
Buyers don’t realise that Tenders are sometimes used in situations where the home seller is not realistic in their expectations as a tool to show them true market value.
I have found many times that a well run tender shows market value perfectly. Results often imitate the statistical bell shaped curve. A couple of cheeky offers below fair market, most offers buzzing around fair market value, and often one or two stand out tenders that are from owners willing to pay a market premium for one reason or another.
Nothing manipulative about this is there?
Buyers all have a chance, knowing that there is competition, to put a tender in at a level that they are comfortable with.
@david
Thanks for your thought-provoking comments. As a buyer who has recently been on the receiving end of the (deservedly) much-maligned closed tender process, I find your justifications of closed tenders more than a little disingenuous.
For example your implication that tenders are the best way of marketing a unique home in a sought-after area, or “where the market is leaping ahead, or few comparable sales”.
Surely an auction is a process which gets around these problems equally well, and which provides the transparency and openness which buyers deserve.
As well, your comments about “good ole common sense” and “groundwork” glibly gloss over the fact that it is inevitably the purchaser who has to cough the building inspection and LIM fees – to the tune of up to $1000 per property in which he/she has an interest.
Gareth Morgan’s comments are spot-on: closed tenders exist only to deliberately suppress transparency and maximise buyer disadvantage.