'F' in Economics for Move Inc. Exec

Posted by: Peter Coy on January 11, 2007

I give Allan Dalton of Move Inc. an ‘F’ in economics for comments he made this week at Brad Inman’s Real Estate Connect NYC conference. Escape from New York.jpg
The ‘F’ is for Dalton’s bizarre and economically nonsensical allusion to the 1981 movie “Escape from New York,” in which the U.S. President crashes into Manhattan, which has been converted into a maximum-security prison, and has to be rescued by “the deadliest man alive.” (I’ll explain in a minute.)

Move Inc. hosts Realtor.com, which is the official site of the National Assn. of Realtors. So Dalton, who is CEO of Move Inc.'s Real Estate Div., is a pillar of the real estate establishment. Dalton veered into film history during a lively debate with one of real estate's young renegades, Glenn Kelman, the CEO of Redfin, a Seattle-based online brokerage that rebates two-thirds of its buyer-agent commissions back to the buyers.

Kelman argued that Redfin could save money for buyers because it was designed to be more efficient than a typical brokerage. (For one thing, Redfin brokers don't solicit business or show houses. Customers find houses on their own, then use Redfin to help them close the deal.) Kelman also argued that the real estate business's percentage-based commission structure--in which agents for buyers get paid more when their clients pay more for a house--was "antithetical to customer service."

These might seem like reasonable points to the average homebuyer, but Dalton wasn't having a word of it. He told Kelman that it was dangerous to focus too much on wringing out inefficiencies and cutting commissions. He said lawyers, accountants, and others also charge big fees, and "attacking what people are making" is just not right.

After all, he said, people who make money from fees are consumers, too. "If you put all the consumers out of work because we take out the inefficiencies, there won't be any consumers," Dalton said. He also said, "It'll be like 'Escape from New York'. We'll all be in caves." Yes, that's an actual quote.

Set aside the question of whether there were caves in "Escape from New York." Dalton's bigger point seems to be that improvements in efficiency will lead to a new dark age of joblessness and chaos. Um, that's not the way things work, Allan. When efficiency improves, society is better off. Eventually, people who used to work in the newly efficient sector find new things to do.

Our forefathers and foremothers all worked on farms. Now that it takes only about 3% of the working population to produce all the food we need, are the rest of us now unemployed and running around like the crazed inmates in "Escape from New York"? No. (At least not in my neighborhood.)

I know, Allan Dalton was exaggerating for debating purposes. He even made some noises about how traditional agents should welcome experiments such as what he called the "Redfin Reformation." Still, Dalton made it abundantly clear that he thinks it's not quite cricket for people in the real estate business to attack each other's business models by emphasizing cost-cutting. Sorry, but that's how business should work. More power to the Redfins of the world.

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Reader Comments

Matt

January 11, 2007 07:15 PM

Dalton's comments are a perfect example of what gives agents a bad name and further fuels the fire for people like me to continue to bash the realtor profession. How apropos that it is his company which is the official site of the National Assn. of Realtors.

Additionally at Inman Dalton suggests the only way for a consumer to understand the value of a home is to use a full service agent. Dalton said "the whole notion of suggesting people can find the value of a home with out a realtor offends me". Am I the only one that finds this comment and Dalton himself offensive?

Nagel

January 11, 2007 07:21 PM

Escape to NY is a stretch. He should stick to real estate.

JJ

January 11, 2007 10:50 PM

Great post. I totally agree. Real estate agents have been collecting 6% since the days when the average house sold for $40k. Now that the average house sells for about $400k (in my state, at least), the agents haven't lowered their commission at all. It can't be 10x more work to sell a house today than it was 20 years ago. So why do realtors insist that they be paid 6%? (When I sold my house recently, I was told that this fee rate was "non-negotiable" and no realtors would deal with me if I didn't pay 6%) The only reason that the 6% "realtor tax" on home sales continues to exist is because realtors collude to force discount brokers out of business. It's way overdue for the DOJ antitrust division to investigate this industry.

Doug Quance

January 14, 2007 01:02 PM

Dalton's comments are not helpful to the real estate industry.

It reminds me of the complaints made a hundred years ago about how the automobile makers were going to put the buggy-whip makers out of business.

>JJ - I hate to break it to you, but commissions are down to an average of roughly 5%... so your argument does not hold true. If you can show me a market where you can't find a Realtor willing to list a home for less than 6% - let me know. I'll move there.

Mark Eibner

January 16, 2007 02:18 PM

Great Post! Yea- what a farce!

Allan Dalton is defending the position that the bulk of the agents that feed him dues and pay his salary would want him to say. Glenn Kelman is the outsider looking for enhanced service models, better value, consumer choice, etc...as did Honda and Toyota....and look who's laughing all the way to the bank today, it’s not GM.

I was there at the interview...anyone who needs anger, fear and one liners has no real case.

Mr Condo

January 16, 2007 03:43 PM

The brokers that embrace technology will have a distinct advantage in the upcoming decade.

There are many businesses being formed which help brokers use the great advancements in technology to the benefit of the community of existing brokers.

The 6% fee is just a part of the equation. Brokers need to use technology to become more efficient and maximize their ability to give their clients more of what they are seeking - quality information and access to the real estate they are seeking.

Marlow Harris

January 22, 2007 03:52 AM

Kelman arguing that the real estate business's percentage-based commission structure--in which agents for buyers get paid more when their clients pay more for a house--was "antithetical to customer service" is disingenuous, as the higher the sales price, the more money Redfin collects.

To put their money where there mouth is, they should change to a flat-fee rather than a set percentage of the sales price.

Phil Thomas Di Giulio

February 1, 2007 07:47 AM

See for yourself. Watch the entire debate between Kelman and Allan Dalton of Move Inc here:

http://www.wellcomemat.com/epreview/380

Al Block

February 14, 2007 11:29 PM

THIS IS WHY THE BEST, SKILLED REALTORS CHARGE SO MUCH. This is a repost from my blog:

Attached to this post is an article from the Orlando Realtor's Association that tells you a list of 180 things that actually take place.  If you are a buyer and not a seller, the list would primarily focus on carting people around to hundreds of homes and offer expertise in property resale, value, negotiation, etc..
 Here is my take from the real world as to why it may cost so much.
The first reason and the main reason, real estate agents/brokers assume all the risk.  In most cases, it is like hiring an attorney on "contingency".  We put up all the costs to be in business (office rent, staff, communications, supplies, malpractice insurance, health insurance, gas, auto, utilities, etc.), maintain a market (MLS systems, websites, Associations of Realtors, Ethics and Arbitration controls, etc.), and only charge a small percentage when, and only when, the client achieves their results.  Have you ever hired an attorney in the same arrangement?  I have and it was no small percentage--I paid 35% plus costs.  [:'(]  Attorneys serve an essential function in our society but in my case I could not believe the guy had the nerve to charge me for copy paper, etc.. in addition to what I already paid.  But, hey, I agreed to it in writing because if I would have lost, the attorney would have been out lots of time and expenses, and not even charge me one red cent. (Are they still copper?)
Second, the average consumer we deal with has never even heard of something called "self-employment tax".  You may typically know the term FICA because it is taken out of your pay check.  If you are an employee of a company,  the company is paying about 7.5% on your behalf in addition to what you contribute.  In the case of most real estate professionals, that 7.5% comes out of their pocket, not the company's.
Last, why can't real estate people be paid minimum wage, like those at fast food restaurants and big box retail stores?  Well, for most Americans, their home and real estate represents a vast portion of their assets.  If you owned a Ferrari do you take it to the $2 automated car wash.  Well, you might.  But most wouldn't knowing the car costs $200,000.   The average home costs about as much as that Ferrari and most want a highly skilled, professional dealing with it.  I tell me kids,  "you want more dough, get in the know".   For the most part, real estate agents with higher skill levels will make more income than those that don't.  I may a little biased; check out what I know.
 Let me know what you think.  Feel free to submit your comments.   

 

Al Block

February 14, 2007 11:33 PM

This is my response to a blog post from the URL I have attached that claims RedFin and the web will put Realtors out of business:

If all there was to transacting real estate sales is web info and a handshake, then Realtors as we know it would have long ago went into extinction. This is not the case. We have no monopoly. We control nothing. Buyers and sellers CHOOSE our services. I have never heard of a Realtor put a gun to the head of a prospective client (or real estate agent for that matter--there is a difference--a Realtor subscibes to the Code of Ethics of the National Association of Realtors who polices any violation of it). We fill a need. Especially in the Detroit market. A skilled Realtor has experience from selling many properties (I have sold over 700 in 17 years), so I think I have seen almost every situation and know how to protect my clients and also save them money. The average home owner or buyer maybe will complete a handful in a lifetime. I sell more homes in one month than you may in your whole life! Who brings experience, skill, knowledge, and insurance to the table??--Redfin, Zillow, I don't think so. Don't get me wrong, there is lots of room for every business model. There always has been. Do you think discount brokers are new to the game? They have come and gone, and some do well and I welcome the competition. Anyone who has experienced the dealings of a smart, highly skilled Realtor can tell you they were worth their weight in gold. Don't take my opinion. Go to this website and check out a survey that was conducted randomly on consumer's view of their Realtor and real estate transaction:

www.realtor.org/pac.nsf/pages/ConsumerRe
search

You know, there is an old Southern saying, "Its a sorry dog that can't wag its own tail." Well I'm waggin' the tail of Realtors and also my own. Need a great Realtor in the Metro Detroit area. Call Al Block at 1-800-SOLD-678 or go to my website. www.alblock.com

Al Block

February 14, 2007 11:47 PM

Most buyer agency contracts allow a consumer to pay us a percentage for every dollar we help them negotiate off the list price when purchasing a property. Since the inception of buyer agency contracts in the State of Michigan in 1994, I have asked every single buyer client if they wish to choose this option. THEY ALL said, "No thank you." Here is why:

Smart Realtors put their clients needs first and when we do that, everyone wins. The long term committment to produce repeat customers and referrals is of much greater reward than a quick buck to try to get someone to pay more for a property. MOST Realtors are ethical and whether we are getting 3% on a $100,00 sale or 3% on a $95,000 sale, we are in it to make the client happy and not concerned about losing the $150. Most of us do not receive 6%--we receive 1/2 of that if we are lucky. Then our overhead is about 1/2 of that. Then when you account for self-employment taxes and paying for your own health insurance, all we truly have left is 1%. Please, let me have that because my wife and kids need a house, food, and clothing.

Careful Who U Trust

July 19, 2007 05:52 PM

I went with a discount broker, so called real estate agent and attorney. He didn't know the current law and didn't protect us, all for saving 1.5% on commission. The sale fell thru 2 days before closing because he didn't get the buyer to remove contingencies.

We ended up selling with a full service agent but do I think agents should get %5 in a market where the average house price is over $800k - no way!
They are getting too greedy in my neighbourhood.

6% where houses are $200k is reasonable for the amount of leg work, and I do agree with the other realtors that work has to be done to sell a home and that you have overheads.

Thank you for your interest. This blog is no longer active.

 

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BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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