Real Estate laws and practices that no longer serve a purpose…

As the society evolves around it, the world of real estate has gotten out of sync with current needs and expectation in its laws and practices. That is not unusual. Many things that have been around, basically unchanged for many years, begin to look and feel dated over time.  Some laws and practices that were originally put in place to help may now be actually hurting the businesses or the very people that they were initially trying to protect or help.  That is certainly the case in the world of real estate.

Recently the Michigan Legislature finally abolished the Dower Rights laws that have been embedded in Michigan Law and real estate since the late 1700’s. Those laws were originally put in place to protect the rights of widows against being thrown into poverty due to the death of a spouse or ex-spouse.  Dower Rights established the right of the widow to a 1/3 share of the real property of the marriage, should the husband die first. Later laws dealing with estates broadened and clarified the rights of inheritance of widows, but the old Dower Rights laws remained on the books in Michigan, which was the last state with Dower Rights still in effect. In practice that meant that a man could not sell property without his wife signing off on giving up her Dower Rights to that property.  With society changing to recognize non-traditional marriages, the old law, as written actually may have become unconstitutional, so the Legislature thought the easiest way to deal with the changes was to do away with the Dower Rights  law. See this article from the Michigan Bar for more on this.

Many practices in real estate are not backed up by laws, but rather are just rules or practices that various groups that are involved with the process have enacted over time. Some are defended as being in place to protect the rights or interests of the buyers and sellers of the real estate, but, in reality, many were put into place to protect the interests of the companies involved – to shield them against loss or to add to their bottom-line profit. I recently read a good article by Benny L. Kass, a staff writer for the Realty Times web site, entitled “Escrow Accounts Serve No Purpose” .

In the article, Kass makes a very reasonable case that the escrow accounts that most buyers are forced to establish with lenders is not really needed and may just serve the lender by giving him access to the escrowed funds (one way or another). These escrow accounts are a classic case of the consumer being told that he/she is being protected from themselves for their own good, by “insuring” that they have money set aside for taxes and insurance on the property. Kass makes the logical case that it is in the best interest of the owner to make sure that those obligations are met and so the escrow accounts aren’t really serving anyone but the lenders.

In Michigan the real estate brokers have all found a way to charge just about the same amounts for what they have euphemistically called “Compliance Fees”. The original rationale was that they were collecting these fees to cover the costs imposed by the State laws for record keeping and reporting of the sales. Court cases challenging these fees under RESPA laws (and now under RESPA-TRID) established that were was no such work actually being done; so, now the brokers just call it what it always was – extra commission on the sale – even though many still use euphemisms to try to mask the real nature of this added cost.

While there has been much complaining about the new TRID rules governing the mortgage and closing processes, most of that has come from the people that the rules were enacted to reign in from shady or fraudulent practices. The old practices of lenders that brought about the need for TRID involved not sharing all of the costs and charges with the borrower until it was too late for them to use that information to make decisions. It was not uncommon before TRID for lenders to release the final closing packets the morning of closing and for that final document to be full of surprises for the borrower. Many times the borrower would not even know how much he had to bring to closing until that morning. It was a mess of their own making that required that lenders be brought under tighter government control.

The real estate business itself has been slow to evolve, with many traditional brokers having to be dragged kicking and screaming into the 21^nd Century. There are many experiments that are ongoing to try to find alternative business models to the traditional broker-centric model that make sense in modern times. Hopefully some of them will succeed, because there is really no reason to maintain the current broker-centric model.  Traditional brokers were very good at lobbying for laws to protect their interests; so, there will be many State laws governing real estate that will need to be repealed or modified. 

The so-called “traditional brokers” will need to accept changes to how the business will be run in the future based upon the changing needs of the customer and agent bases.. Just like the automotive industry is morphing into a mobility industry, the classic real estate brokerage needs to morph into something that better serves both the customers and the people (agents) who are actually out doing the real work. The somewhat feudal-like relationship between the traditional broker and the agents will need to change to reflect the lesser role and lesser values of the brokers in today’s real estate world.

Most of the changes that need to take place and will take place over time will be kicked off by customers and agents asking “Why”. Why do we need this practice? Who does it really serve? What purpose does it really serve? Why am I paying for somethings that doesn’t benefit me? Why are the laws protecting the profits of a few at the expense of the many? There will be much mumbling and perhaps even some loud cries of consternation from those in the real estate industry who have sacred cows that will be gored by these changes. For many it only by that sleight-of-hand and hidden extra fees that they get by these days. Change is in the air and perhaps it will blow away some of the odor left from tired old practices and no longer serve any good purpose. 

Dude, what happened to my real estate company?

We’ve recently had a few rounds of consolidation and cut-backs in the local real estate community, with one major bankruptcy and shut down by a national franchise operation. I’m sure that some consumers are confused by all of this because they don’t necessarily understand the business models that most real estate companies operate under. A part of the confusion grows out of the franchise nature of many companies in the business and what that means and doesn’t mean for a local real estate franchise.

There are several recognizable national franchise brands, among them are Century 21, Coldwell Banker, ReMax, Prudential and GMAC Real Estate. These are all umbrella brands that are owned by large companies such as Realogy, which owns the C21 and Coldwell Banker brands. People mistakenly believe that being a part of a big brand somehow also means being a part of a bigger company. It does not.

The local C21 real estate office that you see is usually part of a mom & pop operation, normally a sole proprietorship, which is owned by a broker. Some of those operations are well capitalized and well run and some are not; however, none of them have any real business relationships with the “parent” company other than the franchise license to use the brand name. They pay a good fee for the use of that name and they may gain some benefit from whatever national level marketing and advertising the parent company may do. Some may grow to be big companies, relative to their local market, but most remain small operations. And the fact that you may see 2-3-4 companies in a market area all with the same national brand doesn’t mean anything in terms of leverage or advantage for you as a buyer or seller. They normally don’t cooperate at all, since they compete against one another for business in that market. In our little market we had four C21 franchisees, now we have three.

There is no synergy, no leverage, no advantage that grows out of there being multiple C21 or Coldwell Banker franchises in a state. Contrast that with a brand and company like Real Estate One, which is Michigan’s largest real estate company, but which is not a national brand. Real Estate One is a family owned company, too, which operates only in Michigan. It just happens to be a very successful and very large family owned and run company (in fact it is the 13th largest real estate company in the United States). Real Estate One has 37 Corporate-owned offices in the state and 30 other offices that are franchise operations (yes we do franchises, too), whereas the next largest competitor has 7 locations. The number of Realtors fluctuates up and down, but Real Estate One is normally 3-4 times the size of our closest competitor and our business volume is an order of magnitude greater.

But, size aside, it is the synergy and leverage that Real Estate One is able to generate that provide real advantages for our clients. Any REO agent can go into any REO office and use the facilities and technology that are there to help his/her clients. REO makes such large and consistent media buys that all of the local media give then the best rate, which they pass on to their agents to us on behalf of their clients. REO was an early Internet innovator and still leads in leveraging that resource for its agents and clients. The RealEstateOne.com Web site is the only one locally that aggregates the listings of all of the major realtor boards in the lower peninsula (because we have offices in all of those areas) and makes them available to our agents and our clients. REO continues to innovate on the Web with map-based search options, YouTube video production for our listings and more. You don’t get all of that from the small franchisees, even if they do have a big, impressive brand name on their signs.

So the important take-away here is that those big brand names mean very little. You need to look at the strength of the local company that you are going to deal with to sell your house or to help you find a house to buy. The company with the big brand name could be the next small franchise operation to go belly up in the current real estate environment. Seek, rather, the comfort of the stability and longevity of Michigan’s largest and most successful real estate company, one that has been there for more than 85 years and will be there tomorrow – Real Estate One.