Wisest of the crowds

No not what you are thinking - not social, ethnic, or racial discrimination. Redfin discriminates on price. PRICE! The 60 minutes piece was a yawn for me personally but it does give Americans the right to start to push back. See the posts and comments at TechCrunch, Redfin, Inman, BloodHound for an early read. Whether it becomes a consumer zeitgeist or fades will be seen but the open question is this: will price variation become mainstream in american residential real estate?

There is an old economic idea called price discrimination that is popular with every micro-econ 101 student, and their professors, that says you reach more customers and make more money by offering variation in pricing. Its sort of definitional for anyone who believes in supply and demand. It works like this: when you go to see a baseball game, there are a 100 variations in pricing to meet everyones needs and to tap into every possible cross section of demand. For example, there are ticket prices for corporations who entertain in luxury boxes and ticket prices for those who mostly prefer a beer and some sun in the bleechers. Ticket prices for season holders and ticket prices for last minute shoppers. In short, EVERYONE can have their demand met for baseball. A small example with the mighty SF Giants here.

What would happen if every ticket was the same price? Mayhem and lost profits. Some people willing to pay more for MLB tickets will transfer their money to an underground marketplace that will use price discovery to allocate tickets. Meanwhile, people at lower price points will be shut out resulting in further lost revenues to MLB. Thats why we have pricing variation. Its better for everyone because everyone gets an allocation and the business folks maximize their revenues.
People might argue that the price variation exists is in the underlying house price and not in the intermediary execution price (brokers & agents). If that were true, then why did trading volume in financial markets explode when electronic execution came into acceptance? (For a slightly more technical explanation {very slightly!}, see my earlier post here).

Redfin discriminates. So do I. It makes sense and it is better for everyone. Many people have commented that Redfin basically passes their work load to external agents to facilitate their transactions and to make their business model work. I can certainly see how that might play out. But if the consumer is footing the work load “bill”, don’t they deserve to get a rebate? Don’t consumers deserve the right to choose their level of service? In the end I believe that consumers will still depend on full service agents because housing is complicated and its something we do rarely. But by offering price variation, we get to grow the pie. Anyone else out there a discriminator? Anyone else want to make more money?

Trulia took a big step into socializing camp by creating a Q&A platform with the help of Pat Kitano. Very sharp looking implementation that now solidly takes Trulia from exclusively broker centric to also being agent centric. The list of reviews worth reading follows: Pat Kitano, StartupSquad, TechCrunch, Joel Burslem, Greg Swann.

Trulia’s implementation is clean and certainly ups the feature ante but is basically catch-up with others including Zillow and My-Currency. User generated content is interesting and valuable but is this going to turn into some sort of vertical social networking war where winner takes all? The audience of home shoppers currently is much older and much more tech phobic than what you might see at typical social networks so what the hell are we all doing? Is this web2.0 hipsters flexing, an investment in future behavior by home buyers & sellers, or part of some master plan to disintermediate the existing ecosystems? All three isnt a bad guess.

For a while I have been wondering which direction Trulia would point their ship - towards the incumbents or away?. It feels to me like listings are a commodity waiting to happen and so the question for listings aggregators, like Trulia, is what next? Going social gets them on plan to taking Zillow head-on without alienating their existing constituents. Zillow has ignored the brokers while Trulia has made them their buddies. Each has their natural advantages and disadvantages but Trulia’s is a safer and more optionable route. Only if you raise a bunch of money can you take the path Zillow is taking. The payoff for Zillow, however, is much bigger with the risk because the consumers are the customers and Zillow does this very well. The real estate industry will never go back and the question I have as an entrepreneur is which strategy will win? One that eats its way through the ecosystem (Trulia) or one that completely goes around it (Zillow)?View blog reactions

The Washington Post has a hilarious (but real) article discussing the inside of New Century Financial - the sub-prime mess to end all messes that is now bankrupt. I first read about the article at Inman blog, entitled You WILL play ball. Below is a WP sampler:

“The stress in that place was ungodly. It was like selling your soul,” said Hardiman, who worked for New Century in 2004 and 2005. “There was instant notification to everyone as soon as you rejected a loan. And you dreaded doing it because you paid for it. Two guys would come with a bat, and they were all [ticked] off because you cut their deals.”

I have posted several times about the conflicts between the appraisers, lenders, and agents here, here and here. Bottom line is that it may be time for buyers to hire their own appraisers. This doesn’t represent a new expense but rather a disaggregation of a current expense. If a buyer uses cash, rather than having the costs buried in other transaction costs, than the buyers can control quality and appraiser can get on with their jobs with conflicts.

Also, we might consider the conflicts from the lending side as to communicating affordability to consumers. Does it make sense to expect a lender, who is commissioned based on the number of closed transactions, to actually protect the customers side of the equation? I suppose the logic is that its the banks money but in truth, lenders sell loans and loan agents get new jobs. So the buck gets passed, Wall Street just play the odds (and gets a commission), and the financially illiterate get stuck holding the bag. Nothing new from “big business” but certainly NOT something part of the new business models powered by the internet - including ours.

The solutions to these and other vexing consumer problems are being addressed by market forces. Entrepreneurs like us see this problems as opportunities to add value to people by being open and transparent about our businesses. We put people at the center of our model and drive everything to satisfy this focus. Gone will be the days when trapping and or tricking a customer into a piece of business is THE model. Gone will be the oligipoly’s upon which many incumbent industries are based. Power is being pushed down to people and the economics will follow. Selling your soul in sub-prime, or any other industry, is a dinosaur waiting to happen. A lot of other charts will look like the one below over the next few years.

Ardell DellaLoggia of the Rain City Guide pens one the best pieces I have seen regarding housing valuations at a hyper-local level. Entitled Home Valuation “Tools”, Ardell goes on to detail how to properly value a property and how to seperate the value of the land versus the value of the house…an important consideration, often overlooked, in expensive markets where most of the value is actually land (I am talking to you San Francisco!).  Her analysis is deep so get a pencil out but the basic takeaway is that if you can determine the cost of land, and make adjustments for slight differences, you should be able to determine which houses are overpriced and which ones are underpriced.  Ardell finds a home that was torn down after being purchased and so was able to get a solid market value for land. Getting everything apples to apples is critical - and not easy.
Her analysis is not only thorough, but also demonstrates that housing valuation is a highly complex problem that has variation from property to property. In other words, it is very difficult to model and so AVM’s will largely miss the nuances. Naturally we at My-Currency have built our site for this very reason - to enable the local experts to shine and to collect these nuances both in detail and as an aggregated value in our prediction technology we call CrowdValue.

Joel Burslem continues to demonstrate his deep knowledge of tech by discussing how the real estate industry can leverage social networking sites like Facebook to broaden their network of clients and market their listings. In an article entitled Marketing Real Estate on Facebook, Burslem outlines five basic ways an agent can use social networks. Naturally, we agree with Joel. My-Currency is a vertical social network, a term I first read many moons ago at the blog Social Degree. The difference between My-Currency and Facebook is the difference between Walmart and Whole Foods. Walmart has everything but Whole Foods has only the best.

My-Currency is trying to be more relevant to users by focusing on, and aggregating, content specific to housing consumers. We give you all the tools you need to get inside housing problems. For a professional, it should prove a resource that demonstrates to your current clients authority while hooking and incubating future clients. For consumers, its an opportunity to share information and get professional advice - free. The site has all the basic building blocks in place. The open question is whether a vertical network will better serve consumers and professionals than a horizontal network. We obviously think so. That is not to say Facebook and their like are not of value. They are - use them! In fact, we will look to integrate with them and other parts of the internet ecosystem. Its just that we think focus, focus, focus will create better relevancy and better engagement with those interested in housing.

So when you want to purchase Tide Detergent go to Walmart. When you need a 25 year old bottle of Academia Barilla Balsamic Vinegar from Modena, Italy, go to Whole Foods. Do you, as an agent, want to be lost in aisles of Walmart like poorly selling lines of Tide detergent?

This Redfin Consumer Bill of Rights thing got me thinking …Glenn has it all wrong. Here is my list:
1. Shut your pie hole! You get the services we prescribe. One size fits all.

2. Shut it! The way your agent makes money is his or her business even if it results in misaligned incentives ( this is an economics doohicky that means giddy-up!)

3. You are committed to an agent if that agent saw you first or called it first. Next time wear your cloaking device idiot.

4. Your agent’s job is to put lipstick on the pig. All other services are redundant and therefore easily dismissed….cut your own #$@!ing grass!

5. Agents are trained by Jedi Masters to find that singular point of harmony between a buyers and sellers interests….plus money more is better than less (duh!).

6. There will be no commission refunds. Full stop.

7. The only houses for sale are the ones your agent takes you too see….trust them implicitly.

8. Have an open discussion about a house for sale… as long as it is in your toilet and by yourself. We will not tolerate free speech in NARmerica.

9. See only partial information available about a house for sale. Too much information confuses you silly little consumers. Here, have a lollipop!

10. Be sure your agent will show your house to everyone but the cheap bastards that will never pay the sticker. Good agents can tell..trust us.

Marcie Geffner of Inman news has a great article (subscription) about the conflicts and misaligned incentives that appraisers face today. I discussed this in an earlier post entitled “inflating appraisals” but essentially I agree with Marcie’s assessment about the state of the industry. Appraisers get pinched from all sides because those people that hire them are incented to get it wrong. A bank lender gets paid on volume. A real estate agent gets paid upon close of a transaction. A seller get more money. A buyer gets a loan, a house, and a sense of fairness (admittedly a false sense of fairness).

That is not to say that all appraisals are suspect or that there is malicious intent at work. But when relationships in the ecosystem are structured such that there will be implicit or explicit pressure on appraisers, the weakest ones will likely fold putting greater pressure on the vast majority who work hard to get it correct. So it is really about shielding the analysis from the commercial motivations of others.
Marcie doesn’t quite get our model correct but that’s ok because it gives me the opportunity to pitch it. Marcie is right to suggest that buyers are probably in the best position to fix the situation by hiring their own appraisers. This is where My-Currency comes in because we identify the experts. If you are an appraiser, how will you ever reach consumers? Through an agent? No, that doesn’t quite solve the incentives issue (”get me the value or I’ll find another appraiser!”). Through a mortgage lender? No, same problem!

My-Currency gives appraisers a way to demonstrate their skills; talk about what you know; answer questions; and make value predictions about houses for sale or zip code indexes (value per square foot or days on market). My-Currency enables appraisers and other housing professionals to show the world what you know and help you connect with these customers. We offer a platform where professionals can build professional currency and hence virtual reputation.

Please let us know what we can do and stay tuned because we have new things to announce that will further our goal of serving housing professionals and consumers.

One of the nice things about creating something that forces people out of the intellectual cave is listening to massive justifications for crap.

For example, one thing that a few people in real estate industry are in love with is this idea that the value of a home is solely determined by the buyer and seller at a negotiation. Further, some are crass enough to suggest, essentially, that value is a nice concept - but that transaction prices are king. Okay, that is true in a vacuum. It is the equivalent of saying the cake is chocolate because the frosting is brown.  The cake can be anything and certainly no one would suggest that the frosting is the cake (except my three year old daughter).
Why do I say a vacuum? Because people enter a negotiation with information that they receive from all around - from every conceivable person they know. That information comes explicitly and implicitly. In economics its called “signalling“. The idea is that we receive information signaled from others during a transaction. I think you are not paying enough for my car, I shrug my shoulders and tell you as much. Do I really think your offer is low? If there were several people between you and me in the negotiation could the signal lose its strength or have its meaning altered?

So our actions are a function of this signaling effect. When you rely on signaling from someone, there are many problems, the largest being:

- How can you, the receiver (the principal, who is usually the buyer in the transaction), trust the signal to be an honest declaration of information?

The problem My-Currency’s CrowdValue technology solves is that we bring to the surface this information signaling that is happening underground. That is, we are putting you into the information loop so that you get all the information signals in an unbiased manner. We know there are people who have incentives to send you the wrong information signal. That is, people who use signaling to manipulate you. Markets (e.g., CrowdValue) come closest to solving this signalling problem because it is an open mechanism that serves as a battleground for opinions where information collides until we have reached a neutral and aggregated signal - the price. Furthermore, markets constantly adjust to new information - new signalling.
Bottom line is that markets enable transparency - transparency for all the information that is circulating and perhaps being manipulated before it gets to you.

Is this good for housing pro’s? Yes because people will have more faith in the system and hence transact more frequently. It also gives pro’s an opportunity to show the world that have information and know how to interpret it - by taking actions that are measureable against real outcomes.

So who determines housing prices? Everyone. Everyone connected to the buyer and seller and everyone connected to those connections. Negotiated transactions are final manifetations of the whole network - the whole process.  Are consumers getting all the information signals? Mostly no (hence the popularity of AVM’s). Is information passing through the hands of people who have opposite incentives and hence opening the question of whether it is an honest declaration of information? Come on, do I need to spell it out?

In today’s Sunday Real Estate pull-out in the San Francisco Chronicle, Carol Lloyd discusses the various things that agents are, or can do, to market themselves in an article entitled “Surreal estate: Real estate seminars aim to give agents the edge in a competitive field”.
An interesting article that certainly offers a number of valuable points but perhaps the core perspective is that Agents must create personal brands - brands based upon specialized niche expertise. Don Hobbs opines “…Once Century 21 had 80,000 agents, how was an agent supposed to distinguish themselves from the crowd?” Hobbs’s company offer’s a host of marketing and coaching programs.

The most obvious thing missing in this whole article is discussion of the internet. Interesting! Let’s see, 80% of people start their housing search on the internet yet 2/3’s of internet leads have a conversion rate of ZERO percent (NAR data 2005). Consumers expect the immediacy and transparency of the internet to be delivered to real estate services. Yet as an agent, you are just a name and a face. The internet changes everything and makes the playing field much more fair. Gone are the days where networks of people are limited. The network of all humanity is up for grabs but dare you engage with it? The internet is an opportunity to expand your reach by showing people what you know - that YOU ARE THE EXPERT.

It helps you engage with your current and future clients in a meaningful way that elicits trust. It enables you to incubate ALL your clients at the same time and creates a history of your expertise for future clients to reference. In other words, it makes it cheaper, easier, and more effective to keep your pipeline fertile and growing. Welcome to the SHOW ME economy.

But if requires you to do new things. The simplest is to start writing things that demonstrate your knowledge base (blogging). Free systems include Wordpress and My-Currency that offer a blog free just by registering (30 seconds). My-Currency gives you the opportunity really differentiate yourself by taking things much further. We give you the opportunity to answer questions through our “answer” section, to participate in “wiki’s”, and to make valuation predictions on housing indexes (median values of a square foot by zip code) and homes. This all helps to answer consumers SHOW ME sensibilities.

My-Currency also enables you to create a very robust profile with all your contact information. And it is free!

Engagement with clients using social tools is a foregone conclusion in other industries. The real estate industry has begun to embrace it but there is a lot of adoption ahead. As the “rookie agent” at Coldwell Banker noted in Lloyd’s article, “You never know if that deal could be your last”, adding “… do people really choose their agents based on a postcard they get in the mail?”