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Looking For Savings In All The Wrong Places

Almost daily new efforts to automate brokerage, the transaction process and the lending system are announced, proclamations which cause people to wonder: Will new technologies change brokerage economics to the point where computerized and discounted e-brokers increasingly replace their traditional brethren?

You can't look at changing technologies such as those to be displayed this week at the NAR convention in San Francisco and seriously argue that new systems and platforms are somehow irrelevant. New transaction and underwriting platforms will progressively automate and expedite brokerage, and such systems will offer cost reductions.

But technological innovation does not automatically mean that discount brokerage will emerge as the common business model. Look at retailing: Online "stores" with central locations, no sales taxes, and -- allegedly -- better economics were supposed to doom traditional merchants.

It's a great theory, but in practice online retail sites have demonstrated two essential points: First, consumers have a natural desire to pay less for equivalent or better products and services. Second, you can't operate a business for long with losses.

In real estate there have been a large number of online efforts which parallel retail Web theories. Some sites have devised important innovations and concepts, yet traditional brokers remain at the center of the real estate transaction.

The essential "problem" which prevents online sites from maximizing profits or reducing fees on a large scale is the natural and necessary inefficiency which defines the real estate marketplace. Buying and selling homes is a sloppy business. Properties, prices, consumers, and markets are not standardized. It's not easy to acquire either listings or buyer clients. It costs money to market professional services, operate a business, and do deals. There are fixed costs whether the market is up or down.

But if the Internet, computers, and automated platforms can speed transactions and reduce costs, is the old business model for brokers dead?

To answer this question you have to consider several marketplace realities:

  • Discount and flat fee brokers, some with salaried staffs, have demonstrated that there is a market for their services, and with the Internet such firms may find additional growth opportunities.
  • Discount and flat fee brokers have been around for decades -- and yet their marketplace impact has been limited. Their niche is small.
  • The Internet is not a substitute for local offices, a local presence, and meeting people face-to-face. Is there an example of an online realty broker that lacks local offices and yet generates significant profits?
  • The new platforms, technologies, and sites available to discount and flat fee brokers are also available to traditional brokers. No form of brokerage has a lock on new technologies.
  • Being online does not automatically make operations profitable. As one example, says Mortgage.com chairman Seth Werner, "the online mortgage industry has not been able to demonstrate its ability to deliver cost-effective mortgage loans to consumers at a profit." Over time, of course, the situation may change, especially as lenders increasingly determine what works and what doesn't.
  • Being on the web, by itself, is simply not an advantage at a time when the Internet is everywhere, brokers in virtually all communities have sites, and more than half of all households are hooked up.

A careful look at new technologies shows that innovative systems can lead to cost reductions and enhanced efficiencies at the edge of the brokerage process. What such efficiencies don't impact is the continuing need for professional services.

Consider lawyers and the market for legal services: How many law firms today are not connected to online research services or lack websites? How many do not have a thousand forms stored on computers? And yet with such advances -- and with the existence of discount legal clinics -- have attorney fees declined?

In a similar fashion, new platforms and technologies can help brokers reduce back office costs. But new systems do not replace skilled people, the concept of representation, a local presence, or the distinctions which define neighborhood real estate.

No less important, online efficiencies are meaningless if not passed through to consumers. It's nice to hear that FabulousClosings.com can cut paperwork and reduce transaction times. That's great. And the consumer saves how much? You say the site charges the same fees as a local title company? Then why should consumers care? How often do buyers need or want to settle on a new home within 48 hours?

The key to Internet success is the crux of every winning business: Show users how they benefit. Show them something better. Close deals and make money. To this moment, a lot of realty sites have yet to prove their case because promised savings, benefits, and profits haven't emerged.

Save Money Financing and Refinancing

The latest edition of The Common-Sense Mortgage -- routinely among the top-ten best selling real estate books nationwide -- is available in bookstores online and off. In print for nearly 15 years and widely recognized as the standard consumer guide to real estate financing, it's described by syndicated columnist Robert Bruss as "an encyclopedic, detailed summary of just about everything real-estate investors, agents, lenders and borrowers want and need to know about mortgages."

"On my scale of one to 10," says Bruss, "this superb book rates a 10."

"This continues to be the most, lucid, comprehensive treatment of the subject on the market," says The Real Estate Professional. "If you want solid, reliable information about residential real estate financing, written in a thoughtful, convincing style, this is your source."

For additional information, press here.

Question Of The Week

Q Do I need an appraisal under the new federal rules to end PMI coverage?

A No.

The federal standard works like this: For loans issued after July 29, 1999, lenders must end private mortgage insurance (PMI) once the original loan balance has been reduced 22 percent. Consumers may request that lenders end the requirement for PMI coverage once the loan balance has been reduced 20 percent, but lenders need not honor such an appeal.

In other words, if you borrow $100,000 after July 29, 1999 and the loan balance is reduced to $78,000, PMI coverage must end in most cases. (There is an exception for "high risk" mortgages and the federal rules do not apply to FHA loans.)

The federal standard does not relate to equity. No one is asking whether the property value has gone up or down, or about the current valuation. Since there is no requirement to determine value, there is no need for an appraisal.

Lenders, at their option, may elect to end PMI before loan balances reach the cancellation level required by federal rules. Fannie Mae and Freddie Mac, as examples, have such policies for the millions of loans they own. In the case where a more liberal cancellation standard is in place than the federal guidelines require, an appraisal may be needed to demonstrate marketplace value. If this is the case, the lender -- not the consumer -- will select the appraiser.

For specifics relating to your loan, please contact your lender. Also, for general information, see PrivateMI.com.

Weekly Resource

What will the Internet look like in ten years? It's a serious issue because an evolving Internet will reflect a changing society and an unfolding business environment. The Internet's Coming of Age is a report which looks at how the Web may change in the coming years. Published by the National Academy Press, the entire report is now available online and without cost.

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