Industry Changing : Real Estate: Comeback’s New Terms
Back in the salad days of the late 1970s, California Realty was feasting on mushrooming land prices.
After three years of unprecedented inflation in California home prices, the Riverside company was selling more than 100 homes a month by 1978. Employee ranks had swelled ninefold to 45.
Today, however, California Realty has permanently retrenched. Only two people work there--broker Jay Blount and his secretary. The cutback was necessary because of the 1980-83 recession, Blount said, but “very, very painful.”
Events at California Realty are typical of what happened at thousands of other residential real estate firms around the state when the most pronounced, prolonged home-buying frenzy in California history ended with a vengeance early in this decade.
Different Ballgame
While conditions have improved dramatically with the recovery, the recession experience may have helped to transform the way homes are bought and sold in California and around the country. Changing financial conditions and pressures, key court decisions, and technological advances have reinforced and accelerated the trend, making real estate sales a far different ballgame than it was during the 1976-79 real estate boom.
Selling homes is no longer as exciting and lucrative a field as it once was. The job is also a lot harder than it was in the late 1970s when, veteran brokers recall, sales orders were easy and commission checks were fat. “If you were alive and could breathe in those days, you could make money,” said San Fernando Valley broker Ira Gribin.
But industry insiders insist that the changes have had at least some beneficial consequences: professional standards, they say, have risen as many quick-money salesmen have been squeezed out.
Dramatically Smaller
The real estate sales business is indeed dramatically smaller than it was only five years ago when industry membership was at its hottest. The number of licenses for salesmen in California has fallen to less than 200,000 from more than 300,000, while membership in the California Assn. of Realtors has dropped to nearly 100,000 from 150,000.
Broker incomes are not what they used to be either. Annual member surveys by the California Assn. of Realtors indicate that broker incomes have lagged behind inflation--even though the brokers are working harder and are better educated than five years ago.
The job itself has become more complex. Computer technology is beginning to make a mark, and the switch from low-interest, fixed-rate home loans to high-interest, adjustable-rate financing has profoundly affected brokers and buyers alike.
The real estate sales industry is also finding its practices under challenge on the competitiveness of commission rates and brokers’ divided loyalties to customers.
Of additional concern to brokers in California are court decisions that have increased their vulnerability to lawsuits from buyers and prompted sharp increases in their liability insurance costs.
A California appeal court last year upheld a decision holding that brokers have a legal, not just an ethical, obligation to tell buyers about home defects. The ruling sustained a $197,000 judgment against a Bay Area broker who failed to tell the buyer about a foundation problem.
Liability Insurance Up
A later appeal was rejected by the California Supreme Court, giving the ruling the power of precedent in other areas within the state. That, in turn, has helped make broker liability insurance in California at least 20% more expensive than it is elsewhere in the country, said Roland Weiss, president of Los Angeles-based Equity General Insurance Co.
Real estate firms are also feeling the pressure of new economic realities. Unable to count on single-digit mortgages and double-digit real estate inflation to pump up the demand for home-buying, these companies now face tough strategic decisions.
Mid-sized real estate companies, which once had more business than they could handle, now must choose between shrinking so that they can offer the personal touch, or expanding so that they can offer the sophisticated financial services of a nationwide franchise.
Walker & Lee, with 27 offices in Southern California, is expanding statewide this year with 22 new offices so that it can compete more effectively. “We’re caught in between right now,” said Robert Lind, a senior vice president. “We have to compete with the Century 21s and Coldwell Bankers and to get bigger to do it.”
Brokerage Shrinks
On the other hand, Ira Gribin’s real estate brokerage in the San Fernando Valley is shrinking its operations from 14 to six offices as an economy move. “We lost bundles (during the recession),” Gribin said. “Bundles and bundles.”
Some of the pressure for such business decisions is coming from industry behemoths, who are seizing on technological change that could give them a sales edge because of easier access to financing information. In 10 years, it will be commonplace for brokers to arrange mortgages via computers, real estate experts predict.
Irvine-based Century 21 Real Estate Corp. is already experimenting with technology that could sharply reduce the time needed to consummate home sales. It has begun a pilot program in Boston, where office computers, linked to local lending data banks, allow buyers to qualify for mortgages immediately.
Similar computer services offered by other companies represent a small but growing part of the mortgage loan market. One firm named Shelternet, a subsidiary of First Boston Corp., the New York-based investment banking firm, helped originate about $800 million in mortgages in 1984.
Coldwell Banker executive Thomas S. Griffin predicted that the day is coming, in this decade, when real estate salesmen will have electronic printers in their cars that will be able to spit out mortgage loan information through phone linkups with computer data banks.
“The technology is already here, it just needs to be applied,” said Griffin, who heads Coldwell Banker’s residential operations in Southern California.
Mortgage Proliferation
Brokers today are having a tougher time consummating home sales because financing, once a simple matter, is still suffering from the proliferation of adjustable-rate mortgages.
“Financing used to be easy,” said Richard Rosenthal, a broker in Venice. “It was a matter of pointing people to the right savings and loan.”
Today, if brokers want to make a sale, they must be able to explain all the nuances of high-interest, adjustable-rate mortgages, which have a bewildering array of introductory rates, payment ceilings and adjustment indexes. Then, the consumer has to qualify for the high-interest rate loan.
Some brokers also contend that homeowners are more particular today--more interested in the house itself and less concerned about the profit they would realize by selling a year from now. That is because home values have leveled off, and even decreased in some areas of the country.
“You find some real nice piece of property for someone and all of a sudden they cool off,” said Lou Francis, a real estate broker in the Belmont Shore area of Long Beach. “Homeowners are a fickle bunch.”
Sharp Contrasts
Today’s environment contrasts sharply with the heady days of the past decade when California property values were propelled ever higher by nationwide inflation, a superheated state economy, and a large influx of foreign capital--much of it from troubled Iran--seeking refuge in California real estate.
“It was a time when everybody had a real estate license, or his brother did,” said Rosenthal, the Venice broker.
Average land values appreciated as much as 33% annually in some hot spots--such as Orange County--setting off a stampede for real estate sales licenses. Even students who had not mastered English--mostly Iranians, Asians and Hispanics--jammed the real estate training schools in an often-vain attempt to qualify.
Commissions of $100,000 a year were common among salespersons. So were half a dozen competing offers on a single home. Salespersons went door to door, seeking--and often finding--new business. Home prices were rising so quickly that homeowners could easily double and triple their cash investments by selling out.
At the Board of Realtors in the San Fernando Valley, membership ballooned to 11,200, from 4,000, between 1976 and 1979. “It was a unique period in American real estate,” said Robert Adamson, the board’s executive vice president. “We had offers in excess of the list prices. I had never seen anything like that happen before.”
When the plunge came, sparked by soaring mortgage rates, it was equally dramatic. Walker & Lee closed 65 of 92 offices, while the Van Nuys-based Lumbleau Real Estate Schools, one of the oldest training schools of its kind in California, closed 16 of 28 facilities.
Even the best sales agents say they had trouble.
‘Barely Got Through’
One saleswoman in Orange County, making $80,000 a year in the late 1970s, said she had to take a leave of absence because sales deteriorated so much. “It was awful,” she recalls. “I barely got through.” Her salary has since returned to the $80,000 range, she added.
A sense of normalcy has returned to most of the industry as well, although few expect the giddy, get-rich-quick atmosphere of the late 1970s. The factors that caused that explosion show no signs of returning.
The industry’s bellwether indexes have improved, both nationwide and in California. Home resales, for example, hit 3.1 million in the United States last year, 6% above 1983 levels but still 26% below the 1978 peak.
The improved conditions are also evident at some of the hardest hit companies. Century 21, for example, has added 500 franchises, replacing half the ones lost during the recession.
As business has picked up in California, however, so have enforcement actions by the state’s Department of Real Estate.
Tougher Licensing
Department chief James Edmonds said that increasing numbers of salesmen are having their licenses revoked or suspended because they are not being supervised properly by brokers. (Brokers have separate licenses that allow them to operate their own firms and supervise other salespersons. All salespersons must work under supervision of a broker.)
A recent report of Department of Real Estate disciplinary actions shows that another common reason for license revocation was that the salesman or broker was convicted of a crime.
The department, in an effort to upgrade personnel quality, last summer began requiring salesmen and brokers to pass tests in order to get their licenses renewed. The action was sparked by complaints that the department’s mandatory continuing education program, begun in 1981, was ineffectual because no tests were required at the end of the courses, Edmonds said.
Industry watchdogs say the real estate sales industry has other knotty issues to wrestle with as well.
Industry critics say that professional standards are often overlooked in the pursuit of commissions, which generally range from 6% to 7% of the sale price. Most real estate salespersons “won’t do anything to jeopardize the closing,” said Sloan Bashinsky, a vocal industry critic from Birmingham, Ala.
Commissions Kept High
A study published in December, 1983, by the Los Angeles office of the Federal Trade Commission said the inbred nature of the home sales business--a result of the widespread use of multiple listing services--keeps commissions artificially high and uniform.
Consumers might have saved $1.3 billion had there been a 1% reduction in the commission rate in 1978, the study estimated. The FTC also pointed out that buyers are routinely steered to homes on which the broker stands to receive the largest commission.
Industry standards dictate that real estate agents have a fiduciary duty to represent the seller in most cases where homes are sold through a multiple listing service. The guideline has a widespread impact because the overwhelming majority of homes sold through brokers use a multiple listing. (The multiple listing service acts as a market lubricant by allowing competing brokers to share information about what homes are for sale and to split the commission when a sale is made.)
Industry spokesmen insist that sales agents capably represent both buyer and seller, and they correctly point out that there is nothing to prevent buyers from hiring their own brokers.
Consumers Unaware
Even so, most consumers do not understand the ground rules. The FTC study, based on data compiled between 1978 and 1981, found that almost three-quarters of both buyers and sellers were not aware of who represented whom.
Bashinsky--who is a broker, lawyer and author of a book entitled “Home Buyers: Lambs to the Slaughter?”--said that buyers should never tell a salesperson what price they are really willing to pay, simply because the agent is obliged to disclose that information to the seller.
“The buyer thinks he’s being represented,” he said, “and he’s really not.”
California industry officials acknowledge the problem. The California Assn. of Realtors has authored a bill in Sacramento that is intended to ensure that proper disclosures are made. The bill, introduced by Assemblyman Lloyd G. Connelly (D-Sacramento) in late February, is pending.
Second Careers
The problems notwithstanding, home sales remain a valuable outlet for people--many of them women--seeking a second career, a second income or just a second wind.
Gertrude Nunn, a broker in her 70s, received a sales license 17 years ago and was soon making more than $100,000 a year selling homes in Arizona. She now works as a senior vice president in the training department of the Phoenix office of Merrill Lynch Realty.
Nunn said that the job switch--she had been a caterer--gave her a new career love relatively late in life. “I’m 78 now,” she said, “but I don’t feel like an old lady.”
