Will We See a Rising Tide of FSBOs and BUBBAs?

With home prices slowing and in some cases falling, will we see a decline in broker representation for buyers or sellers? Peter G. Miller comments.
By: Peter G. Miller: Realty Times
Whether home values rise or fall there are always self-sellers in the marketplace. To some in the real estate community this is a great cause of alarm, an apparent assault on their self-worth, but in reality those who engage in For-Sale-By-Owner (FSBO) transactions are hardly a threat to the value of brokerage services.

According to the National Association of Realtors, 85 percent of all homes were sold through the brokerage system in 2005. Of the rest, 11 percent were FSBO sales; 1 percent first listed with a broker and then sold by themselves; 1 percent sold to a homebuying company and 2 percent sold in "other" ways.

Ten years earlier - before the emergence of the Internet - the percentage of FSBOs was actually larger. NAR figures show that 81 percent of all homes were sold by brokers in 1995. That same year 15 percent were FSBO sales, 2 percent involved homebuying companies and 2 percent were "other."

These results are notable because the Internet was supposed to do away with the need for brokers, or to at least reduce their role to a sort of clerical activity worth at most a few hundred dollars per transaction.

The problem with such predictions, and the reason for their failure, is that homes are not stocks, bonds or airline tickets. A hundred shares of IBM are exactly the same as any other hundred shares - it makes no difference which hundred shares you own.

Houses are all different. Every property has an inherent physical nature and few buyers are willing to miss an in-person, tactile examination of a property before making the massive financial and psychological commitment real estate transactions require.

But with the market slowing, will we see an increase in FSBO activity? And what about buyers without brokers?

As a matter of logic, self-selling should increase when markets are hot because homes are easier to sell. In contrast, when markets slow the demand for listing brokerage services should increase because it's more difficult to find buyers.

And yet, oddly, compared with a decade earlier we can see that self-selling actually declined in super-hot 2005.

In the same way that we have self-selling FSBOs, we also have self-buyers. About the best acronym for these folks comes from Terry Crook, a Realtor in Chapel Hill and Carrboro, NC. A self-buyer, says Crook, can be described as a "Buyer Unrepresented By a Buyer Agent" or a BUBBA.

In a hot market, such as last year, you might think that purchasers would want to use buyer brokers because good properties were scarce and buyers wanted an edge. Conversely, in a slower market you would expect the use of buyer brokers to decline because many homes are on the market.

In fact, 40 percent of all purchasers used a buyer broker in 1995, a figure that rose to 63 percent by 2005, according to NAR.

One reason for the growing use of buyer representatives is that the concept has gained greater public acceptance. Consumers increasingly understand that if a seller has a broker, then a buyer without representation has a substantial disadvantage.

Now we have a market which has begun to slow. NAR reported last month that of 151 metropolitan statistical areas, 37 had double-digit annual price increases and 26 showed price declines.

What will a changing market mean for brokers and representation?

First, the pricing and volume fall-off we have witnessed to date has been mild - essentially activity in some areas are at levels seen in 2005 and 2004. Those years were considered excellent by historic standards.

Second, reduced unit volume means fewer opportunities for brokers, lenders and tax collectors. Look for the ranks of real estate professionals to be thinned and state coffers to contract.

Third, the ranks for FSBOs and BUBBAs will decline.

How come? Each year the buying and selling process becomes more complex. Here's an example: The first real estate contract I saw fitted nicely on a single page. In my last transaction there were some 65 pages of documentation.

If you had asked about self-selling or self-buying 20 years ago it would have made sense to say that such choices were viable marketplace options. But today that's not the case. Forget some paperwork and you could be out thousands of dollars or have a deal that's void or voidable. Go into a transaction unrepresented and the odds of success very much favor the other party.

So while some brokers may be distressed by the idea of self-selling and free-roaming buyers, the odds are overwhelming that both the marketplace will contract and that the percentage of transactions which involve a broker will increase.