Thursday, February 1, 2007

Perspective: Buyers, sellers deserve chance to shop for settlement services

One of the most dysfunctional aspects of the typical real estate transaction is the near inability of home buyers and sellers to comparison shop for settlement services. A new business model that creates some sort of transparency has been introduced and is welcome, though whether this particular model is exactly the right tool for this important job remains to be seen.

Comparison shopping is severely limited today because buyers and sellers have little or no easy and reasonable access to information about settlement-related products and services. This dearth of information encompasses the nature of these products and services, the differences (if any) among similar products and services offered by various companies, the level of customer satisfaction with these products and services, and lastly, but not insignificantly, the prices of these products and services.

In lieu of comparison shopping, buyers and sellers typically select settlement services without much thought and typically on the recommendation or as a result of the outright decision-making power of real estate brokers and agents, and lenders and mortgage brokers. This system of choice is inherently dysfunctional because those recommendations are strongly influenced by affiliated business arrangements, which are essentially corporate-level kickbacks disguised by cloaks woven of disclosure forms. In the most egregious instances, these recommendations are based not on such legal arrangements, but rather illegal and undisclosed rebates and other perks, pecuniary or otherwise.

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U.S. home buyers and sellers spend $100 billion a year on transaction costs, and buyers' closing costs have risen eightfold in the last 40 years, according to an October Money magazine report. Whether those sums are accurate, reasonable and appropriate is difficult to assess, yet the widespread perception still exists that settlement services come at inflated prices. That perception comes from lack of transparency in the system such that buyers and sellers have little opportunity to choose. Regardless of whether costs are in fact inflated or whether transparency would result in lower costs, more information would at least address the perception. And if costs are indeed reasonable, there should be no objection to transparency of price information.

While Zillow, Trulia, Redfin, PropertyShark and others have focused on property data, another new entrant has tackled the issue of settlement costs with an intriguing business model. allows companies to advertise fees and provides estimates based on fee quotes submitted by those companies. Buyers and sellers enter their own data into the Web site, which then generates a quote for the services.

Judging by the current state of the Web site, the company's execution has thus far not fully met the promise of the concept: The data fields in the vendor profiles are underpopulated, and in at least a few instances, only first names are used for some vendors. The customer satisfaction statistics, blogs and other resources exist more in concept than fact and other areas of the Web site are also still under construction.

Yet despite those weaknesses, appears to have identified a need in the marketplace and created a model that could meet that need once the Web site is fully developed. The fact that others have tried unsuccessfully to introduce variations on this model doesn't mean the idea isn't worthwhile.

However, where seems to have missed the mark is in its obsession with "lower fees," rather than meaningful information about settlement products and services, and what differentiates providers and their products from one another. Commodities are sold on the basis of price, and are subject to intense price competition because there is by definition no other basis of differentiation -- commodities are identical by nature.

But real estate settlement services shouldn't be commodities. Instead, providers should offer buyers and sellers meaningful choices among differentiated products and services at various price points. Differentiation would empower vendors to compete for business without the threat of a price war.

The opportunity still exists for -- or another competitor -- to make differentiation as well as price a selling point for not only buyers and sellers, but vendors as well. That sort of marketplace would give real meaning to transparency.



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