Hard times for the King of the Two-Percent Commission

Back in 2005, Stephen Johnston's Home Discovery realty signs were everywhere. His company's selling point was the 2 percent commission. Of course, lots of full service Realtors despised the young upstart for undercutting their business.

I remember attending a Florida Realtor conference in Orlando last August when a speaker proclaimed that discount brokerages were dead. The statement brought down the house. It was one of the biggest applause lines of the day.

When the housing bust hit, Johnston's 2 percent commission model looked a lot less appealing, especially when you consider he was talking only about the listing fee. To have any hope of a fast sale, you'd have to cough up at least 2 percent more to cover the buyer's agent's commission.

Johnston's company has taken it on the kisser as described in a piece over the weekend by my St. Petersburg Times colleague Scott Barancik:

Biggest reversal of fortune: Stephen E. Johnston III, Tampa
Key stat: Biggest plunge in sales volume, 2007
Quote: "We're fighting the traditional hand holding of the 6 percent model that's not needed. This is how we save you money." (2005)

Stephen Johnston had the bay area real-estate market by the tail. In 2005, the same year he notched an extraordinary $240-million in commissioned sales, Johnston and his discount brokerage firm, Home Discovery Real Estate, received a slew of industry awards and bragged about going national.

Things quickly deteriorated. Johnston recorded just $13-million in commissioned sales last year, a 90 percent drop from his 2006 total. He filed for Chapter 7 personal bankruptcy protection in December., and lenders have filed seven foreclosure suits against him this year. Attempts to reach Johnston, 36, for comment were unsuccessful.

His No. 1 sales ranking may be misleading. Unlike most brokerages, his sales staff were salaried, and all sold homes were credited to his account. And Home Discovery's customer service record? The Better Business Bureau gives it an "unsatisfactory rating."

I always found the people at Home Discovery to be agreeable and accessible.  I wish them luck.

Comments

Unfortunately, his model has been further undercut by e-brokers and their MLS listing-only services. Zealous FSBO types savvy enough to do the bulk of their own marketing, but need the MLS exposure, will continue to pay the lowest price for the same service. Eventually, you will see brokers offering a full menu of services - from the basic $250 MLS with one picture to the full-service 6% marketing gamut. It will be up to the consumer to decide what level they require. For most, it appears the full-service approach has staying power. The 2% (now 4%) model, like K-Mart, is getting squeezed.

[Fuzzy Bear]

Unfortunately, his model has been further undercut by e-brokers and their MLS listing-only services.

I would have to agree with the above statement. In addition, it looks to me that this business just grew way to fast and the growth was not managed properly and failed to account for the downturn.

On the other hand, the e-brokers model appears to be weathering the downturn and continues to grow.

[Florida - Paradise Lost]

I've always felt that the selling agent has always (except during false-prosperity housing crazes - see the years 2000-2006 in the state of Florida) done the lion's share of the work in a sale.

Unless the buyer is completely clueless about the area and doesn't know how to use a computer, the 3% spent on the buying agent is what needs to be re-examined.

And hey, the reason for this guy's downfall has nothing to do with his pricing model. Rather, it has everything to do with PRICES as a whole.

Now that the funny-money financing scheme has been put under the light (and is writhing, shrinking, and oozing slime as I type this), it turns out that it is a very RISKY proposition to buy a house at current prices in this region.

Hence, sales are down for everybody, and many realtors (including our 2% guy here) got caught playing the flip game - now they are playing with a pile of housing debt.

The model is not dead, but the myths are ("they're not making any more land, you know", "there are lots of rich boomer retirees that are moving to this area and they need houses!", "prices never go down", "buying a home is the best investment you'll ever make, never mind the price").

Sales may be close to dead, but FSBO and discount brokers will always be a part of the biz, and will likely grow with the increase of consumer knowledge fostered by the web.

No soup for anybody until prices (supply curve) gets back in line with wages (demand curve).

Cheers!

$13,000,000 in commissioned sales at 2% means the company's 2007 income was maybe only $260,000 tops?

[Karma]

I can remember seeing these guys' ads - clearly playing upon a typecast as they portrayed the real estate agent as a fat, lazy, middle-aged woman who charged too much. Home Discovery was smug, arrogant and classless in taking this potshot at the "typical Realtor." Arrogance usually precedes the hard fall, however - and it looks like that was the case here. The owner probably thought he was a real entrepreneuring special snowflake back when times were good. Now he looks like a fast-money Internet startup type who was "living the good life" before he was sure that he had a sustainable profit base.

A good buying agent is worth their salt as well. They need to know their area through and through - the MLS listings, expired listings, the FSBO's and anyone about to put the home on the market. They need to be kings and queens of networking and find their buyers that perfect house, even if it means knocking on a door and handing their card out.

They also need to properly research property cards, any permits still open. Negotiating escrow amounts, inspections and so on.

I know, a lot of Realtors do the minimum, but the good ones don't.