Yesterday, Sawbuck was named as one of five finalists for the Inman News 2008 Innovator Awards in the category of Most Innovative Brokerage. We thought we had a shot at being nominated, but were really excited to see it in print.

Inman is the real estate industry’s leading news organization; the awards will be presented at next month's Real Estate Connect conference in San Francisco. I'll be out there (I'm a speaker on a panel titled "Building a Brokerage Brand in a Web 2.0 World") to see who wins. My advanced statistical analysis tells me we have a 20% chance of winning, and the competition is stiff (especially from "alternative broker" poster-boy Redfin), so this probably as far as we go. But, as they say at the Oscars (usually with pursed lips), "it's an honor just to be nominated".

If nothing else, this is great validation for what we are doing. We are really trying to do something new, combining the Real Estate 2.0 ethos of free information, powerful online tools, transparency and savings through efficiency with the best of "traditional" real estate -- top local agents who know the neighborhoods and offer great, personal service. It is certainly gratifying to have our industry recognize us; but it's even better when regular people become Sawbuck devotees.

The five year dispute between the Justice Department and the National Association of Realtors is finally, mercifully, over. Predictably, both sides claimed victory, even though it’s hard to remember just what they were fighting about. But while one might assume that the market has moved beyond talk of “opt-outs” and “virtual office web sites,” this week’s settlement will shape the industry for years to come.
 
Real estate has crossed the Rubicon, never to go back.  Now all parties, with the court’s blessing, have sanctioned the rights of innovators and entrepreneurs to create new ways of doing business and accessing MLS listings. In the world of listings ("IDX" to real estate technology insiders), all brokers are now in the same boat -- traditional and alternative, online and bricks-and-mortar. For a given MLS, everyone can display the same listings, with the same level of detail, on their public web site. (Whether they choose to do so is another matter.)

The bigger change comes in new, uniform support for VOWs (Virtual Office Websites, the parts available to registered users). Innovative brokers are now free to provide buyers and sellers online tools and information that match (or exceed) those available to traditional agents at their desk. And now MLSs must make their data available to brokers who want to build a better mousetrap. Ultimately, this is good for everyone -- brokers, agents, buyers and sellers -- even if they don’t yet realize it.

In its news release, the Justice Department predicted that commissions would fall as a result of the settlement.  This assumes that the only new models our industry can create are “discount” models -- more do-it-yourself, less commission. But maybe what consumers want is more for their money, not less for less money? Maybe they like “traditional” local agents and just want to find a new way to work with them? Innovation, on a level playing field, will answer these questions.

At Sawbuck, we created an “alternative” model that preserves commissions and uses traditional local agents (only the best ones), yet gives buyers the information, tools and control they want, plus the financial incentive they require. We did this by attacking the “ancillary services” that have become brokers’ cash cow: mortgage and title.

This model has saved homebuyers thousands of dollars through our negotiated below-market mortgages (with no closing costs) plus our unique no-fee settlement. Our Realtor partners earn full commission, get high-quality buyers and happily pay our referral fee. Yet this consumer-friendly, agent-friendly model was disallowed by NAR’s original VOW policy. That’s why the Justice Department asked us to testify at the planned trial.

Now, we no longer have to put an asterisk in our business plan (*note: business model may become moot at any time). And I’ll bet the surety that comes from this settlement, and the level playing field it establishes, will launch a hundred new business plans.

We're excited to report that Sawbuck co-founder Guy Wolcott has been asked to participate as a speaker at the Real Estate Connect conference in San Francisco this summer.  He will participate in a session entitled "Building a Brokerage Brand in a Web 2.0 World."

This conference is the most prominent event in our industry.  Real Estate Connect has been described as "a gathering of the brightest minds in real estate and technology, who get together to tackle some of the most pressing issues facing the real estate industry."  Pretty lofty company.  Guy should fit right in!

Seriously, we're very honored to be participating and grateful that industry "insiders" are taking note of the unique Sawbuck business model.

What's a "short sale"?  In brief, it's when a homeowner sells their home for less than what they owe on their mortgage(s).  Obviously, in order for this to happen their lender needs to agree to the deal and get less than they are owed.  This is why you will often see the words "Third Party Approval Required" on a listing.  That's code for "The seller's lender needs to sign off on any deal."

There is a perception in the market that because there are so many "short sale" listings then lenders must be signing off on these deals.  Unfortunately, the reality  is a bit different.  Lenders are agreeing to some short sales, but the majority of offers are rejected after a laborious and time consuming process.  Check out this article in The Wall Street Journal.

Bottom line: approach "short sale" listings with the idea that there are likely many obstacles to overcome in order to make a deal.  They are worth checking out, but manage your expectations.

After much anticipation, the US Department of Housing & Urban Development (HUD) finally announced the new conforming and FHA loan limits.  The Washington DC metro area will have a loan limit of $729,750 and the Baltimore area will have a limit of $560,000.  These new limits apply to both conforming and FHA loans (previously the conforming limit was $417,000 and the FHA limit was $362,790).  Most attention will be given to the fact that many loans that were previously "jumbos" will now be conforming -- which means they will now have an interest rate that is dramatically lower (currently over 1% lower).  But this expanded availability of lower rates, in my opinion, is not the primary benefit of HUD's much needed action.

More important is that down payment requirements and other underwriting standards are much more lenient on conforming and FHA loans.  As an example, the down payment required on an FHA loan can be as little as 3% -- as compared to "jumbos" that now often require at least 10% down.  Lower down payment requirements will provide a huge shot in the arm to our real estate market, where entry level homes in some sub-markets easily exceeded the previous conforming and FHA limits.  At Sawbuck, we know first hand that our region has an extremely high number of young professionals with great income and credit -- but who understandably have not yet saved enough money to buy a home under current "jumbo" guidelines.  HUD's new loan limits are a welcome change for these folks, not to mention home sellers who for the first time in many months could start seeing more prospective buyers coming through their homes.

This morning, we awoke to find thousands and thousands of people coming to the site. The Sunday edition of The Washington Post included a very nice column about our company and our site. Interestingly, lots of people seem to read that paper.

We had more traffic in a few hours than in the past few days, and our technology platform was creaking under the load. Our servers were doing just fine, but we were bumping up against some hard bandwidth limitations. We just didn't have fat enough pipes from the Internet to our servers. So the site seemed slow -- which is too bad after spending months making it as fast as possible!

We were able to take some action today to mitigate the problem -- mostly moving static files like images off to another server using a different connection. But after 12 hours of very-high-volume, we are still playing catch-up. It's somewhat like changing your tire while driving at 55 mph.

In addition to the site being hammered, we had to bring all hands on deck to answer phones and live chat requests.

Obviously, we are delighted that the Post (and columnist Elizabeth Razzi) took the time and trouble to write about us. It appears that she did a considerable amount of research on both the site and our business model, and we are grateful she had so many nice things to say. We will try our best to live up to them.

(And if you thought the site seemed slow today, it should be back on its feet quickly. We hope you'll give us another chance.)

When the US House of Representatives passed the “stimulus package” a few weeks back, most reports focused on the $300-1200 tax rebates that Americans would get in their mailboxes later in the year. At the time, an important piece of the legislation went under-reported. The bill proposed to raise the conforming limit--the maximum loan size Fannie Mae or Freddie Mac can buy--from $417,000 to $729,750.

In the weeks since, especially among those in the real estate industry, word of this change began to spread; it became more widely reported in the media as well. But the specifics of the bill were not well-presented. The change would raise the new limit to no more than 125% of the median price in certain “high-cost” areas, with a maximum of $729,750.

In fact, the Senate just yesterday approved a bill with the same provision. It was quickly approved by the House and is expected to be signed into law by the President quickly.

The HUD Secretary is to determine within 30 days what the median home prices (and therefore new conforming loan limits) are for each “area”. The only wildcard is: how will he define an “area?” The most likely answer is by MSA; median home price data by MSA is readily available and well-known.

Here’s the problem, and the thing most commentators missed in the initial excitement about the new limit: very few places in the country would enjoy the new $729,750 maximum. Because many MSAs are very broadly defined--they include many outlying counties far beyond the city core--their median home prices are surprisingly low.

After three days of fielding press and industry-insider interviews, I have a new perspective on people's knee-jerk reaction to what we are doing. Now, keep in mind that these are, by definition, the most jaded and cynical questioners with regard to new business models in the real estate arena. They know all the ways people have tried to skin the cat, and they assume we fit into one of the pigeonholes they've created.

The greatest skepticism was reserved for our Free Mortgage. The assumption is that this is done with smoke and mirrors. Partly, this is due to the way traditional brokers have used ABA and in-house mortgage companies to abuse their customers--making extra money from them in the name of "one-stop shopping". So there is a tradition in the industry of using mortgage as a sneaky way to make money and pad the bottom line.

Second, mortgage is such an easy thing to play numbers games with. It's like a balloon--squeeze on the rate and the points increase; squeeze on the points and the "fees" increase. Anyone can offer a "no closing cost" loan (if you don't care about the rate). Anyone can offer a super-low rate (if you don't care about points and fees).

So, I wanted to address this issue directly: What makes our Free Mortgage legit? How can our buyers really get a well-below-market rate AND pay no closing costs?

It's finally here. For months, we have been working towards launching our business and site at the end of January, and we made it. It is a strange feeling to switch from keeping things under wraps to trying to tell everyone at once—a complete 180 in a single day.

Yesterday, we sent a preview link out to select members of the media, focusing on real estate, technology and DC-area business news outlets. We got a very good response to both the site and the business model, which was really gratifying. When you work on something new for the better part of a year, it is hard to keep perspective on it, despite constant attempts to challenge your own assumptions and previous thinking. So it is nice to see that after being in the bunker for a long time, our business makes sense to some real people who are seeing it for the first time.

Last night, one real estate technology blog got a little ahead of us and sent our press preview link out to the world. We'll forgive them since it was in the course of a pretty nice review of what we're doing. So last night, instead of the few dozen reporters, hundreds of visitors started showing up. Rather than one last decent night of sleep, we stayed up to be sure everything worked as planned. And to satisfy our curiosity about what people would do once they got there.

As expected, the big draw was our map-based home search. Some people used other pieces of functionality, or checked out the more texty bits of the site. But most people spent their time on the map—several for over an hour!

Today we will open the doors for real, and hope to see an even larger audience. It's a big shift to go from a secret to a real business in one day. We'll see how it goes.

Throughout development of our search technology, usability has been at the top of our list of priorities. We wanted to make something that regular people could actually use to find and evaluate homes. I pictured my parents using the site. Could we make it easy for them to understand and navigate while still maintaining the powerful search features? Turns out I was off by two generations.

Last night, I was using the site on my computer at home, putting it through its paces a few days before our public launch. I left it open to our main search page and was called away for a while by my younger son. When I returned, I found his brother, five years old, reviewing and rating properties—dozens of them.

Holding my laughter in, I watched quietly as he clicked on each little “X” icon, opened the “View Complete Listing” page, clicked the “View All Pictures” link, and reviewed each home to determine the number of ceiling fans it had. If it had a lot, it got four stars; fewer got two or three. He quickly gave listings with no pictures one star (like any buyer would!).

I did have to show him how to scroll the map around, but that was about it. And once I told him the “My Favorites” link collected all the three- and four-star listings, he was psyched. But he got the basic idea without any adults around—he even put the site in his Favorites in Internet Explorer. Our first fan.

Hopefully, this means my parents will be OK too. And everyone else.

As housing prices (and commissions) leapt up over the last few years, the number of real estate agents skyrocketed. Today, there are over 2.77 million of them—one in every 79 adults is a licensed real estate agent! (In fact, it’s much higher than that in areas with higher home prices.)

But as the number of agents has grown, the experience of the average agent has plummeted. The vast majority of these agents haven’t been in the business that long, operate part-time, and don’t do that many deals each year.

Increasingly, real estate brokers have focused their attention (and marketing) on bringing in as many of these low-volume agents as possible. They pay them significantly lower commission splits than top agents and are more likely to get business for their high-profit mortgage and title companies. (Top agents and teams often shy away from the in-house lender and ABA settlement company.)

The idea is that these new agents will sign up their friends and family when they’re ready to buy or sell. And guess what…it works. But that doesn’t mean it’s a good system.

These brokers want you to make a subjective, personal decision in picking your agent—more like deciding who to invite to your party. Who do you already know? Who will be offended if you don’t pick them? Who do your friends like best?

Sawbuck is trying to do things differently. We want to help buyers find an agent for better reasons. Who has the most experience in this neighborhood? Who can provide unique insight into the homes you like? Who has the best chance to know that a house you’ll love will hit the market next week?

You might be surprised to find out that most of their revenue comes from selling title insurance, not from "settlement fees" or other charges. In addition to their other roles, settlement companies are also "title insurance agents"—they sell title insurance policies issued by larger title insurance companies. In fact, 80-85% of the cost of the title insurance policy goes to the settlement company; only the remaining 15-20% goes to the insurance company who issues the policy.

Especially in areas with higher home prices (which mean higher title insurance costs), this is by far their largest source of revenue. So, even if they didn't charge a single other fee, they are still making money.

But they do charge other fees. Sometimes lots of them. That's how you get the settlement fee, title examination fee, doc prep fee, binder prep fee, courier fee, notary fee, attorney's fee, release procurement fee, wire fee, payoff fee, copy and fax fee, tax cert fee, and release recordation fee, to name a few. They're just different ways of saying "additional revenue for the settlement company."

Now, some of the fees charged by settlement companies are just passed through from another company. The cost of the title search or survey (both necessary to buy a house) gets passed on to the companies that perform those services. This isn't revenue to the settlement company—unless they mark it up!

Most people know they need to get title insurance when they buy a home, but aren't sure what it is or why they might need it.

Title insurance ensures that the abstractor and title company have done their jobs correctly in perfecting title to your new property. In fact, the reason so much of the premium goes to the title company is that they do all the work ahead of time to make sure there never is a claim. It also insures against title issues they couldn't know about. In short, title insurance gives you (and your mortgage lender) confidence that you really do own the house you just bought. (For more details on title insurance, visit Wikipedia or the American Land Title Association.)

In most states the cost ("premium") for title insurance is filed with the state. That means that for a given purchase price, all buyers will pay the same amount, no matter which settlement company they use. Settlement companies can't mark up or discount the premiums they charge.

"Enhanced" Coverage

Still, in recent years the title industry did invent a new way to make more money on title insurance. They created "enhanced" coverage. While it does offer some additional protections, the primary "enhancement" is that it costs about 20% more than what is now called "standard" coverage. (Just ask any title attorney if they paid for "enhanced" coverage on their last home purchase.)

Increasingly, settlement companies default to selling enhanced coverage unless buyers specifically ask for the standard policy. This is another way settlement companies make more money.

Strange as it may sound, in recent years, large real estate brokers make less and less of their money from real estate. To compete for agents, they've had to gradually increase the "split"—the percentage of the commission that stays with the agent. Agents keep more; brokers keep less.

To compensate for this lost revenue, these brokers have turned to "ancillary services" (i.e. mortgage, settlement, insurance, etc.) to pump their profits back up. Many brokers now make more on these other services than on real estate itself.

Because these "ancillary services" are so important to the bottom line, agents are pressured in subtle (and not-so-subtle) ways to direct their customers to the in-house mortgage company. Needless to say, the in-house loan officer feels little need to be aggressive in quoting rate, points and fees. They know most of these customers are "in the bag" due to the trusted agent's recommendation—they aren't going to shop.

For these large brokers, real estate is becoming a loss leader designed to sign up as many buyers as possible, who in turn feed their mortgage and title profit centers.

Between 1980 and 2000, power shifted from real estate brokers to real estate agents. Now, brokers must compete harder to attract and retain their agents. To do so, they have steadily increased the "split"—the portion of the sales commission the agent keeps. As brokers earn less and less on real estate, they have looked for other ways to make money.

Enter the ABA

In an Affiliated Business Arrangement (ABA), the real estate broker and settlement company form a third, jointly-owned company that becomes the title insurance agent. The settlement company still does the same work they would do for any settlement, but the title insurance policy is issued through the jointly-owned company. That company then keeps 80-90% of the premium (see How Settlement Companies Make Money). This revenue is split between the two owners of that company—the real estate broker and the settlement company.

The net result is that the settlement company just gave half of its largest source of revenue back to the real estate broker—a legal kickback. They do it to guarantee a steady stream of business from that broker and their agents. But it also means they have to make up for that lost revenue.

Bring on the Fees

Settlement companies with ABAs have to charge higher fees—settlement fees, title examination fees, doc prep fees, binder prep fees, courier fees, notary fees, attorney's fees—because they're only making half as much on title insurance, while doing just as much work.

Now, none of this would work if the broker's agents weren't asked to send their customers to the settlement company with the ABA. And that's what happens. Unless the buyer specifically objects (and how would they know to object?), the deal often goes to the ABA by default.

While these ABAs are specifically structured to stay within the bounds of the law, they are typically bad for buyers, and increasingly under scrutiny by regulatory agencies and consumer advocates.

All mortgage companies (mortgage brokers, retail lenders, in-house mortgage operations, etc.) make money in pretty much the same way. Every day, they get wholesale rates in the back door, based on what investors (pension funds, endowments, hedge funds, etc.) are willing to pay for new mortgages. Out the front door come the retail rates borrowers actually pay.

The difference—call it a markup—covers their overhead (rent, salaries, advertising, etc.), plus the company's profit and the loan officer's commission.

The trick is that the "markup" comes in three forms: fees, points and a higher rate.

• Fees: Mortgage companies usually charge buyers a thousand dollars or more in fees, including "application fees", "underwriting fees", "processing fees", "admin fees" and "funding fees".
• Points: Sometimes called an "origination fee", points are calculated as a percentage of the loan amount. One point equals one percent of the loan. So on a $400,000 loan, a half-point origination fee (0.50) would be $2,000.
• Higher Rate: Investors are willing to pay mortgage companies extra for the same loan with a higher rate. For example, investors might pay nothing for a loan at 6%; but for the same loan at 6.375%, they might pay the mortgage company $4,000.

Mortgage companies are free to use whichever combination they want in order to attract customers, but still make money. Some market low rates (like those who advertise in online or newspaper rate charts), but make it up with fees and points. Others market low or no fees (Bank of America comes to mind), but charge higher rates. You'll pay in one way or another, because mortgage companies have to make money.

But it is in every mortgage company's interest to make a true apples-to-apples comparison difficult. Otherwise it would drive margins down to nothing. In the end, they are all selling the same product, and it is hard to keep it from becoming completely commoditized.