Law firms' real estate venture goes sour

MATHEW DEARNALEY tells the Real story, a seven-month turf war between lawyers and estate agents.

The costly television advertising portrayed it as a marriage made in heaven between lawyers and real estate agents.

But the advent of the Real residential property agency has opened up deep rifts even before the Government sweeps the two groups' respective monopolies aside.

"There was cursing on the phone, all sorts of nastiness - it was demeaning and unnecessary and got incredibly personal," said one Auckland lawyer of alleged abuse from real estate agents upset at his involvement with Real.

Now, he is among scores of lawyers casting themselves adrift from the venture they launched last year with a handful of agents as a lifeboat against partial deregulation.

Others are struggling to keep Real afloat, but only as a cut-down version of the vessel they clambered aboard in July, on the crest of a $1.3 million pre-launch advertising wave but in a depressed property market.

In the wake of six branch closures, including three in Auckland, agency founders are clinging to the hope that clubs of lawyers will form regional franchises to fund some of their 23 remaining offices.

The Real Weekly property listings newspaper has not been published since December 14, and finance for future issues depends on decisions at a board meeting today.

Faced with a new regulatory regime which Justice Minister Phil Goff wants enacted this year, 410 law firms, including 200 in Auckland, formed what critics saw as an unholy alliance with certain real estate agents to muscle in on the residential property business.

Mr Goff, looking forward to a reduction in sales commissions of up to 40 per cent, wants to create a new profession of qualified conveyancers in return for allowing lawyers to compete with estate agencies.

Real was coined as an acronym for "real estate agents, lawyers," and its "get real" advertising threw out a brash challenge to the industry and homeowners alike.

The bait was a sales commission of just 2.95 per cent on top of a $400 base fee, compared with 4 per cent commonly charged by other agencies, and with legal fees covered by the commission at no cost to sellers.

But there have been miserably few nibbles, with Real coordinator Warwick Brown disclosing that it holds just 1800 property listings out of a national market of 60,000 house sales a year, and that about half its member lawyers have pulled out.

He will not discuss sales, apart from that of a $1.1 million Kohimarama house, but admits there have been fewer than 200.

There was unseemly bickering from the start between Real lawyers and those who said they wanted to retain their independence, and the organisation complained of threats to salespeople and vandalism of signs and offices.

Then came an emergency plea in September to participating lawyers for $1.9 million, as an advance on this year's membership fees, a tall order for those left waiting in vain to strike gold.

Real Management Ltd's chairman, Papatoetoe lawyer Martin Strong, died suddenly in November, and Mr Brown now acknowledges that "from a national point of view you might say it hasn't been a success."

But he insists that Real has proved more popular outside Auckland, in centres such as Tauranga and Whangarei, and the board meeting today will consider whether there is enough support from lawyers to underwrite regional franchises.

How and why was Real set up?


Although the Real publicity suggests a full partnership, with lawyers and real estate agents exchanging marriage vows, it was set up primarily as a vehicle for lawyers to market their services in anticipation of partial industry deregulation.

People wanting to sell their homes must first seek a free interview with a Real lawyer, who will refer them to the organisation's real estate agency.

It follows concern among New Zealand lawyers over a loss of business by their counterparts in England to real estate agents under deregulation there. Shrewder lawyers in neighbouring Scotland, however, kept the whip hand by establishing one-stop property shops which Real founder Mr Strong discovered in his travels.

Then came a chance meeting with Mr Brown, a former Queen St lawyer turned art gallery owner, who liked the idea and wrote a business plan for such a venture in this country.

Enthusiasm spread to lawyers elsewhere, though it was initially envisaged as an Auckland-only scheme.

The founders then set about raising several million dollars from 410 law firms, while finding licensed real estate agents to run Real Ltd MREINZ as a separate entity from Real Management Ltd, the lawyers' cooperative through which the entire operation is owned.

Selling a home has always been daunting. What does a Real deal offer the long-suffering vendor?


The main carrot is a commission of just 2.95 per cent on the first $250,000 of a sale, plus a base fee of $400 and GST. Some of the $400 is payable in advance to cover valuation fees. The commission falls to 2 per cent for the next $300,000 and to 1 per cent for anything more.

Legal fees of up to $1200 are covered by the commission charge, so in most cases the seller pays nothing, as residential property conveyancing costs are commonly only about half that sum.

A home fetching $250,000 would thus cost $8747 to sell through Real compared with $10,125 - not counting legal fees - through Auckland agency Barfoot and Thompson.

Other agencies charge more than Barfoot, which does not have a base fee and drops its 4 per cent commission to 2 per cent after the first $200,000 of a sale price, a lower threshold than elsewhere.

Real vendors are offered a no-frills service, including free listings in the Real Weekly and on an internet site but no advertising in mainstream newspapers or other specialised property publications.

And instead of holding traditional open homes, Real salespeople arrange prebooked "screenings."

Sale prices are posted after independent valuations. Real says this removes the temptation for homes to be unrealistically overpriced in efforts by agents to "purchase" listings.

Critics counter that it could deprive sellers of the best market offer.

How can Real afford to undercut other agencies' commissions?


Property listings are referred to Real Ltd MREINZ by lawyers who are not allowed to actually sell a property under existing law.

This leaves salespeople free to concentrate on finding buyers, rather than having to spend much of their time drumming up properties, for which traditional agencies typically allocate a listings commission of 1 per cent.

Sounds okay so far. So why isn't Real awash with listings?


There is no question Real was launched at the worst possible time, in a month when the residential property market recorded the fewest sales for more than 10 years.

But the market has bounced back and Mr Brown is at a loss to explain why business remains sluggish.

He accepts that Real has had no discernible impact on commissions charged by other agencies, and says house owners in Auckland in particular appear undaunted by how much they have to pay middlemen as long as they achieve a sale.

But there must be more to it than that; there must be some serious downside?


Arch-critic John Waymouth, an Auckland lawyer specialising in real estate law and practice, has no difficulty diagnosing the reason for Real's poor performance.

"Real is unable to take advantage of an improvement in the market and provide a product the general public want. People don't want lawyers to be involved in real estate, and lawyers have lost the plot; they have just lost their objectivity.

Although the agency denies that lawyers receive any direct commission, Mr Waymouth says this is splitting hairs as their fees are derived from that source, so they have a vested interest in ensuring that Real makes a sale even if a better offer might be possible from another source.

Paul Gallagher, principal of North Shore law firm Turner Hopkins Albany, denies that lawyers would act against their clients, saying they are specialists in dealing professionally and on a daily basis with conflicts of interest.

But he acknowledges that the public may have been incorrectly left suspecting otherwise, and believes that Mr Goff is playing to a jaundiced popular view that lawyers make bags of money from property deals.

He says conveyancing fees have halved since lawyers abandoned a set scale in 1981, when they charged about $1200 on an average house, but that real estate agents have bumped up their commissions over the same period from about 3.5 per cent.

Mr Gallagher's firm has pulled out of the Real scheme, but he says this is purely because of the decision to fragment it into regional franchises lacking the clout of a national organisation, and he wishes its remaining participants well.

His motivation in joining had been to offer his clients a lower-cost alternative for selling their homes rather than to squeeze out traditional estate agents.

"But some of the other agents have been quite frankly amazingly childish, a bit like silly schoolchildren."

What do real estate agents think?


Barfoot and Thompson partner Mark Barfoot says his firm is not surprised by Real's predicament, having analysed its scheme and been at a loss to see how it could work on such a low commission.

"We couldn't make it work with our higher commission. Either they were incredibly stupid or had come up with something brilliant. It is always dangerous when you step outside your area of knowledge or expertise."

He disputes Mr Goff's perception that the real estate industry is uncompetitive, saying it suffered a large number of office closures last year and charges lower commissions than in the United States or Europe, though higher than in Australia.

Real Takanini branch manager Rod Hull, who has been in the business 16 years, says the organisation is based on an excellent concept which works well where lawyers support it by securing listings.

He says his office receives about 10 listings a week, and notches up good sales, although he will not disclose figures.

But Real's former Takapuna manager, Angela Boa, became disillusioned and moved into another branch of real estate after failing to secure many listings. The office made only one sale in four months before she quit in November.

She says many lawyers failed to pull their weight, taking the view they were too busy. Vendors expected a fuller service, such as open homes, despite the low commission and were disappointed by the small size of house photographs in the Real Weekly.

But there must be some satisfied customers?


Margaret Garthwaite turned to Real after becoming frustrated by Barfoot's failure to find a buyer for her Mt Roskill home, which has just been sold at a saving on the agent's commission of more than $1000. She says the agent who sold her home brought potential buyers "non-stop" through the house.

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