Friday, October 28, 2011

Bank of America: Every little bailout helps

After banking with Bank of America for 16 years, I finally just couldn't handle it anymore and waved goodbye.  An article in today's Wall Street Journal prompted me to write this post today.


About a month ago I made a mistake while paying a credit card bill online.  I accidentally selected the wrong account, and unfortunately that account's balance was too low to pay the bill.  I immediately called both Bank of America and American Express and informed them of my mistake.  American Express was understanding, cancelled the transaction, and informed me they would reimburse me if I would be charged any fees on their end.

Bank of America told me it was too late, the amount had already been overdrawn, would be returned, and I would be charged a $35 non-sufficient funds fee.  Fair enough, I thought.  After all, this was my mistake. 

A few days later I get another email from Bank of America alerting me to a non-sufficient funds transaction and corresponding $35 fee.  Then this happened again 2 days later.  I called Bank of America, and after being transferred around the globe a handful of times, I was informed that they kept trying to pay the American Express bill on my behalf!  Certainly this was a mistake on their part, right?  Certainly they would refund me all or some of the $105 non-sufficient fund fees I've racked up.  Nope!

In that same phone call I asked to close all my accounts.  They seemed a little too efficient in this process, and the agent informed me I would receive a check within a couple weeks.  Perhaps as a final "f- you" from Bank of America, I received yet a fourth notice in the mail just a few days ago:

As an interesting side note, take a look at the customer feedback survey on the top. 
Have you ever seen a survey require the customer to pay for postage?

Yes, apparently my account was overdrawn by 1 penny when they closed it.  You can't make this stuff up!


Wednesday, October 19, 2011

Realtors Run Amok, Part 1 of a Series on Realtors

I'm sorry I haven't posted in a while, but rest assured that I've been thinking a lot about DoB issues. One thing that I keep reflecting on is the idea of obsolete industries. One such industry, IMHO, is residential real estate. I have so much to say about this issue that I've decided to start a series, and this is just part 1.

Home sellers and buyers pay too much and receive too little for realtors’ services. This is mainly due to a complete misalignment of incentives among the four primary stakeholders: sellers, buyers, sellers’agents, and buyers’ agents. Furthermore, home buyers are even more unique because they do not always share the one common aim of the other three stakeholders: to broker the sale of property.

Home Sellers

A home seller’s objective is to sell their home at the highest price possible. Accomplishing this requires a lot of “traffic” (legitimate and qualified buyers viewing the home) and a lot of dedicated and specific work on the part of the realtor. Specifically, the realtor would need to actively market the home through specialized channels and differentiate it from the other homes on the market. For example, a home with a large, fenced backyard is going to be more valuable to a buyer with a dog; therefore, target marketing the home to buyers with dogs would provide more value to both the buyer and seller.

Seller Agents

Unfortunately, the incentives of seller agents are not usually aligned with the sellers they represent. For a sizable and steady income, seller agents (also referred to as listing agents) focus on volume – they simply want to sell as many homes as possible and thereby have no time to market via specialized channels, as exemplified with the home with the large, fenced yard. Experts and novices alike agree that low-priced homes are more likely to sell than comparable, higher priced homes. Accordingly, it is in the seller agents’best interests to price their homes low. Furthermore, because a typical seller agent’s commission is only 3%, he or she would be more willing to budge on price negotiations than the seller. For example, a $10,000 price change may represent a significant loss of capital gains for the seller; for the realtor, however, it’s a loss of only $300. This $300 is neglibile when compared to the overall commission (i.e., assuming the house lists for $210,000 and sells for $200,000, the realtor makes $6,000 and the owner loses $10,000). Generally speaking, sellers are much more susceptible to downside than seller agents. For those finacial practitioners out there, this is equivalent to a negatively skewed investment paradigm.

Buyer Agents

Buyer agents have entirely different incentives from seller agents. While they do care about volume for the same reasons as seller agents, the pace at which they broker purchases is almost entirely based on their buyers’ motivation to purchase a home. With nearly 100% of buyers having access to the internet -- and specifically www.realtor.com -- many do their own research prior to contacting a realtor. Consequently, a selection bias may exist where buyer agents are more likely to take on clients who know what they want. In reality, the true added value of a buyer agent is helping find the client a good home. Therefore, even if a buyer agent selects a client who needs an above average level of assistance, the agent will be incented to find the easiest homes to market (e.g., those that are well priced.) Once again to reference financial terms, buyer agents do not possess a fiduciary responsibility toward their client.

Home Buyers

Home buyers may be described as the “innocent bystander” in this debacle of an industry. Buyers can be summarized into two groups: those who don’t need realtors and those who do. The buyers who don’t need realtors do their own research and know what they’re looking for. However, since 90%of homes are sold via realtors, these buyers will need to pay a realtor anyway. (Note that buyers typically do not pay their realtor’s fees. The fees are usually paid by the seller and are based on a commission of the final selling price. However, since the seller knows this, he or she will typically “embed” the cost for the buyer’s agent into the selling price.) The buyers who do need realtors have ready access to them, but as mentioned above, their realtor’s incentives may not be aligned with the buyer.

In the next part of this series, I'll provide a pretty interesting historical context about why the situation is as bad as it is.