Michael Eriksson's Blog

A Swede in Germany

Posts Tagged ‘realtors

German regulations sabotaging markets

with 2 comments

Yesterday, I was skimming through a few of my older texts and stumbled upon the claim:

This too is likely a result of the flawed German model: The only reason that realtors do not have money effortlessly pouring in, is that the potential profits have lured too many people into this business…

(In the context of complaining about realtors, their cost, their service level, and the proportion of realtors to real estate in Germany.)

If there are, in some sense, too many realtors, should that not drive down the prices and increase the service level? Should not the more competitive (better, cheaper, more efficient, …) realtors drive the less competitive off the market?

Unfortunately, the aforementioned flawed German model strikes again (see the link for more details): Because realtors provide a service to the seller* for which the buyer pays, the whole price argument goes down the drain. The seller hires the realtor in the knowledge that he will not need to pay him, and therefore does not** care about the actual price, implying that a realtor who lowers his prices will lose in income per object without being handed more objects. At the same time, there is a regulatory upper limit on the percentage*** of the object price that the realtor may charge. In combination, this leads to almost all realtors charging the regulatory limit on almost all objects…

*Until fairly recently, this situation applied both to rented and sold objects, which strongly contributed to the historical development of the situation. Today, landlords have to pay for themselves, and I restrict the text to speak of “seller” (and so on). It is to be hoped that this change will at least partially remedy the problem—but it is unlikely to truly do so unless the seller–buyer situation is also changed.

**With some reservations for objects that are hard to get rid of and where the realtor’s fees might be the last straw for a prospective buyer. That objects are hard to move is the exception in today’s Germany, however, and the realtor’s fee is usually too small (as a proportion of the overall price and costs) to be a major psychological deterrent. (Note that there are a number of other costs than the actual price and the realtor’s fees, including a purchase tax, various administrative fees, bank fees and interest when a loan is needed, fees to the building manager (for an apartment), and possibly a few others—and that is not even counting the costs for the actual move, needed repairs, and whatnots.)

***An interesting twist is that since fees are percentage based, realtors are paid the more, the easier their job is: In an hotter seller’s market, unloading an object is correspondingly easier; in a hotter seller’s market, the price (and thereby the realtor fee) is correspondingly higher.

However, this also means that there is little incentive for realtors to try to compete through better service: If they try to do more for the sellers (let alone buyers…), they have extra costs that cannot be put on the bill; and such a “more” would be bad business. (Obviously, someone who has a better turnaround might be able to sell more objects, but with the over-establishment present, there is no guarantee that such would be found. The seller might be happier with a faster sale, but most will not need to sell another object for the next two decades, leaving word-of-mouth the main benefit to the realtor—then again, since the seller need not even understand that his sale was unusually fast, there might be no word-of-mouth either.)

The problems are worsened by the minimal qualifications needed to become a realtor, allowing more-or-less anyone to move onto the market at will, increasing the risk of over-establishment. This also contributes to keeping the competence levels down, because those with a brain will usually have sufficiently good prospects elsewhere that they do not consider becoming realtors, while many who are worse off believe it to be an easy way to get wealthy. (Which it, except for over-establishment, would have been, at least in the major cities.) This is not only immediately bad for both buyer and seller, but can also have an indirect effect through poor “strategic” decision: For instance, if better service does lead to a sufficiently higher turnaround (cf. above) that the increase in costs is considerably outweighed, a less competent realtor is less likely to realize this.

To this we have to factor in the various problems discussed in the linked earlier text and in an even older, and it is clear that the law has very severely reduced the ability of market mechanisms to improve the abysmal situation— we are left where we were.

Unfortunately, there are quite a few other areas in Germany that suffer from very similar problems.

Consider e.g. taxicabs*: What happens when someone starts a new cab company (be it larger scale or as a one-man operation) or when an existing company adds a few new cabs? Do the prices drop? No—but the line of cabs at the train station or airport that waits for their turn grows longer… In effect, the prices remain the same, the service level remains** the same, and each cabby or cab company just ends up with a smaller piece of the pie. This to the point that I am often*** asked point blank whether I would like to arrange for this specific cab/cabby to pick me up again after work—business must truly be booming… (The extremely negative reactions to Uber and similar services, and the attempts to ban them by court, are understandable, seeing that they drain the market further. However, these reactions are also a great shame, because they do/would introduce a positive competition, and the bans kill that. To boot, Uber shows that regular cab companies, and/or the regulators, might do well to reconsider business models…) When someone calls for a cab, it is pretty much the same, except that there is now a virtual line of cabs…

*The fare conditions are prescribed by the respective city (or some similar entity).

**In this specific setting. In other settings, e.g. how soon a cab can be sent to pick someone up, there might be a positive effect; however, it is unlikely to be very large considering the overall situation.

***On those rare occasions that I do take a cab. Mostly I get by on foot or with public transportation.

Or consider the “Buchpreisbindung”*: Bookstores cannot compete by price, implying not only that books remain unnecessarily expensive, but also that e.g. a “lower price for lower service” or a “better opening hours for a higher price” strategy cannot even be attempted. A family bookstore that might have better margins, absent the need to pay employees, cannot compensate for a smaller set of available books by dropping prices, neither can it drop prices in the “off season”** to get by until business picks up again. Online retailers cannot compete with a lower price based on lower costs. The single low-volume bookstore in Hicktown cannot raise its prices in order to survive; the one-of-many in central Metropolis cannot lower them for a bigger share of the customers. Customers do not have the ability to travel a little further for a better price and a bulk-buy. Etc. In contrast, a large bookstore chain can buy the books at a greater discount from the publishers and pocket the difference. Predictably, the big chains and publishers are great fans of the Buchpreisbindung—they get most of the extra money from the customers and their smaller/newer/paradigm-changing competitors are hindered.

*The obligation for book publishers to set a fix price for every book and the simultaneous obligation for bookstores to sell at exactly that price. I note that the book industry in most other countries, and e.g. the DVD and CD industries in Germany, work without the equivalent of a Buchpreisbindung.

**I am frankly uncertain what this would be for a bookstore; however, there are definitely seasonal variations, including around Christmas and the “back to school” rush in the autumn.

The situation is made the more annoying by the, often idiotic, attempts to justify the Buchpreisbindung, including that it would benefit the smaller stores*. Other arguments point to advantages for first-time authors or small publishers—but how are they helped? The Buchpreisbindung only mandates a fix selling price for any given book, it does not prescribe the amount—and no price is of any help unless a sale takes place! A smaller publisher could try to compete by setting a lower price than comparable books from the competition, but if the book then becomes a hit, a lot of the potential winnings would be lost, because the price cannot trivially** be raised back to the competitions’ level. Vice versa, if the price is originally set too high for the book to sell, lowering it to make the book more attractive is not trivial. Similarly, the first-time author could try to sell himself cheaply, but it is not a given that any publisher would cooperate (preferring other authors who are established and give them a greater profit margin), and he otherwise faces problems similar to the publisher’s. Of course, if (!) and to the degree that these justifications do hold, they are not necessarily doing the world a favor, seeing that they would often artificially keep inefficient businesses afloat at the cost of someone else…

*This seems highly unlikely both due to reasoning like the above, the overall reduction of the market caused by higher prices, and the fact that smaller stores de facto are being wiped out by the larger chains. (The larger chains can compete with more books, a big cafe, name recognition, an advertising budget, special events, better trained staff, … The mom-and-pop store? Precious little…) In as far as the argument holds, e.g. in that the many smaller store with higher costs would be supported, it does not hold by altering the relative ability to compete—but through forcing an artificial subsidy from the unwilling customers.

**Strictly speaking, it can raise or lower the price relative the bookstores, but since their willingness to pay is limited by what they can charge the readers (i.e. the fix price) and since a price change towards the bookstore has no effect on the readers’ willingness to buy, this is not that much of a help. Apart from that, it might (I lack detail knowledge) even be that the publisher would be forced to put out an entire new edition to change the price—and even if that is not necessary, there would be the problem of communicating the price change everywhere. (And what about a price lowering that went beyond what the bookstores originally paid for their current stock…) For price reductions, there is always remaindering (cf. below), but that could lessen future chances (especially for the author) and might not give much flexibility, seeing that remaindered books are usually sold in competition with other remaindered books, which necessitates a very major price cut to be competitive in the new setting.

An interesting twist is the extensive remaindering of books that have sold too poorly, which proves how flawed the system is: After some time period, books can be released from the Buchpreisbindung, and then take ridiculous hits in price, e.g. going from 25 to 5 Euro in one day, instead of gradually drifting downwards over time.

Oh, and yes, if the Buchpreisbindung worked as advertised, would there not be an abundance of new or low-selling “high literature” authors to be found in a bookstore? One might thinks so, but they are a very small minority. In fact, about half a modern German bookstore has no books at all, in favour of Cafes, reading areas, calendars, school supplies, …—and much of the rest is mass- or publisher produced, ghostwritten, whatnot. The cooking and travel sections alone might take up a quarter of the actual book part of a bookstore. Possibly half the books are translated from other languages (or imported without translation), and here the Buchpreisbindung has very little effect on the authors. Etc.

Other government induced market failures and injustices abound in Germany, as with e.g. the construction industry and “Kurzarbeit”: During the summer, the construction industry booms and charges high prices; during the winter, the temperature and weather conditions lead to a scale-back. However, instead of the industry now trying to find more work through a lowering of prices, or the individual construction worker by a temporary switch to another field, what happens? The construction companies go to the government, point to the lack of orders, and request a “Kurzarbeit” classification, allowing them to reduce hours and wages, with the government covering most of the wage reduction towards the construction workers. In effect, the construction industry can both eat its cake and have it too, at the cost of the tax payers and customers.

Pharmacies might be a strong candidate for this discussion (and were the first non-realtor example that occurred to me): Despite a massive over-establishment, pharmacies remain unduly pricey and lacking in service quality (see excursion)—implying a similar market paradox. However, I am uncertain whether the reasons are similar or, as it were, another disease manifests with similar symptoms. The strong regulations on the profession might be a partial reason, as might a partial or indirect price-regulation and price-insensitivity*. It might also be something relating to a poor ability of customers to compare prices, restrictions on the size of the individual pharmacy group** preventing economies of scale, and an undue trust placed in pharmacies by the naive.

*A significant part of the business is, obviously, prescription drugs. These are largely paid for by insurance companies, implying that (a) the individual customer is significantly less price sensitive than he ideally should be, (b) prices are geared at what the insurance companies are willing to pay, with any cent left off the maximum price being a cent lost. (There might or might not be additional regulations or central agreements controlling what the insurance companies pay.)

**In my recollection, a maximum of four (!) individual pharmacies; however, I could be wrong.

Excursion on pharmacies and service:
The problems include poor opening hours and deliberate attempts to fool customers into buying homeopathic* quackery products, the most expensive product that they have in a given product group** (without mention of alternatives), and/or something that the local drugstore or supermarket sells for a fraction of the price. Several of my talks with pharmacy staff*** have had more in common with a sales pitch than with medical advise. The one time I really would have needed advice, after some nit-wit physician actually prescribed (!) a homeopathic product, not one word of warning was given: No “are you aware that this product is useless”, no “are you sure that you want this”, no “you might want to get a second opinion”, … (I only discovered the issue when I had arrived home, leaving me understandably furious.)

*While this is for all intents and purposes fraud, it is unfortunately still legal in Germany, due to a long tradition and a strong lobby. (Or to be more specific: Either the pharmacy worker is so medicinally incompetent that she (it is almost always a woman) should be banned from the profession, or she is engaging in deliberate fraud by trying to sell an over-priced product that she knows does not work.) This is the worse, because it does not end at a fraud against the individual customer, it also helps perpetuate and legitimize homeopathy as a whole, thereby committing fraud against society.

**I recall once buying adhesive bandages and, of the dozens of variations present in the store, immediately being led to one with silver (as an anti-bacterial or whatnot) in it that cost twice or thrice the regular price—even by pharmacy standards. The regular ones were in turn twice or thrice as expensive as in the drugstore… Not only have I used the regular kind, without any type of problem, my whole life, but I usually only use up a small portion of the individual bandages before the claimed expiry—making the multi-markup silver ones a ridiculous waste of money. (For me… For the pharmacy, it is a high-markup, low-cost item.)

***Note that the people at the counter are not necessarily pharmacists proper (which requires formal qualifications comparable to those of a physician in Germany), they can also be various helpers. However, even these helpers underlie strict regulations and are much better qualified (at least, on paper) than what is needed for non-pharmacy counters.

Sadly, pharmacies like to claim that their good costumer service and medical advice would be highly valuable (thereby providing a pseudo-justification for the high prices and the qualifications needed). I have never found this to be the case: Yes, they do try to explain to me how to take Tylenol every time I buy a package—but why?!? I can read… (There are extensive instructions in the box*.) I have also actually used them before… If in doubt, to paraphrase a furious physician on “Scrubs”, having just been called down for a consult by a new intern: “It’s regular strength Tylenol. You grab a fistful, throw it down her throat, and whatever sticks is the right dose.” In all likelihood, the reason for the wish to explain Tylenol is not that there is any actual benefit in doing so—but because they want to create the faulty impression that they do provide additional value compared to e.g. a drugstore (which, unfortunately, is not allowed to sell even Tylenol).

*Drugs are usually sold pre-packaged in Germany, unlike the apparent (going by TV) U.S. system of each purchase being individually dispensed into small bottles by the pharmacy worker. (Incidentally giving another reason why the case for considerable qualification might be overstated. Most of what happens at and around the counter requires no skills more demanding than at many non-pharmacy counters—staff the counters with non-specialists and keep the specialists for tasks requiring specialist skills.)

Sure, when it comes to more dangerous or unusual medicines and e.g. the elderly, some advice might be beneficial, but is there any guarantee that what is said in the pharmacy is even remembered later? (Especially, with the elderly…) Is there any guarantee that the information given is actually correct, when we leave the area of Tylenol? I would certainly trust the written instructions by the manufacturer over the memory of a pharmacy worker. (Especially, with more dangerous or unusual medicines…)

And, no, I do not* want a pharmacy worker to give me something other than what the physician prescribed. Even if we assume that the pharmacy worker knows the drug side better than the physician (unlikely, when not an actual pharmacist; and not a given even for a pharmacist, especially when the physician is a specialist), the reverse will apply to the patient and his problem. This the more so, the more dangerous the problem and/or drug is.

*Apart from apparent errors and quackery (cf. above), and even here I would not just take the pharmacy workers word for it—I would check back with the physician. (And, obviously, apart from the special case of giving me the same drug with a different brand name.)

Finally, asking pharmacy workers for help, e.g. in lieu of going to a physician, is idiotic, because that just gives them an excuse to try to pawn off their homeopathic quackery or uselessly expensive products—see above.

Excursion on realtors vs. pharmacy workers:
In one case, I complain about too lax entry regulation; in the other, about too strict entry regulation. This is not a contradiction. Most notably, for realtors I speak of the entry criteria for a (possibly one-man) business, while for pharmacy workers I discuss the entry criteria for manning the counter in an existing business (run by someone with much higher qualifications, which I do not necessarily question). I would also consider a job as a realtor (even in employment) more demanding in terms of intelligence than as a counter clerk (even in a pharmacy). Further, there is nothing unusual with one “too much” and one “too little” being changed in opposite directions toward a “just right”—I do not, for instance, suggest that a realtor must have a topic-specific bachelor and two Staatsexamina*. (However, as a counter-point, most changes tend to have both positive and negative effects, and I do not rule out that there would be some negative effects accompanying the positive in both cases—but I do assume that the positive would be larger.)

*German official tests that must be passed by e.g. lawyers, physicians, and teachers before they are fully entitled to practice. Exactly what qualifications are reasonable I leave open, but something like an IHK (“chamber of commerce”) test to prove a reasonable knowledge of relevant law and regulation, accounting, construction, whatnot would be a possibility.

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Written by michaeleriksson

August 4, 2018 at 3:18 am

Problems with buying an apartment in Germany

with one comment

I am currently considering buying an apartment, especially in the light of the inexcusable and utterly absurd behavior of my current landlord*. This has turned out to be extremely frustrating, even when discounting the predictable complication of attractive locations having high prices and low prices having unattractive locations (or some other problem). Consider:

*The one for my official residence in Düsseldorf. Not the one for my temporary apartment in Köln. I am very likely to write a long post on this at some point—but I am not certain that anyone will actually believe it! (Sometimes reality makes fiction look unimaginative…)

  1. In the flawed German system, I cannot hire* a realtor to search for me, because they only provide services towards the seller—for which the buyer has to pay.** Ask them to search for the buyer and they may or may not give a listing of the entries they currently have available***, but that is the last ever to be heard from them. If they do any work for the buyer, well, then they have additional work and no additional money…

    *In any sense that matters. As a matter of form, a “hiring” is implied at the latest when an agreement to buy is reached with the seller, but for all practical purposes this just means that the buyer acquiesces to pay for the realtor’s services towards the seller. The real hiring is done by the seller—the buyer just pays.

    **This used to be the case for rentals too. Fortunately, this idiocy has since been stopped—but only for rentals.

    ***More likely than not, they will either not respond at all or just tell the prospective buyer to have a look at their website—which is usually border-line unusable and highly uninformative.

  2. Realtors are highly problematic in other regards to, including that many of them only provide listings through meta-service providers like “Immobilienscout24” (effectively, Craig’s List for real estate), where they upload information provided by the seller, make the disclaimer that they make no guarantees whatsoever (just repeating in good faith), and wait for the prospective buyers to search. (Remember that the buyers are the ones who pay for this farce.)
  3. The lists of potential objects provided by most realtors and the large meta services often make no clear separation between apartments for buy-for-own-use and apartments for buy-and-rent-to-someone-else. These two use-cases are so different from each other*, however, that at least the buy-for-own-use-er will find half of the entries worthless— and often only finds this out somewhere towards the end of the page… The buy-and-rent-to-someone-else-er, OTOH, will be less than enthusiastic about the other half, because if he does not find a tenant, he is just leaking money.

    *In theory, the buyer can get rid of an existing tenant through invoking “Eigenbedarf” (“own need”); however, this brings a considerable risk that the tenant will be uncooperative and possibly requires a costly and time-consuming detour over the courts. To boot, I have considerable problems with the ethics of this, its legality notwithstanding. “Pacta sunt servanda” is otherwise the theoretical cornerstone of German law, as well as of ethical business practices in general.

  4. Similarly, a very considerable proportion of the objects turn out to be “Zwangsversteigerungen” (court auctions; literally, “forced auctions”) that imply a considerable additional risk and a lot of bureaucracy that many are not willing to take. (However, it can have advantages for those who are willing to take the risk.) Of course, the price listed is then not the actual price but some vague estimate or minimum that could turn out to have nothing to do with the actual price paid by the winner of the auction…
  5. The usability of most web sites in this area is extremely poor, including not working with JavaScript disabled, but being border-line unusable with it enabled (through factors like animations, marquees, requests that the user participate in surveys, and the like). Other common problems include poor search criteria, a minimal number of listings*, and “functionality” that breaks tabbed browsing—-something that would otherwise be extremely useful with this type of content (i.e. lists of entries where the user wants to review many of the individual entries at his own leisure and/or concurrently).

    *There appear to hundreds of realtors (be they individuals or companies) who each have just a dozen objects, of which just one or two are relevant to any individual buyer. It would be far better to have a dozen realtors with a few hundreds objects each. This too is likely a result of the flawed German model: The only reason that realtors do not have money effortlessly pouring in, is that the potential profits have lured too many people into this business…

  6. Due to utterly idiotic and over-killing money-laundering laws, the prospective buyer needs to give up a lot of information, typically including a copy of an ID document, even when just approaching a realtor with the wish for information on an object*. Not when he buys it, not even when he inspects the object in person, but when he makes a simple inquiry!

    *Or so a number of realtors claim. I have not checked whether they are telling the truth, but am somewhat skeptical, because not all do require this.

  7. If everything seems to pan out, the object being really interesting, then the “Hausgeld”* turns out to be 400-something Euro instead of the the 100-something typical for the size of apartment I am looking for—might as well be renting.

    *Frankly, I have no idea what this is in the English speaking world, but it amounts to a monthly fee to the apartment owners’ association to cover various costs, including for parts of the house not belonging to the individual apartments.

Written by michaeleriksson

September 13, 2016 at 12:00 am

Absurdities around apartments in Germany

with 9 comments

I have recently been looking for a new apartment. Doing so, signing the new lease, and making first preparations for the move, a number of annoyances with apartments in Germany have been brought to my mind again. The likely two worst are discussed below:

Realtors:

These provide a service exclusively to the landlord—but for which the tenant must pay… In effect, the landlord gives a listing to the realtor, the realtor does everything the landlord would otherwise have done himself (e.g. advertisements and showings), provides the prospective tenants with no value added, and then requires a fee equaling two months rent + VAT from … the new tenant.

In fact, from a tenants perspective, the service provided is actually on a “value subtracted” basis: The realtor is usually unable to answer even basic questions (but refers to the landlord), does not know the house or the neighborhood (let alone the neighbors), and generally seems keen on giving the most pleasing answer. Indeed, having found that I was always given positive answers when enquiring about how quiet the house or the neighbours were, I once reversed my questions (something on the lines of having regular parties or playing music late in the evening)—and was once again given a positive answer! The information given by these expensive “value subtracted” providers cannot even be trusted.

Similarly, a landlord (at least a private one) will be available for phone calls and inspections of the apartment outside of normal working hours, while German realtors keep hours that are highly unfriendly to the prospective tenants—with no possibility to call during the weekend and often forcing a call from work during the week.

A particular quirk is that the realtors are only allowed to charge their fees to tenants who were not previously aware of the apartment in question. This has the side-effect that ads by realtors will not contain the street address, but only a general area—which means that it is not possible to e.g. look up the house and the closest surroundings through Google Maps without first contacting the realtor. This, however, is something that a net-savvy user would want to do as a first step before bothering to call. (Of course, this rule is of dubious value, because if a prospective tenant with previous knowledge does show interest, the realtors will discriminate against him.)

And, no, it is apparently not possibly for a prospective tenant to hire a realtor (at least not in the rental market) to actually do some leg-work for the tenant instead of the landlord: I have over the years tried this on two occasions, simultaneously enquiring at several realtors, with the results being either no response at all (!) or a one-time listing of the apartments they at that moment had on offer (which was then the very last I ever heard).

The regulations should by changed so that it is always the party hiring and benefiting from the service (currently only the landlord) who pays any fees involved. This would not only be a fairer system, but would also lead to more customer-oriented realtors where even a tenant has the possibility to receive value-added services from a realtor—including decent telephone hours and the odd realtor who is actually willing to do some amount of work for prospective tenants.

Security deposits:

German apartments usually require a security deposit equivalent of three month’s (!) rent. While the wish for a security deposit is understandable, I cannot consider the size justifiable. Further, the way the system is implemented, the security deposit can very easily be abused by the landlord, e.g. to recompensate himself for rent held back for legitimate reasons or otherwise disputed, without having to take the initiative to go to court. (Something I fear will happen with my old apartment: The 2009 water bill for the 10-apartment house was inexplicably divided with my share amounting to half (!)—and despite this being absolutely preposterous and obviously incorrect, the landlord has refused to correct the bill and insists on payment of more than 800 Euro + an additional 70 Euro per month since. Considering his highly unethical behaviour throughout my years in the old apartment, I strongly suspect that he will simply help himself to the security deposit and force me to go to court over the money.) In contrast, the intended uses for the deposit appear to have become secondary (to cover unrepaired damages caused by the tenant and later differences in utility bills, as well as preventing a dishonest tenant from just skipping the last few months payment).

Other complications around the security deposit include landlords taking unduly long to repay it after the tenant moves out—often more than a year, rarely less than a half. (A time during which the tenant has six months’ (!) rent unavailable between the new and the old security deposits.) A better solution would include a smaller amount, some stringent form of escrow (no party is allowed to access the money without consent of the other or a court order), and a need for prompt re-payment: The landlord has e.g. two weeks to raise any objections and must then re-pay the major part of the sum, keeping at most a fraction to cover any differences in later utility charges.

And, no, this security deposit does not include the first or last months rent—these have to be provided separately at the beginning of the first, respectively last, month of the lease period. As can be noted, the sums involved are quite large: There is potentially a one-time payment of seven months’ rent (first, security deposit, realtor fees, and a last at the old apartment, seeing that an overlap in leases is hard to avoid)—and this not even counting the costs of the actual move and any needed repairs.

Written by michaeleriksson

August 7, 2011 at 1:25 pm