Flaws in the Real Estate Industry
By Michael Repka, Esq.
Recently, I attended the country’s preeminent real estate convention, Inman Connect in New York City, where I had the opportunity to watch presentations by a variety of different luminaries in the real estate industry. The presenters were universally well spoken, dynamic, and interesting. Although I learned much over my four days in New York, many speakers reinforced my belief that the real estate industry is still fundamentally flawed in a few key ways.
Old vs. New
Speaker after speaker seemed to fall into one of two camps: “Traditional” or “Disruptor.”
First, there were speakers from the traditional (or “old-guard”) real estate brokerages that generally follow the same commission-based, independent-contractor model employed by companies such as Coldwell Banker, Compass, Intero, and many more. Many of these brokerages have agents who have been in the industry for 10, 20, or more years. These speakers focused on the fact that traditional brokerages are generally profitable, proven, and non-threatening.
On the other hand, there were speakers from new firms pejoratively labeled as “disruptors.” For the most part, these businesses were founded by very intelligent people from a variety of industries, but with very few coming from within the real estate industry. Traditional agents in attendance, and many of the speakers, quickly pointed out that these firms are, by and large, infused with venture-capital money and not profitable; at least, not yet.
When I spoke with my fellow attendees, most seemed to believe that the two concepts are mutually exclusive. Few considered the possibility that a company with a lot of experience in “traditional” real estate could also be innovative, agile and client-focused— all while remaining profitable and independently owned.
Overlapping Industries
The real estate industry is actually two very different, albeit confusingly linked, industries that overlap despite having disparate goals and objectives. These distinct industries are: (1) brokerages; and (2) selling homes.
The Brokerage Industry
Traditional brokerages offer recognizable branding, conference rooms, and limited management and training to independent-contractor agents. As a practical matter, these brokerages face a significant amount of liability from any incorrect advice proffered by its affiliated agents, so they generally discourage or prohibit any sort of legal, tax, or other professional advice irrespective of the clients’ needs. Furthermore, because agents are free to move from brokerage to brokerage in search of more favorable commission splits, the brokerages are reluctant to invest in substantive training for these agents, especially costly outside training, such as Harvard’s Program on Negotiation.
In exchange for giving independent-contractor agents market recognition and credibility, these brokerages generally charge agents a monthly fee and a small percentage of the commission. In other words, the agent is paid on straight commission and the agent, not the brokerage, pays for most of the agent’s expenses, so there is little to no marginal cost for the brokerage to on-board an agent.
Due to this structure, the brokerages have an incentive to bring in as many agents as possible because the brokers will make money irrespective of how much the agent sells. Generally, these agents are advised to start with their friends and family members. Indubitably, brokerage managers recognize that friends and family members are more open to working with an inexperienced agent and less likely to sue if there’s a mistake.
Out of the above-mentioned fear of liability, brokerages often replace specific and substantive advice with a mere presentation of “facts” to the clients. The clients are then expected to determine their own course of action. With the exception of DeLeon Realty, few (if any) brokerages provide legal or tax advice (free of charge) to its sellers.
As a real estate attorney and tax attorney myself, I am often very disappointed with the level of knowledge that I encounter with many other real estate agents, and even some of their managers.
In my opinion, there is far too little technical training in real estate, and far too much focus on “prospecting” for potential clients.
Selling Houses
Real estate salespeople are not in the “brokerage” business as defined above. Rather, they are in the business of selling properties.
Many clients would be very surprised to realize how little support, training, and oversight agents get from their brokerages, even brokerages with well -recognized names. This is not to say that there are not some very good agents who are “affiliated” with each of the different brokerages—there certainly are. However, the strength of an individual Realtor® is largely a result of the agent’s individual efforts and willingness to pay for outside technical training.
Another very important variable is how much money the individual agent is willing to invest in his or her listings. Given that the agent, not the brokerage, generally pays for inspections, staging, property preparation, videos, TV commercials, newspaper ads, and any other marketing for their listings, there is a wide disparity as to the individual agent’s quality of service.
Personally, I have found that the agents who are willing to invest the most in marketing their listings are also the ones who are willing to invest in maintaining their own competency. This competency often begins with the agent’s experience and education prior to joining real estate. After entering real estate, agents keep up to date via Realtor® designation programs such as obtaining a CRS (Certified Residential Specialist), CIPS (Certified International Property Specialist) or a GRI (Graduate Realtor Institute), while others attend graduate level classes in real estate. If the agent happens to be an attorney, then he/she can attend the Legal Affairs Forum, which focuses on new case law, statutes, and regulatory issues impacting real estate. The Legal Affairs Forum is presented three times a year in California and is extremely valuable. Additionally, as mentioned above, some agents attend Harvard University’s well-regarded Program on Negotiation, which is offered in Cambridge, Massachusetts. DeLeon Realty has sponsored five DeLeon employees to attend this fantastic program.
One of the challenges that clients face is determining the true skill level of the individual agent. I recall managers explaining to groups of agents how to make their background sound better than it really is. A waiter was told to explain that he was involved with customer service, a woman who worked at the front desk of a hotel was told to say she was in “hospitality management.”
Ultimately, the problem is that the brokerage industry focuses on agent count and total sales volume rather than maximizing the result to each seller. There is a stronger incentive for the brokerage to avoid its own liability by telling agents not to advise the client on what they should do, than there is for the brokerage to train agents to actually give substantive advice (or provide a lawyer at the brokerage’s expense), which would reduce the client’s liability and maximize the sales result.
We have built DeLeon Realty on the simple premise that clients deserve more. We have put our clients’ needs first, which, in turn, has attracted more clients to us than any other real estate team in the United States. As the old saying goes, you really can do well by doing good.
