For example: We are about to sell a property on the other side of the country from where we live. The home is vacant and has tremendous potential value. It is located on a very desirable canal leading to Long Island’s Great South Bay. The home has a huge lot, tons of waterfront footage, new docks and bulkheads and is on the best side of the canal – water never rises over the bulkhead as we are on the high side of the canal. Homes in this area are very much in demand and the property should sell rather quickly.

Forget for a moment that I am a real estate professional with more than twenty five years experience. We are sellers, plain and simple. Now, we can easily market and sell this home with no assistance from a Realtor® . We can list the property on the MLS, on realtor.com, and on more than one hundred websites. We can get a sign, lockbox (probably combination), send out postcards, and likely get several offers at a very good price. We can then hire an attorney to perform the closing, have all the documents prepared, make the correct disclosures and close the sale without having to pay a real estate broker for any of this work that we can do ourselves. But. . . we will not do this.

What???

Right. We will not do this. We will engage the services of a real estate broker.

Now, I will tell you why we would do this. First, we absolutely need the local knowledge that a true professional can provide. In our case, we need to know how much value to add because of our location on the canal. How much more can we get because we are still inside the area that can join the beach club? Is there a value to add for a new bulkhead and docks? What are the negatives we might not know about. In short, true value can best be determined when all factors are applied to the area’s benchmark pricing.

Next, we will benefit from the local contacts that the professional will have. We might need services, repairs, inspections, staging and more to ensure that we will get the highest offers possible.

Risk reduction is a good thing. Having a professional who has a good Errors and Omissions policy always helps.

Local knowledge vis-a-vis regulations and ordinance changes can help us to meet any and all legal requirements and can keep us out of court by making sure we meet all disclosure regulations correctly. Yes, the title company might help, but I want someone with “skin in the game” making sure we all meet these requirements together.

We want to be certain that our selected agent is present at every showing. The information gained through this process will help us assess our pricing strategy, our marketing plan and our overall probability of success. Speaking of showings, it is not all that easy to sell a property across the country unless you have a lockbox that most area agents can also use for showings.

So you see, there are some very valid reasons for hiring a professional. If the property were here in town, it might change the equation, but try imagining that I am not in the business. I can tell you that we still would hire a professional broker. The question remains; at what price? Given that we have some very specific tasks that we want our agent to perform, and many that fall under the category of “full service” are not needed, we will not be content to hire a broker for a percentage of the eventual sales price. We will create an agreement that tells all of us exactly what the broker will and will not be responsible for. We will predetermine a price for these activities, and we will contract according to this plan. This is a true value proposition, is it not?

How about you? Are you willing to create a similar value proposition with your clients? Do you see yourself “laying it on the line” and only getting paid for the work you are called on to perform? This means no more percentage of sales price. This means you are required to give your clients full disclosure of your value – under a full transparency of your activities. You will no longer try to convince them that they need some vague interpretation of “full service” that will cost them some vague percentage of whatever price the property eventually sells for.

Are you ready for this? I hope so, because it is going to soon be the normal way of doing business in the real estate industry. In a future post, we will examine this future trend in more detail.

JH

Or

Herd Cats for a Living

In the early 2000’s, I managed offices for a large regional real estate franchisee. At one point, I was asked to move from one office, where I had been for five years and had my own management systems in place, to another, larger office that had very different systems. I will draw no conclusions about which style was better than the other – both worked and both didn’t work for various reasons. One thing for certain, my style was much more hands-on than the other.

The very first day I went to the new office, my regional manager handed me a stack of eight transaction folders. “These are your current lawsuits,” he told me. Eight active lawsuits from one office ?! Even more of a sad surprise; not a single one of them involved an agent who was still in our employ. As you can imagine, I spent many hours of non-productive time managing the impact of these eight lawsuits. Maybe I have just been lucky, but I don’t think it is all luck. In more than 25 years in this business, I have never been sued, and none of the agents under my direct management have ever been sued over a real estate transaction. To have eight from one office can only partially be explained by relative office size. The real difference, I believe, lies in the fact that I am a deeply hands-on manager – probably to a fault. I believe it is my almost instinctive need to cross every “t” and dot every “I” that keeps me and my team slightly above reproach in a legal sense. Of course, anyone can sue anyone at any time. But I feel that there must be a potential to win that is the deciding factor when a consumer considers suing a broker. He must really think he can get some form of award before he spends time and money in going after a broker.

As an important aside to this, we should look at associate mindset as it relates to management oversight. Most of the agents I have talked to over the years truly believe that they are their own and only boss. “I am an independent contractor.” You don’t really have the right to tell me how to run my business” they say. They are absolutely correct, by the way. The IRS uses the willingness of the broker/owner to allow agents to make all of their own business decisions without being told what to do by management as the true litmus test for independent contractor status. Tell them what to do and when to do it, and you might violate the spirit of independent contractor status. The repercussions will be huge: brokerages will have to withhold taxes, probably provide health insurance and more. But, this is where we need to go.

Let’s put things on the table where we can examine them more closely. We start with an industry filled with “professionals” who were able to get licensed  by spending about 90 hours in front of a computer screen or in a classroom listening to rote lessons designed to satisfy dubious state requirements. Next we have them use “practice tests” (often the actual questions on the state test) until they score consistently high enough to pass (sometimes only 70%). Finally we ask them to pay fees and submit fingerprints in order to be judged to be “ a real estate licensed professional.” In some states, by the way, even convicted felons who wait a prescribed period after release from parole can sit for their license test! Next, we tell these newly licensed “professionals” that they are independent contractors. We lead them to believe that they can make deals, hold negotiations and commit the brokerage without any real supervision. If you have ever tried to get an agent to reopen a listing negotiation because they accepted less commission than the agency wants, you will know how strong this independent contractor thinking goes.

Finally, we let them know that we generally don’t care how much business they do or don’t do. Oh, we make noises about minimum performance, telling them they need to work harder. But rare is the brokerage that actually holds the line on these so-called standards. On the recruitment side, companies press managers so hard to recruit that the result can be an office filled with underperforming agents who just happened to fog a mirror.

Something has to change. This is a broken equation.

Brokerages must be willing and able to provide direct management over field operations on a daily basis. If you agree with the concepts outlined in Part I (Raising the Barrier to Entry) then you must realize that the independent contractor model no longer works for the residential real estate business, if we have any hope of elevating professional standards. The quality of professionals must increase dramatically as the number of available agents drop. Mirror fogging mentality needs to be put in check and a new focus on professionalism needs to be our guiding light. Here is my simple yet extremely large formula for ending the herding cats syndrome and moving a brokerage into a level of professional service that they have likely never experienced:

• Restructure as an Employer/Employee brokerage
  • All agents and associate brokers become salaried employees
  • Pay can be all commission, part draw, part salary/part commission or all salary
  • Pay scale commensurate with prior year success
• Implement real and meaningful management of associates
  • Objectives vs. Key Results metric management
  • Required contract review within 24 hours
  • Management reserves right to accept or reject all contracts written into agreements
• Create in-house training and require timely participation by all associates
  • Over and above mandated CE for the state
  • Focus on risk management and business building
  • Corporate Culture must be taught
• Co-op classes with local Community Colleges
  • Can be great for recruitment
  • Sets your associates apart from the crowd
• Design, Implement and Monitor a true apprenticeship program
  • Sponsoring associate earns bonuses based on apprentice-generated business
  • Sponsoring associates gets a quasi-assistant for a time
  • Company gets to “try out” all new associates before turning them loose on the public
• Promote associates as being “best of the best” as a result of stringent standards
  • Hiring standards
  • Performance standards
  • Training standards

Once these new structures are in place for a time, they will attract the better quality of agent that you have always wanted but were not always able to attract as a byproduct of your “hire them all and see who makes it” culture.. Clients will soon recognize the shift in quality (of course your marketing will help them to see the light) and this will attract new business.

Now, business management can exist in a real estate brokerage. Employee-agents and employee-brokers will soon assimilate into the new structure. You will likely find that professionals actually appreciate a structured business environment. In fact, they prefer it over a non-structured environment. Before long, you will see that these changes will have a positive impact on your bottom line. Associates will be happier, the workplace becomes less stressful and more exciting and your corporate culture of highly professional associates will move you to the very summit of your markets.

In a very significant development, you will soon learn that your days of trying to herd cats are over. You have become a true business manager and your new business can now operate as a series of business units, each working in harmony with the others in a cohesive movement toward your corporate goals.

Again, I ask; Are you willing to make the changes you know must be made by all in the very near future, or do you prefer to sit on the sidelines and wait for your competition to lead the charge? Do you truly believe that the status quo will reign supreme? Or, as I believe, do you believe we have a critical need today to make serious and timely changes in nearly every aspect of our industry for our own sake and the sake of the consumers?

Why here, and why not at the association level? It is clear that associations, MLS providers and their members have the interests of members and their consumers at heart, they also have a deeply vested interest in the status quo. True open and frank discussion will best be served outside the box.

PART I: Raising the Barrier to Entry

I have compiled a spreadsheet that details the requirements for real estate licensure in the fifty states.  In the initial stages of development, an awareness of the reality became very disturbing; The process to get and keep a real estate license in most states is very simple, relatively inexpensive and involves taking only a few classes, often less than 60 hours of education, then passing a state exam. The exams are not quantifiable, as I do not have a copy of each. Several states that I have seen have tests that are comprised of around one hundred questions and there are any number of study guides that will help one pass on the first or second attempt. Contrast this with the need for more than 1200 hours training in order to get a cosmetologist license in California, and you can see that we have a long way to go if we are to be viewed as truly “professional” service providers. There are some exceptions, but these are the general observations I have made.

There is currently no perceived need for novices to serve in apprentice mode.  What they learn about the daily practical aspects of this industry, current belief holds,  can be provided by a combination of manager oversight, continuing education and an unending array of classes on how to get more leads from a myriad of sources – good and otherwise. This model is broken. Since the Industrial Age business segments have long held that new workers need to go through some form of apprentice learning before they can be left on their own to get the job done. Even in medical and legal segments we see extreme cases of monitored learning, otherwise the clients would potentially suffer great harm at the hands of a newbie.

There are some great learning tools available to the industry. Several of the NAR designations and the certificate programs can be extremely informative and go far to help a professional become just that; professional. The list includes Certified Residential Specialist (CRS), Online Professional (e-PRO), Graduate REALTOR® Institute (GRI),  Accredited Buyer Representative (ABR) and several others. These are great learning grounds for professionals, however they pose two shortcomings:

1. They are optional
2.  They come after the license has been issued and the agent is already in the work force.

 In addition, they do not go far enough toward creating meaningful education and experience that will signal to the average consumer that their agent is actually a skilled and informed professional, capable of helping them through the complexities of a transaction representing more financial risk than most other financial activities in their lives.

In short, to call oneself a “real estate professional” is meaningless. On the other hand, to be viewed as a professional carries all of the importance and significance required in the mind of the consumer and professional alike to allow them to form a true principal/agent relationship.

Now, let’s take a look at some interesting facts:

 In 1985, I appeared before the governing body of my local association of Realtors® in a sincere, albeit naïve desire to inspire them to get behind a movement to convince our state regulators to raise the entry bar for the real estate license to some believable levels through increased education and experiential levels. You can imagine the shocked look on each face as they realized that I was advocating making it harder to become a member of their industry. And I was asking them to do the same! After they politely walked me to the lobby, I could imagine how much f a laugh they might have had at not only my expense but the expense of our professional image. What I failed to understand up front was that the need to increase member dues was seen as their primary function. Dues dollars were the majority of association income. I was asking them to make it significantly more difficult for people to joins their association. How could I have been so naïve? Today, some 25 years later, I see that not much has changed in this regard. Dues dollars are still a primary financial factor governing decisions. This must change.

License laws make it so easy to become a licensed agent and sometimes a licensed broker that the public has a growing sense that we are not really as “professional” as we claim to be. Several states even allow convicted felons to get real estate licenses after a waiting period (some are five years from release).

We need to stop being the Association of Anyone Can Belong, and start becoming an association of skilled and knowledgeable professionals. Is it any wonder then that most consumers invest much time and energy in searching for available property, researching loans, discovering channels of valuation – all designed to place them in a position of managing their own transactions with little or no help from a real estate professional.  

Imagine consumers defending themselves in a major court battle, or performing surgical procedures on each other, simply because they can get instructions on the Internet? Preposterous! Yet, we call ourselves professionals, just like doctors and lawyers do, don’t we? I submit that the real underlying cause of this disparity can only point to one thing: in general terms, we are not true professionals in the skill and knowledge sense of the word. How can we be when it is approximately 25 times harder to be licensed to cut someone’s hair than to sell them a house! The barrier to calling oneself a real estate professional is laughable at best and unfortunate at least.

“What is the big deal?,” you might ask. “We operate on a “cream rises to the top” basis. We hire them all and keep only the good ones.”  Your argument is as old and as widely accepted as the industry itself. Is there any reason to change this? I suggest that there is, and it is a huge reason; We need to change this because we want to become relevant to the consumers once again.  The big deal is the impact this mindset has on our public image. It goes something like “anyone can be a real estate agent, as long as they are breathing.”

So, what am I advocating? I am taking the very unpopular position that we, as an industry, must take steps that will reverse the trend of “anyone can do it.” We need to raise the barrier to entry high enough that we are able to weed out those who probably are not looking for a true career. We need to provide some indication that a real estate license carries some weight and is a meaningful indicator that the holder is much more capable of transacting such large-scale business that today’s license indicates. Here, then, is a formula:

• Create a new category for licensees; Apprentice Licensee
• Lobby at the state level for stricter pre-licensing educational and testing requirements
  • Real Estate Associates Degree or current Broker Courses at a minimum
  • Make the test actually match the practice of real estate
  • Create growth path for licensees to attain as their skills and learning grow.
  • Institute internal (per brokerage) standards for hiring that exceed current “fog the mirror” standards
    • Required apprenticeship for new licensees
    • Success-based promotion to full licensed status

More than this, and more than any other change possible, we need to change our business thinking. The “cream rises to the top” thinking will no longer help. If we continue this path, then we continue the notion that we are not an industry made of truly professional practitioners.  Yes, it will be extremely difficult to change the industry and it will not happen overnight. It must start with the individual business owner. Are you prepared to place serious restrictions on your hiring practices? Are you prepared to hold the line relative to agent training and management oversight? These are some serious questions for an industry that faces some serious changes.

• Listings are readily available to most consumers at the click of a mouse
• Consumers are ready willing and able to particcipate in their transactions, from the beginning
• New business methods, data access, data analysis, valuation and financing models are here to stay.

I recently penned a white paper that covers each of these threats to the status quo. The link to this paper is on the header, above. I welcome your comments and questions. JH