Real estate boiled down to its fundamentals.
I’ll postulate seven theories here that I think reduce real estate to its fundamentals. These are the seven building blocks of real estate as I know it, unvarnished and unadorned and for better or worse.
I hope you find these fundamentals helpful in demystifying what is, to the consumer and even occasionally to the agent, a mystifying business. I don't know if you'll find what follows especially uplifting, but if you happen to have "Gloomy Sunday" cued up in your Marantz, I wouldn't hit Play just yet.
Theory number one: Nothing we do in daily life prepares us for the wheeling and dealing, the ambiguity and emotion that defines the real estate transaction.
Other professions have little in common with real estate sales, and the few where similarities do seem to exist mostly mislead. To work with real estate consumers, no matter how skilled or sophisticated, is to discover not only how highly depersonalized other commercial transactions are in comparison, but also how small a role emotion is allowed to play in them—and rightly so, because emotion is so often the monkey wrench in the machinery.
Even outside the world of business, our days consist of routine social transactions with rules clearly spelled out, the prices of alternative decisions clearly identified and the grey areas minimized. Here, too, elemental emotion is minimized. That’s just how Western civilization likes it.
Real estate, on the other hand, is anything but routine. Real estate is a throwback to the free-wheeling commerce of the village marketplace. It’s a survivor—one of the few in this country that consumers are likely to encounter—of an older way of doing business, less structured and therefore far more nuanced and therefore much harder to pin down. Ironically, American commerce is known for its wheeling and dealing, but it's usually confined to the upper echelons of business, and practiced only by specialists intimately familiar with the rules and risks of that marketplace. We can thank the industrial revolution and, probably, one or more federal agencies, for this.
But real estate is where Main Street rocks and rolls in the marketplace, a marketplace where risks can be great and rules fluid and unfamiliar. That’s why real estate consumers need professional assistance, whether they know it or not and whether they like it or not. It’s also one of a number of reasons consumers are suspicious of real estate practitioners. How can you be sure your agent is playing by the rules when the rules seem inconsistent or even non-existent?
I talk about this in Know what you don't know about real estate.
Theory number two: The business model of real estate is fundamentally and critically screwed up, to the disadvantage of those who bring the most to it and deserve the most from it—the “real” buyers and sellers, and the agents who strive for professionalism. This is the biggie, the root cause, and no one, despite what they claim, has come up with a better model. Different? Sure. Better? Not yet.
I talk about this in The real estate business model, part 1: friend or foe?, part 2: let's see that train wreck again, in slow motion, part 3: tragedy and farce in three acts, part 4: "it's a funny business", and part 5: "real estate reform". There's lots to talk about.
Theory number three: This has two parts, macro and micro. Macro: consumers largely get the marketplace they ask for and deserve. Micro: real estate’s buyers and sellers have shaped the industry they love to hate. Ironic, huh? But if this wasn't true, the traditional real estate business model would be withering away, much as newspapers wither away. It's not, despite the media's predictable fascination with alternate models. How can the traditional model hang around? Forget all that conspiratorial nonsense about monopolies and agent cabals that meet by moonlight. The clueless—whether they be consumers, critics, journalists, regulators, even (especially) economists—always look under rocks for mysterious forces when they don't understand a market. And if the boom has made one thing clear, it's that very few people understand the real estate market.
I talk about this in Do consumers get the real estate market they ask for?
Theory number four: The real estate transaction has become too complicated, particularly in pro-consumer states like California, to negotiate without the guidance of a real estate agent. You’d expect me to say this, of course, since I’m an agent. You may not expect this: mind-boggling complication makes it less likely that your agent has the skills to get you securely through a transaction. This situation isn’t helped by a flood of new agents, always inexperienced, almost always from less-demanding forms of sales, sometimes poorly-trained if trained at all, who think (as we all do when we get into this business) that real estate is a quick and easy way to make a buck.
The complexity of the real estate transaction—I almost said "typical" real estate transaction, but that's one of the problems: there isn't one—is often but not always the inevitable result of disclosure requirements, which reached and then passed the point of diminishing returns to the consumer. No buyer can stay focused through hours and inches of seller, brokerage and agent disclosures plus third-party reports, then spend another hour writing an offer, all after a hectic day of work, family and life. We're disclosing to the sleep-deprived and the brain dead, and it won't get better. Another lawsuit? Fine, another disclosure form. More legislation? Fine, throw in another disclosure form. In the on-going war between plaintiff and brokerage attorneys, it's consumers and their agents who do the heavy lifting.
Theory number five: Sure, real estate is really complicated, but it doesn’t matter all that much because even if real estate was really simple, human nature would make it really complicated. All the simmering emotions and ill-concealed hang-ups that complicate our lives bubble to the surface in the white-hot crucible of real estate. I don’t mean to move in on Dr. Phil’s turf, but anyone who’s worked with this many people, this many dollars and this much emotion soon discovers that “dysfunctional” isn’t just a pop psychology buzzword, it’s a preferred lifestyle.
Theory number six: Real estate’s consumers don’t consume real estate services often enough to be good critical judges of the experience. They certainly know if they’ve enjoyed the experience, but they often don’t know enough to judge whether their agent was good or not. What would they compare his or her performance to? How many times have they bought or sold real estate? Once? Twice? Three times? Compare that to the number of times they’ve gotten a haircut, bought clothes, even bought a car.
In fact, there’s something to be said for the idea that the better the agent, the more seamless the transaction and the less likely you are to be impressed by her heroics. “Don’t let them see you sweat” is the motto of the good agent. Were you overwhelmed by your agent’s valiant efforts to keep the transaction together? It’s possible that the fires she so valiantly extinguished were ones she accidentally set. Yet you’d use her again—“Gosh, what a hard worker!”—and you’d even recommend her.
Theory number seven: When I first got into real estate sales, well-meaning agents would tell me, “It’s an emotional business.” Like any new agent, I was playing the lead in “Death of a Salesman” nightly, with matinee on Sunday, and after I’d heard “It’s an emotional business” once too often, I said, “Yes, even for the clients.”
Emotion is indeed a huge part of real estate, and one of its principal drivers. Those of you familiar with the financial markets know that the emotions of fear and greed have the same effect on markets that the moon’s gravity has on tides: they pull markets in opposite directions. That’s also true of real estate, but there’s a third emotion in that market, "home", unknown to and unrecognized by most economists, that differentiates it from financial markets.
Emotion writes the First Rule of Real Estate: It doesn't have to make sense. Understand just this, and real estate will make much more sense.
Next, Know what you don't know about real estate.