The real estate business model, part 4: it’s a funny business.
Let’s review what we’ve learned from the seven interviews of real estate consumers in part 1: friend or foe, and part 3: tragedy and farce in three acts.
By now you probably agree that the real estate agent’s job is more demanding than that of the typical salesperson. As I’ve said, the agent’s relationship is more intense, more complex and invariably more time-consuming.
But you’re not ready to feel sorry for real estate agents. You don’t feel their pain. In fact, you might even hate their sleazy guts.
Yeah, but our pain is your pain. As I said in part 2: let's see that train wreck again, in slow motion, any time there’s a problem in a delivery system—in this case, the system that delivers real estate services to consumers—the consumers downstream have a problem.
In real estate, consumers have at least seven big problems.
First, the people who consume the most real estate resources—agent time and money—are often those who least deserve it. Spend years looking for a house that doesn’t exist and you’ll get plenty of professional attention without paying a dime. Ignore professional advice, flake out at every decision path, fail consistently at every turn—and there won't be any consequences for you, at least not directly. It’s like consistently turning in lousy homework yet never flunking, or even paying tuition.
Real life isn't like that. Someone has to pay the piper, and in real estate that someone is the consumer who gets in and out of the market quickly, efficiently and successfully. The current business model operates only because the best clients pay the freight for the worst. To reward the least deserving and penalize the most deserving strikes me as unfair and inefficient, yet it’s inherent to the real estate business model.
Didn’t this kind of inequity start the French Revolution?
Second, when real estate services are readily available to consumers at no initial cost, the value of that expertise is cheapened in the public mind. If something isn't just handed out free on street corners, but handed out free for months or even years, the inevitable question is “how much can it be worth?” “Free” is invariably “worth less”. Do consumers perceive free real estate services any differently than they do the free samples handed out in grocery stores? Is that how the real estate industry creates an image of professionalism? Is the strategy behind it—“try it, you’ll like it, and don’t worry, we’ve got lots of it in the back room”—any different?
No, because there is lots more of it. In fact, there’s a virtually unlimited supply of agents. Is the market booming, with more buyers and sellers creating more demand for real estate services? No problem: the real estate license factories crank out more agents. In the Los Angeles and San Francisco Bay areas, the number of real estate licensees now exceeds the number of real estate transactions. A few more years of this and the boom market would've collapsed under its own infrastructure, a nation comprised entirely of real estate agents paying each other referral fees to sell each other's homes.
If you live in a major metropolitan area, there are probably 600 agents who’d be willing—nay, anxious—to help you sell your home. If you had the time and stomach for it, you could pick the brains of every single one of those agents—free. So let’s see: professional services with no upfront cost, no limit to the quantity consumed and, in fact, no real limit to the number of service providers available.
What else is that cheap and plentiful? Air?
Unlimited “free” real estate services make consumers cynical, not just about the value of those services, but about the legitimacy of the people who provide those services. Cynicism leaves the door open to discounters who take advantage of the perception that agents are overpaid. Doubts about legitimacy foster a belief that the real estate industry is nothing more than smoke and mirrors, a belief so durable and pervasive that no amount of damage repair by the National Association of Realtors® can counteract it.
Third, the model virtually guarantees that real estate’s consumers distrust their service providers. Agents get paid only if and when their buyers buy and their sellers sell. Until then, agents hemorrhage cash or run up credit card debt. So the sooner you buy or sell, the better off is your agent. Any fairly astute student of human nature (in other words, anyone at least as sophisticated as Larry, his brother Darryl, and his other brother, Darryl) will look at this and conclude that agents are of necessity mercenary. Agents will want you to buy this house or take that offer, not because you should, but because they have bills to pay.
Which leads us to a paradox you can really sink your teeth into: the business model puts the agent in the role of expert/advisor/counselor, yet also establishes the appearance of a conflict of interest for the expert/advisor/counselor that no consumer could miss if she had her head stuck in a drainpipe. What's wrong with this? For one thing, it cripples the agent-client relationship. One buyer told me, “I know I’m not supposed to tell you, but I really like this house.” Huh? What were we supposed to do? Play Twenty Questions? It also leaves the door wide open to other “experts”—trusted but naïve friends, neighbors, relatives and co-workers, plus assorted journalists, economists and other opportunists—to muddy the waters and make the real expert’s job that much more difficult.
Example: Shortly after I’d started working with a couple, a home came on the market listed at $585,000, well within their price range. The house was hammered, but in the highly-popular school district they wanted. The list price was low but apparently correct, based on recent sales; it wasn’t a Mickey Mouse price calculated to start a bidding war. But as it turned out, those recent sales were irrelevant, which made the list price irrelevant. We were about to be overwhelmed by one of those markets I can only liken to a flash fire, a quick updraft that catches everyone by surprise, the market we get when everybody and his dog decides that today is a good day to buy real estate.
So this house was one hot property. In my area we gauge interest in a house by the number of “disclosure packages” requested by buyers. A house gets maybe one offer for every two packages out. Well, there were thirty packages…forty packages…fifty packages out. Entire forests were being clear-cut just to keep up with demand. I watched this feeding frenzy and told my clients they’d have to offer at least $675,000 to get the house and possibly more. The husband called back and informed me sternly, “I’ve been talking it over with the guys at work and they think the house is worth $650,000 max. That’s all we’re going to offer.” And they did, and the house sold for $685,000, and never again did I hear what the "experts" back in their cubicles thought.
Another example: I had a pleasant, if unusually timid, woman referred to me by another agent. We hit it off and after months of looking she felt comfortable enough to make an offer—or so I thought. She asked that we write the offer at the house, an unusual request, but since it was vacant I agreed. When I arrived I found that she’d arranged this so that her friend, an overbearing woman with a surplus of the confidence my client so sorely lacked, could see the home. Her friend scanned my list of recent neighborhood sales, pointed to the average sales price at the bottom of one column and declared, “That’s your benchmark. That’s how much you should pay for this house.”
The problem with this “strategy” was that it was irrelevant. The house wasn't average. It was in above-average condition and would therefore sell for an above-average price.
The house was listed at $625,000 (and today it's probably worth $875,000). We wrote an offer at $605,000, the friend-endorsed average sales price for the neighborhood, a price I knew the seller would never accept. Sure enough, he countered at $620,000, at the high end of what I thought the house was worth. I suggested we counter at slightly less, but my client refused to budge from the $605,000 her friend had pulled out of the air. When I pointed out that the difference between $605,000 and, say, $615,000 wasn't that great, especially amortized over 360 monthly payments, and that her friend's number might be a trifle low, I was informed that a) I was being presumptuous to question her friend's omniscience, and b) her friend was ready to throw more monkey wrenches into the works as requested. Most agents would’ve blinked and backed down. I told her nicely that I was very sorry, but that I couldn’t work this way, and wished her well. A few weeks later the house sold for $615,000. A week or so after that, my (former) client paid list price (no more artificial “benchmarks” for her) for a house that was $85,000 more expensive.
Did I feel good about any of this? No, of course not, but I didn’t have a choice—a real estate transaction has room for just one expert.
Fourth, remember what I said about the model creating “the appearance” of a conflict of interest? That’s a nice way to put it. Less charitable people, and there are many of them, say it goes beyond “appearance”. These people say the model puts overwhelming pressure on your agent to sell to you now instead of later. How could it be otherwise, they ask?
I think I've always managed to rise above this, but every agent probably thinks that, and I don't think we can't all be right. Sure, I’ve felt virtuous discouraging clients from buying what I thought was the wrong house, and many other agents have too, even though we then run the risk of forcing our own preferences on someone else's buying decision. But human nature is human nature, and human nature is fallible—you heard it here first. The pressure on your agent to make a sale may be subtle and unconscious, or it may be the first thing he thinks about in the morning and the last thing he thinks about at night, but it’s there, it’s real and it tests his integrity every time he deals with you. That’s never a good thing, even if many of us meet the challenge.
Which leads us to consumer problem number five: the model requires your agent to be a saint. In these secularized post-modern days saints are far and few between, and even fewer of them get into commission sales. “Oh heck, money doesn’t mean anything to me.” We live in a culture that worships money and mythologizes its acquisition, and it should be no surprise to learn that many of the commission-compensated independent businesspeople called real estate agents worship money.
To which many reading this might add Mes amis. Mon frere!
Money aside, warm-and-fuzzy reasons to stay in real estate abound, but brutally compelling reasons to leave real estate also abound, and that outsized earnings potential helps most of us pick ourselves off the floor. We're a little like the guys who pump out your septic tank. Sure, they feel good knowing they perform a useful service. But the money has to be good too, at least compared to what they could earn doing something cleaner and more prestigious, to compensate for the crap (see client interviews, above). And the look-out-for-number-one clients we've met are enough to give any real estate agent equally deficient in character enough ammunition to rationalize bamboozling his clients.
Which reminds me. Years ago, after I'd been in property management long enough to get bored with it and before I began selling real estate, I got the idea that I’d like selling cars, preferably at a dealership where I’d made several purchases. I liked and admired the owner, and I was a “gearhead”, a car nut’s car nut, and thought I'd like being around cars. Lots of cars. (I didn't know that liking cars has nothing to do with selling them.) The owner seemed open to taking me on, even though I had no sales experience, saying, “I like hiring new salespeople. I don’t like hiring people who’ve learned the business the wrong way, the ones who brag ‘I really kicked that buyer’.” He sent me off to be interviewed by his sales manager, who monopolized the conversation to explain why he’d lost a Buick dealership, while I looked at him in silent wonder, and then decided I wasn’t talkative enough to be car sales material.
But it was all good, because I’ve often thought about what the dealership owner said, because in this respect the real estate model is no different from the car sales model. It encourages the adversarial relationship or, at its very worst, the “I'll-screw-them-before-they-screw-me” approach to Looking Out for Number One.
Unless you're a saint. And you can't get them anymore.
I’m not suggesting that "screw or be screwed" is the standard modus operandi of the real estate community. I'm even open to the idea that consumers weed out the bad apples, the blatant opportunists, the poorly-trained and the untrained, and those who shouldn't be in any business more complicated than managing a lemonade stand. I may not believe it, but I'm open to it.
But this does lead to consumer problem number six: even the most ethical, well-adjusted agent can fall prey to a certain cynicism about the real estate-consuming public. And unlike the cynicism of the vast majority of the public, the ethical, well-adjusted agent's cynicism is based on hard-won experience. This cynicism can, in turn, present itself as what I call “the usual agent paranoia”. Experience teaches the agent that a certain percentage of his clients stand ready to bolt or flake at the first opportunity. Thus warned, he looks for tell-tale symptoms and infallibly finds them even when they don't exist. This subtly but inevitably colors his relationship with all but his “safest” clients. And if a safe client bolts, watch out, 'cause that’s Basketcase City, Arizona.
I don’t remember the first time this happened, but I do remember the biggie, a dear elderly couple I’d known for years who darn near squeezed my cheeks and baked me cookies every time they saw me. Then one day I was out on broker’s tour, looking at homes that’d come on the market that week, and noticed that the next house on the list was theirs. And I wasn’t the listing agent. All I could do was laugh. It wasn’t a big laugh.
Then there was this conversation overheard on broker's tour:
First agent: “I’m going to be selling my mother’s house.”
Second agent (jokingly): “That must have been a tough listing to get.”
First agent (seriously): “It was. She was interviewing other agents.”
Have your safe clients flake on you a few times (and it happens to every agent) and it’s helpful, indeed essential, to develop the same careful detachment toward your clients that doctors develop toward their patients. Because it's inevitable that a certain number of patients will, despite their doctor's best efforts, become gravely ill, suffer greatly and die. In real estate it’s not life-or-death, although an agent's wife may notice that he's been unusually grumpy lately.
On the other hand, good agents still care about their clients. They have to, to do their job well. So the good veteran agent is constantly walking a tightrope between engagement and disengagement. It takes the new agent a while to learn this trick, so if you’re looking for boundless and unconditional love, I recommend either using someone new to real estate or adopting a dog.
In business, disengagement can easily lead to opportunism, although I should add that I don’t often see blatant examples of this in real estate. Maybe we're just good at hiding it from each other, or maybe I don't want to see it, but I’d like to think that one of the few bright and shining aspects of the current real estate business model is the sight of so many agents, just average people, none of whom will ever be nominated for sainthood, fighting and often beating that “us-against-them” cynicism. This may surprise you. You may not believe it. Sure, a few agents would sell their mother for a commission, but they quickly make themselves known to the local real estate community—although, unfortunately, not always to local buyers and sellers. Why not? It’s a big world out there, folks, with plenty of opportunities and a steady stream of easy marks, most of them convinced they're beating the system.
You’ve probably noticed by now that I consider the real estate business model “highly illogical” (this is the only Star Trek allusion I’ll use). This brings us to consumer problem number seven: if the business model of a particular profession is illogical, only illogical people will be attracted to it. There’s symmetry in this, but not complete accuracy. Because you could also say that since there’s so much emotion in real estate sales, only emotional people will be attracted to it. Or that since there’s (potentially) so much money in real estate sales, only the money-hungry will be attracted to it.
There may be a grain of truth in all the above, but people get into (or more to the point, stay in) real estate sales for a variety of reasons. Most are people persons: emotional and intuitive, not analytical. They have strong bonding skills, need them and use them frequently, because a career in real estate requires either a large circle of friends and acquaintances or the ability to get one quickly. You also need to be a “glass half full” person, with a boundless, even mindless, optimism about what tomorrow will bring.
In other words—big surprise—it's helpful for the real estate salesperson to have the salesperson’s personality. Your buddy.
This is the person who helps you buy and sell the largest financial asset you’ll ever own, while guiding you through a large pile of complex legal documents. Should his job description require more than strong bonding skills? Only real estate consumers can answer that—and they do.
I've always held up my CPA as the ideal agent type: calm, unemotional, no-nonsense yet patient, no surface flash but plenty technique, with degrees, certificates and a bookshelf of reference books behind him. Above all, analytical.
In other words, the kind of person who would look at real estate’s business model and walk away shaking his head.
Yet I may be wrong. Because the analytical types so often don't get real estate. Because emotion is and must be a big part of real estate. The engineer-turned successful entrepreneur-turned unsuccessful stock market investor-turned venture capitalist and refugee from the stock market says, "I don't understand emotionally driven things".
Real estate agent ubermensch: analytical and intuitive.
But a loopy business model does more than just shut the door to CPAs. It leaves the door wide open to industry critics, so open that any plausible idiot can roll through and start making direct hits. We create and nurture the careers of those who claim the real estate profession charges too much and does too little.
Every industry has an Achilles heel. Real estate has an Achilles backside. Change the business model, and the critics will be back stocking shelves at Wal-Mart.
Next, The real estate business model, part 5: real estate reform.