Danger, Danger: Real Estate Brokers Face New Reality

“The real estate industry is saddled with a large number of part-time, untrained, unethical and/or incompetent agents.”

You might think that the statement above comes from a fanatical consumer group or homeowners with an array of ugly experiences. That isn’t the case; instead the remark is part of a new report funded by the National Association of Realtors, a report which may set some sort of record for brutal association honesty.

Prepared by consultant Stefan Swanepoel, The Danger Report, is a hard and harsh look at the brokerage industry and the challenges it faces. The report is not especially original in the sense that the “dangers” it mentions have been unknown, but it brings to the table in one place issues which the real estate community can no longer ignore.

The great oddity of the real estate industry is that it has not been “Amazoned,” “Pricelined” or “Ubered.” It’s an inefficient multi-billion dollar business that has somehow adopted to the Internet era with a skill that can only leave travel agents, cab drivers and booksellers looking on in awe. How do brokers do it — and can they keep doing it?

The Danger Report presents a grim view of the present — and perhaps a grimmer view of the future.

Let’s start with those “part-time, untrained, unethical, and/or incompetent agents.” For a thousand different reasons it might be nice to dump them, say through the imposition of stricter educational requirements. The report notes that on average it takes only 70 hours of training to get a sales license as opposed to, say, 372 hours for a barber.

Higher standards sound enticing but there are financial reasons which explain why hordes of barely-able licensees are unleashed on the public despite the report’s observation that “professional, hardworking agents increasingly understand that the ‘not so good’ agents are bringing the entire industry down.”

When you think about the central importance homes play in our lives surely it makes sense to have the most-qualified individuals we can find. And yet a sudden and dramatic increase in licensure standards is wholly unlikely. If there are fewer licensees there are also fewer dues-paying association members, continuing education enrollees, malpractice insurance sales and revenues from licensure fees.

Lower Commissions

When it comes to industry fees, Eugene Conser wrote about lower commissions overseas in his 1976 book, Real Estate European Style: What You Should Know About Real Estate in 32 Countries. Four decades later Swanepoel correctly points out that commissions in Europe and the U.S. are still wildly divergent — as low as one percent in the United Kingdom versus five to seven percent in the U.S.

“The continued rise in home prices has facilitated the elevation of real estate earnings based on commissions,” said the report. “Those earnings have not gone unnoticed by consumers, who are responding by placing increased pressure on real estate agents to reduce their commission rates. As a result, many fear a gradual downward slide or a realignment of fees as charged in other countries.”

Lower commissions sound like a very good idea, especially for consumers, but they imply a completely different way of selling homes. Can U.S. brokerages survive in a world with smaller fees?

If the complaint is that it costs too much to sell real estate in the U.S. then there ought to be someone benefiting from such a system. With home marketing as it now stands, gross selling costs are high but inefficiencies mean few people benefit. Under the present commission system the typical NAR member has a gross annual income of $45,800. Some members, of course, do very much better than others.

“Nineteen percent of members earned a gross income of less than $10,000 in 2014, while 24 percent earned more than $100,000 in the same time period,” according to NAR’s 2015 Member Profile.

The catch is that there’s a huge difference between gross income and net income. The gross figure shows how much is taken in before costs but the real question is how much do real estate professionals take home after deducting business expenses? You can bet the net — the money real estate professionals can spend on groceries — is well below the gross.

For Sale By Owner

Some percentage of all consumers have always sought to avoid brokers altogether. Empowered with reams of online information and photos, it logically follows that self-sellers, or what are known as “FSBOs” (For Sale By Owners), should multiply in the Internet era.

The report explains that the FSBO option “has been available in the industry for many decades, and has been used primarily on an individual basis (local level) by consumers that want to take control of the transaction in order to save money. The FSBO share of the real estate market in 2014 amounted to nine percent of the 5.1 million houses sold. Should this method be packaged in a more dynamic and formal offering — bundled together with a portfolio of technology and mobile applications — and be aggressively marketed and sold to consumers, the model could gain rapid adoption by a new generation.”

There hasn’t been a massive increase in FSBO activity despite that fact that expansive real estate information has been online for more than two decades. Instead, there is something inherent in the real estate marketing process which confounds potential self-sellers.

The real bottleneck is not the selling process — if “part-time, untrained, unethical, and/or incompetent agents” can sell real estate, individuals separated from the public by as little as 13 hours of instruction, then why can’t homeowners post ads, plant signs and show houses? The answer is that they can.

What they can’t do is deal with the endless forms now required to sell a home. Long ago, when I bought my first house, the entire deal was finalized with a contract that ran all of two pages. Today, real estate agreements rival “Gone With The Wind” in terms of length and complexity.

Why have contracts become so massive? We want to protect consumers and brokers, so in a fit of caution we have attempted to outline, disclose and account for every possible contingency. Since no agreement can incorporate the universe of possibilities represented by each home sale it follows that in addition to the basic 12-pound agreement we also need addenda to address contingencies of every size and type.

The real competition faced by brokers is not from self-sellers empowered with Internet knowledge and forms, it’s from the nation’s vast over-supply of lawyers who populate every community, educated and informed people who have a lot more than 70 hours of training as well as a need to pay down massive tuition bills.

FSBOs and attorneys, working together and using technology now available, are the real threat faced by the brokerage industry. No less important it is brokers themselves who are showing how to sell without the MLS or fancy websites. This is being done through the increased use of “pocket listings,” homes represented by MLS-member brokers which somehow don’t quite make it into a local MLS system before being sold.

“Pre-MLS, pocket listings and off-MLS listings have always been around,” Swanepoel explained, “however, today their impact is more significant because of the digital age of the Internet. There are numerous reasons for the increase in this marketing strategy: market conditions (fewer houses on the market); the advance of technology; the desire to work with a specific group of agents (listing clubs); and agent compensation (dual agency).”

The purpose of pocket listing is not complicated: If listing brokers don’t have to split the commission they can get a bigger fee from an individual sale. The problem with pocket listings — one of many — is that if a member broker does not need the MLS then why does a home seller?

It would be a mistake for the real estate industry to ignore the many ideas raised by the Danger Report. The study outlines issues which need to be addressed now, before the momentum of the marketplace slips away from the brokerage community.

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