Agent Professionalism, Millennials, and Value

price signals

Russ Cofano, formerly of Move and the former CEO of Missouri Association of REALTORS, and an all around thoughtful man who knows a lot, has penned an interesting op/ed for Inman. He thinks that the industry’s discussions about agent professionalism is (a) misguided, and (b) won’t matter because Millennial consumers will determine what is and is not professionalism. He asked that the op/ed spur some conversation so… I’m happy to oblige. 🙂

Cofano’s Thesis

The flow of arguments goes like this. First, Sam Debord, a name that should be well-known around these parts, wrote in a post that Russ quotes:

We can all agree that there are real estate licensees without the experience, ethics, education, or conscience necessary to serve their clients well. There are bad apples in our midst. They’re a poison on our reputation and should not be allowed to sell real estate.

Let’s not overreach with our reaction, though. This rhetorical journey usually ends with lower producing agents or those with non-traditional business models being given the scarlet letter and pronounced as a scourge on the industry.

Volume does not equal professionalism or quality. We’ve seen sweatshop practitioners become real estate celebrities, only to later lose their businesses and licenses when their practices came under scrutiny.

On the other hand, some of the lowest-volume agents often have the most experience to with which to guide their clients. Agents who are nearing retirement will often shrink their active client base significantly. The buyers and sellers who work with them are afforded all of the benefits of an agent with decades of experience and insight, as well as a greater share of that agent’s attention.

Russ generally agrees, but points out that quantity does matter:

At a high level, I generally agree with DeBord about the whole quality-versus-quantity thing. As former general counsel for a vast real estate firm, I can attest to the fact that “one-star” performance is not reserved only for the inexperienced. Some of the worst transgressions I saw were committed by top producers.

But I also don’t think you can generalize the other way that the volume of deals has no bearing on an agent’s value proposition to his or her client. Deals create experience, experience creates knowledge, and knowledge delivers value.

In other words, do you want to be the first patient of the newly minted surgeon? I’ll pass.

Then Russ goes on to say that none of this really matters because Millennials, the largest group of homebuyers coming up anytime now, will determine what is and is not valuable. He posits that Millennials are all about word of mouth and “wisdom of crowds” but distrusts ratings and review websites. So he thinks NAR and the industry as a whole should really tackle this thing today, somehow:

The current system might be broken, but millennials will be undeterred in their search for the wisdom of crowds. If they are willing to talk smack about their doc, they will do the same about their agent.

There is an opportunity for the industry, led by NAR, to influence this next generation’s desire for authentic evaluation of real estate professionals, both regarding quantity and quality.

Since Russ left the actual solution up in the air, we can’t actually evaluate what he thinks would do the trick with Millennials. But as longtime readers know, we here at Notorious sort of specialize in throwing out actual solutions (that won’t ever be adopted because they’re, you know, politically unworkable and stuff like that) at least for the sake of stimulating thought.

That Question of Value

The handwringing around the issue of “authentic evaluation” all center around the relatively subjective issue of “consumer experience”. The problem is relatively straightforward, and yet complex as hell, and one that I’ve been asking both on and off blog for years now. The problem is to answer this simple question: What makes an agent “good”?

There is no actual agreement on this seemingly simple question. Judging by how the industry gives out awards, production (quantity that Sam Debord was decrying) is what makes an agent good. Certainly to the broker who takes a piece of every commission check, that is the quality that matters. Others think that an agent’s knowledge of the local market is what makes her good. Still others think it’s about caring and dedication and ethical behavior, although all of those are somewhat difficult to define, and “ethical behavior” seems like setting the bar way too low: “You’re great, because you’re not a crook!”

Usually missing from the entire discussion is a simple fact that I’ve pointed out time and again, is acknowledged but then quickly dismissed because “that’s just not how the industry works”: missing price signal. Here’s a brief and fun video about price signals; it’s worth watching in full:

The key lesson is that prices tell producers what the consumer wants. If people are willing to shell out $150 for designer skinny jeans, other people will look at that and say, “Hey, we should make skinny jeans and get in on that action”. When too many people make skinny jeans, so prices plummet, producers say, “We should stop making so many skinny jeans.”

There’s another function of price signals, and that is to consumers. The old saying, “Champagne tastes on a beer budget” comes to mind. Fact is, when something costs more, we tend to believe that it is of higher quality than something that costs less. Usually, we’re right, because higher quality products and services require more labor, or more expensive labor, or higher quality raw materials, etc. etc. A Rolex costs more than a Timex for those reasons. And in services, it costs more to become a top-notch doctor than it does to become just a doctor, whether that’s in additional years of schooling, attending more medical conferences, investing in better equipment, etc. etc.

(Sometimes, of course, higher price doesn’t mean higher quality. A white T-shirt from Giorgio Armani might cost $35 not because it’s higher quality but because of the cost of marketing the brand of Giorgio Armani and because Armani intentionally keeps production low to boost the appearance of value.)

The single biggest barrier to the whole “professionalism” issue is that price signals are missing in real estate.

The Missing Price Signal

Russ kind of touches on this but glides past it when he talks about not wanting to be the first patient of a newly minted surgeon. But what he leaves out is that the newly minted surgeon will charge a fraction of what an experienced surgeon would charge. In some cases, the newly minted surgeon would be working at a clinic providing low-cost healthcare to the poor because he can’t get a private patient until he gains some experience.

Some consumers, who don’t have tens of thousands of dollars for an experienced surgeon, might decide to hire the newly minted surgeon because they still need surgery. That’s a perfectly valid choice.

Another way price works out is that it is often less costly for the consumer to hire the more expensive professional. I’ve hired my share of web developers over time, and as a general rule, the cheaper web developers simply take longer to get things done. Someone charging $25 an hour might take 10 hours to design the website, but I’m not happy with the result, so we end up going back and forth revising it, until I’m looking at a $2,500 bill at the end of the project. A far more experienced, more skilled web developer might charge $250 an hour, but get it done in 4 hours, and I’m happy with the result on the first try. It actually costs me less to hire the more expensive web developer.

In profession after profession, the same mechanic plays out time and again. Hiring a master plumber might cost you more per hour, but at the end of the day, you save money and headache and heartache. A great lawyer might charge $750 an hour, but losing the case might cost you $7.5 million. And so on. Price is not value, but it is an important component of value.

With real estate, however, whether you hire the newly minted REALTOR on her first deal or the 20-year veteran top producer, you pay the same commission. Whether you hire someone who gets your home sold for top dollar within three days or someone who can’t get the job done and has your home languishing on the market for nine months, you pay the same. Whether you hire someone who is pleasant, keeps you informed, and gives you peace of mind, or someone who goes AWOL after the initial consultation, you pay the same.

No wonder then that consumers and the industry have no idea what to look for and who to hire. So we’re stuck in the constant loop of “quantity over quality” and “ratings and reviews are the way to go” and so on. Word of mouth only goes so far, and consumers come to expect the same (great) or same (crappy) service from real estate agents no matter who they hire, because they’re paying the same price.

Professionalism in the Price Signal Age

Let’s imagine for a moment that real estate moves away from the commission model to a per-hour model. (Which is not as crazy or as unlikely as you might think these days….) All of this headache over professionalism would likely disappear overnight.

An experienced agent who can get a home sold in a week or two with an array of marketing tools, teams of assistants, local expertise, and savvy negotiation skills might charge $1,000 per hour because she can get it. A newly minted agent, on the other hand, might have to charge $50 per hour until she can build up a portfolio and a practice. As a consumer, I might want that $1,000 per hour agent for my difficult-to-sell McMansion; or I might want to save money and hire the cheaper agent because my house is a cookie-cutter in a development with a severe inventory shortage. That’s my decision as a consumer, and the price signals are telling me who to hire and what to expect.

If someone charging $1,000 an hour can’t get it done, or behaves unethically, or otherwise screws me over, then the ratings/reviews focus on not just the crappy job she did, but on the exorbitant fee she charged. My word of mouth isn’t simply, “Don’t hire her” but also “You can get the same for a lot less by hiring these other agents.” Others see that and choose not to hire that agent, until she has to lower her price or improve her service or both in order to compete. Conversely, someone charging $100 per hour and doing a bang-up job will soon find herself flooded with too much business such that she has to turn clients away… or raise her prices until there is an equilibrium between how much she can work and the money she will make.

Professionalism naturally sorts itself out based on price.

One Thing We’ll Find Out…

Seems to me that one thing we will find out as an industry is the precise mix of consumer demand for high-quality professional service vs. low-quality sales service. If 90% of consumers consistently hire the cheaper agent, then we know that consumers actually just want some bargain-basement crap experience. If 90% hire the more expensive professional, to the point that a newly minted agent has to go do an internship to build up a practice (as doctors have to do), then we’ll know that consumers really want high-quality service.

We as an industry may still be unable to define what makes an agent good or bad. But we won’t have to, because consumers will tell us with their wallets.

Like the employee-contractor issue, seems to me that maybe the solution to the industry’s thorniest problems lie in embracing what we most fear. Something to think about.

-rsh

 

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6 Comments

Join the discussion and state your opinion. Some comments may be held in moderation. I try to get to them as soon as possible, but may be traveling or unable to approve comments immediately. I do not censor comments, but reserve the right to remove anything that looks like spam, trolling, or just outright inappropriate.

  1. Rob, this is exactly the type of convo we need. I intentionally did not offer a solution in my article. Complex and competing issues that warrant another article. Totally agree with your premise that the price component is sorely missing and with that, the quality equation is flawed.

    1. Russ/Rob
      I managed to raise my family selling residential real estate for 30 years. I never considered myself a “top producer” but averaged 20 closings per year over that period. I did, however, consider myself a “successful” agent primarily two reasons: One, I resolved client issues before mole hills became mountains or lawsuits sometimes at considerable cost. And, two, I maintained the highest ethical standard possible. Perhaps today’s consumer should qualify their real estate representation by asking the question, Have you ever been sued in a court of law or been charged by by your Professional Standards Committee? Neither happened to me or to many other real estate professionals that I know that aren’t necessarily considered “mega – agents”. I consider it a mistake to start defining successful agents only by volume.

  2. Great analysis Rob. But fundamentally this a major issue that has been dealt with in most all other industries yet never even touched in residential real estate. What is at stake here? If all it takes to become a Realtor, join the local and State Association and the MLS is to have a real estate license and pay the dues . . . . nothing will ever change in this industry. And finding a competent Realtor will be just like what it is today – like playing Russian roulette. My brother in an airline pilot and he went to work for the airlines after a 20 yr. career in the Air Force. As a retired colonel, with more than 7500 hours as a fighter pilot and decorated war hero, when he was hired, he was “demoted” to a co-pilot by the airline and for 15 years he flew as a copilot before becoming a Captain. The airline industry has its own set of standards for performance and time in rank that are unique to even the Air Force. He had to pay with time in service in order to one day be in command and serve as a Captain. In our business, absolutely NO time in service or performance requirement is needed to take command of huge transactions, negotiate and draft contracts involving potentially millions of dollars. This is absolutely and totally insane! And please do not say it is the broker’s responsibility to raise the bar. Even if the brokers took action and installed performance requirements, in their companies those standards would be destroyed by the MLS that mandates that the same broker is required to coop transactions and pay more than 50% of the commission to a Realtor with zero experience and time in service. Sorry. This is not an issue of value with just millennials or any other age group – this is an issue with anyone who is faced with working with the more than 700,000 dues paying, inexperienced and incompetent Realtors. Agree? Disagree? If you disagree – and in our lifetimes we cannot change the licensing qualifications – then let’s at least stop allowing the NAR and the MLS as the membership driven, organized real estate cartels they are – from determining who is able to be a Realtor, sell our listed properties, take listings and face the consumer all the while, polluting the reputation of our entire industry. After 38 years in this business and all of the discussion I have heard about what could or should be with regard to industry standards – isn’t about time to match the talk with the walk? Experienced industry performers – let’s hear you make some noise out there!

  3. Commission compensation creates a conflict of interest. I’m not sure anyone can debate that fact with any true degree of honesty. I’ve worked on commission most of my life and its been good to me, I like it. I believe I work by high moral and ethical standards…but, I have to do a deal to pay my bills, feed my family, send the kids to school etc.

    So, what makes a good agent or an agent good? “Good” as a noun…”morally right, truth, honor, purity”, there can’t be many those, there are just too many opportunities when working towards deal closure that cause even the purist of pure to side with our own compensation…because without that compensation we can’t live, at least the way we want.

    But then there’s “good” the adjective; robust, sturdy, strong, healthy, sound etc. IMO, there are a slew of those agents, it’s almost a prerequisite to being successful in the profession.

    I guess then “what makes a good agent” is someone that possesses some degree of both. I’ve intentionally avoided all the obvious things like market knowledge, returning phone calls, a good “negotiator” etc. because that’s the easy part.

    Compensating sales people is a really tough part of running a business. Salary, salary plus bonus, hourly pay all have their good and bad. Straight commission? IMO, it will always give customers a funny feeling in their stomach and will always make it hard for agents to be truly “good”….at least as a noun. 🙂

    Thanks,

    Special thanks to Dictionary.com

  4. Here we go again the Real Estate Agent is the problem??,the entire system is the problem,it is totally corrupt,from nar”a shakedown racket” to the lousy mls’s and the parasitical boards of “realtors” at the state and local levels,the money in the pacs that RE Agents are urged to contribute to, is used to bribe politicians, to pass more laws to perpetuate the existence of these lousy institutions, we do not need these people to choose winners and losers,let the market determine compensation freely,some years ago a group of establishment brokers in my area were prosecuted by the Feds for infringing the anti-trust laws, and that issue was the commission structure.,we need a free market, a meritocracy if you will, the best achieve,the incompetent fail, and the criminal go off to the Government hotels.

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