The Foggy Question of Broker Competence

Why incompetence is rampant in our business

When I first got into the business I did not understand.

To my naive eye, the brokers who did well did not seem to know or care much about real estate.  While this is not one hundred percent true, I noticed that the more successful a broker, the less competent they tended to be.  How could this be possible?  It just did not make any sense to me.

So I spent years observing, trying to figure it out.  And what I discovered led me to the distinction between client acquisition and conveying real property.  Here are the first three paragraphs from The Competent Broker:

Real estate brokers have two primary jobs:  Client Acquisition and Conveying Real Property.  These two jobs involve entirely different skill sets.  In fact I would argue that the type of person who is good at either one of these jobs, that has the skill set to make them good at it, is almost always not the type of person who is good at the other.  Many very successful brokers are quite brilliant at client acquisition, but not terribly competent at conveying real property.

To be successful in the real estate business, it is vital to have, or to generate, a stream of potential clients.  In fact, this is so important that brokers will concentrate their time, effort, and money, on this aspect of the business to the detriment of all others.  What you find is that the people who are most adept at this, do best in the business financially.  And this does not go unnoticed by their colleagues.

As a consequence, transactional competence suffers industry-wide.  Why become a better negotiator when you can make more money prospecting?  In fact, why learn basic accounting, why keep up with contract and paperwork changes, the law, best practices, building techniques, technology, etc.  The whole range of knowledge and experience and expertise that is useful and helpful for serving clients.

I think any discussion of broker competence must address this distinction.  Because when it comes to conveying real property, brokers see little correlation between this competency and success.  You see, conveying property is the expense side of the business; it does not make the broker any money.

There is however a direct correlation between competence at client acquisition and success.  Client acquisition is the revenue side of the business.

So the 20 percent of the brokers doing 80 percent of the business are focused on client acquisition.  This is real reason why incompetence is rampant in our business.

NAR points to other reasons, but I am skeptical.  For example, would more pre-licensing instruction help?  Maybe, maybe not.  But unacceptably low entry requirements are not the real problem.  This is perhaps even an intentional misdirection by NAR in order to justify high commissions.  Raise pre-licensing instruction to one thousand hours, and the same brokers will still seek out Mike Ferry types to coach them on client acquisition.

Plus, there is just no way that NAR can admit that its 250,000 top producing members spend the bulk of their time chasing business and very little of their time actually conducting business.  Stop and think about that.

To really understand this problem, we have to look at the incentives.

Competence is a choice.  In the business of real estate brokerage, this is an absolute.  Brokers have a duty to their clients to be competent.  A duty of competence.  And that competence must be purposefully acquired.  So competence is a character trait and a function of integrity.  If you want to claim integrity, you must first work on your competence.  You must choose to be competent.  It is not that brokers choose to be incompetent.  But they do choose to focus their attention elsewhere.  Competence simply falls by the wayside, unnoticed and unattended.

Making this choice, brokers demonstrate a complete lack of regard and respect for their clients.  I can think of no other business where so many of the so-called professionals hold their customers and clients in such low regard.  Surely this, too, is a question of integrity.

And you know what?  Regardless of what they proclaim, they do not care.  They’re making the bucks and there is precious little penalty for incompetence.

Since most of the revenue flows into these hands, the remaining eighty percent of the brokers scramble around for the crumbs.  Some are competent at conveying real property, some are not.  Competent or not, most don’t make it.

This leads to Gresham’s Law for Real Estate:  The incompetent, low integrity brokers drive out the competent, high integrity brokers.  Those brokers who focus on client acquisition drive out the brokers who focus on conveying real property.  Incompetence rages.

Whenever I write about these issues, I am met with condescension and derision and indignation.  Realtors absolutely love talking about their ethics and their professionalism and yes, their competence.  It is vital for them to maintain the illusion of these qualities.  So sincere discussion is rare.

And I do understand:  They are competent at what is important to them, client acquisition; they follow a Code of Ethics which allows single-agent dual agency; and they memorize scripts to mimic professionalism.  Their whole business model is dishonest.

Since consumers don’t enter the market very often, they can be terrible judges as to the competence of their broker.  As an example, I recently wrote about a neighbor who thought her daughter had a fabulous broker because the broker sold the daughter’s house in four hours.

So what’s the answer?  The only answer I know is to shine a light on the issue.  But that is far from sufficient – Because brokers immediately fill the arena with the fog of deception and misdirection.

The Game of Thrones tag line is:  Winter is coming.

I think that works great for the real estate business as well.  But perhaps we should tweak it just a little:

Zillow is coming.

They can’t get here soon enough.

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Scripts For Superstars

Mike Ferry wants to help me with my scripts

Got an email from the Mike Ferry Organization today:

Do you need to know what to say?  Do you want to learn how to effectively internalize the scripts and dialogues?  Do you want to learn how to set more listing appointments and get the contract signed?

I was reminded of the greatest real estate video of all time:

If you have read my book, you will already know, Number 4 (at the 4:54 minute mark) is my favorite.

Dear readers, before you dismiss these videos based on their sheer truffery and ridiculousness, please know this:  Real estate brokers eat this stuff up.  This is how they spend their time.  They are not experts on conveying real property.  In fact they care very little about it.  Rather, they are experts at client acquisition.  And they cannot even be genuine about that.

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More on Scripts

And how real estate brokers think

This past fall I wrote a brief piece on scripts, making my favorite point on the topic:  If you cannot trust someone to have a sincere and genuine conversation with you, how on earth can you trust them with something as important as a real estate transaction?

And that remains my primary thinking on the subject.  But what about the time involved?  These things require so much time.  Why not instead spend your time mastering the field of real estate?  Spend your time becoming competent at conveying real property.  Then, when you have a conversation with someone, you don't need to rely on some canned, memorized script.  You can have that genuine conversation.

But so many brokers need scripts because they are not competent and do not care about competence.  They only care about client acquisition.  And that is where they spend their time and where they become competent.  I assure you, client acquisition does not get your house sold.  And it certainly does not help you find and purchase a property.  In short, client acquisition is a totally different skill set than conveying real property.

What I love about this video is it demonstrates how real estate brokers think.  There's nothing terrible here.  There's no real gotcha.  If there was, she would never put this online.  But there can be no doubt about her single-minded focus on client acquisition.  So watch and ask yourself:  Do I want to do business with these people?

Some people, evidently many people, will watch this and say yes.  Tina Caul is very successful in this business.  And the thinking expressed in this video is pretty typical for our business.  So if they don't hire Caul, they'll likely hire someone who thinks this way.  But for those of you who, like me, find this approach sort of disturbing, demand something better.  There are alternatives.

Now, should I not post this for fear of losing business to Ms. Caul?  She is after all a master of client acquisition.  Well the type of people who appreciate her methods would never hire our firm anyway.

My favorite part is where she describes how brokers must go off script in order to respond to someone who says my grandfather died.  My God, throw the script out and have a real conversation.  Better yet, don't pick up a script, any script, in the first place.

Finally, there's one other interesting aspect to this video and some of her others.  By placing them on her public YouTube channel, she does not seem to care if her clients and potential clients learn that she is a big script-reader.  I have always thought that no one wants to be scripted, and that if they realized that you were scripting them, they'd be upset about it.

Maybe I'm just wrong about that.  Judge for yourself.

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Frightening Inventory Level

The Complete Collapse of Supply

Here is an interesting number to start our Tuesday:  306

I live and work in Wake County, North Carolina.  It is a large county with more than 1.1 million residents.  This morning, just for kicks and grins, I looked up how many homes are actively For Sale through our local MLS, in the entire county.  Of course this is a point-in-time figure, and it will change from day to day, and even from hour to hour.

Let me qualify this.  I looked up the number of re-sale homes, under a million dollars.  I wanted a true active figure, so it does not include any Coming Soon properties.  And I excluded properties with current Contingent or Pending contracts.  I also excluded new construction.  But this number does include all property types:  Detached, Attached, Condo, and even Manufactured.

Let me say, I have absolutely no idea what this number is on a regular basis.  No doubt it's seasonal.  But for mid-March, 306 seems frighteningly low to me.

We've all been discussing low inventory for a few years now.  But after the posts Multiple Over Madness and Four Hours or Four Days, I really wanted to get a handle on the current situation.  Sure, there are any number of ways to dissect the statistics.  But I think this one number pretty much captures the situation.

Update, 7:07 PM, Tuesday, 16 March 2021

As weekend sales are finalized and properties go under contract, our figure drops even further:

288

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Four Hours or Four Days?

The Immutable Laws of Supply and Demand

Yesterday, I ran into my neighbor out walking her dog.  Here's our conversation:

Neighbor  Hey, my daughter just sold her townhouse in Chapel Hill.  It sold in four hours; isn't that great!

Me  Hmm, four hours?  That seems irresponsible to me.

Neighbor  But, she got more than she expected.

Me  Well, I wonder what she could have gotten if she gave it four days instead of four hours?

Neighbor  But she was in a rush.

Me  What's the difference between four hours and four days?

I know the real estate market has gone crazy.  But people seem to have totally forgotten the fundamental laws of supply and demand.  If you limit demand, you simply cannot ensure that you will get the highest and best offer.  This is all the more true given the lowest inventory levels (supply) in recent memory.

The worst part of this is the seller has no idea what she could have gotten for her home.

Sellers:  You won't lose a buyer to another house, because odds are, there are no other houses.  Give it a week.

One point brought up in the Multiple Offer Madness post is that sellers don't want potential buyers traipsing in and out of their homes all day long for days on end.  No problem, make your agent earn their money.  Hold an open house for two hours a day – for seven days.  You might not get all the potential buyers, but you'll get most of them.

And you will have confidence that you really did accept the best possible offer.

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KB Homes Slashes Commissions

Congratulations to home builder, KB Homes.  Effective March 15, they are cutting commissions to real estate brokers to two percent.  At least here in my market.  Here is the email announcement:

So why congratulations?

Well let's ask the obvious question:  How much should a real estate commission be?  Or, how much is a broker's service worth?

Of course, it's debatable.  And brokers can charge whatever they like.  But that does not mean that buyers and sellers have to pay whatever the broker likes.  Sure, some brokers are worth more than others.  And some deals are easy, some are difficult.

Nevertheless, after a lifetime in the business, if I had to put a number on it, I would say that on average a real estate transaction should pay one percent to each side, plus expenses.  That is, one percent to the seller's agent and one percent to the buyer's agent.  Plus an accurate accounting of expenses related to the transaction.  For the seller, these expenses should only include marketing costs of the property involved and not any other marketing expenses of the broker.  For the buyer, only the search costs, and not the marketing expenses of the broker.

Most brokers will find this pretty radical.  But I am simply trying to match brokers' fees with their actual value proposition.

And just to be clear, I am NOT talking about any form of discount brokerage.  No, I am talking about full service.

But brokers are consistently paid much more than this.  Why?  Well they have perpetuated the myth that they are worth more.  And have frightened buyers and sellers into believing that if they pay less, something bad will happen to wreck their transaction, or otherwise cost them even more money.  It is a sham.

Let me quote from The Competent Broker:

I will tell you what many brokers will never admit:  Many of the services offered are commodities and should be priced as such.  And as we have discussed, many brokers offer only the illusion of Lexus-level service.  Their value proposition is minimal.  This certainly applies to almost all real estate marketing.

Also, and there’s no getting around it, this industry dynamic involves an element of work ethic.  Or lack of work ethic.  It is easy to get fat and lazy at six percent.  If the industry average commission was dramatically reduced, brokers would have to really hustle.  There’s a lot more hustle at Walmart selling household goods than there is at Nordstrom selling high-end handbags.  Now sure, Nordstrom has luxury offerings and a refined atmosphere and unmatched service.  But what you have in the real estate business is Walmart brokers waiting for (and insisting on) handbag shoppers.  They need to cut their prices, roll up their sleeves, and get to work.  Yes, really.

I also think that reduced commissions would lead to a more professional class of broker across the board.  With six percent commissions, what you find is many marginal brokers remain in the business who would otherwise have to find a real job.  If we dramatically reduce commissions, these people would be forced to leave the business.  Those remaining would be the true professionals.

But the real question is:  Why do sellers continue to hire these brokers?  It is, I think, a combination of factors that we’ve discussed.  The pretense of competence and authority.  The widespread, and often valid, stereotype of brokers.  And the illusion of high service.

There is also an element of fear.  Some sellers fear that if they hire the wrong broker, the broker might make an expensive mistake that the sellers cannot afford.  I get that.  But brokers prey on this fear.  So many of them are little more than snake oil peddlers preying on the nervous, uninformed, and credulous consumer. 

So with this book, I hope to convince you that six percent does not guarantee competence or integrity.  In fact, it might even reduce these sought-after qualities.  I have mentioned this a couple of times and I will again here:  If we want better brokers, the only way we are going to get better brokers, is for consumers to demand better brokers.  Please.

So with the above announcement, KB Homes is paying the buyer's agent two percent.  Double what I think it is worth.  But okay, what I think is only one opinion.  You decide for yourself.

In any case, I'd say KB is taking a step in the right direction.

Update:

Just for kicks and grins, I looked up the commission payouts from other new home builders.  Lennar, Pulte, Taylor Morrison, and Dan Ryan are also paying two percent.  Maybe it's a trend.  In this huge seller's market, how long before lower payouts reach the re-sale market?

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A Few Thoughts on Zillow

Zillow Buys ShowingTime.  Realtors Silent.

Last month I sent a question to an email group of North Carolina brokers:

What is to stop Zillow from opening dotLoop and ShowingTime to consumers directly?

Crickets.

No one wanted to even discuss the possibility.  Why?

Well the Realtor associations have scared brokers into silence.  The Realtors point to Article 15 of their Code of Ethics.  Let me quote it here:

REALTORS® shall not knowingly or recklessly make false or misleading statements about other real estate professionals, their businesses, or their business practices.

Does asking or speculating about a firm's possible future business model violate this article?  And even if it does, should we care?  Let's come back to this.

I am generally supportive of new business models in the real estate industry.  As long as they are honest, bring them on.  Because what this industry needs more than anything else is to be turned upside down and given a good shake.

Zillow currently allows homeowners to claim their property and then "list" it for sale on the Zillow website.  What's to stop them from adding a button to the property page that says Schedule a Showing.  Scheduled with whom?  Well, it could be the listing broker of course.  But it could just as easily be the homeowner.

With dotLoop, Zillow has a system for managing all the paperwork involved.  So again speculating here, why couldn't Zillow develop a system for negotiation between the buyer and the seller?  That is, under their Schedule Showing button, we might find another button:  Make Offer.  Again make offer to whom?  And again, it could be the listing broker of course.  But it could just as easily be the homeowner.

I included a whole chapter on how this could work in The Competent Broker.

Such a system would put the whole industry, as currently configured, at risk.  And you know what?  I'm all for it.  Even in 2021, we have way too many six percenters and way too few everything else.

Is this the path that Zillow is taking?  I have no idea.  But I have been writing about the possibility for over ten years now.  Zillow always denies it.  Why?  Well they make money selling both ads, and now with dotLoop and ShowingTime, services, to real estate brokers.  We brokers are giving Zillow the gun that they will ultimately use to shoot us.  Money.  That is, we are the ones paying them.  For now, Zillow's revenue comes almost entirely from the brokerage community.

But that is not all.

By refusing to talk about the possibilities and what Zillow may or may not be up to, we Realtors are giving Zillow cover to put this system in place.  Right before our very eyes.  And we have absolutely nothing to say about it.

The Code says shall not knowingly or recklessly make false or misleading statements.  I'm not sure whether my speculations cross this line.  But I can tell you that, in practice, Article 15 is used to shut down any discussion whatsoever.

And would not such a discussion be valuable?  Let me ask a final question:  Could it be that one reason our industry is so highly resistant to change is that we don't allow ourselves to openly discuss alternatives?

This is not a case of cognitive dissonance.  I want Zillow to succeed whatever it's up to.  I want a stronger, more competitive, and more consumer-friendly industry.  I think Zillow has a role to play.  Likewise Redfin, Opendoor, Move, and others.  But I also want the rest of us to have a chance to succeed as well.  We won't get that by sticking our heads in the sand.

The Realtor Code of Ethics?  It's really a Code of Silence.

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