Ratings, Signaling, and Peer Reviews
Most people will do more research on what new toaster to buy than they will on which real estate broker to hire.
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Okay, so what about referrals and client testimonials and Zillow ratings, etc?
Sure, have a look. But in the real estate business there are an endless number of ways to harm your client without them ever knowing. Promote yourself, acquire a client, do a lousy job for them, and the client is often clueless. Underprice a house and the client might just thank you for getting it sold so quickly.
The point is, many people really have no idea whether or not a broker has done a good job for them. Most buyers and sellers simply do not do this often enough to know one way or the other. I love underpricing as an example here. What is more important, a quick offer and contract, or the best offer and contract? Yet brokers continue to brag about quick sales because sellers do not realize it is a function of underpricing. Or maybe the broker lost a deal for a buyer because she did not know how to put a pdf document together. How would the buyer know? By the way, they left her a fantastic review.
So the ratings and reviews often come down to simply this: I liked her. Great! I am not saying to totally ignore referrals, testimonials, and ratings, but take them for what they are worth.
In economics, there is a concept called signaling. Firms and individuals signal their competence and their value in various ways. An individual may signal his or her ability level with an Ivy League degree and an extensive resume. A firm may signal its value with posh offices and pricing. Yes, most people believe that you get what you pay for. So, if a firm wants to signal that they offer superior service, one way they can do so is to simply charge superior prices.
Of course, over time, if the actual service provided does not match the superior prices, this will eventually catch up with the firm. But, it can be slow to catch up.
Let’s take a break from real estate and look at another service business: Legal services. Don’t worry, I am not about to compare real estate brokers with attorneys. I just want to look at how people shop for legal services.
It is largely referral based, right? We can ask our friends and family and colleagues for a referral. Or we can ask our real estate attorney if they know a good estate planning attorney. Now of course, this is very similar to real estate.
But then, we also use signaling: We go to the attorney’s website and discover that she went to Harvard Law School. And before that she attended Vassar on a full academic scholarship. Right? And sometimes they will list their major clients. And we see that she is a member of the bar in our state and in New York and Delaware. We might learn that she argued and won a case before the state’s Supreme Court, and wrote about it for some prestigious legal journal. Yep, there’s the link. And finally, we look up her address, and find her office in an expensive office park, rather than in some walkup over a pizza joint.
Of course. But it largely depends on how important our legal issue is, right? And legal issues can be pretty important. And how much is all this going to cost? I mean, if it is a simple will, we may not pay much attention to all this signaling. But if we have complex estate issues, we might give it a lot of attention.
In the market for legal services, there is also the concept of Peer Review. Yes, attorneys will rate other attorneys they have dealt with. While every business, including legal services, offer some form of customer or client review, surely a colleague in the profession would be better equipped to offer a useful and informative review. A judgment based on the reviewer’s own knowledge and experience and expertise. Now of course, it is not a perfect system. But whatever you think of it, it does add to our ability to find a competent attorney. Personally, I find them helpful. I just do not know enough about the law and the legal process to make an informed judgment myself. But if I see that an attorney has an AV rating,5 I sure feel better about engaging them.
Okay, so let’s return to the real estate business. Yes, there is some signaling involved. Of course there is. But I submit to you that it is much less substantive than it should be. Let’s be perfectly honest here: The primary signaling done by real estate brokers is their choice of automobile. Right? I will let readers judge for themselves whether or not this is an effective signal, but I think we can all agree that it is rather limited in its utility.
As for education and experience and major clients and all the rest of it, for the most part, this is completely lacking on the residential side of the real estate business.
And just like in the legal services business, whether or not signaling matters is largely dependent on how important or expensive the client’s needs are. Maybe if the client is buying a $100,000 townhouse as a rental unit, well, it’s really no big deal. But if the client is buying a $500,000 home to raise their family, I just wish (and that is all it is, a wish) that they would invest a tiny bit more time and effort beyond merely admiring the broker’s car.
Now I mentioned peer reviews for attorneys. And sure, for most of us who are not attorneys, we probably know a bit more about real estate and the real estate process than we know about the law and the legal process. Nevertheless, I wish (and that is all it is, a wish) that there was some outlet for peer reviews of real estate brokers. I think that would be quite helpful, even for those of us in the business. I may be a real estate expert in my area, but peer reviews would help me select other brokers to work with, advise clients on out-of-area brokers, or brokers out of my field of expertise. After all, the biggest users of attorney peer reviews are other attorneys.
In any case, we only get so far with referrals, testimonials, and ratings; professional real estate signaling is of limited and questionable utility, and peer reviews are nonexistent. So we do need to spend more time and effort to determine broker competence and integrity.
And most of us, just don’t. But in our next chapter, I will propose one way we might.
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5. AV is the Preeminent peer rating by Martindale-Hubbell, which maintains and publishes a database of attorneys.