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If I Ruled The World: Insane Strategery for the Real Estate Industry

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Yesterday, either Inman News or I broke the news that the California independent contractor case, Bararsani v. Coldwell Banker was settled. (I kinda think I broke it, because the settlement came down on the 13th, and since Inman has actual reporters and such, I’d have thought they’d have sniffed it out between then and the 18th, when my post went up. It’s flattering to think that Inman folks monitor this tiny little blog here to see what’s interesting, but of course, that might be my fantasy talking. But just in case… let’s wave to Amber, the wonderful Editor of Inman News.)

Hopefully, the good people at Inman can track down the actual documents, get some quotes from the lawyers on both sides, and all that good reporting stuff. I will turn my attention to more ah… speculative and interesting things. Like wondering how the industry should — not will, but should — respond.

It’s fairly obvious how the industry will respond, like this quote from Inman suggests:

In the 2015 Swanepoel Trends Report, Bernice Ross, CEO of RealEstateCoach.com and a consultant and columnist [opining] on real estate industry issues, noted that despite the resolution reached in some of these cases, “as a defense against independent contractor misclassification and vicarious liability claims, a number of franchisors and broker owners are rewriting their franchise agreements/policies and procedures manuals to only include what is required to meet regulatory standards. Mandatory training, systems, tools and procedures must now become ‘optional,’ ‘highly recommended,’ or ‘best practices,’” Ross said.

Various commenters go after things like not calling mandatory meetings, telling agents what to do, etc. etc. and so on. That is what the industry will do.

But it is what we should do? I don’t think so. I think the industry should do something so outrageous, so crazy, so outlandish that it just might work instead. Let’s get into it.

Don’t Play It Safe

The main reason why I think the “defensive” measures that the industry will take suck is that they don’t insulate anybody from what they have done to now. I noted in the post about the settlement of Bararsani that now, the vultures will gather, and the swarm will attack:

So I am now predicting that we will see a flurry of litigation around the country against large real estate companies by a swarm of lawyers seeking a pay day. Because lawyers have newsletters. And blogs. And conferences where they network and talk and share stories. In fact, they have an Association and litigators make up a big chunk of the ABA. The pattern in the past has always been that one lawyer gets a significant settlement, the others see the payday, they smell blood in the water, and then the swarm attacks begin. It’s happened to asbestos, to tobacco, to drug companies, etc. etc. So… it’s going to happen. It’ just a matter of time.

That brokerages going forward will essentially exile their agents to the 1099 hinterlands and never actually talk to them very much doesn’t change the fact that they were managing the agents in a real way, putting real burdens on them. So instead of being sued for all your agents going forward, you’ll only get sued for the thousands you’ve had over the past ten years. Or five years. Or whatever the statute of limitations says. That’s cold comfort for the broker who’s looking at a $30 million lawsuit he can settle for $3 million.

Plus, the bigger issue is that this hands-off approach could have some unforeseen consequences for the broker’s responsibility, under the real estate licensing laws, to exercise guidance over the salesperson. So, for example, if you’re a broker, and you don’t review every single listing agreement your agent brings in, or every single offer she writes, are you exercising that guidance and control the real estate laws require? If you do, are you now violating that agent’s ability to perform as a bona fide independent contractor?

Finally, the biggest issue of all is that the hands-off approach doesn’t exactly help with the single biggest threat to the industry: too many crappy agents doing crappy things to too many consumers. If we’ve been lamenting at the lack of training, lack of judgment, lack of professionalism on the part of the majority of agents out there today, when the brokers were exercising all kinds of control to try to get them better trained and better able to serve consumers, what’s it going to look like when the brokers all go, “Yeah, we strongly suggest that you attend this optional meeting on professionalism, or else… you’ll get fi– I mean, nothing will happen to you.”

What if, instead, the industry did something completely unexpected and wacky?

Embrace The Suck

What if, instead of trying to fight this, the industry decided to embrace it instead?

What if brokerages throughout California (and soon throughout the country) decided to say, screw this, we’re just going to go to an employee model and fire 70% of the agents because they suck at this. And of the remaining 20%, the top 10% who are super-duper producers all go, “Yeah, well, I’ll go setup my own brokerage, because I’m not good at working for other people.” The brokerage is left with about 20% of the agents who are solid producers, works well with others, and can work in a structured corporate environment.

Would they go bankrupt? Really? Now every single listing of one of your agents on Zillow has your firm’s name on it, and the firm’s main telephone number. I call it and I get a nice young lady thoroughly trained in telephone manners and customer service taking my call, asking me questions, and setting an appointment. On that day, three agents show up from your company: a senior associate, a junior associate, and a trainee. The trainee spends his time measuring the dimensions of your rooms, while the senior associate walks you through the listing presentation, market conditions, and pricing your home. The junior associate sits next to her pulling out documents to support what the senior associate is saying, and taking notes. At the end of it, all three leave their cards, the senior associate says that if she’s not available, call the junior associate on the deal, and if it’s after hours, call the main line and someone will return your call immediately.

Is that horrible? It’s institutional brokerage, and just might be the kind of service that consumers want.

Ah, but! That’s an insane idea, because some unscrupulous broker down the street who’s operating a bodycount shop will just take the 70% you fired and take over market share. True.

Plus, the 10% of the top agents who left just set up shop as your fiercest competitors. Also true.

And you’re having to pay all this money to have employees and they don’t.

What now?

Enter NAR

So I fully understand that NAR and the general Association model today is all about increasing headcount as much as possible to maximize member dues revenues. I get that. But if there is real change in the legal and legislative landscape, Association membership numbers would get crushed in any event. (I believe Joel Singer, CEO of California Association, referred to Bararsani as a “nuclear bomb” on the industry once.) So why not get ahead of the curve instead? What do I mean, and how would NAR do this?

Two parts to this insanity:

  1. Eliminate real estate licensing completely; and
  2. Change NAR membership

What the hell are you blubbering about? Here we go.

Eliminate Licensing

One of the problems with this whole employee-vs-1099 thing is that state employment laws often conflict with real estate licensing laws. If there are no real estate licensing laws, then every agent in every brokerage would automatically be an employee under just about every legal test of employee vs. independent contractor case out there.

NAR and the various state and local Associations (California, Massachusetts, etc.) have all fought these fights on the grounds that the independent contractor model is the basis of the real estate industry and how it’s set up. That’s true, and insofar as that’s true, the Associations should fight those battles. It’s also true that NAR historically has had a major role in creating licensing requirements for real estate, and many of the various state real estate commissions have been successfully co-opted to protect the real estate industry. (Regulatory capture, kids!)

But here’s the thing: we could honestly say that licensing has failed to deliver on its core promise. I mean, the whole point of licensing, the entire rationale for government licensing, is consumer protection. The idea is that by requiring practitioners to take tests, live up to requirements, etc. and so on, the government can help make sure that consumers are not defrauded, harmed by incompetents, etc. It’s why we require doctors to be licensed, because we don’t want some dude doing a liver transplant in his garage while looking at Youtube videos on how to do liver transplants.

Yet, in our case, in the real estate industry, incompetence and lack of professionalism is Problem Numero Uno. That’s not me talking; that’s NAR through the DANGER Report talking. So whatever else licensing does, we know that it doesn’t do the one thing it’s supposed to do: Eliminate incompetence for the sake of consumer protection.

Grab any REALTOR off the street, or better yet, attend an Association meeting and grab any REALTOR you see, and ask them: “Your son who lives in another state wants to buy a home; he wants to hire an agent who is duly licensed by that state. Is that enough proof of competence for you?” Once the guffaws cease, the answer will be, “Are you crazy? Licenses don’t mean diddly-squat; it’s harder to get a hairdresser’s license than a real estate license.”

So what is the harm in eliminating the license altogether?

Enter, The White House

As it happens, the White House doesn’t think licenses are all that great either. I did an interview with Al Ricci at PWR at an event last year which you can see here:

So if a political heavyweight like NAR (#9 on the OpenSecrets Top Organizations list) were to back the White House play here and suggest repealing state licensing schemes for real estate… NAR would find numerous friends in high places to help push that through.

Joining Forces With the Most Powerful Political Force in the U.S.

If you looked at that OpenSecrets Top Organizations list, you quickly realize that despite NAR being the top industry lobbyist, it really does lag behind the most powerful political force in the U.S. today: the unions. If you’re going to get states to OK doing away with licensing, which impacts government jobs in various real estate commissions and such, you’re going to need to get the unions on your side.

As it happens, the primary opponent to NAR in this cycle of litigation over employee vs. independent contractor status is… you guessed it, the unions. I wrote about that here and uploaded the amicus brief that the AFL-CIO filed in the Monell v. Boston Pads case.

The obvious incentive for the unions is to have a huge pool of people to go unionize. They can’t unionize independent contractors; they can unionize employees of brokerages. NAR stands in their way saying, “You shall not pass!”

What if that changes? If NAR says to the unions, look, support us on this whole repealing licensing for real estate deal, and we won’t oppose your efforts to unionize real estate agents, what happens then? Maybe you can get the unions to line up behind you on this issue. Along with the White House.

Yeah, that reform can get done, and licensing to help people buy/sell homes can go away.

Unlicensed Real Estate = REALTORS Shine

Let us suppose for the sake of this insanity that NAR gets this done. All 50 states essentially drop real estate as a category they license or supervise at all. It’s just “buyer beware” for everybody out there. Banks can get into it, Lowes and Home Depot employees can now list your home, and Walmart Real Estate becomes a real thing. Terrifying, right?

I don’t think so. Because it isn’t just the salespersons who no longer need a license; it’s also the brokerage that no longer needs a license, and be subject to all the crazy regulations of the states. They just have to follow normal employment laws and various normal business laws of the states like any other business.

Suddenly, NAR’s Code of Ethics looks really, really good, doesn’t it? If real estate as a whole becomes the Wild West, then the Code (which was sort of born out of the Wild West) becomes really meaningful.

Not only does the term “REALTOR” take on a whole new meaning, but marketing takes on a whole new dimension.

Today, Code Articles 15 and 16 make it very very difficult for brokers and agents to go after each others’ business and compete with no holds barred. Post-deregulation, I don’t see why they couldn’t go after Walmart Real Estate or the $8/hour real estate sales guy at Home Depot. Brokers and professionals with decades, sometimes hundreds of years, of experience and tradition behind them can reassure consumers that they can do a far better job than those guys down at Home Depot can. They can go after listings of some fly-by-night operator without fear. And in that competition, being able to say, “I am a REALTOR, who lives the Code, unlike these fools out here” is an advantage.

Changes in REALTOR Membership

Yeah, but, Rob… like every single person in my area is a REALTOR. It doesn’t mean a damn thing to consumers.

That is true, today. But in my crazy scenario, think of what has happened:

  1. Real estate is no longer a licensed profession, so anybody can try to become a broker or an agent
  2. Some existing brokerages have embraced the employee model

The major change that NAR, and all of the state and local Associations, would then make is this:

  • Only brokerages may join NAR.
  • All agents within a REALTOR Brokerage must be employees, with the broker taking full legal and financial responsibility for their work and their actions.

Bam! Overnight, the bodycount shops cease being REALTORS because their business model does not allow for having 100,000 employees, 90,000 of whom do zero transactions in a given year. They can still stay in business, of course, trying to use the independent contractor model, but they cannot be REALTORS.

Okay, but how do we know that a person is a broker when there is no licensing scheme?

That’s easy too. NAR can set up its own requirements and guidelines for when a person is a broker. For example, off the top of my head, some of the requirements could be:

  • Brokerage must be a legal entity, duly organized under one of the 50 state laws; it cannot be a solo practitioner or a sole proprietorship.
  • The management team of the Brokerage must have at least thirty years of experience in real estate combined between them.
  • The Brokerage must have liquid assets of at least $250,000 and carry liability insurance of at least $2M to ensure that any consumer wronged by the Brokerage has some recourse.
  • The Brokerage must have at least three agents on payroll who are not part of the management team.

Or some such. Fact is, NAR is a private organization, so it can come up with whatever requirements it wants as long as such requirements are not discriminatory against a protected class.

The End State

After all the dust settles then, here’s what we have:

  • Unlicensed, unregulated industry for helping people buy or sell homes;
  • In such an unregulated industry, firm reputation, third-party certification (such as the Code of Ethics), and smart marketing make all the difference;
  • NAR membership restricted to brokerages, who meet NAR’s requirements, one of which is that all agents must be employees;
  • The REALTOR brand becoming actually meaningful;
  • Brokers exercising total control over the consumer experience, setting standards and mandating practices that its agents have to meet and follow, or be fired;

Now, why is that bad?

As a related matter, that real estate industry is one that young people fresh out of college can join, because they will be paid a salary while learning what to do and how to do it from their superiors. Maybe the average age of the REALTOR will drop into the 30’s instead of the high 50’s as it has been for a decade or more. The partners, the senior associates, the people who have been practicing real estate at a high level for years and years would remain, but the newbies would be bright young people who want to start a career in real estate, not hobbyists who go get a license to have something to do while the kids are at school.

Firms will develop their own best practices that work best for them, and a dozen different business models would flourish, until competition shows which one works the best.

Crazy, right? Totally insane and unworkable, right? I know, I know. But hey, if I ruled the (real estate) world, that’s what I’d be pursuing.

-rsh

 

19 COMMENTS

  1. For starters you should hold yourself in higher regard. IMO, Inman is not even a close second to the perspective and information you share about the business of real estate…loud and proud 🙂

    I have to be honest here. I have only read a handful of books in my life..yes that even includes text books, so I skimmed the bottom two thirds of your post. I did get enough however to share my two cents.

    I’ve offered this up before and you touch on it here. I think the Wall Street brokerage model is about 20 years ahead of real estate brokerage. Wall Street has always licensed their sales-side employees (retail and institutional brokerage/agents) and your description of what an employee based model would look like is spot on and IMO very likely what a successful model will look like, at least in the upper-end markets where the revenue of bringing in the senior/junior associate to a listing presentation make good business sense.

    Because I believe the Wall Street model will infiltrate the real estate brokerage business model I have never understood the role of NAR or the Association…I just can’t wrap my head around their purpose in the business. I do however, think licensing is important, if nothing more than as a qualifier.

    Again, I’m a crappy reader. I’m sure your discussion about the Government, Unions and the like is interesting…but, my take away was the simple structure you laid out regarding the first phase of the new look, feel and identity of the real estate brokerage.

    Not so sure the old guard is willing to get ahead of curve…but the new guys certainly will be looking at the industry from a different perspective if this case gains more traction.

    Thanks,

  2. In a silo’d environment this strategy makes sense. However that isn’t the playing field that exists. Prisoner’s Dilemma / game theory

    • OMG Rob, you ARE crazy! But thanks for being a dreamer!

      I get why you’d like the industry to go where you think is best, and if you ruled (not only the real estate world but also the legislative and regulatory world) you could get it done. But really, given where we are after 150 years of an evolving industry and licensing of “trades” in the US, and the elimination of “caveat emptor” in most states, the only conceivable way to get to your world from this world is a cataclysmic event–“nuclear bomb” per Joel Singer–where the lawyers sue us into submission and we end up HAVING to hire employees. Don’t be surprised when the Associations react negatively to that prospect.

      And it’s not fair to bash NAR, CAR, MAR and others for trying to defend their memberships’ “status quo”–in many ways, it’s what they exist to do. As it ever was, so shall it ever be. Our associations exist to help us in the world that IS, not in the world we wish would be.

      Look, everyone knows that we as an industry change when we have to, not always when it’s in our best interests. It’s the same for people and businesses everywhere. As an industry, we
      “associate” for mutual benefit, which means we often ask our associations to find the middle ground between defense and offense, between preserving what we have and identifying where we should be. Like sausage making, it’s not always pretty (or that sanitary), and a lot of stuff goes into sausages we don’t want to look at that closely. But at the ballpark, everyone wants a hot dog!

      Getting to a brighter future is easy for the oracles, not so easy for those of us on the journey. In a perfect world, we could jump to your model, play nicely with each other in the sandbox, have healthy but friendly competition, make a reasonable living and keep the vultures at bay. But then, some serious social engineering might be required to get us all to have the types of personalities that make that possible.

      Like a good oracle, Rob, I appreciate that you keep shining the light on what could be. In the spirit of MLK, I might not get there with you, but I share the dream.

      • Thanks Rick –

        Just to clarify, I’m not bashing NAR/CAR/whoever for defending the status quo. I’m not bashing them at all actually. I’m rather recommending to their various Strat Planning Committees and Directors and leadership (many of whom silently lurk on these pages, reading but never commenting for obvious reasons) that they at least consider one crazy idea.

        I just don’t see the possibility of long-term defense against a swarm attack. And I don’t see the laws being strengthened/changed anytime soon because of the power of unions. So I’m saying, while y’all have time, why not at least consider getting ahead of the curve?

        You’re right of course — the industry will chug along as it always has and change only when forced to change. But here’s a question: When the industry changes because it has to change, has that ever worked out well for us? (See, e.g., Internet and listings….)

        Ciao!

  3. Bararsani’s lawsuit was frivolous. Coldwell didn’t do the industry a favor by settling the suit. The should have whipped Bararsani’s butt and counter-suited him for damages. By longstanding prescriptive means real estate agents are independent contractors.

    Real estate brokerages should resview their business models into LLC’s and keep the LLC’s broke. When a frivolous lawsuit like Bararsani’s comes along shut down the LLC and open up shop the next day under a new LLC. Repeat as necessary.

  4. Hi Rob — you got your story up first. We heard that a settlement was in the works back in August but didn’t have any specifics. So you can take credit for breaking this one. We’ll beat you next time, though! 🙂

  5. I cannot imagine that any state or the White House would really want this scheme. When someone enters into selling real estate, they are no longer considered unemployed (even if they don’t make a dime). There is no way the government will want higher unemployment rates by getting rid of the independent contractor designation.

    • Rachael – I actually touched on that and talk about it often. The notion that government will raise the bar on licensing is… well, fantasy because of what you mentioned.

      I don’t think the states and the White House want higher unemployment rates. No. The White House wouldn’t want 1099 gone; they want the licensing scheme gone, as that report shows. The states resist that of course, unless there’s an even more powerful political force compelling them to go along. That would be the unions. The states could replace licensing with some sort of registration scheme, and lack of licensing doesn’t then mean that a whole bunch of real estate agents file for unemployment. After all, they can keep selling real estate.

      What it does do, however, is that it creates differentiation between “an agent” that could be anybody and a “REALTOR” who voluntarily agrees to abide by the Code. But by moving membership out of the individual and to the Brokerage, who in turn must buy into the employee model, we eliminate most of the headcount shops.

      Again, completely, 100% unrealistic and crazy. 🙂 But hey, it would make Strat Planning a lot more fun this year, no?

  6. So Rob, you commented recently that you were working on something to address the facilitator/counselor dilemma. Is this the first shot across the bow? 🙂

  7. Nice job Rob. But in my lifetime. The NAR finally raises the bar and the Realtor brand actually stands for something – namely experience and proven production. MLS sales stats and metrics are not hidden but rather are made public. Agents licensed or not, it doesn’t really matter, now show-up to the job with actual professional credentials. And the brokers dump the IC and then embrace categorizing all agents as employees. They then adjust their numbers and agree to provide benefits (stay out NAR, real benefits), take proactive control of their consumer experience (predictability) and weed out the non-performers as needed to sustain their own economy (normal course of any good business). And then, just maybe, Realtors brokerage brands might actually stand for something. And in the end, we all take a massive deep breathe, sigh and live happily ever after.

  8. Follow the money! Commissions are lucrative and remain so in the face of shrinking costs for many “professional” services requiring similar licensing qualifications. If you equate the overall quality of the average agent to the potential earnings per sale…we are all overpaid. The real pro’s are worth more than they’re charging and the SLUGS are vastly overcompensated. When you fail to regulate your industry, someone else will do it for you OR when you fail to justify your sales commission, the government will regulate what you can charge. It’s not about abolishing licensing or embracing an employee model backed by the big unions, it’s about providing a value proposition commensurate with the fee you collect from the consumer. Begin with this thought in mind and visualize how to reconstruct the industry to better align value with commission.

  9. SO Rob, I am in NAR leadership (MLS Chair this year) and I do think there’s a way to get ahead of change and make it work better. But really, who are those that address coming change “first” and get it right? Mostly we have those who try to address it and get it wrong, then other learn from their mistakes and get it “more right”.

    On the MLS side, there are definitely those who bleed on the edge, followed by those who lede on the bleed (journalistic reference there). And then, after the spurting slows, there are those who learn from the mistakes, ride in with a concept informed by the failures of others, and make a successful go of changing things. Henry Ford succeeded where others failed because he analyzed their failures, learned from them, borrowed from the successes of others (Eli Whitney, Cyrus McCormick and others) and built a better mousetrap (or assembly line). Edison succeeded on the back’s of the real genius of others, although he was much better at industrial production than the others. As it ever was, so will it ever be.

    I really do appreciate that your poking and prodding and goading and cajoling is with the best of intents, and designed to get our industry to THINK, no just react. But realize that there ARE those who are trying, hard, to change the tide. Who are leading, and bleeding, in the attempt to make the fantasy you hope for more of a reality.

    Looking forward to sharing provocative ideas with you soon.

    Cheers,

    • Definitely, Rick. So many of my friends and people I respect in the industry are exactly those who are working towards change and reform. I figure my role is to (a) throw them crazy ideas that they will turn into something slightly less crazy, and (b) expand the space of possibility such that what they want to do is not seen as extreme.

      Something that people like you and they want to do doesn’t seem quite so radical if you compare it to what I would do were I to rule the world. And eventually what seems crazy today may come to be seen as possible, then probable, then inevitable. I’m happy to play the long game, with full recognition that there are great people trying to push things along just a bit at a time.

  10. Hey Rob – great read for sure but let me open up one other point.

    What about the CFPB? I mean the new TRID discloser and the Seller CD has spun the business around again these past few months.

    Now the CFPB knows every dollar earned in every transaction not to mention every licensed LoanOriginator tied to each closing.
    So now this single unmonitored regulator with unlimited control under the guise of consumer protection is lerking to control the Realtors next. There is just way too much money for them not to go after and try to control.

    How does this fit into your new worldly view of a better industry?
    More hope and change? More of the same just like the past 7 years?

    If the new seller closing disclosure doesn’t give you insight into big brother looking at each and every closing as a first step to highly regulated real estate. Then you don’t know the CFPB.

    Really enjoyed your article and yes, you broke the story first.

  11. What you describe to a great degree already exists…south of the border. There is no licensing requirements in Mexico for real estate agents. In tourist areas, such as Puerto Vallarta, where many Americans and Canadians own properties, a situation close to what you describe exists. The onus is put on the real estate association, which has a national mandate but also regional rules regarding a code of ethics and how real estate transactions should be handled. Brokers and agents essentially police themselves. Brokers must be a legal entity and show that they have worked in the industry for a certain period of time before being accepted as a member.

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