One of the new business models attempting to gain ground is the show-for-free or show-for-fee model; Each one is driven by their desire to make money, regardless of their hyperbole about why they started the business. I have no problem with wanting to make money because that’s why the vast majority of people go to work or open businesses, and everyone has a variety of motivators that decide why they choose the job or business that they desire. For example, I love that I get to help people build familial and generational wealth when they achieve a part of the American Dream, but I operate a business because that fulfills the primary need that I had to support myself and my family, so I’m as guilty as they are when I reveal that, but still, I do want the priority to be straight.
Information is Not Knowledge, Knowledge is Not Wisdom
I say this a lot because people habitually confuse these three words. Buyers, for example, have access to more information than ever in history, but that doesn’t make them more intelligent or better equipped to make decisions than their predecessors because the information is not knowledge about anything complicated in life. Knowledge, I believe, is information placed into context. Context is understanding what the information means in relation to the other factors in the process you’re considering. Information, understood in the light of the process, is knowledge. But knowledge is not wisdom. If knowledge is understood in light of its relationship to other pieces of information, wisdom is understood in light of aggregated experience in similar situations. Thus, wisdom is Knowledge tempered by experience.
Here’s an example of how this works. Most people in my market can access information about asking prices, sales, prices, rental prices, tax implications of property ownership, the costs of mortgage payments, etc., but that doesn’t necessarily make them savvy real estate investors. When someone learns more about the four types of real estate returns, the benefits and difficulties of operating a rental property, they understand what they will need to do on a regular basis, and they turn the information into actionable data with this knowledge. I on the other hand have been investing in real estate for decades, and in minutes can identify and good deal from a poor one in seconds. That’s because having bought and sold hundreds of homes, I know the unseen benefits and pitfalls that I learned one deal at a time, and that’s wisdom (in this example),
Buyers are exploited by needing to pay per tour instead of working with the traditional success-based fee. With a success-based fee, the buyer spends nothing until they have purchased and closed on a property at a price and terms that they are happy with. As you may recognize from an earlier blog post of mine, that means an average of 10 showings for the successful deal, but there are many more showings for people who have not achieved a successful transaction that cost those consumers nothing.
It’s Bad for Buyers
Showing a property is far more involved than just opening the door. Showing a property starts outside when an experienced agent can help the buyer understand the architectural features of the property and its condition in comparison not only to other properties for sale but also to properties that have sold in the past or did not sell when put on the market. Also, the agent can point out how the location of the property, including the street it’s on, compares to other properties in the area and what is negative or positive about them.
The showing agent should conduct the tour of the property in a logical order to make sure that the buyer sees the flow of the property, that all of its features have been demonstrated, and that the benefits or obstacles caused by those features are discussed with the buyer in the spotlight of the buyer’s needs, wants, and wishes.
The agent should be able to comment on the home’s condition, the types of amenities and improvements made to the home, what those amenities mean to the property’s value, and what the quality of those things might be. The agent, having knowledge of the history of the properties and homes in the neighborhood, should be capable of talking about things like functional or locational obsolescence if they exist, how they impact the value of the property, and whether the buyer benefits from them or not. They should also be capable of commenting on whether other homes in the area would suffer from that design or location flaw.
Agents typically are aware of the foibles of different builders and styles of homes and types of heating and can provide additional information because they see so many homes. Again, the context can be brought to their inspection by the agent’s experience in listing, showing, and selling other properties in the area because that experience lets them understand why one property sells while another lies completely fallow.
All of these things and more are completely aside from the other things that buyer agents should be doing and are solely related to the showing, but the business model has demoted the licensee from a trusted advisor to the guy who just opens the door for a fee. Most state regulators would consider that they have actually performed as an agent, creating liability for them and their brokers.
Having skipped a buyer counseling session to establish the buyer’s needs, wants, and wishes, the agent can’t properly demonstrate the benefits (or lack thereof) of the house’s features because they can’t be clear on what they are to the specific buyer.
We all use professionals because they know more about their topic than we do. These buyers don’t get that help in their home-buying journey. But they do get to spend money every time they look at a property—something that other home buyers don’t need to do. And that can add up. In a recent post, I pointed out that real estate agents typically are paid on a success based fee, and that they statistically show about 10 properties to buyers who make offers, and that they statistically write four offers to get one accepted. That means that with a $49 per showing fee, four buyers would pay $1960 for showings, but only one of them would have gotten a property, And that doesn’t;t count the buyers who end up coming into and then leaving the market, costing them hundreds or thousands of dollars they don’t need to spend using traditional models.
It’s Bad for Brokers
When these business models were first announced, this jumped out as me because as a broker, I often feel I have a target on my back, and I am careful to minimize the number of people that might be shooting at it. There are few, if any, brokers who don’t think about liability and risk management frequently because if you don’t, you end up out of business. When an agent shows a house, the liability starts outside the house. If the buyer or the agent trips, slips, or falls and hurts themselves, there’s liable to be a claim. If a key goes missing from the lockbox, there may be a claim or at least the cost to replace the existing locks. When an agent accompanies a buyer through the house the liability grows. The agent is responsible for the actions of the buyer and their invitees. If they break something in the house, let the cat or dog out, use the bathroom and clog up the plumbing, try the water pressure and can’t turn the faucet off, forget to lock the house, or slip and fall inside the house, there’s liable to be a claim. Did I mention falling down stairs, tripping over an uneven threshold, or forgetting to lock a door? All of these things and more are events that cost the brokerage thousands of dollars to defend, putting aside any bad results from the litigation or claim.
Finally, most states forbid real estate agents from accepting money from anyone other than their broker for real estate activities. I’m unsure how seriously these new entrepreneurs take the state regulators or their opinion of whether they will inspect agents accepting money from these companies. I know many of these people around the country, and thankfully, for the consumer, they take that job very seriously. There is of course, a concern that an agent will ” go rogue”, and accept these “assignments” without notifying their broker, and the business may pay them directly. Now the agent is in violation of the state regulations, their broker may be liable because they “failed to supervise” the agent sufficiently, and hopefully, the regulators will fine the business for practicing real estate without a license and violating the state real estate regulations, but none of those things benefits anyone.
It’s Bad for Agents
I understand the average agent’s optimism and willingness to hope that showing the property will create a bond with the buyer, but any good buyer’s agent knows that isn’t the right way to approach the problem. I also know that in the current market, many agents are struggling, and a little income is better than no income, so they may decide to try this without giving it the thought it deserves.
To begin, the buyer is most likely to believe that they have paid for the agent’s time and are under no obligation to them. The agent has decided not to be a professional but to be a door opener. Of course, we’ve already talked about what a good agent will do, and how long they will take, but in the eyes of the buyer, you and the guy at Dominoes who delivers the pizza are in the same line of work. Not consulting, not advocating, not negotiating, not assisting, just delivering the experience to them they asked for.
The agent loses a lot. Like everyone, they only have so much time in their work day. Instead of spending time reaching out to potential clients, looking for properties, and soliciting opportunities for their existing clients, the agent burns time and wastes gas running from low-intention consumers to low-intention consumers.
So Why Is This A Thing?
Whenever there is disruption or chaos, there are those who seek to benefit from it. In the rush to exploit the new policies surrounding the real estate industry, many people are treating it like a new gold rush.
It seems they suffer from unwarranted confidence generated by a lack of understanding, which made Dunning and Kruger household words. One of the companies states that it’s not a broker or licensee but is providing services that, in most states, are regulated by their real estate licensing laws. It reminds me of a friend of mine in high school who got a job working for a clothing store when he was 16. When I asked him what he knew about selling clothes, he said, “I wear them, don’t I? That’s good enough!” When helping consumers navigate one of the most significant purchases or sales of their lives, just buying or selling a property or two isn’t enough. That’s why states make real estate agents take course and test in order to get licensed,
Secondly, these business ventures, like so many others before them, have a low opinion of what agents and brokers do. And how they approach them through these businesses are indicative of that. Ironically one of the named plaintiffs in the Missouri law suit has opened one of these businesses. I don’t think he suffers from a surplus of respect for the people he wants to facilitate his new business.
Speculation about Change is a Risky Business
I get that change brings disruption, and businesses are always looking for ways to exploit that, but experience has taught us that the newest idea is only sometimes the better idea. Sometimes, the business is a solution in search of a problem. Here, the problem these business models have identified is the reluctance a consumer may have in signing an agreement with a real estate licensee as required by the policy change resulting from the NAR settlement. The solution to that is an educated consumer, not pandering to their reluctance. Buying real estate is a complicated process requiring the cross-disciplinary skills of a real estate professional. Having a trusted advisor who has a legal obligation to your best interests is far smarter than finding someone to open a door and deprive you of that guidance and protection.