Why Standards ?


Setting Standards of Business Practice for the Real Estate Industry


Prior to the universal adoption of state licensure laws, a process that began in the 1920’s and extended into the 1940’s, the REALTOR® Code of Ethics provided the only measure of standardization and consumer protection to be found in the real estate marketplace.

Today, this combination of state laws and an enforceable set of ethical standards administered by local REALTOR® Boards and Associations serves consumers well for the most part.

Unfortunately, the residential industry’s shift to an agent-centric business model beginning in the 1960’s meant brokers began to exercise less and less control over their agents, preferring instead to characterize real estate as the last great frontier of “independence” in the free enterprise system and encouraging their top sales people to become a “business within a business.”

Top producers were given equal or top billing vis a’ vis the brokerage. Self-promotion became the order of the day with agent’s pictures taking up as much ad space as the photos of the homes they were selling – or more. Their brokers and sales managers assumed the role of “valet” or “maitre d’” to the industry’s high rollers.

Moreover, the responsibility for building and maintaining client lists fell to the agents, not the firm. And, not surprisingly, this also meant that customer loyalty was focused on the agent, not the firm.

The “bidding wars” among brokers for top producers that ensued in the 1980’s and 90’s saw higher and higher commission splits being offered in the hopes that a top seller’s sales volume would generate enough net for the brokerage to make this gamble worthwhile. And it did, until the mid-90’s when the economies of the marketplace began to extract their price.

With a labor cost exceeding 80% (compared to a general business average of 37%) and with the net per transaction sliding rapidly from $300-$400 to less than $100 per transaction in just five to seven years, the moment of truth was approaching for the traditional brokerage business model.

So, while the primacy-of-the-agent orientation worked until the mid-90s, the marketplace has began moving quickly to a strongly consumer-centric environment where the customer once again is the primary focus. In real estate, the new millennium’s Internet-empowerment is serving only to seal the primacy of the customer in the transaction.

This sea change finds the brokerage and its agents at a crossroads. At a time when customers say they want a reliable, dependable, consistent home buying or selling experience, the industry is hard pressed to provide one, despite millions spent by brokerages nationwide in the attempt.

The “why” is simple. The industry’s top sales people are still those fiercely independent souls recruited years ago by brokers anxious to keep their sales volumes growing. To do this meant keeping the lightest of reins on their fractious thoroughbreds lest they jump the fence to another brokerage, taking all that volume and all “their customers” with them.

Reinforcing this laissez-faire attitude is the standard industry practice of having all sales persons act as independent contractors. While this relieves the broker of the costs of employee benefits and payroll taxes, the downside is that brokers can exercise only limited control over their workforce, lest the IRS rule them to be employees.

Which brings us to today -- a day in which the level of service and care that a brokerage’s customers receive is left in the hands of a largely independent workforce whose standards and basic business practices can differ greatly from firm to firm, and even from desk to desk within the same firm.

Most REALTOR® Association executives would agree that the majority of complaints they receive from the public and other REALTORS® are not ethical in nature. Rather, they concern acts of unprofessional behavior – unreturned calls, no-shows for showing appointments, lack of feedback from listing agents, sloppy paperwork, lack of follow-through, doors left unlocked, promises not kept, and on and on.

Several other industry trends are exacerbating the difficulty brokers are experiencing in maintaining standards of professional behavior among their agents.

• Changes in consumer expectations. Today’s average homebuyer is 40 years old and a member of the “GenX” generation. Over 50% of buyers are between the ages of 25 and 45. Their idea of what constitutes a good buying or selling experience differs greatly from the way the “Boomers”, today’s top producers, learned their craft and the way they treat their clients. This disconnect is placing great strains on the agent-client relationship, with the result that real estate consumers are looking elsewhere – to the Internet or to their own abilities to find or sell a home.
• Freedom Shops – these are low-budget brokerages in which the agents are charged a minimal annual fee for affiliation and receive little to no brokerage support or supervision. In essence, the agents become little more than “lone rangers”, left to practice real estate as they choose. One industry observer labeled them “gangs of roving street agents”.
• Steadily falling net profits – To complete, brokers feel compelled to keep even marginal performers in the hopes they will contribute at least something to the bottom line, while top performers essentially are given carte blanche.
• Given the apparent unwillingness of most brokers to deal head-on with this problem, industry forecasters see this unevenness of service being dealt with by forces outside the brokerage industry.
• E&O Insurers – Premiums and deductibles have begun to rise as insurers recognize the liability inherent in an industry with no real standards of practice. These increases signal their growing unwillingness to assume that risk.
• Consumer Ratings – Websites are now springing up that purport to provide consumers with factual information on the performance of agents and brokerages
• Third Party Referrers – Allied industries such as mortgage and title are beginning to capture more and more real estate consumers “upstream” of the transaction. These industries are going to ensure that the brokerages to which they hand off an eligible consumer have exacting standards of customer care that make for a pleasurable experience.
• Pre-paid legal Services – These services are easily positioned to establish agent standards of practice for their participating attorneys to apply in handling closings – a main selling feature of such policies.
• RELO: From some time now, relocation services have been setting standards of customer service and business practices for those who wish to affiliate with their networks and receive referrals. When you think about it, this means that the outside parties that are setting the hoops for REALTORS® to jump through are also charging them a healthy slice of the commission to do it!

The challenge then becomes finding a “champion” willing to accept the task of setting standards of business practice for the real estate industry. Thus far, the most natural candidate, the National Association of REALTORS®, has expressed little interest or inclination to give leadership to such an undertaking from the top down. That is understandable, given that such an effort is fraught with difficulties, both operational and political.

To its credit, for several years NAR has sponsored a continuing series of risk management seminars and forums at its national meetings. However, this emphasis and discussion has yet to result in any significant initiative to aggressively establish and promote the industries “best practices” as a method for lowering risk and for publicly associating these practices with the consumer’s changing expectations of real estate professionals.

Hence, it appears that any such standard setting must begin from the grassroots through an alliance among those most affected by the uneven business practices of today’s practitioners. This means that local (and perhaps some state) associations, in concert with those brokerages willing to be early adopters of such standards, along with allied industry players such as E&O insurers, must step forward to meet this challenge head on.

This is not about creating standards of business practice from whole cloth. General agreement is that there is absolutely no need for that. Rather, we must begin a concerted, aggressive effort to identify and codify the industry’s already existing best practices.

Once identified, these practices can be promoted as the “touchstone” for this industry. They can become the foundation for documents like a Real Estate Consumer’s Bill of Rights that could be adopted by brokerages of all sizes and business models. They can be promoted to the public nationwide as the professional practices that should be expected from an agent or brokerage that commits to them.

Without such an initiative, there is the real concern that within a relatively short time REALTORS® may awaken to a day in which their basic business practices and approach to customer service are being set by those around a distant corporate board table in an affiliated industry.

It’s the inherently unpalatable nature of that eventuality that has triggered the Orlando, Houston and Chicago Associations to stage the nation’s first conference on real estate standards of business practice – Touchstone for Excellence.

We invite you to join us on the ground floor of this quest for the best.