Real Estate Agency: Adjusting to the Death of Expertise
Guided by a passion for historic and modern architecture, restoration & renovation, construction, exterior/interior design, and everything NYC...I became an agent because I wanted to improve on the miserable experiences I had working with agents to find larger home to live in. I'm not sure why so many people are surprised to learn that I've hired a number of agents to represent me in real estate transactions, even after I gained years of experience. Working and hired are bolded and underlined in the first two sentences to draw attention to their contextual dissimilarity.
People work with peers. Relationships should be on the same level to foster teambuilding and to incentivize equal contribution. It's okay for friendships to develop, as long as they don't interfere with overall professionalism and the motivation to do a good job.
People hire employees, vendors, and service providers, and also specialists including c-level executives & consultants. Hiring is decidedly different from working with someone, because the hirer shoulders complete responsibility for choosing the right person for the job. Employees, vendors, and for the most part service providers work beneath the hirer, not with them.
The specialist roles of executive and consultant are far more complex. In a nutshell, they are tasked with delivering expert-level information that the hirer cannot obtain for themselves. When a high-level consultant is delivering what is required, the relationship between hirer and specialist must be able to shift from one of superiority to subordination when it benefits the goal.
“It doesn’t make sense to hire smart people and tell them what to do; we hire smart people so they can tell us what to do.”— Steve Jobs
A·GENT:/ˈājənt/ – a person who acts on behalf of another person or group.
It took years for me to understand that the miserable experiences I had working with agents were totally my fault. I never took the time to ask them where the market was headed, we never discussed defining my goals, or what kind of help I was hoping to get from them. I only saw them as people with keys to homes I wanted to see, who could call the owner if I wanted to make an offer. I never bothered to understand what other capabilities they may have, or what qualities an agent needs in order to help me find success in my goal. I never even realized how to distinguish who the trustworthy ones were.
A competent decision maker's greatest asset is the ability to surround themselves with others who have the skills to help them make the best choices. This takes faith in the individual, and the conviction to act on the information they provide without hesitation. Faith and conviction cannot exist if the hirer skips the steps required to find the right person for the job. For me, having the best available information to make a decision is a necessary and sufficient condition for success. As soon as I started hiring agents, all the misery went away.
Many factors should be considered to make better hiring decisions, or if you should hire at all. Here are the top six:
Define the goal clearly.
- Are you buying or selling a home? Buying and selling?
- What are you expecting your agent to do for you?
- Do you feel you would be better off with an employee or an expert-level consultant?
- Not everybody is ready to take the advice of others, and not everybody is able to execute orders they don't believe in.
Experience is important.
- If candidates have a proven track record of success, they will likely be able to replicate this success for you.
- If you have a choice between a candidate with experience and one without, it often makes sense to choose the former. This is especially true if your goal is to hire an expert-level consultant.
- It’s not enough to just hire the person who’s most experienced on paper. Make sure to consider experience, but don’t prioritize it over everything else.
- People regularly hire individuals with limited applicable experience, but who have proven themselves in other pursuits.
- If you are NOT looking for expert-level information, this may be the right fit.
- These individuals are generally given lower level positions, at a compensation level commensurate with their experience.
- Make sure this inexperienced person has access to direct guidance from a very involved mentor or team leader.
- If you are looking for expert-level information, determining the extent of your candidates knowledge is top priority.
- Because they are directly measurable, testing an agent is the easiest way to uncover their aptitude.
- Understanding hard skill requirements in real estate is not common knowledge (even for agents), and must be researched.
- Inexperienced candidates who don't have the right skills will not be able to close the deal without significant guidance from others.
- Communication is extremely important in real estate, especially when dealing with higher price points.
- Organization and punctuality are vital.
- The curiosity to continuously uncover new ideas and seek out new information.
- Grit. The flexibility to adjust and to remain positive are crucial, especially when uncertainty creeps in.
Cultural Fit and Rapport.
- Your job is to define the goal, your agent's job is to get your there.
- Don't let anyone change your goals, especially yourself.
- If respect isn't mutual, your goal will suffer, and your experience will suck.
- If they insist you take their advice, they better have solid information to back it up...in fact they should have led with it.
- It's good to like the person you are working with, but they have to be comfortable contradicting you without being afraid to hurt your feelings.
Should You Be Honest With Your Agent? Do You Even Need One?
In a scholarly article entitled "The Optimal Selling Strategy of Residential Real Estate" (Journal of Real Estate Finance & Economics (2019)), Jia Xie of Mihaylo College of Business and Economics, California State University–Fullerton considers the expected outcomes of 3 fundamental selling strategies of residential real estate:
- Go FSBO
- Engage a broker in "cheap talk" (wacky sounding but nuanced - a economic concept rooted in game theory...more later)
- Delegation to an broker (Hire an expert and just do what they say)
- "We find that if the state of the market is very uncertain and information of the market is scarce, the seller should hire a broker and delegate the decision right to the broker, even if the broker has no informational advantage. In this case, delegation may induce the broker to over-invest in information acquisition, i.e., more than what the seller would do in FSBO.
- If the market is certain and information is easily available, FSBO is optimal.
- Cheap talk, on the other hand, is never optimal, as much information is lost in the cheap-talk communication, weakening the broker’s incentive to acquire information."
Crucial: Understanding What Kind of Information Influences Best Outcomes
Xie goes on to explain:
There is a large literature on optimal contract design in residential brokerage. Much of the literature is built on two theoretical models: the search model and the moral hazard model. Both models assume that the sale price increases with the broker’s search effort, and focus on the seller’s problem of inducing more effort from the broker.
Levitt and Syverson (2008) and Rutherford et al. (2005), however, have provided empirical evidence that information is more valuable than effort in residential real estate transactions, and the agency problem between the seller and the broker is likely to originate from information asymmetry instead of moral hazard.
Our paper is one of the few that focuses on information asymmetry instead of moral hazard. Instead of assuming that the broker’s search effort increases the sale price, we assume that the broker’s effort improves the accuracy of [the broker's] private information which is important to the seller for making right decisions in the selling process, and the brokers can voluntarily choose this effort level.
I must argue that not every broker has the option of choosing their level of effort. An experienced broker with the skills to define what information is required, how to get it, and how best to interpret it in a way that benefits their client can voluntarily choose their level of effort. A bad broker does not, and neither does a great agent who is too busy or too scattered.
Risks of Hiring a Bad Agent
In a technical paper written in 2019 by Sonia Gilbukh of Zicklin School of Business and Paul Goldsmith-Pinkham of Yale School of Management entitled Heterogeneous Real Estate Agents and the Housing Cycle, the authors analyze over 10.4 million transactions, and prove their hypothesis that agent aptitude was a significant contributor for seller outcomes. Homes marketed by less capable agents sat on the market much longer, had a lower probability of selling, and sold for less than properties marketed by good listing agents.
Though statistical and empirical proof are exciting for nerds like me, it should come as no surprise that the authors concluded 11% more homes would have sold if better agents were hired. Could you imagine how annoyed you would be if you had deadline, but you missed it because your agent was bad at their job?
The authors went on to consider several maneuvers to minimize the effects unskilled agents have on seller outcomes, which included:
- Reduce commission rates to attrite bad agents
- Increase barriers to entry in the real estate business
- Increase client awareness about agent aptitude (including what an agent actually does to improve their clients' outcomes)
While I am sure many readers would love to offer less commission to find the best agent, this would only help your foreseeable future if every seller in your market had the same idea, simultaneously, perhaps on an industry level. Increasing barriers to entry is at its core a regulatory problem, which could be solved by robust formal education and standardized testing requirements for licensing, which are currently middle-school level.
Use Your Brain. Take Responsibility. Improve Your Outcome.
The way I look at it, neither 1 nor 2 address the obvious issue, which is alluded to in 3: if you hired a bad agent to sell your house, don't blame the industry. Raising one’s awareness of an agent's role in a real estate transaction, understanding what professional skills are required, and asking well-informed questions will significantly increase the odds of success.
How do you know an agent is the right person for the job? Most people ask their friends for a referral, read some reviews, and then schedule some meetings with a few agents they consider standouts. If one is selling a home, the agents price the property using a sales comparison approach (or CMA - usually before seeing the property), present the owner with a very basic marketing strategy (again, usually made before seeing the property), and then engage in small talk complimenting the home, dropping references to how great they are, and how hard they work to get you the best deal.
Rapport building is an extremely effective communication technique, but can lead to choices based on level of comfort with an individual's personality rather than comfort with skill level. When asked about their qualifications, most agents will allude to how many millions they have sold (which can also be manipulated), their years spent as members of the “Diamond Club” (any agency that has a "Club" will find a way for most agents to "earn" membership), and may even point you to their dedicated Instagram following (which can be purchased). Agents realize that the real estate business (like most others) is a numbers game. If enough leads are pursued, the agent will eventually build rapport with some of those leads.
Comfort and Social Proof Are Not Good Enough When Stakes Are High.
Does this sound familiar? Combined with rapport building, offering social proof to prove success has evolved into a powerful confidence evoking one-two punch. What about real expertise? Ask yourself this question: under what circumstances would you pay your agent, say, 25% of the commission upfront with no guarantees? Would social proof be enough, or would you need to know a little more? Every single other professional gets a down-payment...what's wrong with real estate agents?
How much confidence would you have if your lawyer pointed to their Facebook, then told you they got an award for billing the most hours last year? Or if your doctor complimented your shoes, then spent 15 minutes telling you about their success treating people you know for medical conditions similar to yours? Yet for many home sellers it’s tempting to accept social proof as sufficient - more than tempting, they just hire the agent who has the most listings without considering this means they have the least amount of time to work with them. Do you think a bank or a technology company would ever consider hiring somebody who already had a full time job, but planned to keep it?
Most people I talk to think real estate is a pretty easy gig. This is reflected in the obvious and very simple tasks most people understand, like putting photos on the web, scheduling appointments, and hosting open houses. These are just the scratches on the surface of a breathtakingly vast and complex industry.
In the US, the value of real estate is $36.2 Trillion. In 2018 housing services accounted for 15% of the GDP. Healthcare comes in a bit higher at about 17.5% of GDP, and its practitioners spend years pursuing advanced education, passing rigorous standardized exams, and are held accountable for the duration of their careers with oversight from regulatory bodies and professional boards (like the AMA). Residential real estate has virtually no entry requirements and paltry oversight, and while I am not not saying agents need a PhD, real estate has proven itself such a complicated business that it is yet-to-be-tamed by technology.
Meanwhile - medicine, law, and investing have been “disrupted” by innovation designed to increase transparency and efficiency. Retail, accounting, education, marketing, finance, television and film: falling like dominoes into the hungry maw of the tech sector. Yet the biggest change in the real estate industry is online listings, and that happened in the early 2000’s.
How To Tell If An Agent Knows What They Are Doing.
If you really want a deep dive, there is one thing you have to understand first: agents are all independent contractors - business owners - and the agency they are working with (not for) is little more than a toolbox that helps agents execute their many tasks efficiently. One would think a real estate agency functions like most businesses people are familiar with – financial and law firms, tech companies, ad agencies, etc. - but that is absolutely not the case. A real estate agency functions more like Uber and Lyft.
While most agencies do train their agents how to use the toolbox, NO agency will teach them how to evaluate property. Virtually nobody at any of these firms has a formal understanding of why improving liquidity and transparency result in higher asset prices, nor that statistically, more expensive homes tend to sell with greater price dispersion (a much wider range).
Test Your Agent: Make Them Take This As Seriously As You
If you want the best outcome, your agent needs to provide you with expert-level advice and endogenous information you can't get anywhere else. Determining the extent of your candidates knowledge should be your top priority. Ask your agent why they chose their agency. See what they say about the role their company plays in their professional career, and see what they have done on their own to become better agents. Do they have a background in finance, economics, marketing, construction, law, architecture…anything like that? What have they done to expand on this knowledge? Because real estate is all of these things in one.
See how vast?
Ask them the difference between a coop and a condo. This is easily Googled (and I urge you to do it), but a good agent should be able to speak volumes about the technical differences, and should be able to explain very coherently why condos tend to sell for more money (it’s about transaction friction and liquidity). In fact while you are googling, write down a bunch of terms and ask them what they mean. If your agent hasn't mastered an understanding of the difference between these similar products, and some basic terms, what can they possibly tell you that will help you get the best deal?
Next, ask your agent the minimum amount of money your potential buyer will have to make in order to qualify for a loan to purchase your property with 20% down. Do not feel bad asking because this is actually an extremely basic question that any real estate professional should be able to handle with a financial calculator (have one ready at the listing presentation), and professionals should not need a web-app. Not everybody is great at math, I get it, but if they are unable to do this, or haven't already, how are they suppose to narrow down your target market? How will they be sure your buyer will get a loan, or pass the board? If they can't do this, you should be be extremely concerned.
"...I'm sorry I can't answer that...that's a question for a [insert real estate professional title], I'm an agent..."
If your agent passed the general competency test, ask them directly what steps they will take to reduce the difference between their proposed valuation and your potential bottom line. This is something the agent should be able to answer confidently, and is a lead-in to the part of the presentation that means most to you: does this agent have the skillset to reproduce successful outcomes without relying on luck. Ask them where the biggest uncertainties lie, and how they plan to adjust their marketing efforts to keep the odds in your favor.
Fact: The inherent characteristics of real estate means two identical homes are likely to sell at different prices
There is a well-studied concept called idiosyncratic home price dispersion (mentioned above). Price dispersion is a supply/demand concept that explains why identical goods often sell for different prices. Many factors influence price dispersion including friction cost and asymmetric information. It is relatively easy to estimate the value of your property using the sales comparison approach (CMA - Comparative Market Analysis).
Measuring the friction cost and asymmetric information of a closed transaction is very difficult.
Stay tuned for more discussion about getting the higher price.