Mark Nadel’s white paper on real estate commissions is very thoroughgoing, rich in detail and a rational understanding of human motivation — without slipping over to the hyperbole that afflicts much criticism of the residential real estate industry.
But Nadel is an outsider, so, while his diagnosis of what ails our business is spot on, I don’t get the impression he apprehends the underlying causes of our belligerent sclerosis.
I wrote the text quoted below a couple of weeks ago, and I need to come back to do it better justice. But it remains that the real estate brokerage business is not so much about selling real estate as it is about milking agents.
There are at least three components that have made this industry amazingly stupid, as compared with any other business in the capitalist system. The first two are commissions and licensing, but the third, and by far the most consequential, is the safe-harbor income tax exclusion. Because brokers can “hire” everyone as an independent contractor, they have no reason to cultivate human capital — the only kind that really matters. This was a foolish mistake, and it may well be the death knell for traditional personal-service real estate. One of the things we want to do, in the long run, is effect a totally different kind of business model for real estate representation. This again could result in huge costs savings for buyers and sellers while increasing our own profitability.
Want to get the bums out of this business? Make real estate brokerage so efficient that only smart, honest, ethical people can make a living. Profit is the purpose of capitalism, but a gradual movement toward moral perfection is a necessary secondary consequence.
Getting rid of the broker-level license would help, but don’t hold your breath. Getting rid of the safe-harbor withholding-tax exclusion would achieve a similar effect. When real estate brokers face a substantial cost for head-count, only the profitable agents will survive in this business.
This alone is probably not enough to get brokers to behave like the owners of other professional-service practices, but it’s a step in the right direction…
Technorati Tags: compensation for buyer representation, disintermediation, real estate marketing
Marguerite Crespillo says:
I could not agree with you more Gregg! My biggest frustration is lack of accountability for the people (brokers) who are supposed to be in charge. It seems that since they are all “independent contractors” that takes away the responsibility of the brokers at least in their minds. If they would interview their agents like they do their employees and check their refences and prior employment things would change in a hurry.
October 15, 2006 — 2:19 pm
Greg Swann says:
> If they would interview their agents like they do their employees and check their refences and prior employment things would change in a hurry.
And, of course, this is the way things are in every other sort of business. The withholdng safe harbor enables real estate brokers to operate in ways that would bankrupt any other sort of business. We would turn into an industry of responsible players overnight by eliminating this one aberrant IRS rule.
October 15, 2006 — 8:06 pm