Jane Austin. Algebra II. Hypnotherapy. Jazz. Those are some of the subjects of the newest books in the “for Dummies” series published by John Wiley & Sons.
There’s also another new title: Success as a Real Estate Agent for Dummies, being released this summer.
With all due respect to author Dirk Zeller and the legions of loyal “Dummies” readers, it must take more than a 384-page, black-and-yellow book chock-full of “Reminders,” “Tips” and “Warnings” to learn how to sell real estate.
That steep learning curve is but one of the reasons why there are too many brand-new salespeople starting out in real estate today.
The economics of real estate brokerage create incentives for brokers to recruit, recruit and recruit, regardless of the reality that most of the recruits won’t survive their first year much less succeed in real estate as a long-term career. If long-term success isn’t the prime objective, it should be because the revolving door of salespeople is no more new to the business than are the established agents’ complaints about their supposedly ill-trained and incompetent new colleagues.
Yes, everyone who succeeds at any endeavor was once an unschooled newbie who needed to learn the ropes. But in real estate, today’s swollen ranks of newbies create adverse consequences for brokers, home buyers and sellers, and the new salespeople themselves.
Brokers are naturally keen to recruit promising newcomers who can close a couple of deals before they exhaust their circle of family and friends, tap out their savings accounts and exit the business. There is seemingly little downside for the broker, given the attractive 50-50 split offered to most newcomers and since the cost of a recruiting a dozen flame-outs could be recouped in one superstar. Yet the overabundance of salespeople consumes managerial time and attention and contributes to the fiercely competitive nature of the business, which in turn contributes to the downward pressure on real estate commissions, which is a real cost to the broker. While the payoff of more recruits may make sense for the individual broker, it’s a classic prisoner’s dilemma in that more newbies don’t benefit the industry as a whole.
A 2003 study published in The Journal of Political Economy and reported by Inman News, concluded that a flood of new agents into a hot housing market dilutes earnings from home-sales commissions.
“What’s really funny about the real estate broker business is (home sellers) are paying a lot more money, but at the end of the day, the Realtors are not benefiting from the system,” said Chang-Tai Hsieh, an author of the study, researcher and professor of economics.
The downward pressure on commissions should benefit home sellers who theoretically would be able to leverage the excess supply to obtain brokerage services at a lower cost were it not for the dysfunctional split system that artificially sustains the buy-side of the transaction. But there is a qualitative difference between a first-time salesperson and a 10-, 15- or 20-year veteran in real estate just as there is in any other business. A better system would pair new agents with more experienced counterparts in a way that would give home sellers more choices in the marketplace and enable the newcomers to acquire the necessary skills before they attempted to fly solo.
The intense competition that’s exacerbated by the presence of so many hungry newcomers in the marketplace also creates a fertile and ready environment for unethical behavior and outright fraud. That’s not to suggest that newcomers are necessarily more likely to cross the line or that they are in any way responsible for the lapses of others, but rather that the intensity of the competition acts as a pressure cooker and a rationalization for those who are inclined to operate on the edge. This “cooker” is a liability for brokers, salespeople, affiliates, home buyers and home sellers.
And then there are the newcomers themselves. How can 1.3 million Realtors, the current membership of the national association, plus the thousands more people who no doubt are studying for the state licensing examination at this very minute, all earn a decent living in today’s housing markets? NAR expects 6.61 million homes to be sold this year, a figure which would be not only the third highest on record after 2004 and 2005, but also a 6.5 percent decrease compared with last year. If that figure proves correct, it’s conceivable that some 78,000 Realtors, if not many more, could be compelled to exit the business.
Today’s housing markets may prove to be a very hard landing for newbies because those who fail to thrive in a business that is intensely competitive and shrinking face the prospect of exhausted savings accounts through little fault of their own and, perhaps even worse, the loss of opportunities to invest their time and energy in other, more promising endeavors.
Next: How to fix the problem.
Marcie Geffner is a real estate reporter in Los Angeles.