In last week’s column, I wrote about the so-called "raise the bar" movement for real estate professionals and the call for higher licensing requirements and stricter standards to become a member of the National Association of Realtors.
I offer suggestions here on exactly how high the bar should be set and why a bar should exist, if at all.
Why a bar at all?
The ostensible reason — given by every industry that cajoles or threatens or in some other way convinces the government to create licensing schemes limiting the number and types of people who can practice that profession — is consumer protection.
For example, the New Jersey law establishing the state Board of Cosmetology and Hairstyling Laws states in section 45:5B-2(b):
"The Legislature finds and declares that it is a valid public purpose: To protect those persons of the general public who are direct recipients of the services regulated by this act and registered students receiving instruction at licensed schools of cosmetology and hairstyling from unsafe, fraudulent and deceptive practices, as well as practices which reduce competition …"
Well, as a resident of the great state of New Jersey, let me be the first to thank our legislators for protecting me from unscrupulous hair-hackers who might give me a bad haircut, as opposed to the licensee with the tattoos and piercings at Supercuts … who gave me a really crappy haircut.
But from hairstylists in New Jersey to medical doctors in California to lawyers in Texas, the given reason for licensing and regulating a profession at all is some sort of consumer protection. In some cases, the formal regulatory framework appears as a transparent attempt to pad the public payroll. Someone has to work at the state Board of Cosmetology and Hairstyling Laws, right?
In other cases (like medicine), there may be very compelling reasons.
The oft-unspoken reason for licensing, of course, is that those who are already in the profession would love to limit competition.
Licensing itself is a "practice which reduces competition," but our legislators haven’t quite figured that one out yet. For this reason, the full list of licensed professions in New Jersey makes me alternately laugh and cry.
There are state boards for accountants, architects, electrical contractors, dentists, mortuary workers, professional engineers and land surveyors, marriage and family therapy examiners, medical examiners, nurses, optometrists, ophthalmic dispensers and ophthalmic technicians, pharmacists, professional planners, psychological examiners, master plumbers, real estate professionals, court reporters, veterinarians, radiologic technologists, acupuncturists, chiropractors, respiratory care practitioners, and the list goes on.
That’s right, people! New Jersey not only has a state Board of Mortuary Science, but also a Cemetery Board. Our lawmakers are protecting not just the living, but the dead, both in the funeral home and at the graveyard. God forbid that an unlicensed person put my dead body into the ground!
On the one hand, those in favor of consumer protection might argue for making it easier rather than harder to join a "profession," as it could allow more service options and price competition.
On the other hand, those who support tighter regulation and licensing laws could also argue that they seek to protect consumers by raising the bar for industry professionals and weeding out the worst practitioners — though making it harder to join a profession can keep prices (and therefore income for said professionals) artificially high, which may ultimately harm the consumer.
These two camps are obviously in conflict. …CONTINUED
With real estate, the cynic would suggest that the only reason why one needs a license to show houses for sale is to limit competition. On the other hand, the folks who are advocating to raise the bar may be genuinely interested in providing superior, expert service to consumers in the "single most important transaction of their life." I do not question their motivations at all.
So we come to the rub: How high should we set the bar?
For consumer protection
If the goal is to ensure that the people about to go into debt for 30 years with the biggest purchase of their lives are well-counseled with expert advice, then the bar needs to be set extremely high. After all, this is the biggest financial decision of most families; it isn’t like getting a bad haircut at Supercuts. Make a bad decision here and you could go bankrupt and be screwed for decades.
From that perspective, let’s consider the modern real estate transaction. It is an intense, highly emotional transaction with enormous financial implications for both buyer and seller. It involves macroeconomic considerations of long-term interest-rate movements, political economy, and investment alternatives.
And real estate is tightly wound with all manner of laws, regulations, tax issues and potential litigation.
The real estate license should require a master’s degree in business administration, investment adviser licenses (Series 7, Series 63, etc.), a certificate in macroeconomics, a law degree, a license in psychological counseling, proof of competence in all via intense five-day exams, and a minimum of five years of fulltime apprenticeship.
At 40 hours a week times 50 weeks, it will take five years to acquire the 10,000 hours that Malcolm Gladwell believes is necessary for mastery of any skill or topic.
If the goal is really consumer protection, and ensuring that the customer gets the best representation possible, then anything less than the above is wholly unconvincing. Why wouldn’t I want a Realtor who is also a real estate lawyer, a financial adviser, a certified public accountant, and a psychologist with a minimum five years of experience? This is the biggest financial decision I’ll make in my lifetime, after all.
Even in states that require a real estate attorney’s involvement in the transaction it is not at all obvious why the Realtor should be held to a lower standard.
If the goal is really consumer protection, most of the proposals — like raising the number of required classroom hours from 20 to 80, or requiring a one-year apprenticeship, or requiring a college degree, etc. — all fall short.
And there aren’t many (if any?) real estate agents in the entire country who could meet all of the above requirements.
Let’s say that the motivation to raise the bar is to limit competition, which is often expressed as "getting the incompetent morons out of the industry." There is nothing unethical or immoral about wanting to limit competition; everyone else is doing it, including lawyers and doctors. Why not Realtors?
In fact, a strong argument could be made for all professions in which practitioners have to deal with each other on behalf of clients (example: lawyers) that removing incompetents from the profession results in a benefit to consumers.
The trouble with raising the bar with an eye toward removing "incompetents" from the profession is one of perspective: There’s always someone better. …CONTINUED
For example, Realtor A has a college degree in marketing, six years of experience, and does 25 transactions per year.
She might want to raise the bar to exclude those who don’t have a college degree, have less than four years of experience, and complete fewer than 10 transactions per year.
Realtor B, however, who has a master’s degree in business administration, 15 years experience, and averages 50 transactions per year, might want to raise the bar to exclude Realtor A.
From Realtor B’s perspective, maybe Realtor A is not competent to represent clients in the most important transaction of their lives. There is no logical answer to either standard.
We see this in the legal profession, where despite the high barrier to entry — four years of college, the law school admission test (LSAT), three years of law school, the bar exam, and typically years of internship as an associate — many of the "top lawyers" despise the so-called "ambulance chasers" and believe the bar needs to be raised to exclude such incompetents from the profession.
What constitutes "adequate competence" is entirely dependent on one’s point of view, position in life, success in the industry, and the like.
The issue of compensation
Finally, one cannot talk about raising the bar without addressing the issue of compensation. In other regulated industries, the more expert, the more qualified, the "better" professionals are able to charge a premium for their services — and in many cases, simply won’t even deal with most consumers.
If you’ve got a traffic ticket problem, you can’t even get in to see the attorneys at Cravath, Swaine & Moore. The head of neurosurgery at Massachusetts General does not have office hours to deal with your sore throat.
The better-qualified, better-trained accountants might charge you $300 per hour to do your taxes, while H&R Block can charge just $49.99 to do your 1040. Even hairstylists charge different prices depending on their reputation, experience and expertise.
Real estate is, in a sense, unique in that the best agent in the country may be charging the same amount as the newbie working on his first deal ever. Furthermore, Realtors are not compensated for their effort or expertise; they are paid only upon success.
As a consumer, it costs me the same amount to use the best Realtor in the county as it does to use the worst Realtor in the county. And in both cases, if there is no sale then neither one gets paid.
The market mechanisms that normally punctuate differences in expertise and competence are malfunctioning in real estate. This fact may underlie all of the agitation to "raise the bar," but as we’ve seen, regulation (whether governmental or from NAR) is a poor tool to address a broken market mechanism.
My modest proposal, then, is for people who are agitating for a legislative solution to the problem of poor service and low professionalism to turn their energies toward fixing the broken market fundamentals.
When better agents can charge more than worse agents, when experience and expertise can be compensated directly by the market, the issue of "raising the bar" will naturally disappear amid healthy competition in the marketplace.
Robert Hahn is managing partner of 7DS Associates, a marketing, technology and strategy consultancy focusing on the real estate industry. He is also founder of The Notorious R.O.B. blog. You can reach him on Twitter at @robhahn.
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