This article was originally published on Business Insider.
Bret Weinstein is a Denver-based real estate broker who wants to love the industry. The business is most successful when it helps people secure financial independence or find their dream homes. He's had trouble reconciling his passion for real estate with the growing problem of an oversupply of agents who are underqualified.
Weinstein said, "It's really in need of a revamp." "The public deserves much more than what most real estate agents provide."
Weinstein said that the problem is that becoming an agent is too easy. In most states, a license for helping people buy or sale a home only requires a few hundred bucks, several weeks of course work, and a passing score on a multiple choice test. Low entry barriers and large commissions are what attract many people to the real estate industry, particularly when home prices increase. Since the housing market began to recover from the financial crisis lows, agents' ranks have grown with many part-timers or career changers looking to take advantage of the boom. There were approximately 1.6 million Realtors registered in the US at the end of June. That's about 2 1/2 Realtors per available house on the market.
A report by the Consumer Federation of America last month said that the excess of agents was bad for the housing industry as well as the average consumer. A report from the Consumer Federation of America said that the low entry barrier puts both buyers and sellers in danger of receiving shady advice about one of the most important transactions of their life. Meanwhile, capable agents have to spend a lot of money and time trying to differentiate themselves. In addition, they waste time dealing with incompetent co-workers as they attempt to close a deal. Too many agents fighting over too few sales encourages them to raise commission rates to continue making a living, to the detriment to consumers.
This assessment is not shared by all in the industry. The National Association of Realtors (NAR), the largest trade association in the industry and responsible for setting professional standards for most agents, has refused to increase the licensing requirements. It claims that the ease of entry is not a problem, but a feature. This is an example of free market competition in action.
It's terrible to set such a low standard.
The NAR, as well as many brokerages, have an incentive to maintain a high number of agents. They rely on agent dues to run their business. Since the beginning of the pandemic, the NAR's headcount has grown by almost 200,000. The past few years also revealed the downsides to this system: customers complain about high commissions and subpar service while the increase in fly-by night agents makes it difficult for those dedicated to their profession.
It's not possible to eliminate these problems, but you can take small steps to improve the situation. States could increase the educational requirements to obtain a license, tighten up the standards of passing the test and require hands-on experience, instead of leaving it up to individual brokerages. The industry may lose agents, but it could be worth the effort to ensure that everyone who buys or is selling a house gets the help they need.
The threat to industry
Most real estate agents are independent contractors that rely on commissions. The promise of large payouts and the flexibility of the position were all big attractions earlier in the pandemic.
Real estate agents are not difficult to find. Most states allow you to complete the education requirements in just a few weeks. Self-paced online classes can cost as little as $100. Weinstein noted that real estate appraisers are required to undergo "substantially greater training" than an agent to be able to value a house, despite the fact that they both play a key role in the sale process. Appraisers in Texas must complete 150 hours of classroom education, followed by 1,000 hours of supervised work experience, before they can take a test to earn their license. For a real estate agent, 180 classroom hours are required. No other experience is necessary. In other states, the disparity is similar. Massachusetts and Michigan only require 40 hours of training while barbers must complete at least 1,000 hours. In Pennsylvania, nail techs must complete 200 hours of training, while agents are only required to finish 75 hours.
Weinstein stated, "We are the ones who negotiate the purchase, sale, and all of these pieces." It's terrible to set such a low standard.
Many, but not necessarily all, agents join the National Association of Realtors after completing the training. This allows them to use their designation of "Realtor", and also requires that they adhere to a code of ethical conduct. In order to become an agent, you must also be affiliated with a brokerage. The brokerage is responsible for the training and mentoring of your agent. Weinstein, the broker who founded Guide Real Estate in 2018 told me that some agents do a good job, while others are more focused on quantity than quality. The brokerage may receive a cut of the commission checks from a new agent who brings in friends and family. If the agent fails, the brokerage is not harmed, as they do not pay a salary to the agent and can focus on the next batch of agents.
Weinstein told me that there should be a period of internship. We just throw people in because we only have commissions.
The business may be simple to start, but it's not easy to succeed. According to the NAR, Realtors who had less than two year's experience in their field earned just $9,600 as a median gross. The median gross income for those with 16 or more years of experience was $80,700. However, fewer agents reach that level.
In an email, Lawrence Yun said, "The real estate market shows the entrepreneurial spirit among Americans who launch their own businesses in a fiercely-competitive environment." "Like restaurants and retail, some people do not succeed."
Costs to remain in business can add up quickly. More than $1,000 can be spent on memberships to local and national Realtor Associations, access to the database of homes for sale, and the cost of the annual subscription. The majority of agents are also associated with a brokerage, which gets a cut of the commissions they earn and may charge extra fees. There are also costs associated with advertising, client leads, gas and other expenses. Many agents find they cannot support themselves solely on real estate because there are not enough transactions each year.
Stephen Brobeck told me that the constant churning and low standards were a problem for all parties involved. Stephen Brobeck is a senior fellow with the Consumer Federation of America, and the author of CF's latest report. When home sales drop, such as in the past year after mortgage rates spiked, an excess of agents can be even more harmful.
Brobeck said, "It is essentially a game of zero sum." The commission income is fixed. The average income per agent will rise or fall in proportion to the increase or decrease of the number agents on the market.
In the real estate industry, the battle between entrepreneurialism and quality has been a hot topic for years. A 2015 survey conducted by Inman revealed that "low-quality" agents were the biggest problem. In the same year, a NAR-commissioned study on the threats facing the industry identified the "masses" of marginal agents as a key threat to other agents and professions at large.
The report stated that "the real estate industry has a large number untrained agents who are unethical and/or incompetent." This knowledge gap threatens to undermine the credibility of the real estate industry.
The report stated that "the difference between great real estate services and poor realty service has become simply too large due to the inacceptably low entry requirements for becoming a realty agent."
The consumer gets the short shrift
Normaly, more competition between agents should be good for consumers. Agents would be encouraged to lower their prices to attract more clients. In real estate, this is not the case. The average agent collects between 5% to 6% of a house's sale price, divided between the buyer and seller's agent, regardless of how much time or experience they have, and what quality of service they provide. The NAR claims that commissions can be negotiated, but consumers don't always see the benefit of more options.
Of course, buyers and sellers can try to do the deal themselves without an agent. Home shoppers are now able to browse properties online with ease, but buyers and sellers still rely on agents. Brobeck said there's "a huge asymmetry of knowledge" between the industry, and consumers. It's not easy to buy or sell a house. Between mortgage applications, insurance, home inspections and the paperwork involved, it can be a complicated process.
Brobeck warned me that the risk of being stuck with an incompetent sales agent cannot be ignored, even though "it's highly likely" at least one of the agents in a transaction is capable of closing a sale. Brobeck cautioned that the CFA report cited a number of surveys that showed that most buyers and seller were satisfied to some extent with their experiences with agents.
What could the system change into?
You have to weigh the trade-offs. Jessica Reinhardt is a second generation Realtor and president of the Denver Metro Association of Realtors. She told me that she was concerned about raising the entry barrier, as it could drive away people who are already underrepresented. According to the NAR, last year the average Realtor was 60-year old white woman with a college degree and a homeowner.
Reinhardt said, "I think it is a two-edged blade." "I believe you run the risk of losing access to underserved community." They want someone in their community who can relate to them to help them purchase a home. If they don't know how to become a realtor or real-estate agent, they will lose the opportunity to be represented.
Reinhardt was also adamant that people with less experience weren't qualified to perform the task or didn’t deserve the same commissions.
Reinhardt stated, "I believe that you can be brand new in this industry and still be a success," he said. You've taken the time to learn it and deserve as much money as someone who has been in it for 10+ years.
Reinhardt believes that competition is essential for business. Those who don't have the skills to succeed won't stay around for long -- they can't continue to pay the costs of staying in business.
Reinhard stated, "I don't think that it is necessary to stop it and I do not think that it will change." "I think it's a part of the business."
But there are other ways that the system can change. State licensing agencies could raise the educational standards for agents or mandate that they complete supervised real-world experience before earning their license. With its powerful lobbying, the NAR could advocate for these changes. The NAR could also provide more education to its members in order to maintain their "Realtor' designation. Currently, the organization defers to different state requirements.
The NAR lawsuits and other major brokerages that are suing for billions of dollars over commissions to agents could also have a dramatic impact on the industry. If the plaintiffs who represent a large group of home sellers prevailed, then commission rates may fall dramatically. This could lead to a mass exodus among agents. Agents and executives have been wringing their hands over the existential threat posed by these lawsuits. They are worried about maintaining commission rates. Weinstein said that these concerns were not the real issue.
Weinstein stated that "there wouldn't have been a lawsuit" if all of these people felt valued and cared for, as well as working with true professionals, rather than feeling forced to pay whatever the outcome may be.