Add value or ……………… get out of business.

Theo Muller – md MMResearch™

Real Estate agents have been in the news lately, mostly about shonky deals. There is the case of an agent selling a property to another agent after withdrawing an offer from a fictitious buyer, then telling the elderly vendor that “the market had gone down”, and pressurising the vendor to accept an offer several thousands of dollars below the market value. That offer came from another real estate agent.

On Fair Go we saw the story of a successful café owner who spent in excess of $100,000 upgrading her business on the advice of a Real Estate Agent that the renewal of her lease “would not be a problem”. Of course it was a problem; the landlord did not renew the lease and subsequently leased the space to a well-known international beverage franchise. The café owner was adamant that the agent told her that there was no problem renewing the lease contract. The agent in question denies having said that. Her word against his. There was no doubt in my mind – I believed every word the café owner said. She oozed integrity. She was also naïve and should have followed up on the agent’s alleged promise with a request for a new lease agreement. Big learning!

Just about everybody you speak to these days, has a story to tell that does not put the real estate profession in a favourable light. Why is that? I offer three opinions.

First of all it is far too easy to become an Approved Real Estate Sales Person – the qualification is a joke, almost an insult to one’s intelligence. When my brother sat his Makelaar’s exams (real estate exams) in the Netherlands, he could only do so after a year’s of intense study and attending night classes twice a week on subjects like economics, construction engineering, town planning, law and finance. He told me that standards are set extremely high and half of all candidates fail at their first exam attempt. Those who eventually pass their exams can boast some very serious qualifications at just below tertiary education level. Compare that to the requirements to become an Approved Sales Person under the auspices of Real Estate Institute of New Zealand (as per their website). See table below.

 

  • Describe the structure of the New Zealand real estate industry and duties and obligations
  • Demonstrate a knowledge of real estate law
  • Establish price ranges for proerty (sic) and complete listing forms
  • Develop plans to attract prospects for specific properties
  • Demonstrate the ability to qualify prospects and show and present property
  • Demonstrate a knowledge of facilitating offers to buy or lease property
  • Demonstrate a knowledge of closing, financing and after sales service
  • Demonstrate a knowledge of basic real estate marketing and how to build a client base

 

Perhaps good enough if you want a career in selling second hand cars, but definitely on the light side for assisting vendors and buyers of homes with in-depth knowledge.

As a result of this there are far too many real estate agents in the country. Lost your job? – become a real estate agent. Want a second income? – become a real estate agent (but don’t have your hopes high on making good money. Real Estate companies are happy to give you a go, because if they don’t, you might go somewhere else, thus potentially reducing their slice of the cake.

Secondly, I still cannot figure out who the agent actually works for. Is it the vendor or the buyer? This is a totally unsatisfactory situation because the interests of both parties are diametrically opposed. The vendor wants to maximize the price, whilst the buyer wants to minimize the price. How can an intermediary do justice to these opposing goals. As a potential buyer, I feel uncomfortable to deal with anybody whose earnings are dependent on the sale price of the property. Can I expect that person to act in my best interests?

Thirdly, the real estate sector, in the way it has operated for decades, has had its time. There are now alternative ways of selling your property. The market has responded to the availability of technology that makes the Real Estate Agent redundant. You can buy or sell your house on Trade Me. The last time I checked the property section on Trade Me there were in excess of 30,140 listings nation wide. When I looked on Trade Me four weeks ago there were 27,000 property listings. Or you can use the services of the Jones’s who offer standard marketing packages of no more than few hundred dollars, thus saving the vendor thousands of dollars in commission.

The commission payable to a Real Estate Agent on a $500,000 residential property is probably in the vicinity of $15,000 to $20,000 and there may be marketing costs on top of that. The question is, what value do you get for this commission? Very little in my opinion and, I believe, increasingly in many other people’s opinion. Value is the key here. As a generalized principle, people are prepared to pay for as long as they get value in return. If the value drops away, people will stop paying. The value offered by Real Estate Agents – as evidenced by the stories mentioned above – is dropping away. This, coupled with advances in technology that allow people to sell their property at much reduced selling and marketing cost, is enough to motivate people to look for alternative methods and avoid the need to deal with a Real Estate Agent.

Adding value is the key. The real estate sector can learn some lessons from the retail sector. Mr Tindall and the Warehouse turned this sector upside down and inside out. For imported products the traditional flow of goods was manufacturer, exporter, importer, distributor (wholesaler) and retailer before the consumer could lay their hands on it. All these “middlemen” had to make money and charged a margin. Margins on top of margins. Mr Tindall saw that he could easily cut out a lot of these middlemen by going direct to the manufacturer and sell the goods in his own retail stores at such an attractive price that traditional retailers simply could not afford to compete with.

On the surface it may seem that price is the sole reason for consumers to turn to the likes of the Warehouse. There is no denying that price is an important contributor. However, as these middlemen failed to continue to add value to their service and were incapable to respond to changing market conditions, their demise was inevitable.

The lessons for the real estate sector are this. Add value …………. or get out of business! The customer has to appreciate that a $15,000 commission has been EARNED, that there has been a fair exchange of value for money.

The Real Estate Institute has to “control” the number of Approved Sales Persons and reduce it (by natural attrition). Control should be exercised by significantly lifting the minimum requirements and qualifications of its members. Members need to learn how to add value and not “how to close the sale”. The stuff an Approved Sales Person has to learn (refer table above) is so eighties and doesn’t cut it anymore in the twenty-first century.

Most of all, the sector should embrace modern technology – some have, to their credit. Why close down the likes of Home Sell, because they were not “qualified” Approved Sales Persons? They were probably a darn side better (in adding value) than the average Approved Sales Person. They were innovative, marketing savvy and had the ability to think outside the hitherto accepted box. Encourage progress, don’t stifle it.


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