ARE WE WITNESSING THE COLLAPSE OF AN INDUSTRY?

ARE WE WITNESSING THE COLLAPSE OF AN INDUSTRY?

NOW IS THE TIME TO DEFINE YOUR ROLE WITH THE WORLD OF REAL ESTATE

By Jason Schmidt, CCIM

FEBRUARY 2018 – Should an industry that is responsible for more wealth creation than any other single field be allowed to

implode due to its leaders’ lack of oversight and responsibility? It would not be unprecedented. We’ve

seen it in recent history with financial and banking services.

 

Residential real estate is the largest asset class within the portfolio of most Americans. A family’s home is

typically the most valuable asset it will ever own. Those representing the average family in the sale or

purchase of their home, real estate brokers and agents, are mandated with being experts in their field in

order to protect the public and ensure a smooth transition for all parties involved.

 

Despite this mandate, would you find it surprising to learn that earning a cosmetology license requires 11

times greater the amount of training and education as compared to the real estate agent?

 

Many of my commercial real estate peers view the residential brokerage sector of this business as immature,

unsophisticated and question why it is that given my experience with institutional level commercial real

estate I would fight in the mud with residential brokers. My answer is always quite simple, I find it to be an

admirable profession. My view is that one can only close so many commercial or business driven deals

before a feeling of sterility overtakes your day-to-day professional life, whereas every person or family is

unique. Each home is not merely a margin threshold to exceed or a disposition strategy to outperform.

Each home is the largest financial commitment most will ever undertake, the place where they will raise

and shelter their family, and the asset that will be left after they are gone. Businesses come and go and can

be forgotten, people cannot. Unfortunately, the current negative reputation of the residential real estate

agent has been long and well deserved.

 

The residential real estate brokerage industry today is headed for a crisis because it does not take itself

seriously, not in its education, mentorship nor execution of its practice; and considering the professional

role I take today as the Director of Operations of one of Central Florida’s leading privately owned real

estate brokerages and advisory firms, with my sole focus being the protection of my clients, colleagues and

peers, I take particular exception to this disturbing trend. Unfortunately, despite there being many well-qualified

practitioners in the field, there are seemingly many more who are not and who overshadow much

of the good work that is being done.

 

A DECADE OF TRENDS:

The first 10 years of my career were defined by extreme discipline. I began in real estate in 2004 when I was

in college with what I thought was a small commercial real estate office, Atlantic Management. Mark Hayes,

its CEO, recruited me and I followed what, for most, is the expected hierarchical professional track; first as

an assistant, I’ll call myself a glorified gofer, then as a lower level associate and researcher and ultimately

moving into a more formal career path. What became clear to me as time progressed was that this “small”

company, and Mark at its helm, was actually a strategic consultant to global private equity firm, Tavistock

Group. The size and scope of the projects I was a part of were mind-boggling to me as a new member of

the industry and I was humbled for being allowed to be in the presence of individuals I know today to be

local, national, and global industry leaders.

 

The most notable project in which we were involved was in the land acquisition and planning component

of a large-scale city-building project in an area of Orlando known today as Lake Nona. This community is

now the site of the University of Central Florida Medical School, Nemours Children’s Hospital, the Orlando

VA Medical Center, bio-technology research clusters, smart and connected homes, the new corporate base

for the United States Tennis Association, Valencia Community College, and many others. For Orlando, the

success of this project was of critical importance; and from the development side, its failure was not an

option.

 

That environment commanded a constant pursuit of working towards the best that could be done and an

adherence to a fundamental concept: production must exceed consumption. This was a high stress and

high stakes environment, but the stress was not erratic or without purpose. It was focused on the task at

hand and keeping on top of mind what we all were working towards, the creation of something new. It was

in this environment that I began to fundamentally understand the drivers of value for not only large-scale

development, but for individual businesses, and, ultimately, people. It was also here that I personally

experienced a turning point, witnessing firsthand how the execution of a professional work ethic set you

apart from the fray. When working with a global organization, it was not uncommon to receive calls in all

hours of the day and night from all over the world. In a semi-uncertain condition of not knowing when you

are needed to have an answer, we became accustomed to being well prepared for almost everything on

short notice.

 

The environment within Tavistock was one of seeking perfection while working harder than anyone else;

and when your daily business includes preparation for business minds the likes of Rasesh Thakkar,

Tavistock’s Senior Managing Director, Jim Zboril, President of Lake Nona, and projects that would be used

by the Metro Orlando Economic Development Commission, Chamber of Commerce, etc., the natural

response is only to improve and rise to the occasion demanded of you. Counsel from these and other

individuals gave tremendous context and scope to not only projects on which we were working, but in what

ways to focus our business efforts, ultimately having a hand in the professional shaping of what our

organization has grown into today.

 

As my career evolved, I began to work much more closely with real estate brokers rather than developers,

and over the past several years, I have found myself almost exclusively in a brokerage and consulting

practice; and I must say, having come from a world that operated with an intense focus on planning,

strategy and organization, nothing could have prepared me for the erratic and disorganized world I walked

into as a residential real estate broker. Residential real estate agents are generally lazy, sloppy in both

professional skill and appearance, and often flatly unqualified to even remotely approach the concept of

advisory services.

 

MY SHIFT:

My opinion of the field was truly solidified following the earlier years of Lake Nona when, in 2010, Mark was

given the opportunity to oversee the real estate operations of Tavistock’s premier luxury Central Florida

community, the Isleworth Golf & Country Club. During our time with Lake Nona’s growth, Mark had become

my mentor and friend, and with our transition in optics from a commercial development focus to now a

luxury residential community where I would manage some the most expensive homes in the Central Florida

region, my involvement in the residential brokerage market would be solidified.

 

Over our tenure we would broker close to $200 million in luxury residential homes ranging in value from $1

million to over $20 million. It was here that I was introduced to the general residential real estate brokerage

world, but we were, by virtue of price segment, in an isolated bubble, insulated largely to what most know

as a true “general” real estate practice. Although initially there was a feeling of apprehension and general

discomfort with a transition from commercial real estate to selling homes, there came an exciting realization

when we discovered our clientele demanded the same level of skill and prowess as we were accustomed

with our commercial work; but it also triggered a thought that we could apply that same level of diligence

to a general residential practice and change the landscape of the residential brokerage community.

 

In 2013, following the first few years of management success with the Isleworth brokerage, taking it from

$10 million in annual sales to $50 million, we were presented with that very opportunity when asked to

assess the viability of one of Tavistock’s true general real estate firms, Stockworth Realty Group. Not only

was the long-term assessment positive, we chose to assume its operational management by the end of that

year and began the implementation of the standards we believe to be central to a truly viable real estate

practice.

 

In successive year-over-year performance, we went from $45 million in sales, to $91 million, to $148 million,

all with virtually the same sales team. Then, in 2015, everything changed. Tavistock was in the midst of

restructuring its real estate portfolio and, given the realization of long-term viability of the professionally

managed residential model, Mark made an offer to purchase Stockworth from Tavistock. From that point

forward, our core team has been focused on nothing but the furtherance of that professional philosophy

through the construction of a platform of a professional real estate practice atop Stockworth’s business

operation.

 

SPOTTING THE ISSUE:

From the beginning of my career, having touched over 1,000 transactions and coming into contact with

hundreds of real estate agents and brokers from all over the country, I have developed an absolutely

appalling opinion of the work ethic, diligence and overall set of professional standards that plague the

residential segment of the real estate market. The worst part is, when I began in this area I thought it

impossible for the system to devolve any further, but since the start, I have witnessed a continued and sharp

decline in the overall skill and professional acumen held by the average residential real estate agent.

This decline is a direct and proximate result of the lack of leadership of real estate brokers, professional

industry associations and boards. The business today is driven by large national and regional brokerage

houses and brands transitioning towards the business of real estate agents and away from the business of

real estate itself. One needs only to look at national brand parent company structuring to understand this

fact.

 

Realogy is the franchising parent that owns the flags of Century 21, Coldwell Banker, ERA and Sotheby’s,

to name a few, and an organization that states “we are the largest owner and operator of U.S. residential

real estate brokerages.” Considering that the U.S. residential real estate market is measured in the trillions

of dollars and millions of transactions annually, in my view, that franchising fact comes with an extreme

directive, one to provide preeminent skills and knowledge training to its franchisees’ agents.

It’s senior executive leadership and Board of Directors is made up of well known, very successful business

people. Their success can be traced to fields of banking & financial services, technology, retail

advertisement, corporate branding, food distribution, online dating, credit cards, accounting, and so on,

and so on. What I find striking is that almost none of those charged with leading “the largest owner and

operator of U.S. residential real estate brokerages” were themselves real estate people, professionals who

began their career in real estate and found their way to success through that field.

 

The cumulative experience of these differing fields is quite impressive and lends itself very well to

enhancing the perception of having the secret to the real estate business through use of the newest and

most efficient tool(s) available. What may not be so clear to the public is who these conglomerates are

targeting as their primary consumer, the real estate agent.

 

What I see in my marketplace, one that is currently populated by +/-14,000 real estate agents within a $11.5

billion/45,000 transaction annual market, is a collection of national franchising brands that are on a

recruiting mission like nothing I have ever seen. Having myself been recruited by these and other large

corporate brands, the predominant value proposition is one of enhanced technology. Platforms, portals,

apps, services and tools may very well provide efficiencies and enhancements within the field of real estate,

but the absence of fundamental real estate training is almost always a pathway to failure and something I

see within all of these brands. Though there is always “training” offered by major franchises, just ask your

real estate agent to calculate your mortgage payment and gauge the vacuous stare that returns your

question as a baseline for overall skill. Better yet, ask their broker.

 

Admittedly, the business of branding real estate franchises is brilliant; so brilliant, in fact, the very concept

of creating passive revenue through franchise and product fees, ironically, the function of real estate

investment, has created a business model rewarded not by the skill of the practitioner, but by the number

of practitioners, and may be the very structure that creates an industry shifting model, one away from the

giant franchise operation in which the Realogy-like brands are so heavily entrenched, and into a smaller,

well trained and qualified practitioner based operation.

 

Unknowingly, these agents, consumers purchasing products developed by a parent, under the flags of

various brands, are the very people who have created the vacuum for there to be such a pervasive and

negative narrative surrounding the real estate agent and its place within the professional world. This stems

directly from the average agent’s complete ignorance of how a true professional conducts business and

carries themselves, an ironic contrast to those operating and charged with leading “the largest owner and

operator of U.S. residential real estate brokerages,” and is the quintessential and demonstrable

characteristic that defines real estate agent transience as outlined below.

In this market climate today, the earning potential on the order of scale of a Realogy sized brand is

enormous. This skill of creating tools and brands attractive to real estate agents without first creating real

estate professionals to implement those tools only further establishes the advancement of the business of

real estate agents, not the business of real estate, one that its franchisees are licensed to conduct.

Further, when an organization of this size is publicly traded with a fiduciary obligation to its shareholders,

an obligation that now lies in direct contravention with state licensure law, protection of the public, a

conflict of interest on a scale I am not aware of in any other industry may become a real factor for the

sustainable viability of this model of industry operation.

 

Sadly, the losing party in this equation is the public. No longer is the emphasis of the broker or real estate

agent’s role placed on advising, rather, serving as a glorified home shower that merely fills in pre-printed

contract blanks, shuffling people through what I call “The Transaction Carrousel.”

 

THE REAL ESTATE INDUSTRY TODAY:

Real estate is everything and everywhere; it is quite literally the world. Long term, it is also one of the largest

wealth creating asset classes in existence in both commercial and residential sectors. Using a simple

analogy, real estate is like food; it is necessary for survival. In the same way that we must all eat to survive,

we all need a physical space to live, work, shop, etc.

 

For those in the investment world, real estate itself is unique in that it serves as its own fixed and immobile

source of collateral, able to be levered, leased, produce cash flow, pay for its operation and subsequently

sell for a recapture of and/or gain on upfront equity.

 

As a product of the size and scope of what real estate is, an entire industry has emerged; development,

brokerage, sale, leasing, hospitality & entertainment, timesharing, etc. The rewards from real estate success

rise to the level of what we might call “prize-worthy.” In any equity area, the rewards of success can be life

or business changing, and likewise, the rewards for those who represent and advise in the purchasing or

selling of those opportunities can also be immense; enter the role of the broker.

 

The purpose of a brokerage is quite simple, to represent parties in either the sale or purchase of a real

estate asset. The real estate agent, or agents, conduct business under the license of a single broker. The

agent’s role is to represent, guide and advise those selling or purchasing real estate and the broker’s role

is to supervise and train any agent licensed under that broker. Within the practice of real estate, there are

many areas in which errors can occur, and those lacking critical skill or guidance have the potential to cause

great harm to any party involved; whether financially, legally or even physically. The level of depth and

complexity in certain areas of this industry can become daunting to the inexperienced and can even rise to

the level of requiring specialized consultants, attorneys or other practitioners.

 

What I find frightening and tremendously dangerous is that many I encounter genuinely do not know what

they don’t know. Areas of negotiation, property inspection, insurance, financing & financial review,

permitting & licensing, construction elements, land use rights, appraisal, transfer of ownership, and so on,

contain areas of tremendous regulation, legal focus and general awareness that if left unknown, present a

“not if, but when” scenario for an agent or broker to miss something that results is significant damage to

those who they are charged with representing.

THE INDUSTRY’S PROBLEM IS EVERYONE’S PROBLEM:

During expanding market periods, the real estate industry experiences a tremendous influx of new agents,

as evidenced by figures 1.2 & 1.3 below, followed by an equal exodus during contracting markets. The ease

by which a person is able to obtain a real estate license has long been pontificated upon. The low barrier

of entry into the brokerage segment of real estate creates a system that rewards low standards and

encourages large brokerage houses, as referenced above, to create profit centers via franchise fees,

product fees, transaction fees, desk fees, office supply fees, etc., rather than focusing on the skill and

education of the real estate agent. It is as if the large real estate brokerage seems to have forgotten that it

is the skill and diligence of the agent that creates not only their brand reputation, but reputation of the

industry itself.

 

Why is this happening? The answer is quite simple, competition. When real estate cycles are expanding

and the number of transactions and dollar volume is growing, brokerages use financial incentive for

inducement of new agents, “the split,” or the percentage of any sales commission split between the agent

and the brokerage. Likewise, when a market cycle is contracting, a brokerage will often use the same

inducement to keep agents or woo them away from another company, merely for the purpose of survival.

In my time within the industry, I have seen the split go from 50/50 between the agent and brokerage to, in

some cases now, 100% of the sales commission going to the agent. It does not take a mathematician to

understand that there must be a source of capital for the 100% company to operate; fees and tools.

There also exists a hybrid to the straight commission split model; commission capping. In this model, once

the agent has paid to the brokerage a predefined sum of commission income, the agent’s split goes then

to 100%, less, of course, fees. To some agents, this structure appears as an exciting commission relationship

with their broker. They believe they will know at the beginning of any year what their financial obligation

will be to the brokerage; and from a planning perspective, it can appear as a nice structure for the agent.

What most forget in this structure is the stacking of these miscellaneous fees and the cumulative effect on

commission income. Similar to the models referenced above, the agent is often left to their own devices

on marketing spend, office space, etc.

 

Who actually wins in this scenario? Not surprisingly, the brokerage. Once the agent has “capped” there is

no further incentive for the brokerage to aid the growth of that agent. After the cap is met, every dollar put

into the agent is a dollar lost. There exists no fundamental value proposition for the broker to create highly

trained and skilled real estate practitioners. Why? It is tremendously expensive and under this and many

other brokerage models, the math simply does not work.

 

On a higher level, why is the split important? The relationship between the number of agents under any

one broker coupled with the skill of that broker and any supporting team is balanced by the amount of

operating capital available to the brokerage. The higher the spilt, the more agents any one brokerage will

need to sustainably operate.

 

The focus of the real estate agent can become consumed with the spilt and that with a lower spilt model,

the less money they will make. What top selling agents have known for a long time is that brokerages

operating off of a larger company spilt model tend to provide much greater and advanced services to their

agents through corporate training, greater amenity offerings, office space, supplies & marketing materials,

in-house marketing services, etc., where the corporate franchise or large brokerage agent is often selffunded

and left to their own devices to succeed or fail.

What many top producing agents will also tell you is that they are generally able to sell much more through

a company driven model than through an agent driven model, ultimately offsetting the perceived

imbalance in commission paid to the agent between the two structures.

 

The reality of any commissioned sales organization is that there comes a tipping point between operating

capital and the number of sales agents. In real estate, one broker, or even a broker plus a competent

support team, can only supervise, train and guide so many agents. Once the balance has been offset, the

operation of the brokerage becomes about agent acquisition rather than talent acquisition.

 

This balance is akin to the same economic

principals upon which the ‘Laffer Curve’ was

developed. Simply, economist Arthur Laffer’s

concept states that a government can only tax

production to such a point before that taxation

ultimately limits production and stifles future

innovation; or, a real estate brokerage can only

functionally support so many agents before it

becomes an exercise of diminishing returns.

According to the National Association of

Realtors (“NAR”), following the 2008 financial

crisis, membership within NAR plummeted to

963,455 in March of 2012 from its previous high

in October of 2006 of 1,370,758 (+/-30% overall reduction [+/-5% average annual reduction]). On its face,

considering the collapse of real estate and financial markets, that statistic may not be indicative of any

material flaw within the industry, rather, a product of a failed financial system.

 

Nationally though, when compared to other service industries requiring professional licensure, advanced

education and the offering of skilled advice, there exists a stark contrast in overall industry ingress and

egress through market cycles between real estate and members of those respective fields. For purposes

of this writing, we will compare law, medicine and financial/investment service brokers.

Fig. 1.2 (End of Year Active Practitioners – Note: slight variation from absolute high & low NAR membership points referenced above)

From 2012 to 2017, the end-of-year attorneys practicing in the United States, on average, has increased by

a factor of 1.5% annually, with not one single year of decline in new bar admittance. Over that five-year

period, the overall growth rate of licensed attorneys was only 7.3% as compared to 30.9% in real estate

brokers and agents.

 

Indsutry

2006

Practitioners

2012

Practitioners

2006-2012

Growth

2016/17

Practitioners

2012-2016/17

Growth

2012-2016/17

Avg. Annual

Growth

Residential Real Estate 1,357,732 999,824 -26.4% 1,308,616 30.9% 6.2%

Law 1,116,967 1,245,205 11.5% 1,335,963 7.3% 1.5%

Medicine – 878,194 – 953,695 8.6% 1.7%

Financial Service Brokers 658,173 630,391 -4.2% 630,132 0.0% 0.0%

Brokerage Training Capacity

Number of Agents

Fig. 1.1 Broker Productivity vs. Number of Agents

Productivity

Tipping Point

Similarly, the total number of actively licensed physicians in the United States has seen a consistent

trajectory of growth (8.6% total growth since 2012 [1.7% annually])1 despite a well-known and growing

physician and medical staff shortage predicted over the coming decades.

 

When compared to an industry that saw an equally volatile period following the 2008 financial crisis,

financial service brokering (stock brokers, financial advisors, financial managers, etc.), the number of

practitioners, despite 2008 troubles, remained largely unaffected. From 2006 to 2012, the average

contraction of practitioners was only 0.69% annually. From 2012 to 2017, the industry has been flat as

compared to a 26.4% contraction and 30.9% expansion respectively in real estate.

 

At the close of 2017, NAR’s membership stood at 1,308,616. This 30.9% increase from its 2012 end-of-year

overall membership represents a near complete recovery of lost members. From 2012 to 2017, this overall

rate of growth in industry practitioners dwarfs its nearest competitor, medicine, by a staggering 325%.

The answer for the tremendous disparity in the overall fluctuation of practitioner presence is barrier to entry.

It goes back to the old saying, “if it were easy, everyone would do it,” and with real estate, compared to

many other fields, it is easy and, apparently, everyone is doing it, until the market again shifts, that is.

The fact of the matter is that no less than a bachelor’s degree, plus law or medical school, plus additional

advanced training (residency, clerkship, etc.), plus advanced final testing is required to become a licensed

and practicing attorney or physician. For a financial services broker, requirements are typically no less than

a bachelor’s degree, specialized internships & training, sponsorship from a current practitioner and financial

series examination.

 

For the real estate agent, high school or an equivalent, no felonies, nominal fees, a few weeks of pre-license

courses and a test; a rather simple one at that. Nothing more. Yet the real estate agent is now licensed to

represent members of the public in what will, for most, be the single largest financial transaction of their

lives.

 

1 The Federation of State Medical Boards maintains a compilation of actively licensed medical practitioners within the United

States. Its census of actively licensed physicians began biennially in 2010.

NAR Membership

Practicing

Attorneys

Licensed US

Financial Services Physicians

Brokers

400,000

500,000

600,000

700,000

800,000

900,000

1,000,000

1,100,000

1,200,000

1,300,000

1,400,000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Fig 1.3 – 10 Year History of Professional Practice Participation

NAR Membership Practicing Attorneys Licensed US Physicians Financial Services Brokers

 

Why then have the standards of education and skill for which the representative of the buyer or seller of

that large asset been set so tremendously low when professional acumen, skill, competency and experience

in other professional fields require years of high-level education and rigorous testing?

The real estate industry today is in crisis because it does not take itself

seriously, not in its education, mentorship nor execution of its practice.

-Jason Schmidt

 

For reference, in Florida, a real estate sales license currently requires a 63-hour pre-license course and 45-

hour post-license course. That post license education, though, is required only after passing the state

licensure test. The base license requirement is 63 hours of education with a total permanent licensure

requirement of only 108 total hours. A cosmetology license, by comparison, requires 1,200 hours of training

plus a final cosmetology exam before a license may be issued. A nail care specialty requires 240 hours of

education. That licensure requirement of lengthy specialized training is admirable and important. I

personally would not want anyone in a personal care industry to operate without it.

 

Where is it that we draw the line? The consequences of a failed real estate transaction stemming from an

untrained or incompetent real estate agent or broker could result in complete financial ruin, destruction or

deterioration of property as well as costly and time-consuming litigation; yet with only 108 hours of total

education, in Florida, the real estate agent is now permanently licensed to wreak potential havoc. Let’s also

consider the steps to becoming a real estate broker, the individual licensed to supervise real estate agents.

With two years of licensure as a sales agent plus an additional 72-hour pre-license class and 60 hours of

post-license education, the sum total of the maximum required real estate education in the State of Florida

amounts to 240 hours to achieve the highest form of real estate licensure, the same amount of training as

is required for a nail care specialist and still five times fewer hours of formal training as the cosmetologist.

Yes, the two years of required licensure prior to earning a broker’s license is designed for an agent to

receive training from an active broker and become competent to sit in that role, however, there is no

requirement for proving activity within the business; no portfolio submission, no minimum volume

requirement, no minimum number of transactions. The academic portion of licensure, both in the real

estate sales and broker role, is only a “crash-course” intended to make students aware of only broad

elements of law, finance, land use, business practice, etc. There is no path to mastery or a platform upon

which the student is encouraged to seek additional education. Though not identical, the general

qualifications, academic and testing requirements are similar across the country; and, unfortunately, with

the overall industry trend barreling towards massive brokerage conglomerates where brands and franchises

are in the business of agent acquisition, not talent acquisition, the requisite training needed to advance

beyond base licensure education is virtually nonexistent.

 

Of the 26 designations NAR currently advertises, a generally meaningless alphabet soup real estate brokers

and agents are permitted to add to the end of their name, only a select few are advanced and measurably

test the skill and experience of the practitioner, Certified Commercial Investment Member (CCIM), Society

of Industrial and Office Realtors (SIOR), Accredited Land Consultant (ALC) and Certified Property Manager

(CPM). Further, those who ultimately earn these advanced designations often hold advanced academic

degrees and/or have years of substantial professional experience; and their pursuit of these designations

is purposeful to be set apart from the general real estate world so that there is no confusion or

misunderstanding as to the carried skill set; at least that was the purpose for me. For industry reference,

U.S. CCIM designees, the industry’s highest level of commercial real estate designation, represent less than

1% of current NAR members, a similar make-up to the additional above-referenced designations. Why? It

is not easy and not everyone can do it, nor should they.

 

Let’s consider what may seem like a rather innocuous example, one that occurs all too often here in Florida.

During the course of a buyer’s property inspections, it was identified by the licensed home inspector that

a few of the home’s electrical outlets appeared darkened around the receptacle input points. The real

estate agents then discussed this problem and agreed that the outlets would be replaced prior to closing.

The seller then engaged someone to replace the outlets, a handyman. All looked well at closing and

everyone parted ways as happy as could be. Two weeks later, the house burned down.

 

As it turns out, the darkening around the receptacle inputs was caused by inadequate wiring within the

walls creating overheating within the outlet. The new outlets masked this problem until the wiring in the

walls could no longer handle the load being demanded of it.

 

An educated real estate practitioner would have known that only licensed electrical contractors are

permitted to touch anything involving electricity, even a simple outlet replacement, and would have

advised their client(s) accordingly and amend the purchase contract accordingly to incorporate that

requirement. The electrical contractor likely would have seen the burning receptacles as a symptom of

something greater rather than simply replacing the outlets as instructed.

 

Unfortunately, the buyer’s house is now destroyed, hopefully with no injury or death, the buyer’s home

owner’s insurance may now refuse the claim due to existing known defects prior to coverage and the seller

and all real estate brokerages are now potentially exposed to a liability and/or negligence suit. Not only

that, the business operations of many major franchise organizations are structured in a way that agents are

only required to turn in all listing and contract documents at the time of closing, merely for the purpose of

satisfying record compliance regulations. Unfortunately, nothing can be done to right a wrong inflicted

during the course of any transaction after that transaction has closed. It is only with the supervision of a

competent broker and support team that identifying potential issues as they occur that a redirection is

possible.

 

APPROACHING A SOLUTION YOU CAN BE A PART OF:

The industry is showing no sign of turning away from what I call “agent farms,” that is, a brokerage model

incorporating many more agents than can be reasonably supervised, trained and generally supported. As

such, there exists a real and present danger to the public should an untrained, unsupervised agent wind

up leading someone astray.

 

Unfortunately, the sad truth of the world is that any legitimate errors and omissions (E&O) insurance policy

will pay for the legal defense and any subsequent settlement or judgement stemming from a real estate

claim. This type of insurance is akin to medical and legal malpractice, though designed for professional

industries like real estate, accounting and engineering.

 

Although errors by competent and qualified practitioners do occur from time-to-time and the presence of

insurance is a necessary element of any business practice, given the skills gap held by real estate agents

today and what is required for competent advising within the practice, I can’t help but wonder if residential

real estate brokerages make hiring decisions while keeping in mind the significant insurance protection

that is carried. Just consider the electrical issue mentioned above. With any legal claim, the burden of

proving its merit is placed upon the shoulders of those making the claim. When you sue a person or

business that is adequately insured, you’re not suing that individual or organization, you are suing their

insurance company. The insurance carrier has a legal obligation to defend the policy holder, the real estate

company, in an amount equal to their policy limit. For a real estate company that has been in business for

only a few years, it is likely that millions of dollars in E&O and liability protection is carried.

 

Do you have the means to take on an insurance company? Can you fund a lawsuit from start to finish when

the potential for its cost could very well exceed the value of the claim you’re making? Are you willing to

hire a lawyer who will take the case on a contingency (they don’t get paid unless you do)? Does that

contingency based attorney have the means to fight a months or years long legal battle? Would you even

know where to begin when seeking skilled advice from an attorney?

 

As a career-long practitioner of real estate, it worries me to constantly feel as though I must keep this topic

front and center in my world. If you were to ask anyone with whom I work or even passively discuss general

business they will tell you of my passion for protecting the public and raising the standards of this industry.

It has been my only career. The practice of real estate is a noble profession and it deserves more, those

who have dedicated their professional career to the practice of real estate deserve more, and the public,

you, deserve more.

 

Practically, as a member of the field, for me, or even with the weight of our full operation behind me,

tackling an industry and the institutions that are interest driven or legislatively deficient is an uphill battle

at best. Uprooting political entrenchment and special interest money, thus shifting focus, is highly unlikely.

There are just more important legislative priorities in the world today. Despite ongoing chatter amongst

established professionals over the past few years, the industry direction is also proving that it is incapable

of policing itself or imposing reasonable professional standards; so, it starts with you, the public.

 

Earning my CCIM designation required approximately two years of my time to meet its academic and

testing requirements, at a cost of approximately $12,000 for required classes, testing, travel, etc., plus a

submission of a final committee reviewed portfolio of business proving that I engaged in significant and

meaningful business in the world of commercial real estate. All of this plus a letter of recommendation from

a past client, current CCIM designee and CCIM chapter representative.

 

Though perhaps those standards are too rigid for operation within the general business of real estate, there

is absolutely no reason why each and every individual who is active in the business of real estate is not

required to meet both academic and active business application-based standards. There is also a cost

component involved. The financial cost of a real estate license in Florida including pre-license education,

less than $1,000. The expense of time, less than one month. You judge for yourself. What respect would

you have for your field if your investment was measured by your entire career to date when anyone with a

month to kill, a get rich quick scheme and less than $1,000 was able to obtain the same level of licensure?

My wife is a physician. Not only did she have to outperform her peers in her undergraduate studies to be

considered for admittance to a reputable medical school, she then had to outperform her peers again in

medical school to be considered for a reputable residency. Even better, she had to outperform her coresidents

to then be competitive for her specialty within the job market. If she makes a serious mistake,

someone could die. If I make a serious mistake, someone could go bankrupt. Which is more devastating?

I’ll give you a hint, there is no right answer.

 

Mark once told me that, on occasion, there comes a time when the best thing you can do for someone is

to fire them with love. I love my career and I love this business. I want nothing but its success and for the

public at large to view it through the same rose-colored lens I do, but something has to give. Those of us

who have long followed the “live and let live” philosophy, hoping that natural selection would eliminate

those who have no business being in this business must begin voicing their concern and shining a light on

those unable to compete. There is so much good work being done, yes, even by brands of the likes of

Reaolgy, that there must be a collective voice championing real quality work, real professionalism and real real

estate.

 

So, it comes back to you, the public. There would be cause for outcry if there were rampant negligence

within the field of medicine or law, doctors killing their patients or lawyers manipulating their clients.

Following the 2008 financial crisis, you chose to not accept a financial services broker acting with selfish

negligence, so don’t accept the presence of real estate practitioners who are not skilled, careful and

diligent in their practice. I would again remind you that the potential consequence of a failed real estate

transaction is complete and total financial ruin. That is not something the industry nor you, the public, can

afford.

Sources:

1. Association, A. B. (2017). ABA National Lawyer Population Survey 1878-2017. American Bar

Association.

2. Authority, F. I. (2017). Registered Representatives Statistical Review 2002-2016. Financial Industry

Regulatory Authority.

3. Realogy Holdings Corp. (2018, January). Retrieved from Realogy: www.realogy.com

4. Realtors, N. A. (2017). Membership County by Month. National Association of Realtors.

5. Realtors, N. A. (n.d.). Designations and Certifications. Retrieved December 11, 2017, from

National Association of Realtors: https://www.nar.realtor/education/designations-andcertifications

6. Regulation, F. D. (2017, August). DBPR: Cosmetology FAQs. Retrieved from Florida Department

of Business and Professional Regulation:

www.myfloridalicense.com/dbpr/pro/cosmo/documents/cosmo_faq.pdf

7. Schwaar, C. (2014, March 5). Making it Harder to Get a Real Estate License. Realtor AE Magazine.

8. Winkler, D. T., & Gordon, B. L. (2013). Commission Splits of Real Estate Agents with Affliiated

Firms. Journal of Housing Research, 22(2), pp. 91-108.

9. Young, A., Chaudhry, H. A., Pei, X., Halbesleben, K., Polk, D., & Dugan, M. (2015). A Census of

Actively Licensed Physicians in the United States, 2014. Journal of Medical Regulation, 101(2), 8-

23.

10. Young, A., Chaudhry, H. J., Pei, X., Arnhart, K., Dugan, M., & Snyder, G. B. (2017). A Census of

Actively Licensed Physicians in the United States, 2016. Journal of Medical Regulation, 103(2), 7-

21.

11. Young, A., Chaudhry, H. J., Rhyne, J., & Dugan, M. (2011). A Census of Actively Licensed

Physicians in the United States, 2010. Journal of Medical Regulation, 96(4), 10-20.

12. Young, A., Chaudhry, H. J., Thomas, J. V., & Dugan, M. (2013). A Census of Actively Licensed

Physicians in the United States, 2012. Journal of Medical Regulation, 99(2), 11-24.

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