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Why supplanting the National Association of Realtors can work where other reform initiatives have failed

I call it the Law of Somebody’s Dinner. Free market solutions to problems tend to work because entrepreneurs or investors won’t get to eat if they don’t. Government solutions tend not to work because government employees get paid the same — or even more — even if nothing works as advertised. Economists would call “Somebody’s Dinner” an incentive system, and predicting whether some proposed idea will work is a matter of evaluating the incentives — weighing the perceived attainable rewards against the anticipated costs.

This is why the existing reputation management sites for real estate agents tend not to work. The site itself has an incentive — traffic equals advertising dollars. The agents may perceive a reward in the form of a competitive advantage. But the actual end-users, consumers, do not perceive that they have anything to gain or lose, either from reporting agent activity or from perusing reports. In the case of reporting, the activity could only be seen as charity, doing good for others with no anticipated downstream return. Worse, consumers, especially buyers, are unlikely to make critical distinctions among real estate agents.

So why would I expect the kind of certification system we’re talking about to work so well that it could supplant the NAR in the minds of real estate consumers?

Because a very rigorous certification system would be a significant long-term marketing advantage to the certificants. Individual agents already try to market to the kinds of strengths certification would verify, but their efforts are too localized to have a significant impact upon public perceptions.

But if enough first-quality agents were to pursue certification, and if they were to market their certified status among their clients, we could achieve a critical mass that would eliminate uncertified agents from the mainstream of real estate transactions.

The incentive is the agent’s first, and only secondarily the client’s. In fact, consumers stand to realize great benefits by working with highly-skilled, scrupulously-ethical agents, but they only agree with that idea in the abstract, at most, for now.

But because certification brings agents a significant added marketing value, certified agents have a very strong incentive to promote the benefits of working with certified agents in their marketing and in their face-to-face presentations.

The secondary consequence — better and more ethical real estate transactions — is far more important and far more beneficial. But the consuming public, for now at least, is not well-enough informed to seek out better-trained, more-ethical agents. In their eyes, judging by their behavior, the perceived rewards for due diligence do not measure up to the anticipated costs. We can regard this as an error, if we like, but this is how things work out in reality right now.

But the primary consequence, a significant marketing advantage for certified agents, is positively viral. Agents who do better by their clients, and who pursue certification as a testament to the quality of their care, will do even better in the future as a consequence of attaining certification. They will promote the idea because promoting the idea will work not just to the benefit of their clients but to their own direct benefit.

As real estate agents, we are always looking for that edge over the competition, and the alignment of financial incentive with good behavior is the essence of a free market approach to a seemingly intractable problem.

 
More viewpoints, pro and con, on supplanting the NAR:

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Related posts:
  • NAR dead pool . . . ?
  • What would it take to reform the National Association of Realtors, to turn it from an anti-consumer cartel into a steadfast defender of the right of American citizens to own, use and enjoy real property?
  • What does it mean that the NAR won’t defend itself from the charge that it was the sine qua non cause of the Great Recession?

  • 11 comments

    11 Comments so far

    1. Rebecca Levinson August 31st, 2007 5:10 am

      I believe that NAR has effectively tried to communicate the Value proposition to the public. How would this certification process be implemented, would their be ongoing training required and what would the cost be to individual agents?

      Also, it appears with designations such as CRS and QSC- the qualifying factors have to do with performance and customer satisfaction. Agents who have these designations tend to market them.

      Rebecca D. Levinson- http://www.connect2agent.com

    2. Reuben Moore August 31st, 2007 5:24 am

      > But the consuming public, for now at least, is not well-enough informed to seek out better-trained, more-ethical agents. In their eyes, judging by their behavior, the perceived rewards for due diligence do not measure up to the anticipated costs. We can regard this as an error, if we like, but this is how things work out in reality right now.

      Greg, I submit that this factor extends throughout and after the transaction. I am often amazed by what agents get away with vis-a-vis their own clients. In a nutshell, the reason is the client either is not watching or simply does not know what to watch for. The fact is, clients, on average, do not engage a real estate agent often enough to know whether they are doing a good/high-integrity job or not.

    3. John Kalinowski August 31st, 2007 5:42 am

      A noble idea, but unfortunately the general public just doesn’t pay attention to these things. I think they would give it as much thought as they do all the NAR commercials and promotions that talk about how Realtors are much more ethical than regular agents.

      The same goes for the countless initials we can earn after our name (CRS, GRI, etc). These certifications mean a lot to the agents and those in the industry, but the public just doesn’t care.

      What matters, and what will always matter, is when a past client tells his brother, sister, friend, or co-worker that they should use a particular agent because of the excellent service they provided in helping them buy or sell their last home.

      I think the system is already self-regulating, in that if an agent is ethical and professional, the word spreads fairly quickly and it makes their business grow faster than those who act otherwise. The last thing we need is another monitoring system or certification claiming we’re more ethical than the next guy, particularly when the customer cares more about the recommendation they receive from your past clients.

    4. Joe Strummer August 31st, 2007 7:58 am

      Maybe you should hook up with the Apollo Group, owners of the University of Phoenix. I’m not sure that the Univ. of Phoenix is the brand you’re after – probably not – but they have a ton of money, a huge distribution network of educational services across the country, and the ability to deliver (from what I gather) decent quality educational services to established professionals – which is what you’d need to do in order to make the certification program accessible to existing realtors.

      Plus, they’re based on Phoenix, and their immediate past CEO Todd Nelson is worth a ton, and as far as I know, not doing anything these days.

      http://www.forbes.com/static/execpay2004/LIRBNR5.html?passListId=12&passYear=2004&passListType=Person&uniqueId=BNR5&datatype=Person

    5. Artur Urbanski August 31st, 2007 8:41 am

      Greg,
      I am sending you a relevant fragment from my reply to your previous post “Supplanting the National Association of Realtors will turn it into a toothless vampire overnight”.
      The issue is not to create a new standard of excellence, but to create a mechanism that will automatically promote the better quality of service. You said that you believe in capitalism. I do too. So, let’s create an economic mechanism that will eliminate bad agents and bad brokers. Mark Nadel, a policy adviser with a federal government, gave a really interesting idea how the economic system like this might be created in his 2006, and recently updated, report Critical Assessment of the Traditional Residential Real Estate Broker Rate Structure. The system proposed by Mark Nadel relies on a simple decoupling of the listing broker and selling broker fees. The following statement comes from Mark’s reply to my post Is your income below $12,000 a year?: “I believe that the decoupling of buyer and listing broker fees will require a substantial amount of education by consumer affairs media reporters and editorial writers – TV, radio, and print media (online and off). But I believe that the market will work as follows: increasing numbers of sellers will learn that a growing number of buyers desire the option of doing some of the work of searching for a home on their own and thereby saving a significant amount of money – using an excellent broker who passes on the lower costs s/he faces by charging a lower, non-traditional fee. Particularly in a buyers’ market, most sellers will not want to deny an interested buyer this option, if the buyer wants it. Sellers will want the flexibility to accommodate such buyers.”

      My full reply was posted as the last comment to your previous post.

    6. [...] The RE.net, led of course by Bloodhound Blog, is talking about a super level organization to represent the best and most ethical of agents. That is all well and good, but if the National Association of Realtors enforced their own guidelines and ethical policies and investigated ethical lapses with the vigor they deserve to be, the organization would not be facing an uprising by their best and brightest. [...]

    7. [...] As we reported in May, 1 in 50 Californian’s is a real estate agent. With the oversupply of bodies in the field it is no wonder why the top agents are looking for a designation to act as a differentiator. The other surprise for me is the downturn has been going for 18 plus months now and the number of Realtors is still increasing, albeit at a much lower rate. Counting in the length of membership I am expecting these numbers to drop in the near future. [...]

    8. [...] I want to get back to the idea of alternatives to the NAR, but I’ve been busy — that’s because the real estate market is bad. [...]

    9. [...] What’s the issue here, really? I am speaking of the anti-NAR revolution at hand, of course. Is it: [...]

    10. Russell Shaw September 13th, 2007 11:51 am

      I believe you will discover – the better you get – that the incompetent companies and agents actually help you. Most people tend to evaluate by comparing data of comparable magnitude. From a marketing perspective, being able to show how you are “better”, requires agents you are better than, to compare to.
      ___

      All problems in getting listings are either getting to the table or at the table. In the market we had, we were not able to get to the table because even the limited service companies could successfully sell a house. So if they listed it, they sold it. In this market on about half of the listings we take (and sell), we were the seller’s 2nd or 3rd choice.

      I neither need nor want some evaluation organization’s “seal of approval”.

    11. Greg Swann September 13th, 2007 12:47 pm

      > In this market on about half of the listings we take (and sell), we were the seller’s 2nd or 3rd choice.

      So you’re saying that it’s good for consumers that they have no convenient way of distinguishing good from bad Realtors? I read you statement as arguing the contrary proposition.

      > I neither need nor want some evaluation organization’s “seal of approval”.

      And about this I care nothing. We’re not talking about doing what’s to your benefit or mine, but to the consumer’s. The manufacturers of electrical equipment might be happy to see the back side of the Underwriters’ Laboratories. None of the rest of us would.