If I Ruled The World: Insane Strategery for the Real Estate Industry

Yesterday, either Inman News or I broke the news that the California independent contractor case, Bararsani v. Coldwell Banker was settled. (I kinda think I broke it, because the settlement came down on the 13th, and since Inman has actual reporters and such, I’d have thought they’d have sniffed it out between then and the 18th, when my post went up. It’s flattering to think that Inman folks monitor this tiny little blog here to see what’s interesting, but of course, that might be my fantasy talking. But just in case… let’s wave to Amber, the wonderful Editor of Inman News.)

Hopefully, the good people at Inman can track down the actual documents, get some quotes from the lawyers on both sides, and all that good reporting stuff. I will turn my attention to more ah… speculative and interesting things. Like wondering how the industry should — not will, but should — respond.

It’s fairly obvious how the industry will respond, like this quote from Inman suggests:

In the 2015 Swanepoel Trends Report, Bernice Ross, CEO of RealEstateCoach.com and a consultant and columnist [opining] on real estate industry issues, noted that despite the resolution reached in some of these cases, “as a defense against independent contractor misclassification and vicarious liability claims, a number of franchisors and broker owners are rewriting their franchise agreements/policies and procedures manuals to only include what is required to meet regulatory standards. Mandatory training, systems, tools and procedures must now become ‘optional,’ ‘highly recommended,’ or ‘best practices,’” Ross said.

Various commenters go after things like not calling mandatory meetings, telling agents what to do, etc. etc. and so on. That is what the industry will do.

But it is what we should do? I don’t think so. I think the industry should do something so outrageous, so crazy, so outlandish that it just might work instead. Let’s get into it.

Don’t Play It Safe

The main reason why I think the “defensive” measures that the industry will take suck is that they don’t insulate anybody from what they have done to now. I noted in the post about the settlement of Bararsani that now, the vultures will gather, and the swarm will attack:

So I am now predicting that we will see a flurry of litigation around the country against large real estate companies by a swarm of lawyers seeking a pay day. Because lawyers have newsletters. And blogs. And conferences where they network and talk and share stories. In fact, they have an Association and litigators make up a big chunk of the ABA. The pattern in the past has always been that one lawyer gets a significant settlement, the others see the payday, they smell blood in the water, and then the swarm attacks begin. It’s happened to asbestos, to tobacco, to drug companies, etc. etc. So… it’s going to happen. It’ just a matter of time.

That brokerages going forward will essentially exile their agents to the 1099 hinterlands and never actually talk to them very much doesn’t change the fact that they were managing the agents in a real way, putting real burdens on them. So instead of being sued for all your agents going forward, you’ll only get sued for the thousands you’ve had over the past ten years. Or five years. Or whatever the statute of limitations says. That’s cold comfort for the broker who’s looking at a $30 million lawsuit he can settle for $3 million.

Plus, the bigger issue is that this hands-off approach could have some unforeseen consequences for the broker’s responsibility, under the real estate licensing laws, to exercise guidance over the salesperson. So, for example, if you’re a broker, and you don’t review every single listing agreement your agent brings in, or every single offer she writes, are you exercising that guidance and control the real estate laws require? If you do, are you now violating that agent’s ability to perform as a bona fide independent contractor?

Finally, the biggest issue of all is that the hands-off approach doesn’t exactly help with the single biggest threat to the industry: too many crappy agents doing crappy things to too many consumers. If we’ve been lamenting at the lack of training, lack of judgment, lack of professionalism on the part of the majority of agents out there today, when the brokers were exercising all kinds of control to try to get them better trained and better able to serve consumers, what’s it going to look like when the brokers all go, “Yeah, we strongly suggest that you attend this optional meeting on professionalism, or else… you’ll get fi– I mean, nothing will happen to you.”

What if, instead, the industry did something completely unexpected and wacky?

Embrace The Suck

What if, instead of trying to fight this, the industry decided to embrace it instead?

What if brokerages throughout California (and soon throughout the country) decided to say, screw this, we’re just going to go to an employee model and fire 70% of the agents because they suck at this. And of the remaining 20%, the top 10% who are super-duper producers all go, “Yeah, well, I’ll go setup my own brokerage, because I’m not good at working for other people.” The brokerage is left with about 20% of the agents who are solid producers, works well with others, and can work in a structured corporate environment.

Would they go bankrupt? Really? Now every single listing of one of your agents on Zillow has your firm’s name on it, and the firm’s main telephone number. I call it and I get a nice young lady thoroughly trained in telephone manners and customer service taking my call, asking me questions, and setting an appointment. On that day, three agents show up from your company: a senior associate, a junior associate, and a trainee. The trainee spends his time measuring the dimensions of your rooms, while the senior associate walks you through the listing presentation, market conditions, and pricing your home. The junior associate sits next to her pulling out documents to support what the senior associate is saying, and taking notes. At the end of it, all three leave their cards, the senior associate says that if she’s not available, call the junior associate on the deal, and if it’s after hours, call the main line and someone will return your call immediately.

Is that horrible? It’s institutional brokerage, and just might be the kind of service that consumers want.

Ah, but! That’s an insane idea, because some unscrupulous broker down the street who’s operating a bodycount shop will just take the 70% you fired and take over market share. True.

Plus, the 10% of the top agents who left just set up shop as your fiercest competitors. Also true.

And you’re having to pay all this money to have employees and they don’t.

What now?

Enter NAR

So I fully understand that NAR and the general Association model today is all about increasing headcount as much as possible to maximize member dues revenues. I get that. But if there is real change in the legal and legislative landscape, Association membership numbers would get crushed in any event. (I believe Joel Singer, CEO of California Association, referred to Bararsani as a “nuclear bomb” on the industry once.) So why not get ahead of the curve instead? What do I mean, and how would NAR do this?

Two parts to this insanity:

1. Eliminate real estate licensing completely; and
2. Change NAR membership

What the hell are you blubbering about? Here we go.

Eliminate Licensing

One of the problems with this whole employee-vs-1099 thing is that state employment laws often conflict with real estate licensing laws. If there are no real estate licensing laws, then every agent in every brokerage would automatically be an employee under just about every legal test of employee vs. independent contractor case out there.

NAR and the various state and local Associations (California, Massachusetts, etc.) have all fought these fights on the grounds that the independent contractor model is the basis of the real estate industry and how it’s set up. That’s true, and insofar as that’s true, the Associations should fight those battles. It’s also true that NAR historically has had a major role in creating licensing requirements for real estate, and many of the various state real estate commissions have been successfully co-opted to protect the real estate industry. (Regulatory capture, kids!)

But here’s the thing: we could honestly say that licensing has failed to deliver on its core promise. I mean, the whole point of licensing, the entire rationale for government licensing, is consumer protection. The idea is that by requiring practitioners to take tests, live up to requirements, etc. and so on, the government can help make sure that consumers are not defrauded, harmed by incompetents, etc. It’s why we require doctors to be licensed, because we don’t want some dude doing a liver transplant in his garage while looking at Youtube videos on how to do liver transplants.

Yet, in our case, in the real estate industry, incompetence and lack of professionalism is Problem Numero Uno. That’s not me talking; that’s NAR through the DANGER Report talking. So whatever else licensing does, we know that it doesn’t do the one thing it’s supposed to do: Eliminate incompetence for the sake of consumer protection.

Grab any REALTOR off the street, or better yet, attend an Association meeting and grab any REALTOR you see, and ask them: “Your son who lives in another state wants to buy a home; he wants to hire an agent who is duly licensed by that state. Is that enough proof of competence for you?” Once the guffaws cease, the answer will be, “Are you crazy? Licenses don’t mean diddly-squat; it’s harder to get a hairdresser’s license than a real estate license.”

So what is the harm in eliminating the license altogether?

Enter, The White House

As it happens, the White House doesn’t think licenses are all that great either. I did an interview with Al Ricci at PWR at an event last year which you can see here:

So if a political heavyweight like NAR (#9 on the OpenSecrets Top Organizations list) were to back the White House play here and suggest repealing state licensing schemes for real estate… NAR would find numerous friends in high places to help push that through.

Joining Forces With the Most Powerful Political Force in the U.S.

If you looked at that OpenSecrets Top Organizations list, you quickly realize that despite NAR being the top industry lobbyist, it really does lag behind the most powerful political force in the U.S. today: the unions. If you’re going to get states to OK doing away with licensing, which impacts government jobs in various real estate commissions and such, you’re going to need to get the unions on your side.

As it happens, the primary opponent to NAR in this cycle of litigation over employee vs. independent contractor status is… you guessed it, the unions. I wrote about that here and uploaded the amicus brief that the AFL-CIO filed in the Monell v. Boston Pads case.

The obvious incentive for the unions is to have a huge pool of people to go unionize. They can’t unionize independent contractors; they can unionize employees of brokerages. NAR stands in their way saying, “You shall not pass!”

What if that changes? If NAR says to the unions, look, support us on this whole repealing licensing for real estate deal, and we won’t oppose your efforts to unionize real estate agents, what happens then? Maybe you can get the unions to line up behind you on this issue. Along with the White House.

Yeah, that reform can get done, and licensing to help people buy/sell homes can go away.

Unlicensed Real Estate = REALTORS Shine

Let us suppose for the sake of this insanity that NAR gets this done. All 50 states essentially drop real estate as a category they license or supervise at all. It’s just “buyer beware” for everybody out there. Banks can get into it, Lowes and Home Depot employees can now list your home, and Walmart Real Estate becomes a real thing. Terrifying, right?

I don’t think so. Because it isn’t just the salespersons who no longer need a license; it’s also the brokerage that no longer needs a license, and be subject to all the crazy regulations of the states. They just have to follow normal employment laws and various normal business laws of the states like any other business.

Suddenly, NAR’s Code of Ethics looks really, really good, doesn’t it? If real estate as a whole becomes the Wild West, then the Code (which was sort of born out of the Wild West) becomes really meaningful.

Not only does the term “REALTOR” take on a whole new meaning, but marketing takes on a whole new dimension.

Today, Code Articles 15 and 16 make it very very difficult for brokers and agents to go after each others’ business and compete with no holds barred. Post-deregulation, I don’t see why they couldn’t go after Walmart Real Estate or the $8/hour real estate sales guy at Home Depot. Brokers and professionals with decades, sometimes hundreds of years, of experience and tradition behind them can reassure consumers that they can do a far better job than those guys down at Home Depot can. They can go after listings of some fly-by-night operator without fear. And in that competition, being able to say, “I am a REALTOR, who lives the Code, unlike these fools out here” is an advantage.

Changes in REALTOR Membership

Yeah, but, Rob… like every single person in my area is a REALTOR. It doesn’t mean a damn thing to consumers.

That is true, today. But in my crazy scenario, think of what has happened:

1. Real estate is no longer a licensed profession, so anybody can try to become a broker or an agent
2. Some existing brokerages have embraced the employee model

The major change that NAR, and all of the state and local Associations, would then make is this:

• Only brokerages may join NAR.
• All agents within a REALTOR Brokerage must be employees, with the broker taking full legal and financial responsibility for their work and their actions.

Bam! Overnight, the bodycount shops cease being REALTORS because their business model does not allow for having 100,000 employees, 90,000 of whom do zero transactions in a given year. They can still stay in business, of course, trying to use the independent contractor model, but they cannot be REALTORS.

Okay, but how do we know that a person is a broker when there is no licensing scheme?

That’s easy too. NAR can set up its own requirements and guidelines for when a person is a broker. For example, off the top of my head, some of the requirements could be:

• Brokerage must be a legal entity, duly organized under one of the 50 state laws; it cannot be a solo practitioner or a sole proprietorship.
• The management team of the Brokerage must have at least thirty years of experience in real estate combined between them.
• The Brokerage must have liquid assets of at least $250,000 and carry liability insurance of at least $2M to ensure that any consumer wronged by the Brokerage has some recourse.
• The Brokerage must have at least three agents on payroll who are not part of the management team.

Or some such. Fact is, NAR is a private organization, so it can come up with whatever requirements it wants as long as such requirements are not discriminatory against a protected class.

The End State

After all the dust settles then, here’s what we have:

• Unlicensed, unregulated industry for helping people buy or sell homes;
• In such an unregulated industry, firm reputation, third-party certification (such as the Code of Ethics), and smart marketing make all the difference;
• NAR membership restricted to brokerages, who meet NAR’s requirements, one of which is that all agents must be employees;
• The REALTOR brand becoming actually meaningful;
• Brokers exercising total control over the consumer experience, setting standards and mandating practices that its agents have to meet and follow, or be fired;

Now, why is that bad?

As a related matter, that real estate industry is one that young people fresh out of college can join, because they will be paid a salary while learning what to do and how to do it from their superiors. Maybe the average age of the REALTOR will drop into the 30’s instead of the high 50’s as it has been for a decade or more. The partners, the senior associates, the people who have been practicing real estate at a high level for years and years would remain, but the newbies would be bright young people who want to start a career in real estate, not hobbyists who go get a license to have something to do while the kids are at school.

Firms will develop their own best practices that work best for them, and a dozen different business models would flourish, until competition shows which one works the best.

Crazy, right? Totally insane and unworkable, right? I know, I know. But hey, if I ruled the (real estate) world, that’s what I’d be pursuing.

-rsh