Size matters?

Notorious ROB has posted a LONG 3 part series on "Does Size Matter?"--we all know it does, but opinions differ on how. The three segments attempt to compare law firms to real estate brokerages in terms of advantages or disadvantages of size within the context of newly emergent technology. Interesting stuff and well worth the read. There's a fundamental point of contrast in the very nature of legal firms and real estate brokerages that I'll expand upon here.

Law firms hire employees to provide professional consumer services for salaried compensation and consumers pay by the hour as the services are rendered. Results do not impact compensation. More complexity or longer duration in the tasks yields more hours of work and greater compensation.

Real Estate Brokerages are very different animals. Services are rendered for commissions, paid somewhere down the road, after variable effort and expense. Sometime there is no commission at all. Effective compensation per hour ranges wildly, only partially dependent on purchase price. A key consequence is that the ultimate goal is to sell houses. That triggers the commission, nothing else does. The most insightful, sensitive, creative representation imaginable costs nothing until a property closes escrow. It's better if houses sell quickly, limiting time and effort expended by listing and selling agents. The Real Estate Industry, because of this compensation model and the typical independent contractor agent status is a SALES industry driven by numbers, not primarily a purveyor of quality service. Job number one is to sell houses quickly, NOT to provide optimal consumer service regardless of consequences. The efforts at consumer service mostly focus on controlling risk at an acceptable level--not maximizing performance in meeting the needs of the public (real or perceived).

Not surprisingly, ALL the metrics of success in real estate are determined by aggregate MONEY and SIDES. If it walks like a duck and quacks like a duck it's not a swan, it's a sales industry (I'm not inferring only swans are hanging out at the bar association!).

The perpetual disconnect between the goals of the real estate industry and the public is that the public measures success and satisfaction ONE TRANSACTION AT A TIME. Real estate measures success in terms of aggregate COMMISSIONS and SIDES. There are obvious trade offs and potential conflicts of interest in those very different perspectives of the same industry. Firms can AFFORD to provide LESS than optimal service all day long, PROVIDED the SIDES and COMMISSIONS produce profitability and the RISK is controlled. True, if some firm consistently delivered noticably superior consumer service levels, and could document that, it would represent a major point of differentiation in marketing. Evidently costs and benefits don't encourage that approach, perhaps because of a need to educate the public regarding the diverse components of quality service.

A serious problem arises for consumers when the product is complex and rapidly changing and the legal/technical aspects of purchase are complex and rapidly changing, plus the frequency of purchase is relatively low, thereby limiting significant progress up the learning curve. That sounds like a situation where consumers need a highly trained, trusted professional offering expert service for direct hourly compensation. A similar strategic situation exists in the medical and legal fields. Self help books notwithstanding, most consumers see the need for a doctor or a lawyer to optimally meet their needs.

In contrast, Real estate agents are salespersons who are paid, not based on effort or expertise, but as a percentage of the purchase price (which has little to do with the effort involved). Of course there are extremely competent salespersons whose approach to business approximates the highest standards of the legal or medical professions, but they follow that path because of choice, not because of a linear increase in compensation or the enlightened corporate policy of a franchise or brokerage.

The trade organizations, franchises and mega brokers operate in a manner consistent with a SALES definition of the Real Estate Industry. Training of agents, which I did for 18 years within a franchise environment, is perpetually focused on how to be more productive and control risk, not on the subtle nuances of offerring phenomenal service.

Alternative compensation plans and agent employment arrangements are now being tested by a few firms, aided by Internet technology. These are showing modest success in limited markets. Long term reaction from mainstream real estate and the trade organizations will be interesting to observe. Don't expect a $50 billion dollar per year commission based industry to change directions eagerly or quickly.

The lack of transparency in the real estate industry tends to leave the public without much insight concerning what's actually at stake in trade offs between consumer service and broker profitability. Without greater consumer involvement, bona fide accountability within the industry is destined to be thin. The public has access to copious information about individual listings on the Internet, but receives little education about how to define their RIGHT house and find the right agent to help them locate it, then purchase it.

After all, the consumers just want to buy the RIGHT house at a fair price with minimal complication and liability. How closely their experiences and results approach that ideal result is largely a subjective judgement and one they don't make very often. Meanwhile, those within the industry who are in a better position to judge the true quality of service remain otherwise occupied counting the quantity of sides, volume of commissions and number of trade organizaiton members.