True Gotham

Ralph Roberts at Realblogging gives us a Marcie Geffner column (as long as we're talking ethics, hope they had Geffner's permission to reproduce the whole thing!) about the culture of real estate and how it contributes to fraud. For instance, Geffner writes:

Until the culture of hard salesmanship disappears altogether, fraud will continue to exist because fraud also places a higher value on money than fair and honest transactions.

The peculiar structure of the real estate brokerage business also contributes to a culture that enables fraud to occur without repercussions. The necessity for close cooperation among competitors makes finger-pointing, tattling and ratting out either outright fraudsters or practitioners who push the envelope of ethical and legal practices potentially risky and destructive to one's own career. The perceived need to do business with these shady operators protects them from the consequences of their dicey behavior.

Real estate is by no means unique in this respect, as similar "codes of silence" exist to the detriment of other professions (e.g., law enforcement) as well. Yet in real estate, a reputation of being an honest broker and a stickler for ethics can alienate competitors whose cooperation is vital to success. Sadly, doing what's right can chase away more business than it attracts.

She has several great suggestions.

Me? I believe that in addition to stiffer laws regulating real estate agent/broker behavior, the barrier to entry for real estate agents should be WAY higher.

It still boggles my mind that stock brokers endure rigorous Series 5 and/or 7 exams, to trade a few stocks for you. Yet the person who is ultimately responsible for buying and selling the biggest part of most portfolios only requires 45 generally pathetic hours of classroom work. (Often, it's an instructor reading a textbook for 45 hours. Shoot me now.)

Then there's the test! It's unbelievably easy. Anyone with a pulse could pass it.

Until the consumer demands greater credentials from those who “manage” their largest asset, fraud will remain a problem within the industry. In real estate, people who barely graduated from high school can represent the sale of your multi-million dollar property. More stringent education requirements and perhaps even a two year program followed by the real estate equivalent of the CPA or CFP exam would do wonders for the industry.

I’m certainly not suggesting that education would eliminate fraud, but it would certainly be a step in the right direction.

I couldn't agree more! Thanks for putting this out there. There are SO many unethical people in this business who are playing with the LIVES of people's finances and futures without giving a rat's %*&! about anything but their paycheck. I, too, wish there were more stoppers in place for obtaining a Real Estate license!

bahahaha huge surprise - a real estate broker suggesting higher barriers to entry in his field :) Who'da thunk? Should existing practicing brokers have to be relicensed?

I don't think you want to take the Series 7 as your model - first of all it does a pretty laughable job at keeping fraud out of the profession and second of all, I don't think it takes most people much more than 45 hours to study for and pass it. As I understand it, it's true raison d'etre is to justify charging registration fees which can then be used to fund enforcement.

Perhaps a better example for you would be the bar exam - should real estate brokers have to spend three years and $120 G's at school and then who knows how many weeks and dollars on BarBri-like courses to prepare for a strenuous two day long exam so that they can... represent a layperson in a single sort of transaction the contracts for which can be vetted by lawyers anyway for a few hundred dollars?

Probably not, I think. Want to cut fraud in the real estate industry? Do what Cragislist and Zillow and Propertyshark are going to do for you, whether you kick and scream and claim they're poor substitutes or not: dispense with the huge information disparity between broker and buyer and seller. When everyone has access to good information about what properties should be worth, there's a lot less room for lying about it...

Steven Levitt, author of Freakonomics, has I think made some pretty compelling arguments about the future of your profession and the long-term tightening of fees that the internet is going to deliver; among his most covincing? When you lot sell your own houses, you do it for about 3% more money than when you sell ours :) Want to improve the perception of brokers amongst people like me? Forget tests and red tape - start by getting the incentive structure right and figuring out where your real value add is going to come from 10 years down the line.

mg--

Your notion that Doug wants to close the door to competition to protect his own position is entirely unsupported, and, as it turns out, wrong.

This blog has had a consistent message from day one (check the mission way up there in the top left corner): to fight the used car salesman image of brokers, by being loud about having integrity day in and day out. Any real long-term solution that might emerge from that discussion would have to be bad for a lot of existing brokers, and good for new ones who have integrity, and professionalism. Doug has long been pro industry shake-up, not anti as you imply. (It's also worth pointing out that he has been both tattling and lamenting the lack of enforcement when brokers do bad things. See http://tinyurl.com/zzdmc)

As to your Freakonomics/Zillow/Craigslist point--you just started reading this blog, didn't you? Sure, your points there, if a little tardy, all have merit in a larger discussion of the industry, but are hardly fodder for sticking it to Doug. He couldn't be clearer that he welcomes the changes, precisely for the reasons you describe. Use the little search box. Poke around. It has come up many times, like here: http://tinyurl.com/rm6k8

Wow wait, slow down Henry. While you seem to have gotten distracted a bit by my edgy tone, I think I actually gave a substantive reply to Doug's post. The subject of the conversation here is, so far as I can tell, "how can the issue of fraud in the real estate industry be addressed?"

In my reply, I first observed that regulatory exams like the Series 7 (or the Series 63, which I passed just this morning) make poor fraud deterrants and are mostly in place to justify the collection of registration fees; more stringent regimes like the bar association or the medical boards seem inappropriate here. I also noted that I generally find it funny when people in an industry start trying to justify barriers to entry - such barriers are often created with the best of intentions but they're also often ill conceived.

My real claim, though, is that if the real estate industry is more fraud-ridden than, say, the garment business, it's because of the unusually large information assymetry currently built into the broker-client relationship (and that it has nothing to do with the regulatory requirements). The reason why I said anything at all about facing resistance from Doug was because in the only other discussion I've participated in here, I felt he was underestimating the impacts and successes of Zillow.

And I think that Steven Levitt's research dovetailed nicely with that claim and wasn't out of context in this conversation.

Now, the interesting questions on the table, my ad hominem attacks aside, remain the same: do you think 'more stringent exams' are the key to lessening fraudulent behavior? Or do you think other changes will prove more germane in the end?

mg-

The Zillow effect will be what it will be. It will have SOME effect. How much? No point in predicting. It's unknowable. (And, certainly, people intent on cheating tend to find new ways. Much better is to have a system where a high percentage of people intend to play fair. )

In the meantime, there's certainly nothing wrong with discussing concurrent solutions.

Let's turn it around: Right now everyone has to waste 45 hours of their lives in classes that send the meta-message: education, professionalism, and regulation are pro-forma. No one really cares. And, as the article points out, the industry is rife with fraud.

So, what's so great about the status quo? Why get riled at the suggestion of change? Isn't some kind of change inevitable? Shouldn't we just get on to discussing what the next generation certification process should look like?

And, another way of looking at the same thing: if you are not in favor of a higher barrier to entry, why not just hand out real estate licenses for free on the street corner? Why have this pathetic charade anyway? The 45 hours aren't keeping the bad guys out.

You could even theorize that it's making things worse. If you're a regular person looking for work, you may or may not decide to risk the 45 unpaid hours on a hit-or-miss career. But if you Know Some Tricks about how to goose the cash flow in real estate, well then the 45 hours are no barrier at all.

Even though I'm away on vacation, I can't resist chiming in regarding the edgy comments of mg. You seem like a very bright person who knows vastly more about the world of financial exams so I stand corrected that the series 7, etc. are not good benchmarks for comparison. Your posts have really given me pause as I totally agree that more exams are not going to stop fraud in my industry. By the way, I would certainly insist that all of us in the real estate industry would be subject to a "re-licensing" procedure. Bring it on.

That said, additional stringent educational requirements would significantly weed out a segment of my industry that tends to lack integrity. To your point about the bar exam, that obviously doesn't work either based on the reputation that attorneys also fight every day.

I also agree that information should not be held hostage and should be public domain (which fortunately is already beginning) forcing those in my industry to bring much more to the table than simply information.

So you see mg, we agree on many of the same things here. I also think that Henry has made an excellent point in suggesting that if you had further perused our site you would have probably taken a less "edgy" approach with your comments.

To further clarify, more education and stiffer licensing requirements are still necessary to raise the barrier to entry in the real estate business. Relicensing is a MUST for those of us already in the industry. Finally, information should be public domain creating a smaller brokerage community of too notch professionals who bring real value to the real estate transaction. If you care to know what that "value" could possibly be... I have a significant list of current and previous clients who can explain.

Thank you again for participating on TrueGotham and providing such stimulating comments.

Mr. Heddings, I acquired my license a few months ago after purchasing my first home. (I should have done it the other way around, but that's besides the point.) My understanding is that New York real estate agents are widely ridiculed due to the minimal education requirements. The State test is a joke. I agree that more stringent requirements would weed out the segment you speak of. I've met a few members of that segment. They inspired me to go ahead and get my own license, since I'm not motivated solely by financial gain. I genuinely want to help people, despite the fact that I get laughed at a lot when I say this. Incidentally, I took the LSAT back in June, and I've been considering a career in law for the same reasons (cue more laughter). Ultimately, as long as there are licensing procedures, there will be targets for blame. It's always so much easier to point the finger at a trained professional when things go awry. One of the main reasons for requiring a license to begin with is so you can be sued. Such is life. I may be just a newbie with nary a deal under my belt, but I'm not a newbie when it comes to ethical behavior. I choose to believe that will work in my favor, even if it means sacrificing the quick bucks.

Henry and Doug,

Why speculate about the "Zillow effect" (or, as I'd prefer to call it, the "internet")? Well, for starters because it's fun... But also, I think, because when people on all sides of a debate sit down and talk through technological change while it's happening (in exactly the sort of conversation this blog is encouraging), you wind up with a more reasonable and balanced regulatory regime; you allow the technology to bring about real positive change without losing sight of what benefits the 'ancien regime' might have had.

As far as the entrance exams to the real estate profession, I don't know anything about them. But, if they really are as useless as you claim, why *not* do away with them altogether? Give away real estate licenses to anyone who asks but require that people register, and pay as a fee the money they would have wasted on the classes to begin with. Require also that brokers provide their registration information at the request of their clients, and allow those clients a systematic and effective way to complain to the regulatory body when they feel they've been victimized. Use the registration fees to investigate as many claims as possible, and make the penalties, both for fraudulent behavior and practicing without a license, very stringent... No classes, no barriers to entry, but, one would hope, a stronger disincentive to dishonesty.

And again, we all appear to be in agreement on this point but I really do think it's key - open up the floodgates on 'exclusive listings' and make more sale information public (this recent change in co-op pricing disclosure is a good step) - that way, honest brokers won't have to stand for being falsely accused.

I am a victum of real estate fraud, that resulted in my losing my home that happens to have been in the hot BD"sty area. I have spent the last two years digging up crucial evidence to prone it I have all the documeny need for convictions. But by myself I cant get any where. Ineed help. My cell is 917 586 0618, these people need to be brought to justice.