Real Estate Licensing Reality
Posted on May 24th, 2007 by Jonathan Dalton
One of the recurring criticisms of the real estate industry is the fairly minimal standards required to obtain a real estate license. In Arizona, a prospective agent need only complete 90 hours of classroom instruction, select a broker, pay the licensing fee and they’re off and running.
Not that they likely will know much about real estate sales, mind you. The Arizona Real Estate exam is filled with a variety of virtually valueless information. I suppose there may be a need someday for me to remember where the property line ends on a non-navigable waterway versus a navigable waterway, but that scenario probably won’t arise nearly as often as trying to convince a buyers’ agent why the sales price on the LSR matters.
Outside of five digits - 43,560 - the number of square feet in an acre, the vast majority of information contained within the licensing exam likely will never be used.
So why does the licensing process even exist? Greg Swann of the Bloodhound Blog raised this question in last week’s Arizona Republic.
“The licensing requirement for real estate agents is a bad joke. Would-be licensees are required to take 90 hours of classroom instruction. There are real estate schools that will permit you to fulfill this obligation in ten consecutive days. The course material consists of tips and tricks for taking the state test, and the state test has almost nothing to do with succeeding — or even surviving — as a real estate agent.
How do we know this? Because more than 90% of new licensees do not renew their licenses. They fail within the first two years in business. Successful navigation of the licensing process is useless as an indicator of success as a real estate agent.
The state’s licensing procedure actually serves to deceive consumers. The implication is that a licensed practitioner is competent. Far too often, this is untrue.”
To some degree, Greg is correct. Having once upon a time obtained a Series 7 license to sell securities, the real estate exam is laughable in comparison. It’s less a test of knowledge than an IQ test consisting of oddly worded, convoluted, tricked-up questions. Passing the test does not indicate someone is qualified to handle a real estate transaction; it means only that they weren’t sufficiently befuddled by the exam.
Still, licensing does serve a purpose. Perhaps it is not a true indication that someone is capable of competently handling a real estate transaction. But the license does provide the hammer necessarily to remove from the industry the criminally incompetent (or worse, criminally competent.) Require a license, and once that license is revoked the threat posed to the public goes away.
“What would work better? The free market. If competition for reputation were the only standard for judging agents, new entrants would have to get themselves hired by already-established big-name agents. Through a process akin to apprenticeship, they would learn how to work well and wisely in real estate — or they would get fired with dispatch.”
Free market theory will not protect a consumer who largely does not see significant differences between real estate agents. Only after their transaction was botched will the consumer realize that they selected poorly. Caveat emptor isn’t sufficient.
Agents coming out of real estate school should select a broker who conducts in-depth training in the real estate transaction. I was fortunate enough to have some of the best training available through our training director, Mary Sand, and through my one-time broker (now branch manager after we were acquired) Ron Copus.
And while Mary will no doubt cringe as she always does when I say this, I learned much of what I know about real estate while holding a cold Hefeweizen at Rock Bottom on Fridays after work. Why? Because that’s when the real-life scenarios were hashed out by agents winding down from the week and/or gearing up for the weekend.
Century 21 Arizona Foothills has a broker split, as did Century 21 Tradin’ Places before it. There’s also a national advertising fee. So, by the time I see my commission check, there have been a couple of bites taken out. The bites lessen with time, but they still seem less appealing to many agents when compared with the 100% commission plans available.
But those 100% plans, where the brokers take only a desk fee and not a portion of the commission, usually come with little to no training. Agents are rarely found in the office, unless they’re subleasing space from the broker. And in most cases, the brokers couldn’t care less. As long as the desk fees are paid, it matters little to the broker whether their agents actually are capable of producing. If they screw up, E&O will cover it and the agent can be kicked out the door without knowing any more than when they walked in.
Why does so much of the onus of actual training fall on the broker rather than the state? Because it’s virtually impossible to cover adequately every possible situation in a structured classroom environment, much less test for knowledge in these areas.
Rather, the state sets the basic standards - standards sufficient enough that the public will be comfortable knowing the people handling their real estate transactions are licensed, if not sanctioned, by the state. And the state fills its coffers with the licensing fees, the bulk of which do not revert back to the Department of Real Estate.
Are there changes needed in the current real estate model? Absolutely. But abolishing real estate licensing absolutely is not the right way to go. If only so every agent knows how many square feet make up an acre.
Technorati Tags: Phoenix real estate, real estate licensing
Popularity: 2% [?]
Jonathan - A well thought out post, that lays out the truly salient points.
>Why does so much of the onus of actual training fall on the broker rather than the state?
Before I answer, I know you wouldn’t support gov’t training of real estate pros.
I challenge anyone anywhere to show me one profession where the best and the brightest are even indirectly a result of training by the state. The concept itself is scary. My favorite example would be the the post office.
(Yeah, I know it’s federal.) Imagine if mail had always been private, but the training and advise was handled by government. I wonder if Fed-Ex sends its employees to Washington?
I think the stat you quoted showing 90% of licensees never renew, says it all.
Your wisdom in taking a little less in return for superior mentoring should be heeded by newbies. But, alas, we both know that won’t be the case, don’t we?
Thanks for the consistently solid content, Jonathan. I read you daily without fail.
And your insights are always very much welcomed as well, Mr. Brown.
>>I challenge anyone anywhere to show me one profession where the best and the brightest are even indirectly a result of training by the state.
Navy Seals?
But yes I agree with everything. As I understand it the British are screaming for real estate to be licensed to deal with the problems in the real estate industry there.
The biggest problem I see is that new agents themselves are viewed as a profit center by the industry. You get constantly encouraged to go to every training possible and there are more sessions, breakfasts, networking and seminars than you can shake a stick at. All costing serious money.
Hmmm 2 day workshop for $500, or $300 worth of books off Amazon, $100 of business cards and a replacement set of shoes. Hmmm….
And I thought it would be fighter pilots.
The difference though is the teachers are bureaucrats who are teaching because they couldn’t do it. Seals and military experts of all branches are only taught by world class, massively experienced experts. By definition, that almost insures bureaucrats aren’t involved.
>The biggest problem I see is that new agents themselves are viewed as a profit center by the industry.
If the Sock Puppet can eliminate that factor from the mix, the problem is more than half way whipped.
So what’s yer plan wool face?
At this point I’m thinking of a tell all book and a segment on 60 Minutes.
And some kind of online coaching service for new agents based out of Bangalore. It would be just as bad as the training new agents get now, but it would be more cost effective.
-Athol
Wool face? Now it’s getting ugly …
I think the best way would be the other idea I’ve seen pop up on Bloodhound and elsewhere over the past year … abolish the requirement that licensees hang their license with a broker.
In a perfect world it makes sense; the presumption is the broker will provide the needed training and supervision of their agents. In reality, brokers for many 100% shops simply stick out their hand and ask for the check. There’s no vested interest in the agent’s success, not when the broker is making a steady income upfront.
Hey, you know that sounds a lot like real estate companies who charge their sellers a large fee up front. Whether the home sells is irrelevant - they already have collected their money.
Not much incentive in either case.
Jonathan - The result would be nice with brokers paying attention to the training of those under their license, I agree. But by forcing that issue we’re now simply using gov’t force to accomplish something by the same means it forces us to do whatever else it wants us to do. We’re regulated to death.
That said, it’s what I do in my office.
The group in Colorado have the right idea. They’re so successful, agents pay to even be able to hang their licenses. Quality will rule the day when the industry hits the tipping point - that is, more companies supporting quality vs quantity.
I’m not holding my breath for that happening real soon. Meanwhile, guys like you, who have forced themselves to the highest level of both expertise and service, will benefit from hugely increased income, while their clients benefit from superior representation.
Thats an interesting idea Jonathan. I admit I’m eyeing a brokerage license for myself at some point, though honestly not thinking about leaving where I am.
Jeffs idea of tipping point is good too.
The regulation may ultimately come from a better informed public. Of which we are all playing a role however slight.