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A New Industry Aims To Fix A Huge Problem In Real Estate

A New Industry Aims To Fix A Huge Problem In Real Estate
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You're reading Entrepreneur India, an international franchise of Entrepreneur Media.

Nobody likes to get hustled. Whether it is an unnecessary upsell when you are getting your car’s oil changed or just an aggressive telemarketer, the experience is frustrating.

But usually getting hustled does not devastate you financially. That is, unless you are a real estate consumer. When you buy a house you are probably acquiring the single most expensive thing you will ever purchase in your entire lifetime. Buyers carefully calculate what they can get for what they can afford, hoping to find a home that they can build a life in.

Unfortunately, many home buyers fall victim to negligent realtors. The result of working with a bad realtor can range from missing out on buying a dream home, to spending tens of thousands more than intended. That is what it feels like to get really hustled.

The challenge is that most people think their real estate agent has their best interest in mind. Many experts disagree and enough people have been victimized that Change.org petitions have been created and investigations into corruption have been launched, but very little has changed.

That is driving the creation of a whole new brand of business, something Val Tsanev CEO of CityRaven calls concierge real estate services. “Consumers do not have an advocate in real estate, that is what concierge services do. They vet and prequalify agents, provide neutral advice to the buyer throughout the process, and educate consumers.”

Here are the three reasons why real estate buyers need an advocate:

#1 Lack of fiduciary duty

Real estate is an industry that has evaded common sense regulations for decades. It comes as a surprise to many, but realtors have no fiduciary duty in many states, meaning they can legally do a lot of things that do not seem legal. The most common example of this is dual representation, where an agent represents both the buyer and the seller. It does not seem possible that one individual could advocate for the needs of two parties that by nature have polar opposite interests, but it happens all the time.

“A good realtor would never represent both parties in a transaction. But it is hard to find good realtors. I know because I have experienced it myself. When you don’t have time to interview a dozen agents, you take what you can get and hope for the best. That is how thousands of people become victims of poor representation,” says Tsanev.

Tsanev’s company has a rigorous review process for all agents they work with. Of the 27,000 licensed agents in New York City, they connect buyers with less than 100. 

#2 Broken incentive structure

Commissions are a simple idea. If the salesman sells an item, he gets a percent of the total. If he sells it for more money, he makes more money as a result. This incentive structure is used in various forms in thousands of industries, including real estate. The problem is that the incentive structure in real estate does not actually benefit the parties being represented.

The dilemma has been famously described in bestselling books like The Tipping Point and Freakonomics. If you are selling your home, you want to get the highest price for it, and so does your agent. But if you want it to sell for $200,000 and the best deal your agent has found is for $190,000, the incentive structure falls apart. To find an offer for the full asking price could be a lot of work for your agent, but the extra commission on the $10,000 difference could be as little as $500. That is not a lot of incentive to spend hours and hours looking for a better offer.

“Realtors can be very intimidating, telling you they have worked in the industry for years and that if you turn down this offer you will never see a better one. The average homebuyer or seller doesn’t have the expertise to know if that is true. Concierge services are sounding boards for the consumer throughout the process,” says Tsanev.

#3 Lack of quality control

Being a licensed realtor does not make one a good realtor, it just means they are legally allowed to be a broker. To be a good realtor, they have to put in work, sometimes years of work, researching neighborhoods, school districts, market values and trends. That is the expertise that a homebuyer expects and unfortunately it is very uncommon.

It is not hard to find a realtor, there are thousands of them. It is hard to find a good realtor, meaning someone with years of experience who is really an expert and can represent a client properly.

Conclusion

The real estate industry is in a phase of consolidation. A lot of companies are coming up with innovative services to help both the buyer and the seller.

Edition: December 2016

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