4 minute read
Way back in 2014, I wrote an article on Inman about the Zillow/Trulia merger, where I said, “Run for your lives – godZulia is coming muah!” From there, I shared my four-point wishlist of what could keep Zillow from becoming “GodZillow” and holding a monopoly that would indeed mimic the likes of Godzilla, whose 1954 tagline included, “incredible, unstoppable titan of terror!”
Eleven years later, with a reported 2.4 billion visits in just Q1 of this year, but also several pending lawsuits accusing it of “ill-gotten gains”, Zillow might be wise to ask, “Am I the drama?”
Did Zillow truly become “GodZillow”? If so, why have there also been accusations surrounding agents, brokers and the National Association of Realtors (NAR) — practically the whole real estate industry — of also taking ‘ill-gotten gains’?
Ask these questions instead
From an economics standpoint, I think the better question is much deeper than a singular company. It is fitting that this year marks exactly 20 years since the book “Freakonomics” was published. A key premise of the book, and Econ 101, is that the world goes around based on financial incentives — meaning changes in costs or benefits influence our choices and actions. In short, we work based on our pay.
More specifically, Freakonomics concluded that a real estate agent’s financial incentives, which are often percentage-based and not a flat fee, are often misaligned with their client’s best interest, leading agents to sell homes for less than their potential and prioritize quick sales over maximizing client profit. This is also known as the folksy saying, “a bird in hand is better than two in a bush.” As evidence, Freakonomics contrasted how real estate pros sell their own homes versus those of clients.
Of course, we all know this isn’t true.
Let’s be honest, for many involved in real estate deals, whether buying, selling or leasing, consumer protections, including fair housing and lending, often — rightfully — contradict maximizing profit.
Maximize profit and gains from work
As an MBA professor who teaches economics, accounting and other B-school courses to graduate students, I am well aware that most people who are not majoring in a math program cannot stand math. Well, that is, until it has to do with their own finances. For even the most apathetic math students, when they get their first job and see “FICA” and numerous other deductions eating away at what they originally thought they would take home, I notice many become an overnight statistician. For many, this is our first taste of wanting to maximize our profit and gains from our work.
Thus, this is actually a bigger conversation than just Zillow, NAR or any specific firm, agent or broker. Ultimately, many of the lawsuits against Zillow, realty firms and the industry as a whole seem to boil down to this basic, age-old economic principle of incentives.
This means our industry must better answer the root questions of:
- How do Protech tools, like Zillow and other portals, disincentivize real estate agents and brokers to work with everyone or only those at a certain price point? This becomes an issue of “ill-gotten gains” and even unfair housing. How can we improve this?
- How do the current percentage-based referral fee and commission structures disincentivize real estate agents and brokers from working with everyone or only those at a certain price point? This too becomes an issue of “ill-gotten gains” and even unfair housing. How can we improve this?
- With flat-fee referral and commission models, how can an industry that often works for days, weeks, months and years with a specific client (who may be a notorious looky-loo) be properly compensated for additional labor without incentivizing “ill-gotten gains” or unfair housing?
- How is the economic incentive principle of “a bird in hand is better than two in the bush” appropriate for real estate agents and brokers while hindering the best outcomes for real estate clients? How can we improve this?
- How can we reform real estate referral and commission structures to ensure they are not a zero-sum process where the client loses whatever the real estate pro gains and vice versa?
Ultimately, the path to resolving the real estate industry’s drama is to fundamentally reimagine its incentive structures to ensure fairness for both professionals and consumers. Various lawsuits indicate there are indeed gaping potholes along the journey of homeownership that, instead of simply filling, the road needs to be rebuilt.
Lee Davenport, Ph.D., is the strategic advisor at Real Estate Bees, an MBA graduate school professor, executive business coach and author of “Be a Fair Housing D.E.C.O.D.E.R.” and “How to Profit with Your Personality.”
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners. To contact the editor responsible for this piece: tracey@hwmedia.com.
