Deadly Virus Attacks, News @11

Turns out the 11 o’clock news story is about governmental funding of the CDC. Seems odd to say that it’s disappointing, but it sure wasn’t the story television viewers were led to believe. One thing that is certain however, is our love of selling fear.

Nobody sells fear better than the insurance companies. It is after all their principal business and they have been doing it since the dawn of time. Every since man was able to say “what if”, insurance companies have been selling tragedy. What if you die? What if you get hurt? What is this doesn’t happen? What if that doesn’t happen? Nothing is stronger than the fear of the unknown. Or, if you are in the real estate industry, nothing is stronger than the fear of the improbable.

I say improbable because for the last several weeks I have been trying to get a handle on the need and effectiveness of “Errors and Omission (E&O) Insurance” for the real estate industry. Let me state at the very start, this was not an easy task. My journey began when a couple of agents told me they could no longer pay for E&O insurance. Things were tight and they needed to cut back. This made total sense, but when they asked if they really needed the insurance, I found the question a kin to, “do I look fat in this dress”. I couldn’t answer. Or rather, I shouldn’t answer.

Wynd Realty is a micro Broker. We provide basic brokerage services and that does not include the promoting of E&O insurance. A real estate agent is in business for themselves and ultimately all business decisions are theirs to make. But, the question is valid. In nearly a decade in the real estate industry and with personal contact with hundreds if not thousands of real estate sales agents, I have never heard of an actual E&O claim. Just because the thousands of agents I have known have not had any E&O claims, that doesn’t mean there aren’t any. And, since I was asked about E&O by my agents, I owed them, at the very least, some research for them to make educated opinions.

In the following days, I contacted no less than six insurance companies that sell professional E&O insurance. I was looking for statistics regarding the number of realty claims and specific detail how agent policies have helped or “saved” them from financial ruin. All of my efforts failed. Not a single company offered any statistics or detail. I did receive one colorful pie chart indicating areas of “potential” E&O claims. But, its not clear if those “shaded areas” were based in fact.

Even without any factual back up, every one of the companies I spoke with were, not surprisingly, very adamant about the need and requirement for E&O. I even had one salesman tell me that 1 in 4 agents have an E&O claim in their careers. WOW, even though I don’t have any facts either, I found that claim to be a bit overstated.

My next step was to get some guidance from the legal community. Again, this was not an easy task. I asked how a sales agent filling in a pre-printed State-approved contract form could really be held liable for a sale gone badly. Both attorneys I spoke with said they couldn’t. Those forms have been gone over and over with an eye to protect all those involved. That said, if any one party is outright lying, then of course there is a case. Lying and knowingly misrepresenting the situation, to the lawyers I spoke with, were the only ways an agent could be held liable.

Armed with a morsel of legal opinion, I returned to ask additional questions of the insurance companies. I said that I had been told by lawyers that if agents were honest, open and operating above board, they wouldn’t really need E&O insurance. This was universally met with what could only be described as anger. Telling people you spoke with a lawyer is usually met with anger, but this was very different. Across the board, passions rose. And again, without any facts, they were positive about E&O being a critical element in saving an agent’s professional career.

After being a bit of a pain, I was finally faxed some narratives covering “typical claims”. Not actual claims with the names changed, but marketing department developed typical claims. These “could be” scenarios included such chestnuts as showing a family of color only a specific sets of homes. Of course that is illegal. I find it hard to believe, but, I guess that stuff still happens. Most of the other highlights in the insurance examples have the wording; “the Realtor knew of this problem...”. As the lawyers had expressed earlier, if you are open and honest, you can eliminate six out of the top ten claim situations identified by the insurance companies. Additional top ten infractions included things like; “personal injury, other than bodily”. This turns out to be about hearsay conversations concerning the quality of various real estate service companies.

In all, I really can’t imagine any agent being so stupid and or reckless. One company actually sent me a list of “risk reduction techniques”. When I spoke with that company’s telemarketing representative I asked; if the risk reduction list wasn’t actually a “you will never get sued” list. After all, if agents followed this risk reduction list, what could they possibly do to get sued? Turns out, no one had ever asked that question to her before.

Being totally frustrated, I went online to read what others were saying about E&O. I read one interesting rant that had conspirator overtones. It claimed E&O was nothing more than a plot conceived by the National Association of Realtors (NAR). Seems, NAR, in an effort to position Realtors on the same career ladder as lawyers, accountants and architects forced E&O on its membership. By doing so, NAR added perceived career value for its members. This take was certainly interesting but probably not realistic.

Most of the other web-based comments centered on the insignificance of the issue. After all, E&O only costs an agent a little more than $200 a year. It flies under the radar, so pay it and move on. While that may be true in the main, $20 a month for some is still a problem, particularly when that service has little or no perceived value.

Throughout all my research, I was only able to come up with one realistic scenario where E&O insurance should be paid. Over 50% of all E&O claims against agents come in the area of Property Management. This makes sense insofar as Property Management puts agents in many more situations where they must live up to what they said they will do.

In the end, I can not recommend something I do not believe in. For agents that focus on residential resale, if you can afford, it, pay it. But, if you are looking for areas to cut budget, I would rather see an agent cut their E&O expenses than cut out or cut back on the marketing of their core business. I am certain the “industry” would consider this advice reckless. At least its advice I can live with.

For those who say the money spent on E&O is not worth a fight, please take a larger view. Consider 3M+ real estate agents. (NAR claims 1.2M members and there are estimates that more double that number to include non-dues paying agents) Even without Property Managers, there has to be well over 1M agents paying into various E&O programs. At an average of $200 a year, this represents a staggering amount of money. And people wonder how insurance companies pay their executives millions of dollars in bonus money?

Could Agent "Realty Practices" Work?

For years articles have been predicting great change within the real estate industry. And, every year, as expected, nothing really changes. But, the “change” mantra today is louder than ever before because the overall shape of the industry is not good. When things are going well there isn’t much interest in change. For sport, let’s assume all of the doom and gloom articles have some merit and some sort of change is needed. The next question is: who changes what, when and why? To answer that, it’s often helpful to consider others who may have been in the same or similar situations. After all, why re-invent the wheel when you don’t have to?

Real estate is a service industry. In broad terms this means individuals/agents performing professional services on behalf of clients for a fee or commission. That job description is virtually the same as dozens of other service industry professions. As a matter of fact, the real estate industry itself likes to classify and promote its Realtors as being on the same career rung as lawyers, accountants and architects. And, if you consider the service definition in its broadest sense, all of those professions are alike. So if the real estate industry is in need of change, then similar positions in other professions probably need change as well. While that assumption may seem logical, it’s far from accurate.

Lawyers and accountants are not screaming for their industry to change. Why is that? A quick review of various industries reveals a consistent business model across every industry not called real estate.

Most, if not all, of the professional service industries not called real estate, have the concept of a “Practice”. Within the Practice, or “firm”, there are Partners, Junior Partners and Associates. Expenses and responsibilities are shared according to rank. All decisions regarding the firm, such hiring, firing, payroll and capital expenditures are made by the Partners. Advancement in the firm is made through contribution; usually in terms of revenue generated. The members, or employees, of the firm all work in concert with one another for the advancement of the firm. This business model has worked flawlessly for lawyers, accountants, architects and even medical professionals for decades.

Could the real estate industry adopt such a business model? Can three or four real estate agents in Atlanta form a “Realty Practice” and operate just like their legal and medical brethren? They would have complete control over how things got done. The Partners would decide how they are marketed, who gets hired, what the expenses are and what roles everyone plays. Are three real estate agents getting together to form a Practice any different than three lawyers getting together to form a Practice?

Maybe change for the real estate industry isn’t so much change as it is conformity. Maybe if the real estate industry got in line with all the other service professions we would get all the change we need?

I have asked several real estate salespeople why there aren’t any agents promoting “Practice” business models in Georgia. I have been told, and I am not making this up, that agents “aren’t allowed”. Not allowed? Is this junior high? Are Georgia agents riding some sort of short bus? Another popular answer to the why aren’t there more Practice business models is; “we have Practice business models, they are just called Brokerages.” That response certainly seems to answer the question, except it really isn’t true.

Real estate agents don’t work together for the common good of the brokerage. Agents are pretty much on their own. Agents don’t have brokerage responsibilities. Again, the agent’s responsibility is to pretty much fend for themselves as Independent Contractors. I guess monthly fees could be considered sharing expenses, but agents are on their own to create and pay for their own marketing strategies. Everyone knows all brokerages claim to be selective in their hiring process. Everyone also knows they are not. So to say the current brokerage system is the same as a "Practice" is really creating a story that is hard to buy.

“Not allowed”, is not an acceptable answer. The purpose of this blog entry is to find out what agents think about the Practice business model and if it has any viability in the real estate industry. If we look at a large market like Atlanta, certainly there is room for 30, 50 or more realty Practices to operate. Why don’t we see any? Not one? Have people tried and failed? What is so wrong with the Practice business model that it isn’t an option for Georgia real estate agents?