A Biased Critique on the Evolution of Real Estate
We are living in the twenty-first century, the third millennium, at the brink of the fourth industrial revolution. The Institute of Entrepreneurship Development, established in 2005, is the leading Centre of Excellence in European Entrepreneurship and the fastest growing digital innovation hub. They define the revolutions as follows:
The first industrial revolution was in 1765, during which the biggest changes came in the form of mechanization and the decline of agriculture. At the time, the invention of the steam engine created a new type of energy that helped speed up the manufacturing of railroads and accelerate economic growth. The second industrial revolution was in 1870, over a century later. This revolution is defined as the emergence of more new sources of energy – electricity, gas and oil – which led to the creation of the internal combustion engine. After another century passed, the third revolution occurred around 1969, this one triggered by the development of electronics, telecommunications and computers. It opened doors to space exploration, research and biotechnology through new discoveries and automation. The fourth industrial revolution, also coined ‘Industry 4.0’, began in 2000 and is characterised by the advent of the internet, the creation of virtual realities, and tools that bend the laws of physics.
This is a blog on real estate, though, and you may be wondering how all of this relates. I am often accused of beginning my story with Adam and Eve, but don’t worry; we won’t go back that far! Although, they did have a meaningful interest in real estate, so there is a case to be made for doing so….
The emergence of organized real estate occurred in the 1800’s. The oldest real estate brokerage in the United States was established in 1855 when Baird Warner was formed. A brokerage is a formal grouping of sales professionals, so the actual role of a sales person had already been introduced by this point. In Canada, during the 19th century, the Indigenous nations and colonial governments signed numerous treaties; the first was in 1871, resulting in Indigenous nations moving off their land and onto reserves. This was just after Canada itself was founded in 1867. A more organized real estate model followed in 1888, in the growing community of Vancouver.
The next major evolution in the real estate industry did not occur until relatively recently! The New York Times published an article in 1993 entitled ‘When the Broker Works for the Buyer.’ The article discusses a new movement that started in Hawaii and the West Coast in 1983, which had been slowly working East. The movement originated because of a growing awareness of consumer rights, and consumers’ demand to be more informed. Prior to this, when looking to buy a house, one would consult a broker who would show available properties that met their liking; however, the broker was “legally and contractually obligated to represent solely the interest of the seller in any transaction….” So this new evolution was the inception of a ‘buyer’s agent’, also known as ‘dual agency’ or ‘buyer agency’. Slow adoption across the States was in part due to the opposition by many brokers, who feared that the new movement would drive down commissions.
With the new buyer agency role, some brokerages or firms separated their offices into two divisions, one that represented buyers and one that represented sellers. This is not the practice any more. Currently, two agents in the same office can be working on the same sale. In fact, it has even evolved such that a single agent can be assisting both the seller and the buyer on the same transaction. This is known as multi-representation. The University of Central Florida, in their ‘Compliance and Ethics Newsletter’, defines a conflict of interest as occurring when “an individual’s personal interests…..could compromise his or her judgement, decisions, or actions in the workplace.” The role of a REALTOR® is to assist in negotiations, as offers go back and forth between the parties. When negotiating a deal, both parties share confidential information with the agents about their spending limits, or what their drop-dead selling price is. So, when an agent knows such information for both parties, and is being paid a commission fee on the sale, the opportunity to be compromised is considerable, and the line between benefiting the REALTOR® versus benefiting the parties gets very blurry.
The licensed real estate professional can earn an amount in commissions that could take a member of the general public six months to earn, or more. For example, consider a senior manager role for a large company. The manager likely has an under-graduate degree, and possibly a Masters degree, roughly earning upwards of $120,000 a year. During the height of the COVID pandemic when real estate was at its hottest, homes were selling in a day. In January 2022, the average home in Ontario was $998,544, and the commissions to sell that home were around $49,927. The senior manager would have to work over 4 months to earn this much. With the stake of earnings so high, combined with the inherent potential for conflict of interest, is it so inconceivable that the industry is plagued by ethics violations?
Real estate is regulated provincially/territorially and requires licensed professionals to adhere to a Code of Ethics. One important criterion is that licensed professionals are not to ‘indicate to any person, directly or indirectly, that remuneration is fixed’. This means that if the seller is only willing to pay $1000 in commissions to sell their home, the licensed real estate professional cannot dispute this. But, as is widely known, REALTORS® often dictate their rates. Of note, there is a class-action lawsuit currently underway that is challenging this very convention. The erosion of industry ethics does not stop with dictating commission fees. Another ‘unspoken’ but well-known practice is for REALTORS® to refuse showing their clients properties that are sold privately (so-called ‘For Sale By Owner’, or FSBO, sales); this is true, even if the private seller is offering to pay the buyer’s agent their full commission fees, and the property matches the buyer’s precise criteria. Again, this is a prima facie violation of their obligation to work in their clients’ best interests. Complaints may be submitted to the Real Estate Council of Ontario (RECO), but ethics rules are rarely enforced. In fact, the Auditor General of Ontario, in her November 2022 report, concluded that the regulating body, RECO, “has not been fully effective in administering the Real Estate and Business Brokers Act, 2002 to protect the interests of consumers when engaging in a real estate transaction.’
The regulation of real estate has deteriorated to protect an industry that should have been dead twenty-five years ago with the inception of the internet. The impacts of protectionism are real. Since I started this blog with a biblical reference, let’s continue with another biblical metaphor. I am David going after a Goliath industry, trying to share a message that is being completely overwhelmed and suppressed. Think of my slingshot, inadequate as it may seem in its susceptibility to be manipulated by the industry, as the fourth industrial revolution – the vast reach of the internet. My own views are not openly discussed or heard, especially in Canada, because the real estate industry controls the powers to influence governments, the media, and search engines (To illustrate, search for “I want to sell my home privately” online and see what results you get.) I and others can spread our messages of alternative solutions, highlighting the flaws of the traditional real estate model and providing the tools needed to transcend them, but society continues to rely on a service model that was conceived of during the second industrial revolution.
I own an FSBO service, so I have an undeniably biased opinion. But whose biased message is more credible? That of someone trying to help you save your equity, or that of a commission-based industry with known conflicts of interest and a predisposition to violate ethics rules? Neither will have the final word in the matter. You will. Do you want the real estate industry to progress and evolve to protect consumers and give them more power, or do you want to keep it in the 1800’s?
By Connie Heintz, founder of DIYoffer Inc., an alternative real estate service allowing homeowners to sell with the assistance of their real estate lawyer. The service provides comprehensive guidance and allows parties to negotiate deals on a digital platform without third party involvement. The service model removes potential conflict of interest and helps homeowners save equity. DIYoffer is the real estate service for this century.