Incentives

I have mentioned this quote before: “Human nature is surprisingly universal, and it is universally disappointing.” - The Morning Show

However, I have a new take on it after listening to Morgan Housel’s book Same As Ever, where he has a chapter on “incentives”. The following paragraph struck me:

When you understand how powerful incentives can be, you stop being surprised when the world lurches from one absurdity to the next. If asked, “How many people in the world are truly crazy?” I might say, I don’t know, 3 percent to 5 percent. But if I asked, “How many people in the world would be willing to do something crazy if their incentives were right?” I’d say, oh, easily 50 percent or more.

Housel outlines the story of the former Mexican drug lord El Chapo. El Chapo was essentially a hero to the locals, and they would do whatever they needed to protect him. Housel recounts a story from a documentary on El Chapo:

You’re talking about people who have almost no income. It was not uncommon for El Chapo to stop and talk to someone and say, “What’s going on in your life?” And the person would say, “Oh, my daughter is getting married.” Chapo would say, “I’ll take care of it.” He’d get a big place, provide the band, provide the booze and food, and the whole town is invited. The father of the bride says, “Chapo made this possible.”

His point: “...you have good, honest, well-meaning people who end up supporting or partaking in bad behavior because the incentives to play along are so strong.”

***

Last week I talked about how loan officers have a very low opinion of real estate agents. (Like, Real estate agents are surprisingly universal and universally disappointing) What I am about to say isn’t going to exonerate the poor performers, however, it might provide a little context as to why there are so many poor performers in our industry.

First off, and you already know this, real estate has a low barrier to entry. You take some classes (often online), take a test, and voila, you’re a real estate agent! Contrast that to my wife who went to 4 years of college, 4 years of medical school, and did 4 years of residency before she could begin practicing medicine.

To begin selling real estate you also do not need a lot of capital. I mean, you need money to pay your bills before you make any sales, but you don’t need to hire anyone, you don’t need to buy any equipment, and you definitely don’t need $200,000 or more in student loans!

Therefore, if you are working a job where you dislike your boss hate what you do, and aren’t making much money - real estate seems pretty simple and easy to switch to! This also means that anyone can decide to become a real estate agent, the exact opposite of becoming a physician. Or a dentist. Or a lawyer. Simply getting into medical, dental, or law schools can be incredibly difficult. That’s the first screening process. Then, you have to survive those schools.

Okay, so anyone can become a real estate agent. Once they get their license, then what? Well, how do we get rewarded in real estate? Make a sale!

Human beings are addicted to status. Often we define our self-worth by what others think of us. Historically real estate offices, and the industry, glorify “top producers” with awards, rankings, and other hoopla. Making sales in real estate then has the double benefit of giving us income (so we can buy more status with cars, clothes, etc.) and giving us status amongst our peers. The more homes you sell, the more income you make and the more status you have with your peers.

All of this to say: real estate has many untrained, unqualified people racing to make sales at any cost to pay their bills and define their self-worth.

Is that too much of a stretch?

What are the incentives driving many people in real estate? Sell homes at any cost to survive. Pay bills and preserve status (ego).

What is the incentive to be good?
What is the incentive to be/become a professional?
What is the incentive to expand who you are as a human being?
What is the incentive to do what is best for the client? (Especially when the “rent” is due next month and the bank account is close to empty...?)
What is the incentive to build relationships for the future? I need to sell homes...today!

Who cares what my reputation and skill sets are five years from now - who knows if I will even be selling real estate then? Maybe I will go back to ____________ . Or move on to ____________. Because if someone didn’t invest time and effort to develop their skill and reputation, and build a business, what do they have at stake? What does it cost them to stop selling real estate and move on to the next “thing”? Nothing! They aren’t paying off student loans or anything else. Real estate was simply one more job on their cluttered life-path.

Do you see the problem here?

We live in a world that incentivizes celebrity. It’s about looking the part, not being the part. “Look at me! Look how great and amazing I am!”

No-one-wants-to-do-the-work. (Incentives) No one wants to take the time to build a business. (Incentives) No one wants to put in the effort to develop themselves as a professional. (Incentives) While doctors and other professionals have 8-12 years of training before they go out and practice, consider it takes the same 8-12 years in real estate to essentially have enough ‘on-the-job’ training to develop real skills. However, if one’s incentive is to simply make money, what training is one getting?

Incentives.

What if the next three to seven years is a total shake-out? What if only the professionals survive? As the pressure mounts on commissions, consumers are likely to put more scrutiny and wonder why they are paying incompetent, poorly skilled and trained people with a license large sums of money. Unless we can demonstrate we are worthy, well then - some real estate agents will continue to reduce their fee so that it matches their skills.

In that light the incentive to be a pro - is huge - but it is in the future. How many people are going to do the work? The phrase that repeats in my head: "universally disappointing."