Real Estate: General Education versus Specific Expertise

Hi Dan,

Your blogsite is great; I stumbled on it and find you very credible and knowledgeable.

I have two questions for you, if you are looking for things to write about:

1) What are your views on the DELETED area? That market is so high, and I wonder if it will follow the pattern that San Diego sets for price adjustments in the market this year. I'm looking to relocate there from San Diego, so I've started researching that market. And I thought San Diego was expensive... the DELETED area is unreal.

2) As a law student, I've had five professors mention that it's a good idea to get a broker's license in order to represent ourselves as our own buyer's agent when buying our homes (if we can ever afford to with those huge students loans to pay off!). The upside is getting back the buyer's agent commission as a sort of "rebate." To support this, a couple of professors framed the issue as roughly: "most agents you would work with only have a high school degree and a few real estate courses under their belt... and could know nothing about property law. Do it yourself, control your own contract, save a lot of money." What do you think about attorneys who get real estate licenses to represent themselves, having lots of knowledge about legal issues and contracts, but no practical experience and training?

Have a great weekend!

In theory, it's a really great idea.

In practice, unless you're out there in the market all of the time, learning all of the tricks that get played or attempted, learning what the market is actually like, etcetera, you will fall into that group of persons known by the technical description "sucker."

Some lawyers apply for their broker's license and use it constantly. Those folks do fine. They know that being an agent is not just about that subset of lawyer functions that agents are allowed to perform, and if they learn about the rest of the business and keep their finger on the pulse, they are formidable.

Those who just use it to do their own occasional transactions, on the other hand... Let's just say I've had to explain to lawyers who took that kind of professorial advice exactly how they got "taken" more than once. Loans are also the same license, but there probably isn't enough money in the average loan to interest the kind of lawyer that does well in the real estate market, and what clue do they have who are likely to be the best lenders who give the best rate for a given client if they won't spend the time learning the loan market? Truth be told, they can make more money with the same time representing those who've been raked over the coals than they can working their own transactions.

The lawyers that the good agents know about and go to when there's a question or a problem? They strongly tend to use agents and brokers for their own transactions. My last boss did half a dozen transactions in the year I worked for him for one of the best regarded real estate lawyers in town.

Your professor appears to me to be making a "does not follow" error. By the logic of "not much education", he'd be fixing a car himself, rather than using a professional mechanic. Once upon a time I was a pretty fair amateur mechanic. I haven't done more than an oil change in twenty years. I know better. These days, mechanics have to know an awful lot - it's just not reflected by a diploma or advanced degree from prestigious institutes of higher learning. They can take courses, but they've got to learn most of their profession through practical application on the job. The situation with competent real estate agents is the same.

The real problem here is confusing general education and specific expertise.

A lot of people, many of them with advanced degrees, seem to think this translates into general competence in all areas of life. Not so. That degree means you've demonstrated expertise in that one field. You can have a doctorate in mathematics, law, or any other area, and still be a babe in the woods outside of that field. In order to be a good agent, you have to spend time constantly keeping up with the state of the market - there aren't any schools except experience for what a good agent needs to know. If you think a given property is worth less than it is, no transaction. If you think it's worth more, your client is wasting money.

It's true that some agents are just barely high school graduates. Others have MBAs. More important than level of education, more important than how much business they do, more important even than experience, is attitude. Just as important as attitude is market knowledge. And right up there with both of them is negotiating skill in the context of real estate. None of these three skills is certified by a law degree, passing the bar, or anything else in the way of formal schooling.

The result? Lawyers who work at real estate make formidable agents and brokers. Lawyers who get their broker's license because they think they're going to save themselves money by doing their own transaction are fooling themselves. The amounts at stake in real estate are large enough that items which are small differences relative to the size of the entire transaction are nonetheless, significant amounts of money. Getting paid all of a three percent cooperating broker's concession can end up costing you ten percent easily, if you don't understand the market or any of a dozen other things. And that is in addition to the costs of doing real estate (MLS access, agent keys, licensing fees, etcetera) and the economic costs of the other money you could be making if you were doing what you're really trained for. Making three percent of a $750,000 transaction sounds great at first glance: $22,500 in your pocket! But look at the other side of the equation: not knowing and understanding the market meant that you paid $60,000 too much in this particular instance (to use a recent example), and the week or two of billable hours, minimum, that you exchanged for that $22,500. It could be a lot more, since you're not using an agent to preview property, either. Not using an agent to preview also means you have a lot higher chance to miss reasons not to buy a particular property, and it could very well mean you end up with the wrong property for a trivially preventable reason. On the selling side, do you know what an appropriate price is for your property in the current market? Getting it wrong has severe consequences for your sales price, or whether you sell at all. Do you know how to market the property effectively in order to appeal to your target buyers? Do you know how to present it? Do you understand how these three major factors and a host of minor ones influence your attempts to sell the property?

When you look at the whole situation, the benefits from representing yourself in a real estate transaction don't look so hot.

Caveat Emptor

Original article here