On Broker Efficacy -- The Straight Skinny
12/26/2009
"Nam et ipsa scientia potestas est." -- Sir Francis Bacon (or simply: Knowledge is power)
There is an old joke which tells of 3 men stranded in a lifeboat--a priest, a rabbi, and a real estate broker. At one point when all three are asleep, the oars slip from their sockets and drift away. The three awake to see their means of reaching safety floating in the distance and realize something must be done. Unfortunately, between them and the oars lurks a group of sharks hunting for their next meal. Recognizing the threat the priest stands and declares, "Men, I will retrieve the oars as I'm sure my Savior Jesus Christ will protect me from any danger". Immediately, the rabbi also rises and says, "No, no, please allow me, I know Yahweh the God of my people will watch over me and keep me from any harm". At this point the broker who's been listening stands up and says, "Uh guys, excuse me..." and jumps into the water and swims to the oars. As he does, the sharks separate giving him an open path to the oars and back. After hopping into the boat and placing the oars back in position, he turns to the others to see a look of shock on their faces. Together the priest and rabbi ask, "We don't understand, why didn't the sharks attack you? Smiling the broker explains, "Professional courtesy".
Funny stuff and representative of many people's opinion of my profession. When we're not being viewed as shifty or predacious, the alternative is often one of being useless. This second attitude was evident in last Sunday's New York Times real estate section (see "Agent or No Agent?" 12/20/09). Unfortunately, good brokers--like others who endeavor through hard work to succeed in gaining expertise in a chosen field or discipline--have become victims of "the cult of the common man". This increasingly popular worldview denigrates the value of proficient thought and interferes with the world's progress on so many levels. In a time when style is favored over content, form over function, belief over knowledge, many people's interpretation of "all men are created equal" has, like the oars from our story sprung from its socket and drifted away from its true meaning: all men are born equal in rights--an equality that should not be denied by man, his laws, or otherwise. These are inalienable rights, but the equality they convey does not proclaim each person's opinion or ability to contribute to the success of any project, or to understand meaning and solution, is of equal value, utility, or exactitude. Clearly, we don't accept everyone as having equal prowess mentally or physically, for each there's a potential and ability that is specific to them. Sensibility lies in recognizing this reality along with our own limitations and the benefits to be gained by listening to and supporting others better equipped to address the issues at hand. You'll note I say "good brokers" for we are often victims of another popular belief: that all brokers are the same, or similar enough to warrant little scrutiny when being considered to represent and guide the home buyer or seller. This, too, is a misconception I hope to dispel.
In a previous post I stated: "...I've personally experienced few sellers and buyers who really know what must be known to achieve the best sale, or find the best purchase. They often don't know how to recognize and then circumvent or minimize the negative effects heuristics and cognitive biases can have on reaching a proper decision. They have difficulty removing the unnecessary hurdles that may exist as part of one's personal psyche. Too often they are unaware of how these factors along with different cultural conventions and unfamiliar customs are crucial determinants when communicating and negotiating with their potential counterparty. They may lack access to data supporting their position, or, if they do have access, are still unaware of salient information that has been omitted, is proprietary, or has been un-procured. They do not maintain a pool of pertinent resources that can only be acquired over time, and by a professional who's made it a full time job to do so. These resources may include the most potent venues for advertising; the most effective tools for presentation; social connection; systems for distributing and promoting information to other external groups and communities; and outside contacts offering recondite expertise. If merely buying and selling defined success, we as brokers would indeed be superfluous; but if our clients and customers are interested in getting the most for their property and finding the best property within their parameters, we are essential to the process."
I would note that if the value of the services a competent broker renders was not as great as it is, the market would not support the fees being charged.
For the non-believers I would like to respond further and give a few specific examples. Given this format these will have to be the simplest and will not demonstrate the truly intricate nature of what we bring to the table. Still, I would bet they touch on factors often crucial to achieving the best success for our clients and factors that were unknown to them, less competent brokers, and others outside the deal.
The heuristic and cognitive biases referenced are omnipresent and permeate nearly every action. When the knowledge of them is not abused or nefariously used it is a major component in our repertoire and in our service to the public. Its application can involve the simplest decisions from what order a group of properties are shown and where a broker stands during a viewing, to the manner in which statements are made and the broker's choice of syntax. The more sophisticated applications are esoteric and uncommonly thought of, but critical to the outcome. Their complexity falls into the "too detailed to discuss here" category but the next broker-specific attributes mentioned above--the importance of knowing cultural conventions and unfamiliar customs--is an easy one to demonstrate:
I recently had a buyer who decided to bid on two properties at the same time. This is an acceptable practice given that a negotiation is needed to determine one of the ingredients used in deciding which property to buy i.e. the final price. The listing broker was not familiar with the customs of this buyers culture and was unaware of the very different manner in which ultimata are viewed. She had been a broker for many years but was naive in this area and did not properly advise her seller how a false ultimatum would be interpreted, and the stricter limitations it placed on his future options if he chose this route. This would have been easy to explain and, given what the owner really wanted, would have been productive and the mistake avoided, if he only knew. At the time, I explained this to the seller's broker but she dismissed the notion and they presented the false ultimatum. When it was not accepted and they attempted to change position they lost face, the buyer picked the other apartment, and the first apartment remained on the market for many more months and eventually sold below my clients' offer.
In the next case one of our agents was contacted by a foreign buyer who had been abandoned by another broker in the middle of a negotiation! This was extremely unusual and we were hesitant to take them on without contacting the broker to find out what happened. He explained that during the negotiation the buyers had suggested "using green" as part of the deal i.e. giving some cash directly to the owner outside of the transaction. This is, of course, illegal, and the broker and his seller took this to mean these people were very shady characters and should not be dealt with, and communication was severed. This was done despite the fact their offer was and would be the best made on this property. What this broker didn't know, and was therefore unprepared to defuse, was this manner of transaction was standard practice in this buyers' native country (even the tax laws are structured there to take this into account). They were merely following convention, were unfamiliar with ours, and were in fact very honest and reputable people. We were able to subsequently explain to them the problem with doing this in the U.S. and how it would be perceived. They totally understood and immediately changed their approach to honor our laws and way of doing business. This could have easily been done by the other broker or his client had they only known about this custom.
The next example couldn't be more simple and occurred a few years back, involving a huge sale (at that time) in the $4 million range. A fellow broker had called me seeking advise on a potential deal he had sitting in limbo for over 2 months, and was about to lose despite every suggestion he made to both buyer and seller. The seller would agree to any number as long as it had a 4 in front of it. The buyers had come close and, with a major concession by the broker on commission, the numbers were about to converge, but still no meeting of the minds. The broker could give no more and the seller was convinced the buyer would not lose the chance to buy his place for the sake of about $80,000 in price...and frankly the broker saw it this way, too, but the buyer just wouldn't move. This stalemate went on for more than 10 weeks and still neither side would give, and now the buyer was about to return to their homeland. Interesting. I asked my friend to tell me more about the buyers. They apparently had come from very humble beginnings having been initially raised in primitive surroundings and had eventually "come to the big city" and achieved great success. They were now extremely wealthy (another reason the owner was convinced they would come to his price). Hearing this, the reason for the buyers' hesitancy was clear to me. I told my friend, don't you know, in the country these people come from the number 4 is considered very unlucky, it's like what 13 is here, and given these people's early background I wouldn't be surprised if superstition may still play a role in their lives, but they won't admit it. Explain this to your seller so that he understands their behavior. Just get rid of that 4 and you'll have a deal. On hearing this the owner complied and the deal was struck.
Last month I personally closed 2 deals, The first was an exclusive that I showed 84 times in 4 weeks, and in our toughest market in 20 years. I was able to "inspire" such volume by being available 24/7 (indeed, no request to show was ever turned down) and because we knew and had "a pool of pertinent resources that can only be acquired over time, and by a professional who's made it a full time job to do so..." etc. Ultimately, we had 6 bidders and the seller agreed to go with the only all cash buyer despite the fact their offer was $115,000 less than 2 other bidders. The buyer had struck a great deal for themselves but retained lousy legal representation. Using an attorney who charged by the hour (a fact their own broker stressed as not being the best of situations), the due diligence performed was in my opinion lazy and uninspired. Counsel condemned the building's financial features without a more concise investigation of their true meaning and future ramifications. When I was supplied with the same data given to this attorney, but was willing to run further calculations, it became clear to me the scenario he presented was exaggerated and in some respects outright erroneous. I prepared a concise explanation to that effect but, with the owner's agreement, decided we weren't going to "pay" for that attorney and his client's learning curve, especially when, following efforts made by me and another broker to assure financing would be available, the next buyer was waiting in the wings with a more favorable offer. To avoid a similar false interpretation by this new buyer, I synopsized the financial situation and, along with actual numbers and examples, passed the information on to their representatives. The information was understood, verified, and the deal closed.
The second deal was unusual in that after a negotiation was completed and all terms agreed upon, the sellers needed to change the terms in a way that put my buyer's deposit at greater risk. My buyers decided that given the increased liability a downward adjustment in price would be appropriate. This suggestion was not well received and refused. (Some possible heuristics pertaining to this difficulty in giving up something that is thought to already be in one's possession might include selective perception, system justification, the endowment effect, status quo bias, denial, the primacy effect and/or conservatism bias). My buyers remained convinced of their logic (it was logical), and the sellers seemed cognizant but still unwilling to adjust. Clearly, both parties wanted this deal to happen but the attorneys, too, seemed stymied and couldn't find a solution acceptable to all parties. Time was running out--the change in terms involved adding "time of the essence" to the deal--and each hour of delay made a contract less likely as the risk continued to increase. I personally felt this risk was less binary and better examined in terms of likelihood. By balancing the probability with possible solutions I reviewed the following: the owners were willing to accept the argument of greater risk but were unwilling to change the price; the buyers had to be true to their interpretation of greater risk and assigning a value to that risk. I figured that since the risk had a minor probability of actualization why not simply reduce the money being put at risk. This could be accomplished by changing the contract's deposit (and the liquidated damages in case of default) to 5% of the purchase price from the standard 10%. The price would remain the same if title was transferred and its true value realized in that event (fair to the seller and true to the original negatiation) but if the less likely default were to occur the default penalty would be an amount acceptable to my buyers. This suggestion was immediately welcomed by both parties. The default scenario never took place, and the property was successfully transferred...very "win-win".
If the reader still questions whether a competent broker's contribution to success is worth the fees charged or not, I will re-direct them to the "war story" entitled "The Board Supremacy" in which we were able to procure a purchase for a celebrity client at a price $400,000 less than another offer being made on the property.
--Leigh Zaph. (any comments can be emailed to us at webitorials@manhattanhomesinc.com, thanks).
There is an old joke which tells of 3 men stranded in a lifeboat--a priest, a rabbi, and a real estate broker. At one point when all three are asleep, the oars slip from their sockets and drift away. The three awake to see their means of reaching safety floating in the distance and realize something must be done. Unfortunately, between them and the oars lurks a group of sharks hunting for their next meal. Recognizing the threat the priest stands and declares, "Men, I will retrieve the oars as I'm sure my Savior Jesus Christ will protect me from any danger". Immediately, the rabbi also rises and says, "No, no, please allow me, I know Yahweh the God of my people will watch over me and keep me from any harm". At this point the broker who's been listening stands up and says, "Uh guys, excuse me..." and jumps into the water and swims to the oars. As he does, the sharks separate giving him an open path to the oars and back. After hopping into the boat and placing the oars back in position, he turns to the others to see a look of shock on their faces. Together the priest and rabbi ask, "We don't understand, why didn't the sharks attack you? Smiling the broker explains, "Professional courtesy".
Funny stuff and representative of many people's opinion of my profession. When we're not being viewed as shifty or predacious, the alternative is often one of being useless. This second attitude was evident in last Sunday's New York Times real estate section (see "Agent or No Agent?" 12/20/09). Unfortunately, good brokers--like others who endeavor through hard work to succeed in gaining expertise in a chosen field or discipline--have become victims of "the cult of the common man". This increasingly popular worldview denigrates the value of proficient thought and interferes with the world's progress on so many levels. In a time when style is favored over content, form over function, belief over knowledge, many people's interpretation of "all men are created equal" has, like the oars from our story sprung from its socket and drifted away from its true meaning: all men are born equal in rights--an equality that should not be denied by man, his laws, or otherwise. These are inalienable rights, but the equality they convey does not proclaim each person's opinion or ability to contribute to the success of any project, or to understand meaning and solution, is of equal value, utility, or exactitude. Clearly, we don't accept everyone as having equal prowess mentally or physically, for each there's a potential and ability that is specific to them. Sensibility lies in recognizing this reality along with our own limitations and the benefits to be gained by listening to and supporting others better equipped to address the issues at hand. You'll note I say "good brokers" for we are often victims of another popular belief: that all brokers are the same, or similar enough to warrant little scrutiny when being considered to represent and guide the home buyer or seller. This, too, is a misconception I hope to dispel.
In a previous post I stated: "...I've personally experienced few sellers and buyers who really know what must be known to achieve the best sale, or find the best purchase. They often don't know how to recognize and then circumvent or minimize the negative effects heuristics and cognitive biases can have on reaching a proper decision. They have difficulty removing the unnecessary hurdles that may exist as part of one's personal psyche. Too often they are unaware of how these factors along with different cultural conventions and unfamiliar customs are crucial determinants when communicating and negotiating with their potential counterparty. They may lack access to data supporting their position, or, if they do have access, are still unaware of salient information that has been omitted, is proprietary, or has been un-procured. They do not maintain a pool of pertinent resources that can only be acquired over time, and by a professional who's made it a full time job to do so. These resources may include the most potent venues for advertising; the most effective tools for presentation; social connection; systems for distributing and promoting information to other external groups and communities; and outside contacts offering recondite expertise. If merely buying and selling defined success, we as brokers would indeed be superfluous; but if our clients and customers are interested in getting the most for their property and finding the best property within their parameters, we are essential to the process."
I would note that if the value of the services a competent broker renders was not as great as it is, the market would not support the fees being charged.
For the non-believers I would like to respond further and give a few specific examples. Given this format these will have to be the simplest and will not demonstrate the truly intricate nature of what we bring to the table. Still, I would bet they touch on factors often crucial to achieving the best success for our clients and factors that were unknown to them, less competent brokers, and others outside the deal.
The heuristic and cognitive biases referenced are omnipresent and permeate nearly every action. When the knowledge of them is not abused or nefariously used it is a major component in our repertoire and in our service to the public. Its application can involve the simplest decisions from what order a group of properties are shown and where a broker stands during a viewing, to the manner in which statements are made and the broker's choice of syntax. The more sophisticated applications are esoteric and uncommonly thought of, but critical to the outcome. Their complexity falls into the "too detailed to discuss here" category but the next broker-specific attributes mentioned above--the importance of knowing cultural conventions and unfamiliar customs--is an easy one to demonstrate:
I recently had a buyer who decided to bid on two properties at the same time. This is an acceptable practice given that a negotiation is needed to determine one of the ingredients used in deciding which property to buy i.e. the final price. The listing broker was not familiar with the customs of this buyers culture and was unaware of the very different manner in which ultimata are viewed. She had been a broker for many years but was naive in this area and did not properly advise her seller how a false ultimatum would be interpreted, and the stricter limitations it placed on his future options if he chose this route. This would have been easy to explain and, given what the owner really wanted, would have been productive and the mistake avoided, if he only knew. At the time, I explained this to the seller's broker but she dismissed the notion and they presented the false ultimatum. When it was not accepted and they attempted to change position they lost face, the buyer picked the other apartment, and the first apartment remained on the market for many more months and eventually sold below my clients' offer.
In the next case one of our agents was contacted by a foreign buyer who had been abandoned by another broker in the middle of a negotiation! This was extremely unusual and we were hesitant to take them on without contacting the broker to find out what happened. He explained that during the negotiation the buyers had suggested "using green" as part of the deal i.e. giving some cash directly to the owner outside of the transaction. This is, of course, illegal, and the broker and his seller took this to mean these people were very shady characters and should not be dealt with, and communication was severed. This was done despite the fact their offer was and would be the best made on this property. What this broker didn't know, and was therefore unprepared to defuse, was this manner of transaction was standard practice in this buyers' native country (even the tax laws are structured there to take this into account). They were merely following convention, were unfamiliar with ours, and were in fact very honest and reputable people. We were able to subsequently explain to them the problem with doing this in the U.S. and how it would be perceived. They totally understood and immediately changed their approach to honor our laws and way of doing business. This could have easily been done by the other broker or his client had they only known about this custom.
The next example couldn't be more simple and occurred a few years back, involving a huge sale (at that time) in the $4 million range. A fellow broker had called me seeking advise on a potential deal he had sitting in limbo for over 2 months, and was about to lose despite every suggestion he made to both buyer and seller. The seller would agree to any number as long as it had a 4 in front of it. The buyers had come close and, with a major concession by the broker on commission, the numbers were about to converge, but still no meeting of the minds. The broker could give no more and the seller was convinced the buyer would not lose the chance to buy his place for the sake of about $80,000 in price...and frankly the broker saw it this way, too, but the buyer just wouldn't move. This stalemate went on for more than 10 weeks and still neither side would give, and now the buyer was about to return to their homeland. Interesting. I asked my friend to tell me more about the buyers. They apparently had come from very humble beginnings having been initially raised in primitive surroundings and had eventually "come to the big city" and achieved great success. They were now extremely wealthy (another reason the owner was convinced they would come to his price). Hearing this, the reason for the buyers' hesitancy was clear to me. I told my friend, don't you know, in the country these people come from the number 4 is considered very unlucky, it's like what 13 is here, and given these people's early background I wouldn't be surprised if superstition may still play a role in their lives, but they won't admit it. Explain this to your seller so that he understands their behavior. Just get rid of that 4 and you'll have a deal. On hearing this the owner complied and the deal was struck.
Last month I personally closed 2 deals, The first was an exclusive that I showed 84 times in 4 weeks, and in our toughest market in 20 years. I was able to "inspire" such volume by being available 24/7 (indeed, no request to show was ever turned down) and because we knew and had "a pool of pertinent resources that can only be acquired over time, and by a professional who's made it a full time job to do so..." etc. Ultimately, we had 6 bidders and the seller agreed to go with the only all cash buyer despite the fact their offer was $115,000 less than 2 other bidders. The buyer had struck a great deal for themselves but retained lousy legal representation. Using an attorney who charged by the hour (a fact their own broker stressed as not being the best of situations), the due diligence performed was in my opinion lazy and uninspired. Counsel condemned the building's financial features without a more concise investigation of their true meaning and future ramifications. When I was supplied with the same data given to this attorney, but was willing to run further calculations, it became clear to me the scenario he presented was exaggerated and in some respects outright erroneous. I prepared a concise explanation to that effect but, with the owner's agreement, decided we weren't going to "pay" for that attorney and his client's learning curve, especially when, following efforts made by me and another broker to assure financing would be available, the next buyer was waiting in the wings with a more favorable offer. To avoid a similar false interpretation by this new buyer, I synopsized the financial situation and, along with actual numbers and examples, passed the information on to their representatives. The information was understood, verified, and the deal closed.
The second deal was unusual in that after a negotiation was completed and all terms agreed upon, the sellers needed to change the terms in a way that put my buyer's deposit at greater risk. My buyers decided that given the increased liability a downward adjustment in price would be appropriate. This suggestion was not well received and refused. (Some possible heuristics pertaining to this difficulty in giving up something that is thought to already be in one's possession might include selective perception, system justification, the endowment effect, status quo bias, denial, the primacy effect and/or conservatism bias). My buyers remained convinced of their logic (it was logical), and the sellers seemed cognizant but still unwilling to adjust. Clearly, both parties wanted this deal to happen but the attorneys, too, seemed stymied and couldn't find a solution acceptable to all parties. Time was running out--the change in terms involved adding "time of the essence" to the deal--and each hour of delay made a contract less likely as the risk continued to increase. I personally felt this risk was less binary and better examined in terms of likelihood. By balancing the probability with possible solutions I reviewed the following: the owners were willing to accept the argument of greater risk but were unwilling to change the price; the buyers had to be true to their interpretation of greater risk and assigning a value to that risk. I figured that since the risk had a minor probability of actualization why not simply reduce the money being put at risk. This could be accomplished by changing the contract's deposit (and the liquidated damages in case of default) to 5% of the purchase price from the standard 10%. The price would remain the same if title was transferred and its true value realized in that event (fair to the seller and true to the original negatiation) but if the less likely default were to occur the default penalty would be an amount acceptable to my buyers. This suggestion was immediately welcomed by both parties. The default scenario never took place, and the property was successfully transferred...very "win-win".
If the reader still questions whether a competent broker's contribution to success is worth the fees charged or not, I will re-direct them to the "war story" entitled "The Board Supremacy" in which we were able to procure a purchase for a celebrity client at a price $400,000 less than another offer being made on the property.
--Leigh Zaph. (any comments can be emailed to us at webitorials@manhattanhomesinc.com, thanks).
