The 6 Indiscernible Flaws in Real Estate Agency Law

Dear Monty: You believe that agency law does not work. All 50 states have agency laws for real estate. Several of your articles, including "Is Real Estate Agency Law Working?" suggest the real estate agency does not work. What is the problem with real estate agency law?

Monty's Answer: In Wisconsin, 238 businesses require a license, far more than were regulated 20 years ago. All of them appear to be working on the surface. Measurable data occurs when a consumer is unfairly treated and complains. One must dig into the data to understand what's working. For Wisconsin, you can find that data at the Department of Safety and Professional Services. Other states may have similar methods.

THE FLAWS

No. 1: The roots of real estate agency are over 100 years old. When real estate brokers began sharing inventory, horses outnumbered cars as the primary means of transportation. When "buyer agency" first existed in the early '90s, no internet, smartphones or applications existed. Technology has modified consumer behavior, but the real estate industry, including regulators, trade organizations and brokerages, operates under obsolete regulations and inefficient practices.

No. 2: The legislature should recognize the high cost of homes and fees. The Securities and Exchange Commission regulates financial planners because they deal with large transactions. The Real Estate Examining Board regulates real estate brokers. Disputes and complaints are often over large sums of money. The examining board is composed of real estate brokers and agents with token public members. The board would better serve the citizens by reversing the majority to consumers.

No. 3: The barriers to entry are low because outdated real estate models need recruits constantly. A barber license is at least 1,000 hours of classroom study or a two-year apprenticeship of at least 3,712 hours of practical training and at least 288 training hours of theoretical instruction in a cosmetology school. A real estate broker must complete the board-approved 72-hour pre-license program or 20 academic semester hour credits at an institution of higher learning. A broker handles hundreds of thousands of dollars for a hefty fee. A barber charges $20 to $50, and your hair grows back.

No. 4: The inefficient brokerage model, training and supervision drive up the cost of the service. A medical doctor invests four or more years in college and four years in medical school, plus a residency. After receiving a license, a real estate agent has a shallow barrier to entry. All one needs is a car, a smartphone and a broker to hire them. Brokers leave the learning, training and supervision to the agent.

No. 5: There is no insurance for unrecognized financial errors. When the agent wrongs the customer, errors and omissions insurance helps brokers and agents to repay customers. There is no coverage when the customer does not recognize they lost money.

No. 6: The infrequency of real estate transactions works against consumers. Asymmetry is when the seller of a service knows a lot about it and the buyer knows little. Low barriers to entry allow people with ulterior motives easy entry. Because customers transact few times in their life, they most often seek an agent, some of whom use that asymmetry against them.

These six factors are the most indiscernible of many. These opinions resulted in over five decades of working directly with agents, consumers and follow-up research.

Richard Montgomery is a syndicated columnist, published author, retired real estate executive, serial entrepreneur and the founder of DearMonty.com and PropBox, Inc. He provides consumers with solution options to real estate questions. Follow him on Twitter(X) @dearmonty or DearMonty.com.

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