Lessons From The Real Estate Market

Over the past few years, mortgage money has been cheap, mortgage companies have been willing to lend money to virtually anyone who could draw breath long enough to close on the home, and the oversight by regulatory agencies has been minimal at best.

Consumers saw home values steadily increasing. Mortgage companies, industry associations with a stake in the real estate industry, and mortgage, real estate, and financial gurus for the most part were touting the ever upward, never ending march of home values with the advice of buy, buy, buy.

During this time, thousands upon thousands of people who had no idea what they were doing entered the mortgage, investment, and real estate industries as salespeople. Having no significant experience in the industry, they parroted to their prospects and customers what they heard the “experts” saying—which advice was consistent with their own very limited experience: now is the best time in history to purchase a home, to purchase a rental property, to buy and flip a house. There are millions to be made if you buy now. Don’t be left out. Money is cheaper than it has been in decades, cash flows are huge, and you have no reason to be conce
ed about that ARM--smart investors maximize their cash flow and, besides, you can always refinance whenever you want.

Hundreds of books have been published over the past few years by mortgage, real estate, and investment “experts” informing people how not to be screwed when buying and financing a home. Look for the cheapest rate possible; scrutinize the closing costs and look for the company with the lowest fees; get the cheapest rate and invest the difference; don’t worry, all mortgages are the same since they are all going to be securitized and sold to Fannie Mae or on Wall Street. Don’t worry about the stability of the company or the salesperson--it’s immaterial. Don’t seek advice--shop for cheap rates and the lowest possible fees.

And consumers bought it hook, line, and sinker. They gave no thought to the reputation and integrity of the mortgage company or real estate brokerage company. They could not have cared less that the “loan officer” and realtor they were dealing with had been in the business five minutes and couldn’t even complete the paperwork without help. After all, they had been assured by news media, financial magazines, the industry associations, and the loan officer and realtor themselves that they were highly trained “professionals” who adhered to the strictest of ethical standards and who knew what they were doing.

What in the past had been considered decisions of the highest importance, requiring expert advice and guidance, had become a do-it-yourself project. Read a book or listen to a financial TV show and go buy a home. Simply find an agent who would cart you around to an endless stream of homes until you found the one you wanted; call dozens of mortgage “loan officers” until you found the absolute lowest rate; sign the paperwork; buy the house. Easy. Who needs advice? Who needs to pay more to work with someone who had spent years in the industry and thought enough of their time and expertise not to give it away at the lowest possible price? They got all the advice they needed for the price of a newspaper, or the cost of 30 minutes in front of the TV, or, at most, $19.95 for a book.

They didn’t need anyone to explain that the ARM they wanted wasn’t a good investment. They didn’t need anyone to explain how it worked or what the long-term consequences could be—after all, they’d read three whole pages about that product written by an expert who had self-published a book about mortgages and the purchasing of real estate. What else could anyone say about it?

And when they did ask questions, they were given the sage advice of a “realtor” or “loan officer” who were highly trained experts—it said so on their business card. So, that cheapest “professional” they could find explained how the optio
ARM worked. Unfortunately, that “professional” had just been introduced to the product the day before and actually knew less than the customer sitting across from them--but they sure sounded like they knew what they were doing.

Now, they find themselves in trouble. The mortgage broker they used is out of business. The “loan officer” and “realtor” are selling used cars somewhere. They have no one to help figure out where they stand.

Financial Products as Commodities
The real estate and mortgage industries moved from highly technical purchases to being nothing but commodities. Rather than looking for expert advice from a professional who could give advice based on the customer’s needs, financial ability, and long-term goals, the purchase and financing of real estate became a self-serve commodity to be bought like lumber or beans, for the cheapest possible price. Many mortgage and real estate companies were no different then Home Depot or WalMart. Walk in, find that highly trained associate wearing the “How Can I Help You” vest, fill out the paperwork, and you’re done.

Worse still, this transformation of a sophisticated financial decision to commodity isn’t simply a real estate issue. This same conversion is happening in a great number of segments of the financial services industry. From investments, to business and consumer lending, to the leasing of autos and equipment, to financial and estate planning, customers, business and personal, are concentrating on saving a few dollars upfront through a false belief that they can self-mediate in the financial arena.

Despite the lessons to be learned from the current real estate fiasco, it isn’t realistic to assume customers will have learned the dangers of making financial decisions without input from a seasoned professional. History indicates that once a product has been commoditized, it never reverts to an expert based product.

Moreover, the commodization of all aspects of the financial services industry is being accelerated by the financial services companies themselves. Many insurance companies are hard at work convincing consumers that insurance is a simple decision that only needs a 15 minute investment to find the cheapest auto, health, or life insurance; investment firms are busy touting their cheap trades—who needs financial advice anyway?; some “financial planning” firms push their automated, low-cost, fill-in-the-blank “financial plan.”

Can You Survive the Commodization of Your Industry?
Yet, despite the dire example of the mortgage and real estate industries, and the concerted effort by others in the financial services industry to drive consumers to make financial decisions based on price alone, all is not doom and gloom, at least for a portion of financial services salespeople.

There will always be a portion of the population who understand their need for expert guidance regarding their financial decisions. In an effort to find this segment of the population, traditional financial services companies--those that are fighting to remain advice-based instead of low-priced based--are hiring more and more sales staff, hoping that each can bring in a few of these elusive expertise seeking customers. Still, this advice-seeking segment of the population is ever shrinking, leaving more and more salespeople competing for fewer and fewer prospects.

Nevertheless, there are and will continue to be some financial services salespeople making more money than ever. These advisors understand that the advice seeking segment of the population, and even some of those drawn towards doing it themselves, will pay top dollar to someone they perceive as being a true expert. These salespeople are working diligently to position themselves as publicly recognized experts within their local area.

Being a technical expert is no longer good enough to excel in the financial services arena. Developing name recognition through direct mail, advertising, or even word-of-mouth marketing is no longer a guarantee of top producer success.

To do more than simply survive in the new do-it-yourself financial services marketplace, the expert advice based salesperson must move beyond simple marketing and invest their time and dollars in becoming a publicly recognized authority. In order to compete with the “expert” authors giving canned advice, financial services salespeople will have to develop a local image and reputation equal to the expert on the bookshelf in Barnes and Noble or quoted in the Wall Street journal.

Old Marketing is Dead
Developing this reputation requires a new methodology. Direct mail, advertising, cold calling, networking at the chamber of commerce, and sending birthday cards will no longer create the name recognition and image that will attract large numbers of potential clients.

From the consumer’s point of view, if you are not a recognized authority, why should they work with you if you are not offering the cheapest price? Their decision, as far as they are conce
ed, is to either work with a true authority or make their decision based on price alone.

And what constitutes a true authority? Unfortunately, it isn’t technical expertise. Nor is it experience or marketing generated name recognition. Authority comes via publicity. Authority comes from non-marketing related exposure. Authority comes from having articles published, giving speeches, being quoted by news media, appearing on radio and TV as the authority.

Those who recognize the shift in how financial services are sold and wish to thrive as advice based salespeople who can command top dollar must make the time and financial commitment now to learn and implement the techniques and strategies that will establish their image, reputation, and credentials as authorities. Those who do not will eventually, and probably within a relatively short timeframe, find themselves selling commodities at the lowest possible price--just like the WalMart associate down the street.