The Long View: Premier Agent program is a race to the bottom

The battle between Streeteasy and New York’s brokerage industry over the listing site’s Premier Agent tool is approaching an armistice. And all signs point to a conditional surrender by the brokerages. After Streeteasy offered minor concessions about how agent contact info will be listed, more and more agents and firms have started using the tool, and are spending serious money on it.

Take Ryan Serhant. In March, the star broker published Instagram videos calling the tool “shocking” and “illegal,” but now he uses it. “I’m not going to be the guy who, in 1994, said the Internet wasn’t going to affect the real estate business,” he told The Real Deal earlier this month.  Some brokers are now backing Streeteasy’s claim that the tool is good for the industry. The program results in “agents getting opportunities & consumers getting choice,” Spencer Rascoff, CEO of Streeteasy parent Zillow, tweeted last week.

You can’t fault Rascoff for talking up his company’s top revenue source – the program made over $600 million last year – but his argument makes little sense. Ultimately, the goal behind offering consumers choice is to match them with the best brokers, preferably at the lowest price. Premier Agent does just the opposite.

To understand why, picture the following scenario: two young brokers are bidding to become the Premier Agent for a listing. Both are starting out in the business, both have $10,000 in savings and neither has a referral network. Broker A is sharp, likable and already came up with a plan to win over clients by offering roommate matching and concierge services on top of brokerage work. Broker B is a hack and doesn’t have much of a business plan. It’s likely that Broker B is going to put more importance – and resources – into winning the auction because he needs the tool more. For him, it’s Premier Agent or bust, giving him a stronger incentive to spend his savings.

Broker A, on the other hand, could be reasonably confident she will win clients even without the help of the tool. She’ll bid for it, but will probably abandon the auction once the price gets too steep.

A lot goes into the economics of auctions, but as a general rule, those who want or need an object the most are more likely to win it an open auction. In the case of Premier Agent, that could be brokers who haven’t got other ideas, and have money to spend on ads.

“This concept of leveling the playing field is very misleading,” said Jonathan Miller, CEO of Miller Samuel. “Anytime you pay to play, there is no factoring in competence or local market knowledge. It has nothing to do with the playing field. It has everything to do with who has the most money to pay to be in front of the consumer.”

Nikki Field, a top broker at Sotheby’s, said that when she was starting out, she “needed to learn a specialty in the market quickly and deeply in order to coherently and correctly advise/counsel my clients.” Having agents relying on ad dollars to keep them in the mix would make that less of a requirement.

“‘Premier’ agents selling these listings are a giant step forward towards the likelihood of bad representation, bad deals and bad industry reputations,” Field added. Or, as Corcoran’s Brian Meier put it: “Instead of becoming intelligent and knowing the market all they have to do is spend a couple of dollars on leads.”

You could argue that when it comes to sales listings, New York’s biggest firms function as an oligopoly of sorts. They control a good chunk of resale listings, and the lion’s share of new development listings. But Premier Agent doesn’t address this sell-side inequality; it instead risks adding unqualified brokers to the buy-side process.

In a functioning market on a level playing field, talented, innovative brokers rise up while those who do a poor job are forced out. The result is a ruthless industry, but a better one. If Premier Agent becomes entrenched in the market, brokers who are great at their job could lose out to those who are bad if the latter have a bigger ad budget. Take that into account, and it’s hard to see how the tool improves the industry. The only one that clearly benefits is Zillow, which can use its near-monopoly power over New York’s apartment listing market to line its own pockets.

Susan Daimler, general manager of StreetEasy, disputes the claim that Premier Agent will hurt the quality of service in brokerage. “Consumers aren’t committed to working with the Premier Agent they speak with,” she said. “It’s up to that agent to communicate their expertise, services and support to the potential buyer. Consumers can also access the agent’s profile on StreetEasy, research across sites to see reviews and more.”

Brokers who land fat commissions through online leads can also benefit, but research suggests the tool can be a mixed bag for them, too. Brokers bid for Premier Agent status in the hope that it will create leads, clients, and commissions, but no one knows for sure how the investment will pan out. In a 2016 paper published in the American Economic Review, the economists Nick Arnosti, Marissa Beck, and Paul Milgrom looked at how such murky information impacts online advertising auctions, where ad agencies bid for targeted online ads in real time. They noted that when agencies lack the performance-tracking tools to know if a particular ad translates into sales, they are more likely to overpay for the wrong ads. Economists call this phenomenon adverse selection. In the case of Streeteasy, an agent with no clue which listing is the most promising may simply buy Premier Agent status for the cheaper one, assuming they’re all the same, but end up with useless leads.

Daimler noted that “the agent spending the most in a zip code will get the most leads, but the agents who are spending less will also get leads.”

But Compass’ Leonard Steinberg said it’s what agents then do with those leads that would make the difference.

“A great web-generated paid-for lead is a form of paid luck,” he said. “But if you aren’t prepared for your luck, that investment could be a huge waste of money.”