1. MANDATE

Under the program theme of real estate "industry excellence", the Real Estate Foundation has, in recent years, provided funds for research into agency disclosure, continuing professional education and current industry business practices. These funding activities, as well as expressions of concern voiced by licensees and representatives of allied organizations, have alerted the Foundation Governors to concerns about industry business practices.

The Governors authorized the establishment of an Advisory Committee of experienced individuals to provide a neutral viewpoint so that the industry might review changing, and perhaps deteriorating, business practices and consider the attendant impact of these changes on both consumers and licensees. Initially, the complaint and discipline files of the Real Estate Council from the past several years were analyzed. Subsequently, nominees were surveyed to obtain their views on a number of specific business practice issues.

2. SUMMARY

The Real Estate Act has, essentially, been in its current form since its enactment in 1958. There is no doubt that our current business environment and business practices are substantially different than they were in the 1960's and '70's. Considering contemporary business practices, the question must be asked whether or not the original intention and prescription of the Act still sufficiently regulates the industry. More pointedly, is the Act adequately protecting consumers and licensees?

The Real Estate Institute sought to investigate this concern by engaging Stan Hamilton and Bill Stanbury of the University of British Columbia to report on the changing nature of the industry structure and business practices. The research was supported by funding from the Real Estate Foundation and was carried out during 1993 and 1994.

Several areas of concern were identified, and recommendations made, by Hamilton and Stanbury:
a) A concern for the lack of supervision and training provided by nominee/managers, as well as the lack of accountability for the activities of their salespeople.
b) The declining number of transactions per licensee is viewed as creating a potential for unsavoury business practices by inactive or "under-employed" licensees.
c) The apparent inadequacies of the current two-tiered licensing system. Strong support for a move toward a single licence concept was expressed by the report. This recommendation is also very strongly supported by this committee.
d) Notwithstanding the importance of continuing education, competency examinations for re-licensing were suggested as preferable to mandatory continuing education.

The Advisory Committee's research reflected these concerns to be valid. Since each area of concern impacts on consumer protection and licensee liability, they are indicative of latent problems facing the industry. Our conclusion is that the industry must seriously review the implications of current business practices and environment. Without this effort, the industry will fail to live up to its long tradition of responsible self-regulation.

3. CONCLUSIONS

Task A - Review Council Complaint/Discipline Files:
An analysis of Real Estate Council complaint and disciplinary files was conducted by Mr. Jack Lin, researcher with the Real Estate Foundation. The results and commentary by Mr. Lin, as well as commentaries by committee members Marty Douglas and Bill Phillips, are included as Appendix "A".

Trend lines show that the rate of growth for complaints is increasing at a faster rate than the rate of growth for licensees and transactions. The diverging trend lines may be indicative of reduced supervision and training as well as fewer transactions per licensee creating unacceptable business practices.

The analysis also unexpectedly revealed a marked increase in complaints against smaller firms during the survey period. Whereas larger firms may be able to afford full time management, the nominees of smaller firms are often financially dependent upon their personal sales activities. This may result in less time being available for training and supervision.

Task B - Survey of Nominees:
A survey of 200 nominees throughout B.C. was conducted by Robert F. Goodell of Campbell Goodell Consultants Limited in early April 1995. The results of this survey, and Mr. Goodell's conclusions, are attached as Appendix "B" (not available in electronic format). Along with these conclusions is another summary of the survey results prepared by Marty Douglas and Bill Phillips of our committee.

The survey of nominees lends credence to a previous observation that nominees in small offices may be less interested in supervision and training than they are in their personal sales activities. The survey indicates that nominees in small offices (2 to 6 salespeople) devote 14% of their time to supervision whereas nominees of offices with 60 or more salespeople devote 44% of their time to supervision and training.

Only one-third of all of those nominees surveyed personally conduct training of new licensees. Nearly two-thirds have no training programmes for experienced licensees. In view of recent cut backs in training programme by most Real Estate Boards and Associations, our committee has expressed some real concerns about where future training will come from.

One quarter of the nominees surveyed responded that the business they manage is owned by someone else. We do not know the historic ratio of owner/nominees to "front-end" nominees. However, the existence of such a large group of owners who are either not licensed or not qualified, is of concern.

Conclusions - General
The results of the research leads our committee to the inescapable conclusion that, because of changing business practices, the real estate brokerage industry is experiencing both an erosion of consumer protection and an increase in exposure to liability by licensees.

Along with this report, and attached as Appendix "C", is an editorial comment by the chairman setting forth some conclusions reached as a result of the work of this committee.

4. RECOMMENDATIONS

The committee makes the following recommendations to the Real Estate Foundation Governors:

i) That copies of the survey of nominees conducted by Campbell Goodell Consultants Limited, together with the committee's conclusions, be provided immediately to the Real Estate Council, BCREA, the BCREA Hamilton Stanbury Task Force and the Real Estate Institute of B.C.

ii) That, following the Governor's acceptance of the final report, full copies be provided to the above recipients, as well as to each Real Estate Board/Association and Dr. Stan Hamilton.

iii) That a plain language summary of the report and recommendations vi) and vii) below be prepared and circulated to each real estate licensee through the Real Estate Council.

iv) That, following release of the above abridged report, the Foundation provide a 1-800 service in order to, primarily, obtain feedback from licensees throughout B.C.

v) That, in addition to (iv) above, the committee seek written comments about the report and recommendations from a representative group of licensees. The licensees selected should, in the opinion of the committee, have sufficient experience and knowledge to provide the committee with thoughtful observations and opinions of current real estate practices.

vi) That the Foundation encourage the real estate industry to review and consider the provisions of the Real Estate Act as the Act pertains to the relationship between agents and salespeople in the contemporary business practices environment and, where appropriate, make recommendations for reform of the Act.

vii) That the Foundation express an interest in providing funding for the above research and law reform recommendations.

APPENDIX "A"

I. An Executive Summary of the Analysis of Real Estate Council Complaint and Disciplinary Action Files

Prepared by Marty Douglas and Bill Phillips

1. It is noteworthy that the trends for increased numbers of licensees, transactions, complaints and disciplinary actions indicate a possibility that the public will receive an increasingly inferior level of service.

2. The data concerning the frequency of complaints provides some interesting, and seemingly contradictory observations:
a) The number of complaints/discipline amongst licensees increases with time licensed.
b) The number of complaints/discipline amongst firms decreases with time licensed.
Does this indicate that the longer a firm is established, the better its training and supervision is, but that the longer an individual is licensed, the more likely they are to operate outside the control of the firm?

3. Does the disproportionate number of complaints against smaller firms indicate that "selling nominees" leave salespeople in small firms at greater risk of complaints and discipline?

4. The "class of '89" have attracted more than their reasonable share of complaints/discipline:
a) What caused their performance to lack the standards of other graduates? Lack of supervision? Lack of training? Pressures of a "hot" market?
b) Will this group continue to attract a disproportionate share of complaints as they move into the "high risk" period of 7 to 10 years experience?
5. In the lower mainland in particular, there has been a significant shift in cultural demographics. It has been suggested that new immigrants are not aware of, or comfortable with, licensee complaint procedures. Are the complaint statistics therefore a true reflection of the reality of current business practices?

II. An Inquiry into the Business Practices of the Real Estate Industry in British Columbia
Phase One: Analysis of Complaint Files and Disciplinary Action Files

Prepared by Jack Lin

1. Introduction

The real estate industry in British Columbia has gone through a number of changes since Expo '86. Removals of restrictions on the number of licensed professionals, emergence of 100 percent houses, fee for service concept and wider uses of computer and communication technologies are but a few examples. These changes and the growing number of real estate transactions generate concerns whether the public is well served by the industry.

In response to the above concern, Real Estate Foundation, in cooperation with the Real Estate Council, decided to review the current business practices as the first step in establishing an enquiry into real estate practices.

2. Methodology

Since people complain only when they perceive that some questionable practices were being adopted, the complaints lodged with the Council (the complaint files) were chosen as the basis for investigation. To verify the results found in the complaint files, the disciplinary actions taken by the Council (the disciplinary action files) were also included in this research. Both of these files provided a degree of prevalence of sub-standard practices in the industry. Through examination of the demographic characteristics of the complainers and complainees involved, it will provide some inference on the causes for such sub-standard business conduct in the industry.

The purpose of this exercise is to detect any underlying trends or abnormalities in the two files and, possibly, to identify the probable causes for complaint or disciplinary action taken against the parties involved.

To achieve the goal stated above, the complaint files from 1989 to 1993 were chosen and 1986 files were included for comparison purposes. In these files, the number of complaints is correlated with the following factors: the experience of the firm, the experience of the licensee, gender and age of the licensees, the number of licensees in the firms (firm size) and the experience of the nominees in the firm.

For the disciplinary action files, the study period is from 1989 to 1993. The number of disciplinary actions is correlated with the following factors: the experience of the firm, the experience of the licensees, the age and gender of the licensees and the reasons cited as grounds for disciplinary action. The major findings are summarized in the following section.

3. Major Findings

Note that the Figures referred to in the following section are not available on the Internet version of this report. Please contact Foundation staff to obtain a print copy of the figures (graphs).

In general, there is no direct relationship between the occurrence of complaint or disciplinary action with either the number of licensees or the number of total real estate transactions. Furthermore, the licensees, as well as the firms, involved in the complaint files conform to the implicit assumption that the more transactions one handles (or the longer one has been in the business) the more likely it is that one will have complaint or disciplinary action lodged against him or her. Also, there is no difference between the performance of male and female licensees in these files other than the fact that female licensees are under represented. However, some curious trends do exist, which are discussed below.

3.1 General Trends
From Table 1, it can be seen that the number of licensees has increased during the study period regardless of the rises and falls in the number of total real estate transactions. This reflects the fact that the B.C. real estate market out-performs the rest of Canada and thus attracts people to this field. On the other hand, the number of total real estate transactions has been more unstable. In general, however, the number has increased, as the trend line in Figure 1 suggests.

According to Table 1, both the numbers of complaints and disciplinary actions have increased since 1989. However, the trend lines in Figure 2 suggest that the number of disciplinary actions has been relatively stable throughout the years while the number of complaints has been increasing more rapidly in the study period.

If the annual rates of change are used, it is clear that both the trend lines for the rate of change for disciplinary actions and complaints have higher positive slopes, i.e. increased at faster rates, than those of the numbers of the licensees and the total real estate transactions, as shown in Figure 2. This echoes the suspicion that the public may not be well served by the real estate industry.

* Tables 1 and 2 have been updated with current statistics. Click here to view them.
The PDF "update sheet" (73 kb) presents the data in graphic format.

3.2 The "Black Cloud" Group
Interestingly, corresponding with the removal of the licensee quota in 1989, the class of 1989 licensees is significantly and consistently over represented in the complaint files from 1991 to 1993 as shown in Table 3 and Figure 3. This "black cloud" group consists of those who have less than two years of experience in 1991, less than three years of experience in 1992 and less than four years of experience in 1993. This group of licensees has the highest frequency of complaint against them in their respective data years. The causes for this phenomenon, however, cannot be determined due to lack of information in this data set.

3.3 Complexity of Operating Environment
An examination of the 1989 and 1993 complaint files reveals that there is a marked difference in terms of the number of licensees involved in the complaint files. In 1989, about 11.5 percent of complaints involved one or more licensees who worked for either the same firm or different firms. In 1993, the percentage increased to about 20 percent, as shown in Table 4 and Figure 4. This trend seems to indicate that the operating environment may have been more complex in recent years. The fact that a property may be listed by one agent but handled by more than one agent and that the listing agent and the selling agent may be different in the Multiple Listing Services attest to the above observation. This trend also indicates increased cooperation or competition among the licensees.

3.4 Firm Size and Complaint
In terms of the relationship between the number if licensees in the firm and frequency of complaint, the data from 1989 and 1993 are used for comparison. On the average, the number of licensees in a firm in 1989 is about 36 while that in 1993 is 40.6. In other words, firm in 1993 tends to be larger than firms in 1989. As shown in Table 5 and Figure 5, there were more complaints against the smaller firms in 1993 than in 1989. This trend is curious because it is counter to the assumption that the larger the firm (the more transaction that firms handled), the more likely there will be complaints. It could be that the nominees in the smaller firms need to be more involved in personal selling activities and, thus, have relatively less time for supervision and administrative activities. However, no explanation can be offered through the information in these files.

3.5 Opposite Trends in Disciplinary Action Files for Firms and Licensees
Concerning the relationship between the number of disciplinary action and the experience of the licensee involved, there is an upward trend for licensees with more years of experience. However, the trend for the firms where these licensees worked exhibited just the opposite, which is contrary to the assumption made earlier. It could be that organizations are better in utilizing the accumulated experience, and therefore, tend to make fewer mistakes as experiences grow. Still, this is only speculation.

3.6 Reasons for Disciplinary Action
In Figure 7, it shows that negligence and incompetence are the two highest ranking categories as grounds for disciplinary actions. These are the offenses against Regulation 9.12 and often involve both the nominee and licensee of the same firm in the same case. Furthermore, these offenses often coincide with other offenses, which made it difficult to discern the true causes for such sub-standard practices.

4. Conclusions

As indicated above, there were no significant trends found concerning the nature or underlying causes in either the complaint files or disciplinary files. For example, the ratio of complaints to total licensees during the study period is stable at about one percent. However, there may have been cases where consumers have not made their complaints officially known. Of those complaints lodged with the Council, most of them were dismissed. This raises the question of why complaints were raised initially. Was the public fully aware of what services to expect from the real estate professionals? These questions could not be answered here.
Furthermore, the existence of a special group, the "black cloud" group, is itself another cause for concern. Why is this group consistently over-represented over the years? Were they ill prepared? What did this group do differently from the other groups? Similarly, these questions cannot be answered at this time.

The operating environment where licensees perform is becoming more complex in recent years. How does this affect the supervision duties of the nominees? Who is responsible for what? What types of educational programs will be useful? How can educational programs fit into this environment? No answers can be offered from this data set.

For the disciplinary files, the story is basically the same. There were no significant trends to be uncovered, other than that more experienced firms have relatively fewer number of disciplinary actions against them. The real causes for sub-standard practices are not offered through this investigation. Were the nominees not doing their job? Were the licensees not fully aware of the duties or expectation placed on them? Was it because licensees were not fully informed of the updates in the current statutes or regulations? Again, the real answers could not be found.

All in all, this investigation into complaint and disciplinary files provides little insight into current business practices in the field. However, it does indicate that more research is needed, including the need to broaden the information base of the two files under investigation. In addition, this research has shed some light on the types of questions that could be raised in the next phase. It is recommended that a survey of both licensees and consumers is needed to find out more about the nature and causes for sub-standard practices and the probable mitigation measures for them.

APPENDIX "B"

Executive Summary of the Survey of Real Estate Office Managers on Industry Practices

Prepared by Marty Douglas and Bill Phillips

1. The survey reveals some interesting insights into current office management, including:
a) 25% of the real estate companies surveyed have owners who are not real estate licensees.
b) 25% of the offices surveyed have salespeople involved in management. Is there a correlation between this number and the above companies who have unlicensed owners? Does the number of salesperson managers reflect the number of offices with inactive, or "front-end", nominees?

2. Almost one-third of the "important roles" for managers (motivation/handling complaints/leadership) reported in the Hamilton/Stanbury survey of licensees did not appear in this survey of how managers spend their time. Is there a correlation between this and the 31% of the managers' time spent on their own sales activities?

3. Survey responses to questions concerning in-office training reveal:
a) There is no training available for experienced salespeople in 60% of the offices surveyed;
b) Only one half of 100% offices offer structured training or mentoring to new salespeople.
c) While larger offices may offer more training for experienced salespeople, only about one third of the salespeople attend training sessions.
Because of economic difficulties, Real Estate Boards and Associations are currently withdrawing or reducing subsidized education. In view of this, and the fact that two thirds of the managers interviewed believe that more training and supervision will be required in the future, where will this future training come from?

4. Nearly one in ten salespeople only receive performance reviews annually. Of the 100% offices surveyed, 15% never carry out any performance reviews.

5. While only four in ten larger offices support limiting the number of salespeople per manager, smaller offices overwhelmingly (82%) support the concept.

6. While females comprise nearly 50% of all licensees, in the survey sample, less than one in five managers were women.

APPENDIX "C"

Editorial Comment

Prepared by Pat Moore

Along with others, I have been concerned about many of the business practices taking place in the real estate industry. Recent discussions and observations made in conjunction with the Real Estate Directions Enquiry, has led me to believe that an underlying cause of many of these concerns is the framework provided by the Real Estate Act for the structure of a real estate agency. The Act does not reflect current economic realities and, in its present form, will restrict the development of a more responsible industry. The Act is, in my view, both the problem and the potential solution.

Under the Real Estate Act, a Salesperson is defined as a person "employed" by an Agent. The traditional employer/employee relationship contemplated by the Real Estate Act has long been suspect. However, during the past 20 years of evolution, the fact or fiction of an employer/employee relationship has been abandoned by most of the real estate brokerage industry. A number of factors have contributed toward this situation.

For many years companies found it necessary to offer higher and higher commission splits in order to attract and retain salespeople. This trend culminated in the mid 1970's with some offices beginning to offer salespeople 100% of the commission. The salespeople became responsible for their individual expenses, as well as payment of desk and/or transaction fees. As of 1995, it is estimated that more than 50% of the salespeople in B.C. are associated with "100% offices".

Another factor has been the accelerating growth amongst licensees of Independent Contractor status. This brings with it a concurrent renunciation of the employer/employee relationship. Although this does not provide any relief from the provisions of the Real Estate Act, economic benefits can be realized by both agents and salespeople through income tax provisions, GST, UIC and Workers Compensation. In fact, a decision by the Workers Compensation Board that requires agents to provide coverage for all its employees, including licensees, is accelerating the movement toward Independent Contractor status for salespeople.

Because of improving technology, and the ability to write off home office expenses, more and more salespeople are rejecting the traditional office environment and are working off site.

While all of the above factors are increasing the economic power and independence of the salesperson/employee, they are equally diminishing the power and authority of the agent as an employer. Since the agent is economically dependent upon recruiting and retaining salespeople, and since salespeople are no longer dependent upon any one agent for employment, dismissal has become a hollow threat. The shift of power and authority is resulting in some very serious and profound changes in the supervision and control of salespeople.

While the Real Estate Act requires agent/nominees to exercise appropriate supervision and control over their salespeople, the amount that is actually delivered is dependent, not upon what the nominee or regulators may deem appropriate, but upon what the salespeople want--and feel they can afford to receive. The economic forces which have caused power and authority to shift from the agent to the salesperson impacts, not only upon their supervision, but also upon the training they receive.

The Real Estate Council is diligent in its efforts to ensure that nominees fulfill their obligation to provide salespeople with appropriate supervision and training. In spite of this effort, however, the industry continues to move further and further away from the traditional values and responsibilities that the Council is attempting to uphold.

If the industry continues on its present path, what will the effects be on nominees, salespeople and consumers of such other current practices and trends as:
a) Work from home compensation plans for salespeople;
b) Marketing vehicles offering alternatives to the MLS;
c) The continuing increase of disproportionate distribution of income amongst licensees. (The 1991 S.W Hamilton annual survey reveals the bottom 25% of licensees received only 3% of the total income while the top 25% received 60%).
d) Unlicensed office managers;
e) Increasing disregard for Regulation 9.13 which states that "a salesperson shall not engage in any (other) business, profession or employment".

In their 1994 report to the Real Estate Institute, and based upon their research, Stan Hamilton and Bill Stanbury recommended that "the industry move to a single licensee system". The information obtained by the Directions Enquiry and the observations cited above, fully support this conclusion.

The real estate industry has long prided itself upon the responsible way in which it has regulated itself. It is time for the industry to again demonstrate its commitment to the public. Steps should be taken at the earliest possible moment to initiate an enquiry into, not only the inadequacies of the current licensing system but also the impact that evolving business practices are having upon both the public and licensees.