Price’s law explains why over 180,000 realtors are about to fail and quit selling real estate forever. There is something you can do to protect yourself, but Price’s law prevents any less than 180,000 realtors from throwing in the towel over the next few years. Why are so many realtors about to fail, who is this “Price,” and what even is Price’s law? Let’s follow the journey of a realtor who goes by the name of James to uncover this all…
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James didn’t always work for himself. He’s worked at a few different companies over the course of his career and heard that getting his real estate license would be a good way to make a lot of money and work on his own terms. James was looking for a way to make some extra cash - so he decided to get licensed in the middle of 2012. After a few months of online learning, plenty of YouTube videos and some study time in the evenings after work, James was finally ready to take his real estate exam. He passed! His friends and family congratulated him, and now he was faced with his first challenge: James needed to pick a real estate brokerage to work for. Without doing a whole lot of research, James picked a local brokerage that his friend worked at. There’s one problem though. James had never even heard of Derek de Solla Price.
Born in England, at the age of just 16 Price started working as an assistant at a local college’s physics laboratory. He then attended the University of London for math and physics and graduated with a Bachelor of Science in 1942. In his mid-twenties, Price developed his theory on the exponential growth of science, a theory that many of us are familiar with today. After continuing to develop his work, in 1958 Price joined the Department of History at Yale University where he would stay for the remainder of his life. Price was “a man who make such thought-provoking statements as… …to a simpler society (this at 26 seconds). It’s safe to say that Price was a very intelligent man, but let’s go back to James the realtor for a second.
Now that James was finally licensed and picked a brokerage, he was off to the races. One thing he severely underestimated was the amount of work he needed to do to be a successful realtor. He heard of a guy in his city who was selling 745 homes a year. That’s more than 2 homes a day. He figured “well, there should be enough business to go around though, right?” Dead wrong. James was hustling hard every single day. Door knocking, cold calling, posting on Facebook and Instagram, and making YouTube videos, all while having a full-time job. He even had to ask his friends and family for business just to get his feet off the ground, yet things were still happening much slower than he anticipated. After closing only one deal in his first year, James started to lose faith in the “million dollar listing” dream and think that the rich get richer and the poor get poorer. But how does this tie in with Price?
Well, we know that Price was a very intelligent man who developed numerous major scientific contributions throughout his life. One of those contributions is called Price’s square root law, or Price’s law. Before fully understanding Price’s law, it helps to first understand Lotka’s law and the Matthew effect. The Matthew effect is pretty straightforward. It essentially states that those with an abundant mindset receive more and those with a scarce mindset continue to have less and less. What this means is if you believe you don’t have much, you’ll subconsciously keep looking for ways to prove this is true and eventually drive yourself further away from having things, and if you believe you have everything you need, more and more things keep coming to you. Lotka’s law is different though. Lotka’s law essentially states that in any area of scientific literature (such as biochemistry research), this function can explain how many authors there were and what percentage of them wrote X number of articles. In short, if there were 100 authors (an author can be one person or multiple people) who wrote at least one article, 1 author would have written 10 articles, 2 would have written 7, and so forth, to a point where each individual writer wrote 1.9 articles on average, but this graph is the result of the Lotka function. What you’ll notice here is that a very small percentage of authors write a high number of articles.
James is in his office one day and asks his broker, “How can one man sell 745 homes in a single year?” to which his broker replies “Leverage, James. No man in their right mind would sell 745 homes in a year himself, he wouldn’t sleep. That man probably never handled more than 50 transactions in a year, which is impressive nonetheless. How do you think Elon Musk became the richest man in the world? You should see just how much that man worked when he was getting started. He’d sleep in his office, wake up, and get right back to work. Have you heard of Price’s law?” This got James thinking. Price’s law? What is that? And so he went reading. He learned about Lotka’s law with the scientific literature, the Matthew effect and how it lines up with the wealth distribution… It all started to add up. It seemed like a select few people were taking up all of the business or writing all of the articles. But when James heard about Price’s law it shook him to his core.
Price’s law states that the square root of the total number of people in any given domain are doing 50% of all the work. This may not sound substantial at first, but let’s look at the numbers. If there are 100 realtors in your market, 10 of them are handling 50% of all transactions. No big deal, you just need to be in the top 10% to have a significant share of transactions in your market. But if we bump up the market size, this is where things start to get scary. If there are 10,000 realtors in your market, then only 100 of them are handling 50% of all transactions. And if we go up to the number of all realtors in North America, roughly 2.4 million, things get even scarier. Only 1,549 out of 2.4 million people are selling 50% of all homes in North America. So what does this mean for James?
James is competing with the best of the best, the ones who have all of this leverage, the systems that work, the top-tier agents, the luxury clientele, the capital. James has to start from the bottom with very limited skills just to fight with 99% of agents in his marketplace to really get the results he wants. This makes being a realtor a complete bloodbath, and what causes 90% of all business owners to fail within 5 years of starting. In 2020 and 2021 alone, there were about 200,000 newly licensed real estate agents in the US, 180,000 of which will fail and quit by 2025 or 2026 (show a visual that 90% of 200k is 180k). Oh, and the thing you can do to protect yourself. You can handle A LOT MORE work than you think, so simply DO WAY MORE. Stop thinking so small. This is what I do in my business, and it works. I was thinking small for the longest time, and now when I have a good month I double my marketing efforts where it makes sense to and I’m growing so much faster than before. This is what all the top agents and brokers do too. Top brokers are spending tens, if not hundreds of thousands per month on marketing. All you have to do is take on as much work as physically possible, then when you’re overflowing you’ll be able to attract great people to refer your extra business to and build leverage. Don’t be one of those 180,000 agents. So what happened to James? More to come on James later…
- Evan Vance, Founder of RocketSense