A lot, actually. Let’s go back to 1970 to see where this sour tale begins…

It was then that the ‘lemons’ market theory was first described by George Akerlof in an article in the Quarterly Journal of Economics.

Although the original article is only a dozen pages long, it’s had a major impact on how people view markets and, specifically, markets that fail.

The title of the original article was “The Market for Lemons: Quality Uncertainty and the Market Mechanism.” It explored the relationship between quality and uncertainty, as well as how a marketplace can break down when goods of varying quality are sold through it. Under this theory, when sellers with poor quality goods try to pass themselves off as having high quality goods, the future of the entire market is at risk.

The classic case study is the used car market. To really get a feel for it, we have to imagine what it was like in the 1970s. The basic premise is that there were good used cars and bad used cars. The seller of the car – the used car salesperson – likely knew which of their used cars were good and bad quality. The buyer, unfortunately, wasn’t really going to find out until they’d owned it for a month. Unless the buyer was a mechanic or got a mechanical check prior to purchase, it was just too hard to tell which cars were good and which were bad.

It became a self-perpetuating race to the bottom, where the truly honest salesperson couldn’t compete against the salesperson that was happy to try and pass off a poor quality car for a good one.

Sound familiar?

I am absolutely convinced that this theory is currently at play in our industry. There are too many good agents who struggle to maintain fees and growth because less scrupulous companies have a vested interest in perpetuating the myth that all companies are the same.

Given the ‘lemons’ “Trust me” market dynamics in the lettings and property management industry, they follow the lower fees because they have learned not to trust agents in general. The bad agents get a free ride from the work of the good ones.

It’s a devastating consequence because the end result, if left unchecked, is for the whole market to collapse under its own weight.

So how do we sweeten up this lemons market?

The good news is that Akerlof and his colleagues didn’t just win the Nobel Prize because they diagnosed the issue, they won it because they also developed solutions.

It turns out that the lemons market theory came about because there are always some peculiar features of the market in question. Two of those features are particularly interesting and relevant to the property management industry.

There must be an asymmetry of information between the buyers and the sellers – one knows more than the other. In our case, the property management company knows more about the quality of their own services than the potential client. Although this might be obvious, according to Akerlof, there must be an equalisation of information to break a lemons market.

There must be no credible way for the seller to convince the buyer that they are, in fact, one of the good guys. In the property management industry, the good companies currently have no effective mechanism to credibly convince a prospective client that they are honest and truly deserving of the full range of fees.

If we can understand these two dynamics and develop effective ways to overcome them, we will go a long way to breaking the lemons market dynamics that are currently affecting our industry.

In short, we must address the asymmetry of information while developing a credible way to prove that the good are, in fact, good. Without this proof, growth will be hindered.

In smaller and more traditional communities the same was done through word of mouth. Now Google, Yelp, Facebook and others are doing the same thing on a broader scale.

While at the time of writing there has not been a comprehensive user review site for companies, many have been attempting to fill that space and one or more influential review platforms will no doubt emerge. If nothing else, social media is already acting as a platform for sharing experiences, although it’s known that comments generally skew towards the negative.

Companies can also take control of this by publishing more than just the most carefully selected testimonials. Some companies give potential clients a list of existing clients willing to share their experiences and invite them to call any number on the list. Others survey their clients to generate a Net Promoter Score (NPS), then publish the results. Technology makes this process easier.

Overcoming the credibility gap is a little more complicated. The core challenge is to be credible to a stranger. One thing I like to ask people in our industry is “How would you choose a property manager?” People have many different theories, but I haven’t yet met someone who said, “I’d just go with the cheapest” or “I’d read their listing kit cover to cover then choose the best based on that.” (Incidentally, that fact proves the ‘asymmetry’ point above.)

For the record, if I were choosing a company to manage my property, I would ask for two things:

The reason I would do this is that I consider routine inspections the ‘canary in the coal mine’, in that it’s often the first system to break down when things get busy. A company can quickly fall behind if it’s not paying attention. Secondly, if the reports are just handwritten and illegible, it’s obvious the company does not have a customer focus and is instead focused only on its own internal processes.

The point of all of this is that in the absence of other mechanisms, companies can use this way of thinking to find new and interesting ways to prove they are credible to prospective investors, in order to continue to grow their business.

There are some companies that have already effectively overcome these lemons market barriers and are now firmly positioned in their local marketplace as truly good businesses, commanding the appropriate growth rates and fees.