In Part 2 of this series, I spoke at length about institutional CRM and why that can be an unbeatable competitive advantage when properly implemented and used. In Part 3, we examined whether an institutionalized brokerage could shift the grounds of competition in such a way as to obtain a competitive advantage. In part 4, we looked at specialization in real estate.
The culmination of all of these factors is something I am calling “systemic brokerage”. Systemic brokerage is the future of real estate.
This is an idea that was germinating when I was still working for Realogy. As a corporate strategy freak, I’m always interested in looking at various drivers of business inside a company. Another way to ask that same question is to ask, “Who has the power?”
At Realogy, I learned that the agent has enormous power, at least as far as Realogy was concerned. It seemed so illogical at the time, when you consider the talented executives, industry giants, and other men and women of great skill and expertise who toil away at 1 Campus. But time and time again, I saw something like this happen:
When I started looking into it, I started to learn amazing things about the real estate brokerage industry.
For example, I met one agent who was a top professional, a consistent #1-3 in her market, who was on a 100% split with her broker. Think through that one with me: 100% split. The broker was still on the hook legally for all her deals. He was still paying for her technology support costs and overhead. But for every sale she made, he was making exactly zero dollars from it. Meaning, he lost money on having her work for him. Yet, he kept her on, and treated her like a queen, because having her let him boast that his brokerage was the #1 company in his market.
I met another agent from Texas who worked under the Remax brand, and was doing millions of dollars in business every year as the head of her own team. But she had nothing whatsoever to do with Remax, or her local broker for whom she ostensibly worked. She never showed up at the office, never took direction from the broker, never shared her leads or listings with the office, and was basically a one-woman operation. She had a very large support team that she was paying for herself — a marketing person, a graphic designer, sales assistants, even an IT pro — while working out of her house. I asked her and she told me that she was on a 95/5 split with her broker. She was essentially paying him a 5% royalty for the use of his broker license and for the use of his brand (including the Remax brand). I asked her why she bothered at all with being a Remax agent, or with that particular broker, and her answer astonished me: “For the insurance.”
The only reason why this agent was with that office was for the liability insurance.
So what? Superior performers have always been held to a different standard, in every industry, throughout history.
The problem is that when you have a situation where individual agents are so empowered, concepts like Brand, Quality Control, and Customer Experience go out the window. Notions like company unity become hollow jokes, as the top agent gets treated like royalty, while everyone else is treated like serfs.
Furthermore, the agent-centric model leads to untenable business models for brokerage companies. The average profit margin for a brokerage company in the United States is around 3%, according to industry experts like Jeff Wheeler of Coldwell Banker United. That was back in 2008, and may be far worse now. When you’re giving away 95% of the revenues to the agent, or even 100% of the revenues to the agent, then you simply can’t “make it up in volume”.
Instead, the big brand brokerages find themselves engaging in ever-sillier loss-leader schemes like using the superagent to draw in crap agents on whom they will actually make a reasonable profit using high 50/50 or 60/40 type splits. But only if they provide these new agents next to no support, and spend next to nothing on them. Churn and burn is all but guaranteed under such a model, and customer service goes out the window.
In other cases, the real estate brokerage operations become simply a lead-generation mechanism for the actual money-making operations such as title or mortgage.
In these scenarios, I find it difficult to classify such brokerages as “real estate brokerages” at all. They are actually in the title or mortgage business, and the real estate brokerage is just a marketing spend.
There is another way. The Bill Belichick way.
At the time I was looking into this issue and thinking about it, one of the big stories in the sports world was Terrell Owens and his dispute with the Philadelphia Eagles. The whole story of these super-agents and what they were getting away with reminded me quite forcefully of how star athletes are treated. People like Owens, Michael Vick, Pacman Jones, and Barry Bonds routinely get away with behavior that simply would not be tolerated if they were not producing on the field.
Financially speaking, these athletes can demand (and get) absolutely eye-popping contracts, because the team owners are willing to pay those terms. The rule appeared to be that teams would bend over backwards, negotiate away their future, and ignore just about any principle in order to sign the big star.
In the NFL, there was one clear exception: The New England Patriots.
Their philosophy, often described as “good players, great team” is not news. There is even a business management book written about the Patriots. The Patriots have actually practiced their philosophy in a way that is shocking to the sports fan; the most illustrative example is when they let their future Hall of Fame kicker Adam Vinatieri go to their top rival, the Indianapolis Colts, when he got too expensive. They then made it to the Superbowl with a rookie kicker.
It seemed clear to me that Bill Belichick, the coach of the Patriots, believes that it is his system that makes players great, not the other way around. It is his plays, his offensive and defensive schemes, his practice methodology, his way of playing football that makes the Patriots great, not the individual excellence of his players. Then when you add superstars to that system, superstars who understand how it works and understand how to sublimate their egos to the Belichick system, you get results like the recordbreaking 2007 Tom Brady – Randy Moss season. But without stars, Belichick’s team will find a way to win, even if that means using second and third string running backs, or putting WR’s in as cornerbacks. It’s the system that wins, not the players.
I began thinking whether this Belichick-inspired approach could work in the highly individualistic, star-driven world of real estate brokerage.
Could a broker get to a point when he can comfortably tell his top producing agent that if she doesn’t like her splits, she can take a walk? Could a brokerage operation develop a system where one could take a rank novice, stick him into the system, and have him perform as an above-average realtor?
What’s amazing about these questions is that in theory, that is precisely what a franchise is — except in real estate.
When you buy a McDonald’s franchise, you are not required to know a thing about cooking. McDonald’s will come and teach you its system, sell you all the raw materials, and set you up to be a reasonably successful restaurateur. No one is going to confuse you with Bouley, but you’ll make a pretty decent living as long as you’re hardworking, reasonably savvy, and you follow the McDonald’s system.
As a McDonald’s franchisee, you don’t need to go scouting the labor market for the best French Culinary Institute chef. You just need to find inexpensive labor that can follow orders and show up for work on time. You don’t worry about your french fries being good one day, and horrible the next, based on who is manning the fryer.
Therefore, following both Bill Belichick and Ronald McDonald, a working definition of systemic brokerage is as follows. (By the way, I’m 99.9999% sure that preceding sentence has never been written before in the English language.)
Systemic brokerage is one in which success is dependent entirely on a set of objective, definable, and teachable processes.
Personal traits and quirks of the individuals implementing the processes may be advantageous (or disadvantageous), but are not essential (nor fatal) to success, as long as the processes themselves are properly implemented with consistency.
Processes, therefore, cannot rely on individual personality traits or specific individual talents. In fact, too much individualism can be harmful to consistency that is absolutely required of systemic brokerage.
Not only is systemic brokerage doable, it is being done.
The concept of “teams” where you have a rainmaking leader (or a group) who brings on younger, more junior agents on some sort of a private arrangement, then pay support staff out of their own pockets, is something that is being praised in various places in the RE.net. I can’t see how these “super teams” are all that different from institutionalization.
Even more on point, there are major brokerage companies that are on their way of putting together the necessary infrastructure to make systemic brokerage possible.
The core challenge is to understand value. What is it, and how is it delivered?
In football, it may be that Belichick has a definite philosophy of value. “Value” might be something like, “Gain at least 4 yards per play” or “Stop the run” or whatever. And he has an understanding of how that value is actually delivered — blocking assignments, deceptive looks, trick plays, whatever. Knowing the value and the delivery method, the Patriots are able to isolate the particular skills needed for a particular position.
In real estate, I have learned that there are two broad “values”: business development, and service delivery. In both, a set of objective, definable, and teachable processes can be implemented to create and drive value thanks in large part to advances in technology, particularly the Internet.
In business development, a systemic brokerage model replaces the highly personal agent-centric “sphere of influence” model with one leveraging best practices based on objective performance criteria. For buy-side representation, it means deploying resources to develop the best web-based lead generation and customer service system possible. Investment is made not into recruiting expensive 95/5 split agents, but into well-designed, easy-to-use, and highly searchable websites with extremely strong lead generation and CRM capabilities.
Given that the vast majority of buyers start their real estate search on the Internet, going webcentric is a viable strategy today. Companies such as Redfin have raised the bar on what the customer experience should be on a real estate website, and brokerages should be studying these industry leading sites carefully. In addition, the practice of ecommerce and web-based education are more advanced outside of the real estate vertical. Leaders of brokerages — especially those with responsibility over marketing — should be studying sites like Amazon, Newegg, and (deep dark secret) the adult industry websites carefully as well.
On the listing/sale side, it means developing best practices for winning listing assignments coupled to a robust CRM and transaction management system for delivering the highest customer services using a low-cost workforce. It means creating the “why you should list with us” message based on objective and definable metrics (e.g., “sales price to list price”, “days on market”, etc.) by consulting the best practices of the most accomplished agents in the network, then creating materials, training and systems to allow even your most junior agents to deliver that message effectively.
With the technology in existence today (e.g., high quality on-demand printing, on-demand market statistics), there is no reason why getting a listing has to rely only on personal contacts and networks. In practice, to develop this system out probably means implementing one or more expert systems such that each agent has access to the collective knowledge and wisdom of the entire brokerage/brand. But companies such as Fidelity Investments and Vanguard Investments have managed this in financial services — there’s no reason to think it impossible in real estate.
Then on the actual service delivery side, systemic brokerage will rely on support personnel (e.g., transaction managers, data entry, etc.), systems, and processes to deliver consistent, high-quality service. Again, expert systems play a role here by forcing junior agents into a checklist/milestones driven workflow process to ensure that all the T’s are crossed and I’s dotted through the course of a transaction.
Over this whole operational process, systemic brokerage installs effective management with access to productivity, customer satisfaction, and customer loyalty metrics.
Systemic brokerage is the future of real estate because it delivers consistent, high quality customer service at a higher profit margin than traditional brokerage. In much of the theory and back-and-forth, what often gets missed is that brokerage is a service provided to buyers and sellers of real estate. Brand-this or systems-that are all entirely meaningless if they do not lead to higher quality service delivered more consistently across the board.
The agent-centric model of today is lacking because while some individual agents can deliver high quality service, as a brokerage company, there is little if any consistency in service delivery. A pure web-based lead-generation play (or ad-supported media play like Trulia) is lacking because it cannot provide end-to-end service quality, even if it can deliver consistently good user experience online.
Only a systemic brokerage approach — whether done by a Big Brand broker or by a small independent — can ensure end-to-end service quality as well as across-the-brand consistency. Objective, definable, and trainable processes — backed up by technology and training — are the only ways to combine them both.
The specific implementation, the specific processes are all up to the individual or to the brokerage itself. Some will be more successful than others. And new innovation will drive new systems and new processes in time.
But they will all be systems of some sort, codifying processes that derive from best practices, with support from well-designed technology systems, and leveraging enforceable (and enforced) processes for business development and service delivery.
The ultimate winner will be the system that can do that at around a 8-10% profit margin, thereby guaranteeing a sustainable competitive advantage. The next few years promise to be interesting ones for real estate.