Notorious R.O.B.

Thinking about the dawn of a new day

I had promised in Part 2 of this series that I would tackle the so-called “K-Dub” model in this part.  Well, I’ve decided against it.  Looking at the numbers, it seems to me that from a model perspective, there’s nothing particularly novel about the K-Dub (based on Keller Williams) model.  Its appeal and power lie elsewhere — power of recruiting, passive income streams, etc. — but on paper, K-Dub is clearly inferior to an optimized Traditional model and to the employee-based TerraFirma model.  In the real world, of course, Keller Williams is the fastest growing real estate company in America for a reason.

Instead, I think it might be time to get into a meatier, opinion-based discussion about what the future might look like, based on the models thus far.  So first, for those of you inclined to mess around with spreadsheets and such, I’m attaching the actual Excel spreadsheet I’ve been using for my analysis: Brokerage Models 2.0 (.xlsx workbook file).

Also, before we dive in, please take a moment to go read this post by Nicolai Kolding, the guy who sort of started this all with his prescient post on the status quo.  Some of the comments to that post are just excellent, and this post of mine can be thought of as an extended comment to his post.

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In Part 1, we explored the traditional brokerage model by the numbers and found that there are significant issues with the current model as constructed.  It may be, of course, that my hypothetical numbers are just way off, and therefore, the entire analysis ought to be trashed.  I get the feeling, however, that in the main, the assumptions — and therefore the analysis — were mostly correct based on comments in the thread, as well as the simple fact that traditional brokers aren’t out buying luxury yachts and private planes by the hundreds.

But simply because “traditional” models — and please note that I exclude Keller Williams from the “traditional” model, as would Keller Williams itself — are broken does not mean that other models are sustainable.  We have had a number of discussions within the industry about how to address the flawed model for real estate brokerage, from low-overhead virtual models to heavyweight full-service/low-split models, to employee-based models.  Going forward, all of these models have to be put to the same test of (at least) hypothetical numbers.  If the hypothetical numbers don’t make sense, there’s little reason to think that the real world numbers (which are usually worse) would lead to the Promised Land.

One of the first I’d like to explore is the “brokerage as a law firm” model — simply because it was one of the first I had suggested back in the misty days of bygone memory.  The theory here is that producing agents — the rainmakers — would band together and form a partnership, much the same way that experienced lawyers get together to make a law firm, and employ associates who are on salary.  To test this, let us create another hypothetical brokerage for the purposes of discussion, debate, and comparison: TerraFirma.

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Math is FUN-damental!

One of the more insightful posts on the industry came earlier this week from one of the more insightful people in the industry: Nicolai Kolding, COO of Better Homes & Gardens Real Estate, and former head of M&A for Realogy. This is a man who knows what he’s talking about.

He gave a presentation (PDF) at Inman Connect in San Francisco that I unfortunately missed due to meetings and such but I think his blogpost covers most of his basic points:

- The current business model for real estate brokerage is unsustainable.

- There are four financial factors that drive revenues:

1. The number of homes sold (with each sale having two “sides”),
2. The average price of the sales,
3. The brokerage’s take after the agents’ commission splits (”percent retained”),
4. The amount (in percentage) received per transaction (”average broker commission rate” or ABCR).

- Three of these four factors have been going in the wrong direction over the past decade or so. The deterioration was covered by rising home prices during the Bubble, but sides, percent retained, and ABCR have all been headed down.

- Even if home prices recover, without changing these fundamental dynamics, the current brokerage model is unsustainable.

- The sustainable model of the future will, in Nicolai’s view, do four things:

1. Maintain (or increase) ABCR by constantly updating and improving the value proposition to consumers;
2. Increase average agent productivity;
3. Increase percent retained through brokerage-generated business;
4. Generate a far higher output per square foot of office space.

Nicolai recommends a bunch of action items in his presentation.  For example, he talks about reducing office space to 50 sq.ft. per agent, restructuring commission plans and compensation plans, consolidating certain functions such as accounting and marketing, and eliminating technology/office items such as printing, copying, extra landlines, etc.

As it happens, I think Nicolai is right on target in many many respects.  In the comments to his blogpost, there are some heavy duty thinkers weighing in on how to fix the status quo and structure a business model for brokerage that makes sense going forward.

One of the things I wanted to do — and I’ve asked Nicolai for some help on this, which he was kind enough to supply as he could — was to contextualize the discussion by looking at the numbers involved.  A lot of the talk about business models feels to me like a bunch of hot air unless we can start looking at numbers, even if manufactured/fake, just to have some basis for discussion.

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I had high hopes and fond dreams for IDX...

In all seriousness, if you’re a student of the real estate Game, you need to be reading Brian Larson on a regular basis.  The man gives out knowledge like the government gives out your money.  One of his recent posts is a fantastic read as it goes into a bit of the history of the IDX and charts some of the problems that have arisen because of it.  Go read the whole thing.  It’s an important post.

What I find especially compelling about Larson’s post is that he articulates the purpose of the IDX:

There is no definitive statement of the purpose of IDX. NAR did not adopt one with the IDX policy in 2000. The NAR IDX Implementation Guide did not articulate one in 2001. Even RMLS did not adopt an explanation for why it had done IDX. But the message of the leaders at Northwest MLS and at RMLS was very consistent:

The purpose of IDX is to ensure that brokers are unsurpassed as a source for real estate listing information on the web.

I looked back at my communications and presentations from the 2000-2001 era. Back then, we focused on IDX as a tool for brokers to make their sites ‘sticky,’ to keep the consumers on their sites once they arrived. We expected brokers would get the consumers to their sites using traditional marketing; brokers were already spending heftily on it, and adding a web address to display advertising would not increase their costs. That angle also helped to persuade large brokers, who held most of the listings, that it was cool sharing their listings in IDX with smaller competitors. Yes, the large broker and small broker sites would have all the listings, but the large broker’s greater marketing budget assured more traffic per capita (with the capitae here being those of agents). (It turns out we were wrong about that, too. Some small and medium brokers get much more traffic per agent to their sites than even very successful large-broker sites.)

This is a crucial missing piece.  I hope the IDX Implementation Guide adds a purpose statement soon as clarification.  Without this purpose statement, one could reasonably claim that the purpose of IDX is to benefit sellers as much as possible, or that IDX is meant to empower agents to be more competitive, or whatever.

Larson does point out that expectations have been… ah… shall we say unexpectedly changed with respect to IDX:

I’m spending this time on history and the way things were to make a point: I expect many brokers in IDX share my antiquated views about how IDX ought to work, and that those expectations shaped the brokers’ strategies to participate in IDX. Now that brokers have built web strategies around IDX, they cannot respond to expectation-breaking uses of the IDX data just by pulling out of IDX, as some have suggested. Preventing other brokers using your listings in IDX means giving up your own IDX. I can’t imagine a broker doing that.

Well, I can.  And I’m frankly surprised that the extraordinarily perceptive Mr. Larson did not see the possibilities.  Let me sketch out the reasoning for why a broker might pull out of IDX, and the New Expectations that such a world sets up.

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