Incentives and #RTB (Raise the Bar)

I’m working on Part 3 of the Does Size Matter series, but a conversation on Twitter turned fairly interesting and fairly intricate, so a quick little post.  This post is heavy on inside-baseball stuff about the real estate industry and the RE.net.

First, the setup of the debate:

@ProfessionalOne (Michael McClure) whose company has adopted strict standards for its agents says on Twitter that top producers are not necessarily the best agents who give the kind of client service that he expects from his people.

I ask what the average earning of a “RTB Agent” (however one defines that) is.  Michael says it’s between $80K – $100K a year.

I then ask: “don’t you think one issue is that if pursuing a non-RTB path leads to greater earnings for the agent, the incentive is…”

@benjaminbach (Ben Bach, I assume, heh) suggests that #RTB (a real estate industry thing where various people are calling for greater professionalism, higher standards, and the like) is a good thing.  I agree, but then we get into a whole discussion.  On Twitter, which isn’t great for that.

So here’s the point:

Take someone who is the #1 overall producer in a market.  A super-agent who brings in millions in GCI, and personally earns well over the $80-$100K a year that Michael McClure talks about.  Say that agent makes $500K a year selling real estate.

Either that superagent is a supreme practitioner of #RTB or he is not.  This is a binary logical thing.

If that superagent is a true professional, highly qualified, who provides awesome client service, resulting in many referrals and so on, then #RTB should focus on copying the business practices of such superagents.

If, on the other hand, that superagent is not those things (as Michael seems to suggest) then #RTB is in trouble.

Because the argument for #RTB to the individual agent goes something like this: You’ll make less money than you could, but you’ll be happier because you’re a moral person.  Some people might agree and go that route; others, however, will not.  People have different priorities, and different ideas about what “happiness” means.

Generally speaking, however, human beings are motivated more by greed than by altruism.  If joining Michael’s firm means that I’m sacrificing personal income potential… that’s a tough sell.

Ultimately, Ben agrees that it doesn’t much matter what we insiders think about a topic; the real test is in the marketplace.  Do buyers and sellers of real estate see value in what is being offered or not?  The ultimate test, then, is in financial metrics: revenues and profits.

Ergo, my argument is that #RTB has to show that it leads to higher revenues and higher profits for everyone involved, from the agent to the broker.  We can’t simply assume it; we can’t idealize it; we can’t just pay lip service to how wonderful it would be if realtors were professionals who went the extra mile for every client.  We have to see how it does in the marketplace.

But if the incentive structure is setup from the start as “less money, more self-esteem”… that strikes me as a loser in the marketplace.

For one thing, what is the incentive for brokers to “RTB” if that leads to less money?  Maybe the RTB agents all go flock to that shop, but if all of the top-producers are at my shop, and my profits are higher than the RTB shop… why change?

Incentives = everything.

I hope that clarifies what I’m talking about.  Your thoughts?  What am I missing here?  What other proof statements could be used?

-rsh

  • Pingback: Tweets that mention my thoughts in longer form here: hope that clarifies -- Topsy.com()

  • http://twitter.com/ProfessionalOne Michael McClure

    Rob,

    In response to, “You’ll make less money than you could, but you’ll be happier because you’re a moral person,” and “If joining Michael’s firm means that I’m sacrificing personal income potential… that’s a tough sell,” please note the following:

    * Nowhere in our model do we suggest or advocate that agents make less money.

    * On the contrary, because we advocate a low overhead environment – and, ultimately, the noose around neck of most big-box brokerages IS the high overhead that not only destroys the broker's own profitability but forces the broker to charge his agents more – we offer commission splits that are more advantageous (to the agent) than almost all of the other companies in our market.

    * So, no, we don't ask or expect agents to make less – we expect them to make MORE, because our brokerage model is based on financial conservatism. That gives us the room to allow agents to keep more of what they make while still giving brokers a reasonable rate of return.

    * In fact, our model is for all intents and purposes nearly identical to Jay Thompson's, which you profiled recently in an excellent piece in Inman News. It's all about keeping overhead low so that you don't need that many quality agents to earn a decent living.

    * A point I made on Twitter that you may have misconstrued regarding top producers is that, in many cases, brokers offer sweetheart deals to these agents in an attempt at something akin to a “loss leader” concept. The end result of this approach is that, over time, top producers have been led to believe they can 'work for free' (or at very low cost to the agent) no matter where they work. This being the case, such agents typically don't fit well into ANY brokerage strategy that is based on solid financial fundamentals. This has nothing to do with #RTB – it's just business 101.

    * There are many good, honest, service-driven agents who earn between $60 and $100K per year, and these agents also tend to (for whatever reason) recognize the value that a quality broker can provide. These agents typically don't earn enough to qualify for the “sweetheart” deals the top producer agents get from brokers. They are the financial lifeblood of most every brokerage. And while we as a brand do not seek to exclude any particular strata of the production spectrum from our company, these are the agents upon which we believe our brand will be built.

    * The RTB/higher barrier to entry into our company is our branding strategy/our differentiator. We firmly believe that people want more from the industry, and all the surveys bear this out – I trust you read my blog post about how a Realtor Magazine survey showed that 64% of those surveyed said that the bar should be raised “much higher” (see at http://p1fran.com/2010/04/rtb-64-say-bar-should…). So, by having an actual barrier to entry, we can legitimately make claim to being something different from the norm that has led to 30ish years of dismal Harris Poll results (http://p1fran.com/2010/01/the-people-have-spoken/). Absent a REAL barrier such as ours, claiming to “raise the bar” will be viewed as nothing more than platitude from an industry infamous for its puffery and hyperbole.

    * The prior point continued, we're trying to attract more CLIENTS. Our goal: lead with revenue in the form of more business. Of course, we want agents and brokers as well. HOWEVER, if we create a brand image that naturally attracts more buyers and sellers – and we believe that ours does – we think that will make the job of recruiting quality real estate professionals that much easier.

    I hope this clarifies our philosophy and our approach…

    Best,
    Michael

  • robhahn

    Thanks Michael! And for the record, you know I'm hoping to see you guys just kick ass and take names. That's the ultimate proof.

    On the _brokerage_ side of things, everything you said is 100% correct: it makes no sense to have a top producer you're losing money on. Unless there's some other revenue stream that I'm missing (conversion to in-house mortgage or title?), having those sweetheart-deal agents kills a broker's bottomline.

    But let's be clear about this. What I'm wondering about is the appeal of #RTB to the individual agent. Let's say hypothetically there are two paths:

    1. As an agent, you can do a whole bunch of things that aren't in your client's best interest, but helps you make just a ton of money. (E.g., dual agency deals) This path leads to being a “top producer” that could get sweetheart deals at other brokerages.

    Or,

    2. You can join a #RTB firm where you are not allowed to do those things, because they don't serve the client's best interest, and are not in line with what you the broker expect of them. You may be a better agent, but your income will be significantly lower than the “top producer” in the market.

    What you're betting on — and what Ben is betting on — is that path #2 will lead to higher individual income. Not just brokerage profits, because frankly, it isn't clear to me that the individual agent cares that much about brokerage profits, but his or her own take-home income.

    What I'm suggesting is that if the path to riches does not go through #RTB (and there, the evidence is lacking either for or against it), then the whole #RTB movement is in trouble. It's a hard thing to get someone to make less money than he could.

    Of course, if the marketplace shows that consumers are far more likely to use a #RTB firm with strict standards, and as a result, each individual agent benefits more from association with such a firm and its practices, then the game is over: you have won in the marketplace. But until then, it seems a statement of faith to say that higher standards, more professionalism, etc. lead to higher incomes for the agent.

    That's all. I'm saying incentives have to be aligned, that #RTB has to be shown via competition as the path to greater success, to greater income. Brokers, to your point, have different business concerns that have more to do with achieving greater profitability — again, as you mention (and as I tweeted), examples like Jay Thompson and Krisstina Wise are extremely interesting given how different their strategies are.

    -rsh

  • http://www.SanDiegoJeff.com/ jeffreydouglass

    Rob, I'm still waiting for part 3 of 'does size matter”, can't wait to get my two cents into the debate.

    Now the other question, does production matter?

    Michael is a very smart Broker and I have a lot of respect for him and his ideals. I am not sure I agree with his premise completely.

    In my days when I was training new real estate agents I would always tell them to use their power for good, not evil. As we develop relationships with Clients they will begin to trust us and our council, thus the Clients interests must always come before the agents. Good #RTB fodder, but these conversations have been going on for a long long time. Again, it is about the individual.

    So the argument can be made that the higher the producing agent the less ethical they are with the assumption that they will do anything to get the deal done. In my mind that assumption is ridiculous as bad and unethical agents exists at all levels of our business. In fact give me a overworked successful agent over an agent that closed one deal last year.

    #RTB has not much to do with an agents production. It is about the individual.

    Agent production matters in that it shows the experience and skill to get the job done. It becomes more and more difficult as production levels go up and the agent has less time for focus.

    Most of the mega-producers in our business get to that level with teams of buyer's agents and assistants – some well oiled machines popping out happy satisfied Clients, and others constantly seeking the next sucker. It can work wonderfully or be a horrible train accident.

    I know some wonderfully competent moral agents that are not making a living. I know other mean spirited “out for themselves” agents making lots of money. Production is more a result of marketing and perception than reality, but it builds upon itself.

    I saw the twitter stream you mentioned today and tweeted the following:

    The tide is coming in so #RTB will be a natural occurrence of those real estate agents that don't “float”

  • http://www.SanDiegoJeff.com/ jeffreydouglass

    Michael, Sorry I did not see your reply until mine has posted. As always well explained and dully noted. We both have seen the dark underbelly of the beast and I could not agree with you more than Brokerages need to be very efficient.

  • robhahn

    Thanks Jeff -

    Part 3 is coming! I promise you :) It just takes some time with work and life and all that.

    I think what Michael is doing is smart, very smart. He's focusing on broker profitability, as he's a broker and a franchisor. Brokers should be doing that, and being strategic about it.

    The question that still remains to be answered (preferably by the market) is in relation to this:

    I know some wonderfully competent moral agents that are not making a living. I know other mean spirited “out for themselves” agents making lots of money. Production is more a result of marketing and perception than reality, but it builds upon itself.

    So where is #RTB in this “marketing and perception” vs. reality? Is it just the next slogan for agents to slap on their business cards: “I have Raised the Bar!” Or is it something — as I believe — that will be focusing on reality of providing highest levels of client service?

    If it's the latter (reality), then the next question is… will it work? Will it actually help those agents supplant the “out for themselves” agents as top producers? The answer is not as obvious as one might think at first glance.

    Back to working on Part 3. :)

    -rsh

  • http://twitter.com/ProfessionalOne Michael McClure

    Rob,

    A few additional comments:

    * In theory (and hopefully in reality), agents who stand to lose income by being “more ethical” won't make it past our barrier to entry (because of the Merit Profile testing, the vetting of the agent's professional background, etc; see at http://p1fran.com/2010/04/rtb-raising-the-bar-h…). So, no agent who qualifies to be a Professional One agent should lose income because of the integrity factor – worst case, it's a wash. We are not trying to bring on masses of agents and make them all perform ethically – that would be a wholly unrealistic objective. We are looking for the agents who are already ethical and deriving their income from 100% above-board methods.

    * The stats clearly show a serious level of dissatisfaction with the performance of the industry on the part of the gen pop (64% say the bar should be “much higher,” the Harris Polls, etc.). I don't think too many objective people debate that reality. And if those stats are correct, then we believe it's just a matter of getting our message to the masses in an effective fashion. Over the long haul, the results will hopefully show a pent-up demand for more professionalism from real estate. That's the peg on which we're hanging our branding hat.

    * Not to keep mentioning Thompson Realty, but what Jay has experienced is the best “canary in a coal mine” we've found re the probable future direction of our own brokerage concept. As already stated, our financial philosophies are nearly identical: small box/virtual office, better splits to agents than most national brands, etc. Our biggest difference is our respective barriers to entry. The quality of the Thompson Realty agent depends on Jay's ability to profile and interview potential real estate professionals. Our more formalized barrier to entry has been designed to scale and does not rely on the judgement of one individual.

    Thanks for shining more light on this important conversation, Rob.

    Best,
    Michael

  • http://twitter.com/ProfessionalOne Michael McClure

    Jeffrey,

    I always appreciate your comments and your perspective.

    To reiterate and address the point upon which I think you were commenting, there is nothing inherently “wrong” about top producers from an ethical perspective. Just as it is true there there are ethical and unethical Realtors who earn $10K per year, there are also ethical and unethical Realtors who earn $1M per year. I know many good and bad agents at any income level.

    The point I was attempting to make is that top producers *tend* to not create great ROI for their brokers, IRRESPECTIVE of their ethical orientation. I've already noted the reasons why I believe this to be true above and in other things I've written (sweetheart commission splits, loss leader concept, often more demanding, usually insist upon large in-office spaces, etc.).

    That being said, the *optimal* agent to target is the next strata down below the “top producers” in terms of production. These are the agents who make a good income but *tend* to bring less of the “intangibles” that can make a broker's life problematic and or less profitable.

    The ultimate point I'm getting at is that we believe the brokerage of the future can and will be profitable if brokers run their businesses with financially conservative methods (remember, I was a CPA long before I was a Realtor/broker/franchisor). This is where the table is set for profitability: on the expense side of the ledger. If a broker overbuilds and over-commits on overhead – which has been the norm for decades in real estate (aka, “build it and they will come”) – they've already stacked the odds against their probable future success before they've even begun. And this point has NOTHING to do with #RTB – this is just basic, common sense, lead-with-revenue, expect-the-best-but-prepare-for-the-worst business 101.

    Thanks again, Jeffrey, for the excellent contributions that you have made and continue to make regarding the entire #RTB issue…

    Best,
    Michael

  • http://www.SanDiegoJeff.com/ jeffreydouglass

    Michael,

    I can see and agree with your point regarding the “high producing” agent not being that profitable for the Broker. This is the fault of the last 10 years in the Brokers practice of buying agents. The theory being that a bigger army is better than a smaller army and by having the loss leaders of the group it would bring in more opportunity for the Brokerage – plus the could scream “we are number one”. Markets shift and this cannot be sustained.

    Many real estate agents have no clue what is costs to run a business and lease office space. Ask most what CAM is and your going to get a blank look and no response. Moreover the don't realize the legal risk that Brokers take day after day while trying to extract some profit to make the whole thing function. On the other hand Brokers built bigger and bigger temples of ego to attract more and more agents. Everyone has played a part in the bar being set lower and lower for entry.

    It is not until that lead agent leaves the Company and goes out on their own that they realize what the Broker had provided and what the cost are. By then it is too late.

    So I guess my point is the Brokers developed this problem over years of real estate appreciation when money was flowing freely as the inefficient brokerages sucked up more top producers in the hope of having enough bodies to keep the whole thing afloat. Pressure was on for Branch Managers and regional mangers to grow to fill the vast office spaces nearly empty of productive real estate agents. Agents came to expect that the grass was always greener on the other side and continue to negociate higher and higher splits with more and more perks.

    This is where #RTB lost. First it lost in the fact that most major brokers would hire almost anyone in the hopes of a few transactions to feed their lust for the almighty dollar and secondly as the market shifted to more and more transactions being done by fewer agents, those agents became free to behave in whatever way they felt. The Broker cannot lose the income and will often look the other way as unethical behavior grows like a cancer. The dollar has overcome business ethics.

    Michael, as a Broker to survive in the future you must become extremely efficient and build a brand and model that actually means something besides the sad empty claims of Brokerages past.

    That is a win win situation for both the Broker and sales associate – and certainly a win for the consumer. What say you?

  • http://www.SanDiegoJeff.com/ jeffreydouglass

    Michael, Jay's challenge will be to scale his model “brand” if he chooses to continue to grow. Having a strong leader “Broker” that filters reflects his model and brand through his agents which reflect those beliefs is a good thing. Easy to do when your small, hard if not impossible to do when you a big.

    My point with Rob is this cannot be scaled to any large scale. Once that Broker starts to waiver from his core beliefs and hires agent that don't share (believe) that vision, like a herd of cats each heads its on way. The exception to this would be an “employee” style model vs. the independent contractor.

  • http://twitter.com/ProfessionalOne Michael McClure

    Jeffrey,

    What say I?

    I say one of us is the preacher, and the other is the choir…

    My view is identical to yours. Our experiences are synonymous. You've observed the same industry-wide bad decisions that have led us to this point that I have.

    Where do we go from here?

    Financial responsibility is step 1. Out with the big, and in with the small/the virtual. Nothing else makes sense long term.

    This is the only approach that has any chance of allowing both broker and agent to earn a reasonable return on their efforts simultaneously.

    So what if some agents don't like the approach? Again, the beauty of this financial model is that the broker doesn't NEED that many agents to do OK financially, so he can be more selective and enforce tighter controls and standards. Double bonus, double benefit.

    Step 2, as you phrased it, is to build a brand that matters. And that only comes about by having some rigorous standards for the agents that grace that brand.

    Whether that's Nest saying you have to be a broker within six months of joining, or whether it's Jay Thompson and his professional experience honed from years of working in HR in Silicon Valley, or whether it's Professional One's precise barrier to entry, you have to do SOMETHING TANGIBLE above and beyond the hollow words and the meaningless platitudes that have been the rule in real estate rather than the exception.

    Thanks again for pushing this dialogue forward, Jeffrey.

    Best,
    Michael

  • http://www.SanDiegoJeff.com/ jeffreydouglass

    LOL, you are correct, we are of like mind.

    The only thing I would like to add to your statement

    “And that only comes about by having some rigorous standards for the agents that grace the brand.”

    It is all about the agents, they are the wheels that drive the brokerage. If you don't attract successful and productive agents, you won't survive. At the end of the day it is a partnership that benefits all, including most importantly the Client.

    Off to show a house!

  • http://twitter.com/ProfessionalOne Michael McClure

    Jeffrey,

    Again, we agree.

    Scaling an #RTB brokerage IS a challenge.

    And that is EXACTLY why we articulated our barrier to entry as precisely as we did.

    Without some level of precision with regard to who gets in your door, there is little hope for uniformity and consistency of the branding message, the quality of the actual client service provided, and the public's end perception of the brand.

    Also, as I mentioned in a comment below, “So what if some agents don't like the approach? Again, the beauty of this financial model is that the broker doesn't NEED that many agents to do OK financially, so he can be more selective and enforce tighter controls and standards. Double bonus, double benefit.”

    I repeat this to reinforce my obvious point that control over a relatively smaller group is inherently easier than control over a relatively larger group. Also, see Malcolm Gladwell's “Rule of 150″ (http://p1fran.com/2010/02/rtb-bigger-is-worserer/).

    Best,
    Michael

  • http://www.SanDiegoJeff.com/ jeffreydouglass

    Michael,

    I can see and agree with your point regarding the “high producing” agent not being that profitable for the Broker. This is the fault of the last 10 years in the Brokers practice of buying agents. The theory being that a bigger army is better than a smaller army and by having the loss leaders of the group it would bring in more opportunity for the Brokerage – plus the could scream “we are number one”. Markets shift and this cannot be sustained.

    Many real estate agents have no clue what is costs to run a business and lease office space. Ask most what CAM is and your going to get a blank look and no response. Moreover the don't realize the legal risk that Brokers take day after day while trying to extract some profit to make the whole thing function. On the other hand Brokers built bigger and bigger temples of ego to attract more and more agents. Everyone has played a part in the bar being set lower and lower for entry.

    It is not until that lead agent leaves the Company and goes out on their own that they realize what the Broker had provided and what the cost are. By then it is too late.

    So I guess my point is the Brokers developed this problem over years of real estate appreciation when money was flowing freely as the inefficient brokerages sucked up more top producers in the hope of having enough bodies to keep the whole thing afloat. Pressure was on for Branch Managers and regional mangers to grow to fill the vast office spaces nearly empty of productive real estate agents. Agents came to expect that the grass was always greener on the other side and continue to negociate higher and higher splits with more and more perks.

    This is where #RTB lost. First it lost in the fact that most major brokers would hire almost anyone in the hopes of a few transactions to feed their lust for the almighty dollar and secondly as the market shifted to more and more transactions being done by fewer agents, those agents became free to behave in whatever way they felt. The Broker cannot lose the income and will often look the other way as unethical behavior grows like a cancer. The dollar has overcome business ethics.

    Michael, as a Broker to survive in the future you must become extremely efficient and build a brand and model that actually means something besides the sad empty claims of Brokerages past.

    That is a win win situation for both the Broker and sales associate – and certainly a win for the consumer. What say you?

  • http://www.SanDiegoJeff.com/ jeffreydouglass

    Michael, Jay's challenge will be to scale his model “brand” if he chooses to continue to grow. Having a strong leader “Broker” that filters reflects his model and brand through his agents which reflect those beliefs is a good thing. Easy to do when your small, hard if not impossible to do when you a big.

    My point with Rob is this cannot be scaled to any large scale. Once that Broker starts to waiver from his core beliefs and hires agent that don't share (believe) that vision, like a herd of cats each heads its on way. The exception to this would be an “employee” style model vs. the independent contractor.

  • http://twitter.com/ProfessionalOne Michael McClure

    Jeffrey,

    What say I?

    I say one of us is the preacher, and the other is the choir…

    My view is identical to yours. Our experiences are synonymous. You've observed the same industry-wide bad decisions that have led us to this point that I have.

    Where do we go from here?

    Financial responsibility is step 1. Out with the big, and in with the small/the virtual. Nothing else makes sense long term.

    This is the only approach that has any chance of allowing both broker and agent to earn a reasonable return on their efforts simultaneously.

    So what if some agents don't like the approach? Again, the beauty of this financial model is that the broker doesn't NEED that many agents to do OK financially, so he can be more selective and enforce tighter controls and standards. Double bonus, double benefit.

    Step 2, as you phrased it, is to build a brand that matters. And that only comes about by having some rigorous standards for the agents that grace that brand.

    Whether that's Nest saying you have to be a broker within six months of joining, or whether it's Jay Thompson and his professional experience honed from years of working in HR in Silicon Valley, or whether it's Professional One's precise barrier to entry, you have to do SOMETHING TANGIBLE above and beyond the hollow words and the meaningless platitudes that have been the rule in real estate rather than the exception.

    Thanks again for pushing this dialogue forward, Jeffrey.

    Best,
    Michael

  • http://www.SanDiegoJeff.com/ jeffreydouglass

    LOL, you are correct, we are of like mind.

    The only thing I would like to add to your statement

    “And that only comes about by having some rigorous standards for the agents that grace the brand.”

    It is all about the agents, they are the wheels that drive the brokerage. If you don't attract successful and productive agents, you won't survive. At the end of the day it is a partnership that benefits all, including most importantly the Client.

    Off to show a house!

  • http://twitter.com/ProfessionalOne Michael McClure

    Jeffrey,

    Again, we agree.

    Scaling an #RTB brokerage IS a challenge.

    And that is EXACTLY why we articulated our barrier to entry as precisely as we did.

    Without some level of precision with regard to who gets in your door, there is little hope for uniformity and consistency of the branding message, the quality of the actual client service provided, and the public's end perception of the brand.

    Also, as I mentioned in a comment below, “So what if some agents don't like the approach? Again, the beauty of this financial model is that the broker doesn't NEED that many agents to do OK financially, so he can be more selective and enforce tighter controls and standards. Double bonus, double benefit.”

    I repeat this to reinforce my obvious point that control over a relatively smaller group is inherently easier than control over a relatively larger group. Also, see Malcolm Gladwell's “Rule of 150″ (http://p1fran.com/2010/02/rtb-bigger-is-worserer/).

    Best,
    Michael