Does Size Matter? (Part 3)

In Part 1, I explored how large law firms and big brokerages are similar, based on the forthcoming paper by Glenn Reynolds, a law professor and blogging pioneer.  Then in Part 2, we looked at how they’re different in some fundamental ways, particularly compensation models, that makes the size of Big Brokerage appear to be all of the disadvantages with none of the advantages.

In this Part 3, I would like to explore how size could be made relevant again.  There are still areas where size does matter, even in real estate.  And the future of the industry really depends on how big brokerages respond to the rapid changes in the social and economic marketplace.  Up to this point, most have been extremely slow to react, believing that a strategy of evolutionary adaptation makes more sense than a risky revolutionary act.  I no longer believe, if I ever did, that slow evolution will get the job done for the giants in our industry.  The window of opportunity is closing, and quickly at that.  Unless something fairly dramatic is done, and soon, I believe that by 2020, the large brokerage as we know it will be a thing of the past.

So, with that Cassandra moment out of the way, what are the areas where size still matters?  And how might big brokerage respond to make size matter once again?

Technology: Size Matters

My previous arguments about why big brokerage will not only survive, but actually thrive, was based almost entirely on how it answered the challenge of technology.  For example:

Rather, they have to do it with technology that is yet unavailable to the masses.  Two examples: enterprise CRM, and dynamic content management coupled to anonymous user profiling.  Imagine those deployed cross the NRT.  And that’s just pure technology.  Imagine competing with a Big Broker that has an actual, professional marketing and customer relationship team (again, see Zappos.com) empowered with enterprise software.

As of this writing, I am unaware of any traditional large brokerage that is working on big technology projects “yet unavailable to the masses”.  They’re building million dollar websites, and iPhone apps galore, but on technology that would actually let the broker offer some unique value proposition to the consumer, through an empowered agent force, there is no news.

Enterprise CRM?  Tribus offers it; the GoodLife Team, a six-agent company in Austin, Texas offers it; I have heard nothing about such a thing from the likes of NRT, Long & Foster, and HomeServices of America — just to name three of the largest brokerage companies in America.

GIS systems?  Proprietary research tools?  Expert systems?  Data mining technology?  If you’re aware of big brokerages doing these things, please let me know about them.

Even big companies that are focusing on technology, on differentiation, like @properties (#1 brokerage in Chicago) isn’t really doing new technology development as much as they are doing improved existing IT projects (e.g., @properties offers BlackBerry Enterprise Server services, which is rare in the brokerage world, but even they aren’t working on expert systems or data visualization software).  Such projects do provide a competitive advantage for now, but in terms of unique value through technology, there isn’t anyone I know of doing that.

Size matters in technology.  In fact, one of the reasons why size advantage in fields like law and real estate has shrunk over the past couple of decades is because other big companies from outside the industry, often funded by big venture capital, have risen up.  Independent law firms could in no way compete with big law firms without LexisNexis (a division of Reed Elsevier) and Westlaw (a unit of Thompson).  Much of the value of bigness was transferred from law firms to technology/information firms through the course of the computer revolution.

One reason why Big Law is in trouble...

Within real estate, the prevailing notion appears to be that there is a power struggle between the old inefficient Dinosaur Big Brands and the nimble techno-savvy Little Guys.  I think the real story is the power struggle between Big Brokerage and Big Technology to determine which sector will capture most of the value in real estate transactions.  The battle over the consumer web, at this point, appears to have been won by Big Technology (e.g., Trulia, Zillow, Realtor.com, etc.) over Big Brokerage.  Mobile real estate appears to be headed the same way.  The small real estate companies are being empowered by Big Technology in much the same way that small law firms are empowered by LexisNexis.

Doing technology development requires a few things for success.  First, it requires capital; big brokerages have it (at least for now), little ones don’t.  Second, it requires professionals; big brokerages have them (or can hire them), little ones generally do not.

Third, and perhaps most importantly, it requires a large enough base of users to spread around the cost of development and maintenance to drive per-unit costs down.  Spending $2M on a CRM system is crazy if you’ve got ten agents — that’s a $200K cost per user; it’s not so crazy if you’ve got ten thousand agents — that’s $200 per user.  Recouping the investment for a 10,000 agent firm might be a matter of improving productivity by 2%; for a small company, it’s a tall order.

Being big does provide advantages of scale when it comes to existing technology, as Matt Gentile of Century 21 mentioned in the comments to Part 1, “Century 21 Real Estate continues to provide advantages of scale when it comes to online marketing and technology platforms.”  Presumably, given their buying power, Century 21 can make something like agent websites available for less to its agents than some small independent could.

But the issue with such advantages of scale in technology is that it becomes a straight cost-vs.-benefit issue, and the advantages are often not enough to offset the costs of bigness (whether monetary in terms of splits, or psychic in terms of bureaucracy).

Technology strategy is today one of the signal challenges for big firm managers.

Branding & Marketing: Size Matters

The second area where size matters is in branding, brand management, and marketing. It seems obvious to say that big brokerages have an advantage in marketing spend.  Century 21, to use the example from above, could spend far more on Internet advertising, for example, than could The GoodLife Team.  They can do broadcast advertising, and sponsor major sporting events.  They can get their names out in ways that little companies cannot.

This has been a frequent topic on this blog, but it bears repeating: until big brokerages take their brand seriously, take branding seriously, with all that such a thing means, they are throwing away whatever advantage that size gives them.

Specifically, big brokerages have to have their brand be meaningful to the consumer.  We saw in part 2 how the value of the real estate brand actually accrues to the professional — the real estate agent.  As long as that remains the case, the brand doesn’t much matter (nor should it) to the consumer.

So what needs to happen for big brokerage brands to be meaningful?

The answer is simple, yet not easy to hear….

Start with the consumer.  What does the consumer want when he sets out to hire someone to buy or sell him a house?  We don’t have to start at zero; the NAR Profile of Home Buyers and Sellers is an annual study we can look to for insights.  In it, the consumers tell us what was important to them:

Comparable to sellers, buyers chose agents based on a referral or had used them in a previous transaction, with trustworthiness and reputation being the biggest factors in selecting an agent.

Trustworthiness and reputation (for what? perhaps a reputation for being trustworthy?) are what consumers want in a real estate agent.  Brokerage brands, then, should be bending over backwards to become shorthand time-saving devices for ‘trustworthiness’ in a realtor — in much the same way that big law firms bend over backwards to have their names equate to ‘brainiacs’.

Seems simple enough, isn’t it?  Sure — a brokerage brand should be synonymous with trustworthiness.  Obvious!

So let's talk about how trustworthy you are...

Except that law firms spend millions, if not tens of millions, of dollars every year in recruiting and training the best and brightest law students they could find.  Go back to Part 2 and check out the lengths to which big law firms go to screen out even fantastically talented and smart people to focus only on the cream of the crop.  Then they spend tens of millions of dollars paying these first and second-year lawyer larvae inordinate sums of money in order to train them to the firm’s standards of legal practice.  And every single year, incredibly talented and even brilliant lawyers “wash out” because they couldn’t make the cut to ascend to the ranks of a partner; whether that is firm politics or not, at least the brand image of the big law firm as being the equivalent of Plato’s symposium is untarnished.

To do that kind of recruiting, to have that kind of selectiveness, to maintain that kind of brand… size is important.  A small practice where partners are desperate for help to get out from underneath the sixteen cases each one is handling, for whom expensive recruiting efforts are cost-prohibitive, can’t really afford the level of effort it takes to manage the constant turnover, the constant hire-train-fire routine.

The level of branding where the consumer can come to rely on the firm’s name as an imprimatur of trustworthiness requires control over the staff in a way that is quite difficult for the 1099 independent contractor broker-agent relationship.  It requires the firm, the brokerage, to take responsibility over mistakes and to police the agents in a way that is quite uncommon in the industry.

And in order to be seen as being trustworthy, the realtor cannot be seen as having a vested interest in the outcome of her advice.  That means compensation via sales commissions are quite anathema to the idea of a trustworthy advisor, no matter how much real estate insiders want to claim that they can divorce their professional advice from their personal income.  In fact, from a branding perspective, even if they could actually be dispassionate objective professionals in spite of having a vested interest, realtors will not be seen as fully trustworthy as long as their compensation is tied to the transaction.

So… for brokerage brands to be meaningful to consumers, they must be shorthand for “trustworthiness”.  For that to happen, actions must speak louder than words.  Brokerages would need to do all of the advertising, marketing, communications, and standard branding stuff they would need to do anyhow, but in addition:

  1. Have a strict trustworthiness-based recruiting program that is publicized;
  2. Enforce the ‘trustworthiness’ brand through company policies, and terminating those agents who fall short of the standards, even if highly productive otherwise;
  3. Eliminate 1099 independent contractor status (in order to have the greater control such branding requires);
  4. Change the compensation model from commissions on sales to being paid for time and materials.

It is not at all clear to me that any brokerage is yet ready to go down this path.  Companies like GoodLife Team go pretty far down #1 and #2; certainly Michael McClure’s ProfessionalOne concept is very big on #1 and #2.  They’re small enough that they can do #1 and #2; it is in trying to do #3 and #4 where small companies run into problems.  Their brands may be more meaningful, but they’re not quite there yet.

Establishing a real, meaningful brand takes money, takes professional management, takes resources, and takes overhead (e.g., HR and recruiting-as-filtering rather than recruiting-as-sales).

That is why I believe size matters.  Bigger companies could pull this off given the will to do so.  Smaller companies will have a much harder time of it (especially #3 and #4) due to lack of a serious war chest to carry it out.

Pricing: Size Matters

Yes, size matters... why?

The third area where size could matter (although it does not today) is in price.  (I do not mean the price to the agent-buyer, but the price to the consumer.)

One of the biggest advantages of bigness in industries other than real estate brokerage is that size = economies of scale.  Purchasing power increases with size, such that bigger firms are able to acquire equipment, raw materials, supplies, and the like at a lower per-unit cost, which allows them to undercut smaller company’s prices for products or services.  Even expensive technology development (as discussed above) is cheaper on a per-unit basis for the big company.

Other industries translate such buying power into pricing power.  It’s cheaper to buy bananas at Safeway than at the corner grocer, for example.

Real estate services, however, have historical pricing practices that inhibit price competition.  Everyone charges about the same to list a house, and buyer agents are all offered more or less the same payment no matter what, because to do otherwise might result in the property being unofficially blacklisted.  That is, even if the listing broker is willing to take a listing on at 1% instead of 2.5%, the buy-side broker is offered 2.5% in order to induce them to bring buyers to the property.

The experience of companies like Redfin, which rebates portion of its commissions back to the buyer, shows that there was implicit blacklisting going on against such discount models.  Whether such discrimination still exists today is unknown.

However, assuming that the industry practice could be changed to more of a fee-for-service rather than a commission-on-sales model, Big Brokerage should have significant cost advantages over the smaller ones by leveraging its purchasing power, which in turn should affect its pricing power.  For analogues, one might look at companies like H&R Block which employs legions of low-cost tax preparers to offer low-cost tax services to individuals and companies backed up with in-house technology and expert systems, while conceding parts of the market where independents and boutiques and high-end tax consultancies have an advantage.

Nonetheless, that is a world that does not exist today.  It may be that the pricing conundrum cannot be addressed without resort to regulation… which leads to…

Politics: Size Matters

The final area where size matters is politics.  Given that real estate is a heavily regulated industry at the Federal, State and local levels (e.g., Fair Housing Act, state licensing requirements, local zoning laws respectively), to ignore the role of politics in the industry seems to be engaging in willful blindness.

And yet, Big Brokerage is surprisingly inactive in politics, having ceded that field to REALTOR Associations.  The National Association of REALTORS is the most powerful industry lobby on Capitol Hill.  State and even local REALTOR Associations are extremely active in state and local politics.

For example, based on this data on lobbyists in the State of New Jersey, where companies like the NRT and Weichert are headquartered, we find that The New Jersey Association of REALTORS employs 15 lobbyists in Trenton.  Realogy Corp (parent of NRT) employs 2; Weichert also employs 2; and ZipRealty employs 4 lobbyists in New Jersey.

It may simply be that REALTOR Associations do in fact speak for Big Brokerages, such that the latter need not concern themselves with political issues.  In many cases, that is certain to be true; for example, both would want to advocate for something like the First Time Homebuyer Tax Credit.

Nonetheless, it is a fact that in politics, size matters.  Big firms with big pockets are fare more able to influence policy than small mom-n-pop shops.  If changing the way realtors get compensated became an important strategic issue for a large brokerage, it is entirely conceivable than such a firm could get legislation passed that would allow its strengths of size to become more important.

As it happens, I despise the influence of big corporations on electoral politics.  I believe as a voter, as a taxpayer, as an American, that such influence is corrupting.  Personally speaking, I would be just fine and dandy with banning all lobbyists everywhere.  But as a strategy professional, I cannot ignore how little big brokerages even look to leverage their size and money advantage for political power, to sway regulations in their favor, or to move legislation that would advantage them.

Conclusion

I’m not even sure that there is a real conclusion to be drawn here, except to highlight the challenges in the way of Big Brokerage to make size relevant again.  The industry, the technology, the general business environment are all stacked against them.  Technology companies have a vested interest in bringing more and more capabilities to market, at the lowest cost possible, thereby empowering the small independents.  The industry’s basic practices are setup in such a way that bigness grants few advantages, and numerous disadvantages.

One thing I can conclude is that given these factors, evolutionary change isn’t going to do it for Big Brokerages.  Slight modifications to advertising campaigns aren’t going to get it done.  A sexy YouTube channel isn’t going to get it done.  In today’s economic environment, a company has to decide between going Nimble, or going Big.  And Big Brokerage, like any other large organization, is inherently not Nimble.  And going Big in real estate requires revolutionary thinking which challenges some of the oldest conventional wisdoms of the industry as a whole, such as compensation.

Forget strategy, forget execution — just mustering up the will to do such a thing is a tall order.  Time will tell whether Big Brokerages have the will to launch a revolution or not.

This is the way the world ends
Not with a bang but a whimper.
- The Hollow Men, T.S. Eliot

-rsh

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  • http://www.twitter.com/infosam infosam

    Things are changing rapidly, maybe not fast enough for you, but pretty darn quick. Your post had me noodling around with a few random thoughts:

    1) Commercial Real Estate Firms are much further down this road, with global scale, huge tech investment, CRM, GIS, TM, Paperless, etc… We've seen residential firms set up commercial divisions, KW & CB. What if some of the major commercial firms started high-end boutique residential units? CBRE Homes, Cushman & Wakefield Estates …

    2) Compensation structures are largely a function of how the buyer may finance the commission with their mortgage. RESPA & HUD rules largely prohibit the delivery of real estate services that consumers really want. Restrictions on what can be included in the mortgage and the bundling of services undermine the feasibility of one-stop shopping that consumers consistently say they want.

    3) The industry is highly compartmentalized markets, 50 states, 800 MLSs, so any disruptive business model faces hundreds of implementation challenges in order to achieve ubiquity. If RPR puts all of the legacy eggs in one basket, then it could create 1-stop shopping for the next disruptive RE business model.

    4) A lot of real estate work gets done for free by optimistic agents who let consumers waste a great deal of their time. Trying to turn these agents into salaried employees would be unprofitable. Salaried employees will require a whole new model of service delivery and specialization of labor.

    5) Things are the way they are for a reason, actually a whole bunch of reasons. There is history, tradition, capital, relationships, laws, regulations and brand equity. There isn’t much apparent organization to Organized Real Estate. Often times the inexplicability of aspects of the status quo is an indication of a lack of understanding the subtleties and complexities of the marketplace.
    Every day Hundreds of thousands of American get up to compete for a share of the real estate dollar. That competition is bringing changes and innovation into the marketplace.

  • http://www.mikebowler.net mbowlersr

    I see big brokers turning up the heat, offering more services, and being the key players for big technology portals to survive. Just imagine if C-21, CB, Re/Max, and KW pulled out of Realtor.com, Trulia, and Zillow. We all need each other to make the world go around, Some small brokers will always be successful regardless. The one's who have bought into technology, SM, and great customer service will become stronger yet to turn the big brokers heads. The big brokers need to get back into the real estate business by providing more bang for the (franchise) buck in my opinion. They can start by eliminating all costs for profile pages (Make them FREE), offering FREE Blogs, offering FREE training. Thats my 2 cents worth…for now! Thanks for contributing to the professionalism and education of our industry. Mike

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

    Rob,

    A few quick reactions:

    * Great post. I agree with the vast majority of it. I love the depth of your intellectual arguments and perspectives.

    * I don't see how the big brands can alter their existing images very readily, particularly the Big 5. For better or worse, they are what they are, and I don't see any of them really being able to somehow inject trustworthiness into the DNA of their branding (and you hit the nail right on the head with that point, as that IS the key branding element of the moment and the one upon which Professional One focused, as you accurately noted). I trust you saw the video we made about the value of branding – in the middle of the blog post at http://p1fran.com/2010/03/the-brand-illusion-pa… – which suggests the public doesn't have a clue what separates the Big 5 from one another.

    * Further, for one of these giants to suddenly turn on a dime and tell the world that they are somehow relatively more trustworthy than their competitors – when that's never been part of their branding before, when all the stats so clearly say the public thinks the bulk of the industry is NOT trustworthy, and when there are no measurable, tangible standards upon which to make such a claim credible – would be rather brazen and probably disingenuous. Without REAL standards, you simply cannot make the claim of being relatively more trustworthy.

    * One critical point you don't explicitly address in terms of your conversation about CRM solutions is that Realtors are very protective of their client data bases. I could write way too many words here. I'll shortcut all that by simply saying that I predict Realtors will be very leery of putting their client records in any data base to which their broker or anyone else has access. Realtors are extremely protective of and sometimes even paranoid about this information. My ultimate point: a big franchisor could blow a fortune creating a state-of-the-art CRM solution, and it's entirely possible that virtually none of their agents would use it.

    * While bigger, better funded franchisors can and often do offer their agents “free websites,” I would argue with great conviction that this “benefit” has no real value if these agent sites lack any muscle or presence in terms of SEO/Google rankings. And I have yet to see any big brand offer a product like this that does carry any degree of SEO sophistication. Simply providing an “online business card” – and that's all these sites really are – is hardly a competitive advantage. I look at that and just see dollars spent with virtually no ROI.

    * Another point you make that I both agree and disagree with is your comment about shifting away from the age-old independent contractor arrangement toward an employee-based model. I agree that it makes sense on paper. I disagree that it will likely ever catch on to the extent that you might think it will. Again, I could write a book, as I actually ran a company that did this for a few years. I am not saying your perspective lacks logic or is intellectually flawed. I am saying that I did this…and that it was the worst experience of my professional life. There are SO many reasons this will never work on a large scale. Just to do the job at a reasonable level requires way more than 40 hours per week, and agents have to be “on call” pretty much 16/7. Clients' schedules almost mandate that agents work nights and weekends…and days and weekdays. Try finding quality employees who will agree to work under those terms and get paid little enough to still leave some room for the broker to earn a profit. That is a very steep hill to climb. I don't think it's realistically possible. And it's certainly not going to happen with the bulk of the agents occupying the industry today. You'd basically have to throw out the masses and start over with an entirely new population of agents with no recollection of “the good old days” and the traditional compensation structure. Not to mention that it would likely cut the Realtor population by another 50 to 70%, and I don't see NAR getting too much behind a plan that would for all intents and purposes devastate itself financially.

    Thanks for continuing to push this dialogue forward. I think you have your pulse on most of the key issues confronting the industry today, and I think you got the vast majority of this post right.

    Best,
    Michael

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

    Rob, Finally I had a moment to read part 3 and I must say your article has impressed me and touched on points that had not occurred to me.

    Here are a few of my comments:

    “Within real estate, the prevailing notion appears to be that there is a power struggle between the old inefficient Dinosaur Big Brands and the nimble techno-savvy Little Guys. I think the real story is the power struggle between Big Brokerage and Big Technology to determine which sector will capture most of the value in real estate transactions.”

    This is a great point and what is really wonderful is Big Technology has leveled the playing field for the small and medium brokerages – my small one person company uses “Big Technology” far better and cheaper than big brokerages. Big Brokerages are too busy spending money on useless technology that will be out of date next week or interested in making revenue from their agents.

    “The small real estate companies are being empowered by Big Technology in much the same way that small law firms are empowered by LexisNexis.” BINGO!

    Smartphones, Pad's, Realtor.com, Zillow, Trulia, Altos Research, IDX for WordPress, Google Voice, Omni-Focus, Evernote, IDX syndication, cloud computing, Docu-sign, Zip-Forms, and Relay. More useful technology is being added every day. Small can turn on a dime while the big boys have committee meetings, special committee meetings, task forces, approval process, budget constraints, and politics.

    “Third, and perhaps most importantly, it requires a large enough base of users to spread around the cost of development and maintenance to drive per-unit costs down. Spending $2M on a CRM system is crazy if you’ve got ten agents — that’s a $200K cost per user; it’s not so crazy if you’ve got ten thousand agents — that’s $200 per user. Recouping the investment for a 10,000 agent firm might be a matter of improving productivity by 2%; for a small company, it’s a tall order.”

    Any company paying $2M on a CRM gets what they deserve – it will be on the shelf for $199.00 six months from now. Non-issue in my mind.

    “And in order to be seen as being trustworthy, the realtor cannot be seen as having a vested interest in the outcome of her advice. That means compensation via sales commissions are quite anathema to the idea of a trustworthy advisor, no matter how much real estate insiders want to claim that they can divorce their professional advice from their personal income.”

    Rob, I have one word for you, Bull S**t

    “So… for brokerage brands to be meaningful to consumers, they must be shorthand for “trustworthiness”. For that to happen, actions must speak louder than words.”

    Could not agree more, gone is push marketing – the consumer is on to it, and does not believe it.

    “That is why I believe size matters. Bigger companies could pull this off given the will to do so. Smaller companies will have a much harder time of it (especially #3 and #4) due to lack of a serious war chest to carry it out.”

    Really Rob?

    Big brokerages have been touting “We are the best” for years – how are they going to become trustworthy when they cannot get their agents behind the Brand? This is not a problem for small brokerages (that survive) that have a true “leader” and a “brand”.

    Both big and small need to do a better job in who they hire and who they let go. Small again has the advantage due to efficiency and lack of overhead. The bigger you are the harder that is to accomplish.

    Eliminate 1099 income?

    So your answer to what is wrong with real estate is to take thee entrepreneur out of real estate. This has been tried with Redfin and other models but our business is not a business of 9 to 5. Our business is more 24/7 being ready and able to deal with the multitude of challenges, working long hours and weekends, nights and evenings – not appealing for most hourly employees.

    I'm sure you will answer we should be more an Attorney with fixed office hours. We have to work around our Clients schedules and be available to them when they have time because most of them work those regular business hours!

    So Rob taking the dreamers out of real estate will only leave us with semi-motivated hourly employees. Is that someone you really want to intrust your largest asset in life with? Clients don't want to pay an hourly service.

    “One of the biggest advantages of bigness in industries other than real estate brokerage is that size = economies of scale. Purchasing power increases with size, such that bigger firms are able to acquire equipment, raw materials, supplies, and the like at a lower per-unit cost, which allows them to undercut smaller company’s prices for products or services. Even expensive technology development (as discussed above) is cheaper on a per-unit basis for the big company.”

    I have worked for several large big box brokers and all they did was make sweet heart deals with vendors and sell them at an inflated value to their agents, thereby making a profit – think they called it “preferred” partner, etc. What technology is really more affordable to the big guy than the small guy – I think you made your point the Big Technology already won.

    “And yet, Big Brokerage is surprisingly inactive in politics, having ceded that field to REALTOR Associations. The National Association of REALTORS is the most powerful industry lobby on Capitol Hill. State and even local REALTOR Associations are extremely active in state and local politics.”

    Incorrect, both big and small brokerages are very much involved in politics through their local, state, and national associations. I know many large brokers that participate fully in these leadership roles – you are just looking in the wrong place.

    “One thing I can conclude is that given these factors, evolutionary change isn’t going to do it for Big Brokerages.”

    I think that we will have both Big Brokerages in the future and small. The difference will be that these companies that survive in the future are efficient profitable, and concerned about the consumer rather than recruiting agents, and “walk the talk”. It is the Big Brokerage that launches the revolution that will be around in the future. Most of the others will die a slow death of internal collapse as agents wander off for “something of meaning” or benefit to them.

    Rob, great post as always.

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

    Michael, BRAVO!

  • robhahn

    Thanks Jeffrey; you have some of the best comments — a blogpost in themselves really :)

    A couple of responses:

    “And in order to be seen as being trustworthy, the realtor cannot be seen as having a vested interest in the outcome of her advice. That means compensation via sales commissions are quite anathema to the idea of a trustworthy advisor, no matter how much real estate insiders want to claim that they can divorce their professional advice from their personal income.”

    Rob, I have one word for you, Bull S**t

    This isn't my opinion, but widspread public perception — something I wrote about several days ago in the Rebecca Jarvis piece. In it, a TV journalist sort of casually throws out there that the attorney in the deal is the only person who doesn't have a vested interest in it, so can be trusted. Like it or not, that is the perception of realtors out there. I'm not suggesting realtors can't be trusted because of compensation; I AM suggesting that as long as you are paid on commission, it will be a very very difficult thing to convince consumers that you are objective advisors. Note that the attorney is not paid a commission.

    Eliminate 1099 Income?

    The logic is simple, but inescapable.

    As long as an agent is not paid by the broker, the agent can tell the broker to go pound sand. In that scenario, it is extremely difficult (well-nigh impossible, in my view) to build a real meaningful brand.

    The idea that salaried employees are “semi-motivated” strikes me as odd, considering your admission that technology companies have won the battle. All of those tech companies are staffed with salaried employees, not commissioned salespeople. If you think stock options are driving genius engineers at Google and Evernote, a broker can just as easily provide stock options to its employees.

    One myth that realtors probably should eliminate from their minds is the idea that employees are unable to produce or to serve customers effectively. For the record, I don't know a single attorney who works “office hours”; they are entirely at the beck and call of the client, sacrificing weekends, holidays, kid's birthdays, whatever it takes.

    Incorrect, both big and small brokerages are very much involved in politics through their local, state, and national associations. I know many large brokers that participate fully in these leadership roles – you are just looking in the wrong place.

    I think you're confusing the person from the institution. Individuals from big brokerages may be very involved in politics through the Association, but I think you could see how that isn't the same as the brokerage company being involved in politics. When the broker-owner of a mega firm is serving as one of many committee members on an Association, she is bound to act in the interest of the Association and its members, who are all agents, and the other members of the committee balance out her views. If she acted selfishly only in the interests of her brokerage company, I rather think her time on the committee would be curtailed in dramatic fashion. Her company's PAC, its lobbyists, etc. however would be advocating solely in the interests of her company.

    I'm merely pointing out the obvious arena in which size matters; by way of contrast, who do you suppose has more political power — American Bankers Association, or Bank of America? NASD (National Assoc. of Securities Dealers) or Goldman Sachs?

    Thanks again, Jeff.

    -rsh

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

    Rob, Thank you, a lengthily post requires a lengthily response, too many tasty morsels to chew on.

    “This isn't my opinion, but widspread public perception — something I wrote about several days ago in the Rebecca Jarvis piece. In it, a TV journalist sort of casually throws out there that the attorney in the deal is the only person who doesn't have a vested interest in it, so can be trusted. Like it or not, that is the perception of realtors out there. I'm not suggesting realtors can't be trusted because of compensation; I AM suggesting that as long as you are paid on commission, it will be a very very difficult thing to convince consumers that you are objective advisors. Note that the attorney is not paid a commission.”

    Clearly the TV Journalist has never been to a divorce attorney to make such a ignorant statement. Most everyone in the business world has an agenda – to make money, even the television evangelists. The attorney is paid by the hour regardless of the outcome and will gleefully bill their Clients by the hour while being happiest to have another attorney on the other side to run the bill up even further. Broad statement, yes, but as in all walks of life their exists good a bad, trustworthy and deceitful.

    Let me give you an example. Downtown San Diego was caught with many developers building at the top of the market and then having prices drop 30%. Many of those developers have buildings full of vacant units in less than desirable locations. These sellers are offering compensation to the selling agent of 4 to 6% – while the majority of the offerings in the MLS offer 2.5 to 3%. In 20 years of practicing real estate I have never once let a compensation level effect my goal of finding the best home for the Client – in fact I don't make a habit of looking at compensation offered in our MLS when I pull properties to show – I place the Clients interest above mine – which is known as a fiduciary interest.

    “As long as an agent is not paid by the broker, the agent can tell the broker to go pound sand. In that scenario, it is extremely difficult (well-nigh impossible, in my view) to build a real meaningful brand.”

    Here is what the standard California Association of REALTORS® used by the majority of California Real Estate brokerages.

    “Termination of relationship: Broker or Associate-Licensee (Agent) may terminate their relationship under this agreement at any time, with or without cause.”

    So Rob, an agent can tell a Broker to pound sand, and a Broker can tell an agent to order some new business cards. Do you think the Michael McClure or Jay Thompson put up with unethical or immoral behavior. Not really so easy when dealing with an employee and HR and wrongful termination. You may want to revisit your view which has been skewed by the reluctance of many brokers to cull the wheat from the chaff largely due to agent production.

    “I think you're confusing the person from the institution. Individuals from big brokerages may be very involved in politics through the Association, but I think you could see how that isn't the same as the brokerage company being involved in politics.”

    Rob really?

  • robhahn

    Clearly the TV Journalist has never been to a divorce attorney to make such a ignorant statement. Most everyone in the business world has an agenda – to make money, even the television evangelists. The attorney is paid by the hour regardless of the outcome and will gleefully bill their Clients by the hour while being happiest to have another attorney on the other side to run the bill up even further. Broad statement, yes, but as in all walks of life their exists good a bad, trustworthy and deceitful.

    I think the disagreement, if any, here is between reality vs. perception.

    I'm 100% in agreement that the reality is that there are trustworthy realtors (no matter how “vested” in the outcome) and untrustworthy lawyers (no matter what a TV journalist might think). But from a perception standpoint, I really do think that the average consumer would have trouble divorcing compensation model from objectivity.

    Take yourself, going to a clothing store to buy a suit. How much trust do you put in the words of the sales associate there telling you how fabulous you look in that suit? Unless you've worked with that salesperson before, and know from personal experience that he would tell you the truth whether he got the sale or not, you're not likely to view his opinion as “objective” are you? That's all I'm saying; that consumers form their opinion on your opinion in part based on how you get paid. I don't think that's all that debatable.

    So Rob, an agent can tell a Broker to pound sand, and a Broker can tell an agent to order some new business cards. Do you think the Michael McClure or Jay Thompson put up with unethical or immoral behavior. Not really so easy when dealing with an employee and HR and wrongful termination. You may want to revisit your view which has been skewed by the reluctance of many brokers to cull the wheat from the chaff largely due to agent production.

    Michael and Jay run very different models. Jay's whole value proposition is that he won't tell you how to run your business, including the brand. Now, ethical issues are a different matter for Jay, and he hasn't yet had to step in on that basis (as he'd tell you), but from a brokerage brand standpoint, Jay's the first one to tell you that he doesn't care.

    Michael is doing something different — I actually think he's trying to combine the GoodLife approach with the Jay Thompson approach: very strict corporate brand enforcement with low-overhead, low-cost model. I wish him luck, and hope that it succeeds.

    But note that in analyzing all of those models, I have had to consider the agent as the customer because that's how the current 1099 model works out in reality. The broker has little to no out of pocket cost and no real carrying cost (desk fees are the result of broker's own overhead decisions, not whether that particular agent is hired or not) for “hiring” an agent.

    Sure, brokers exist who would tell an agent to take a hike, just like any restaurant can refuse to serve a patron, or any business refuse to sell to a customer. (Well, as long as certain laws against discrimination are followed.) But I really don't think any agent considers it a disaster to get “fired” by a particular broker (today at any rate) the way an employee considers it a disaster to get fired. For one thing, can a real estate agent collect unemployment benefits if she has been terminated by a broker? I don't think so.

    What you're talking about is brand enforcement by the broker, out of his own sense of what he wants his business to be about. Those are issues of will and 'culture' for lack of a better word. What I'm talking about are fundamental financial models and structural business issues that are not influenced all that much about one broker's personal views.

    To be fair, it may be that when a broker culls the wheat from the chaff enough, even with independent contractors, as Michael and Krisstina and others do on a regular basis, that brokerage may come to have its brand be meaningful to the consumer as an imprimatur of trustworthiness. That could happen; it just hasn't yet. I for one am very curious to see how that experiment works out in practice. My personal sense is that in order to have the level of branding required, especially at scale (I think Krisstina and Michael would tell you that scalability is an open question for their business models), the 1099 scheme won't work. But we'll see.

    As for personal vs. institution, yes, really. Otherwise, you'd have to say that Ronald Phipps, the 2010 NAR President, is directing the NAR lobbying operations to benefit his brokerage company in Warwick, R.I. no matter what he might say in public. I for one don't believe that. I think people try to do the best they can to set aside their personal financial interests when in Association context. If Phipps Realty had its own lobbyists, however, they're under no such constraints.

    Great comments, great discussion. This sort of back and forth is the cherry on top of the fun of blogging. :)

    -rsh

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

    Rob, Social media is powerful in that it gives anyone that chooses to participate a voice! You and I would not be having this discussion as we live on opposite parts of the Country without SM.

    “To be fair, it may be that when a broker culls the wheat from the chaff enough, even with independent contractors, as Michael and Krisstina and others do on a regular basis, that brokerage may come to have its brand be meaningful to the consumer as an imprimatur of trustworthiness. That could happen; it just hasn't yet. I for one am very curious to see how that experiment works out in practice.”

    Rob, I believe there are thousands of brokerages (small and larger) across the County that do this today, and have done it for a long time. Brand reputation is very local and was very important until the “Big Box” boys came in and made it all about “a bigger army is a better army” with little regard to the quality of the soldier.

    If you don't think Big Brokerage is involved in politics – look at the fact that dual agency is an industry standard!

    Rob, do you think there will be lots of mega-brokers or only a few in the future? Don't you think that Big Technology has leveled the playing field and done away with the need huge agencies top heavy with expenses?

  • robhahn

    Well paragraph two of the main post says, unless something is done, and soon, and in revolutionary fashion, Big Brokerage as we know it will cease to exist in ten years….

    -rsh

  • http://www.houserefinancecenter.com Laura Morton

    Size does matter in real estate. Or the perception of size. What does an agent do for you? With the technology we have, we can go online and make a short list of say 3 houses we want to buy. We call an agent and go take a look. We will find the agent through the same process. The internet. The agent with the perception of size, will get the phone call.

  • http://www.houserefinancecenter.com Laura Morton

    Size does matter in real estate. Or the perception of size. What does an agent do for you? With the technology we have, we can go online and make a short list of say 3 houses we want to buy. We call an agent and go take a look. We will find the agent through the same process. The internet. The agent with the perception of size, will get the phone call.