Notorious R.O.B. – Conversations on Marketing, Technology, Real Estate

There is an interesting little dichotomy in the results of the survey that Inman ran recently, and published as a Special Report: “To Be A Broker: Charting a Course for Recovery“.  It’ll cost ya some money, unless you’re an Inman Premium subscriber, but I think Inman did a great job here in putting the information together.  If you care about the industry, brokerage models, and the like, you’re going to want to check out this report.  So go buy one, or subscribe.  (Disclosure: I am a columnist for Inman.com… so uh, if you subscribe and such, I think I benefit through that.  Plus, you can see my archives on Inman.com, which might be entertaining later.)

My first thought upon reading the Report was that the sample might be skewed — after all, presumably Inman contacted brokers in its database of subscriber or some such.  They have to be among the tech elites, these brokers, to be subscribers of Inman.  Then my second thought was, that real estate brokers, more than perhaps any other group of business owners in America, need a remedial class on business strategy.  My third thought was, hey, this might be a good blogpost!

Said blogpost follows.

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image: Polly Jordan, realestatecafe.com

Once in a while, realestistas get around to discussing tame, non-controversial topics.  And as any regular reader of this blog knows, I am simply allergic to controversy and disagreement.  I am glad, therefore, that people are talking over at Agent Genius about the entirely boring and controversy-free topic of dual agency.

As it happens, I happen to have a view or two about dual agency, and figured I’d meditate on a few unrelated (or maybe related) topics as follows.  Most of them are inspired by the comments to the AG post:

1. Dual Agency and #RTB
2. Dual Agency and Brokerage
3. What Dual Agency Says About Agent Value

Twitter version: Dual Agency is a symptom of so much that is wrong with real estate today.  Long version follows after the jump.

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Buried within last week’s firestorm ignited by a couple of posts over at AgentGenius was an actually important issue that all social media practitioners and companies thinking about social media need to think about.

When is a company or an organization responsible for the social media actions of its employees?

Now, while I have gone to law school, and am a member of the Bar, I am not a lawyer, and what follows should not be construed as legal advice or any such thing.  Consult your own attorneys for their take on the issue.

From where I stand, I believe the answer will depend largely on three factors: (a) the employee’s “day job” responsibilities, (b) the “social media act” at issue, and (c) employer’s level of knowledge.  But this is a first stab, and I would love thoughts/comments from the readers, especially from those who are practicing attorneys.

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Judgment Day Cometh

Agent ratings are back in the conversation, thanks to this scintillating op/ed by Kris Berg (link is for Inman premium subscribers only) who is one of the best writers in real estate today.  I have written about this topic before (here and here) and it continues to fascinate and puzzle me still.

Kris’s point essentially boils down to the fact that providing real estate brokerage service is one fraught with emotion, with unpredictable clients who don’t know what it is that a realtor actually does for them, who cannot make rational evaluations of how good or bad an agent really is.  Quantitative metrics don’t provide accurate ratings, in Kris’s view, because those focus on production rather than service.  Customer surveys are flawed because customers are ignorant on the one hand, and nuts on the other hand, and are too often influenced by how the transaction itself went down rather than how the realtor performed.

All of her points are, I think, valid and true.

Sadly, they are all irrelevant to some extent.

Fact is, agent ratings are already here in places like Yelp and Angie’s List.  Consumers will talk, will evaluate, and will rate realtors (as they do every other service provider) on their FaceBook pages, on blogs, on websites, and with each other in person.  It’s going to happen whatever the merits of such ratings.

The real issue, then, isn’t whether such rating systems are good or bad or inaccurate or legitimate, but who will do the rating and how they will do it.

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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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Marc Davison (@1000wattmarc) of 1000watt Consulting is one of the top thinkers and one of the most compelling writers in our industry, and his latest posts on the future of brokerage are examples of why one might think of Marc as Master Yoda of the Real Estate Jedi Academy.  You can read part 1 here, and part 2 here.  Marc takes on topics that are near and dear to my heart — real estate brokerage models, the future, and branding — and it goes without saying that I have to add my two pennies to the conversation.

As this post is likely to get long, let me summarize briefly at the outset.

I take Marc’s premise at face value (and agree with him), but then extend the solution beyond what he proposes.  Our difference in approach lies in our different backgrounds — Marc was trained as a copywriter, and comes out of the branding/advertising world.  I trained as an attorney and an entrepreneur, and come out of operations and marketing arenas.  As a result, where he sees the need for a complete and effective repositioning, I see the need for a complete and effective reengineering.  At the end of the day, we end up at the same place, since repositioning is impossible without a level of reengineering, and reengineering is impossible without a new understanding of brand.

Nonetheless, I believe there are valuable insights to be had by comparing and contrasting our different approaches, so to some extent, I’ll be focusing on differences between our approaches and viewpoints.  Again, I think it’s important to keep in mind that Marc and I likely agree far more than we disagree, and that our agreements are fundamental while our differences may be stylistic and relatively minor.

Having said that, let us dive right in.

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Thanks to Greg Afarian (@zipvogreg) of Zipvo, there’s apparently video evidence of my session at REBarCamp Philadelphia.

It was a great and fun session, and I hoped it would be useful to people who attended.

For more information on NetPromoter Score and Real Estate, you can check out the page on 7DS: www.7dsassociates.com/RENPS.

Thanks again Greg!  I owe you a drink next time we see each other.

-rsh

At last.

We have arrived at the destination of this series.  (See parts 1, 2, 3, and 4).

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.

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