Continuing the tradition that started when the earth was young (or last year… depending on your definition of “time”), I’d like to present this year’s version of “Predictions Guaranteed to be Wrong, Or Your Money Back”! As we saw in the report card post, last year, I went 4.5 for 7 in predictions. I hope to bat lower for this year’s predictions. Of course, I can guarantee 0 for 7 by making ridiculous predictions, like “The Jets will win the SuperBowl”.

Without further ado, the predictions for 2012…

Click here to view the embedded video.

1. The Decline Continues

There may be people who believe that it’s just a matter of time before the real estate market comes back strong, and that 2012 is the year. All that pent-up demand! All those Gen-Y kids getting married and needing starter homes! Sadly, I’m not one of those people, although I sure would like to be.

There’s too much chaos in macroeconomic trends to predict what could happen. The best case scenario has some sort of black swan event that dramatically improves employment, willingness of banks to lend, and so on. The worst case scenario — far more likely, so let’s call it a “grey swan” event — leads to global financial collapse… and I rather doubt we’ll be worried that much about industry issues if that happens. We’ll all be worrying more about finding food and fending off bandits.

So the middle-of-the-road boring prediction is that we will see neither dramatic collapse nor dramatic improvement in 2012. Instead, we’ll continue the slow and steady decline that has been the story over the past couple of years. This is particularly likely because 2012 is not only a presidential election year, but one that has been billed as “the most important election ever” by most of the commentariat. Once the GOP primary is over, I expect both candidates to propose nothing dramatic and do nothing shocking that could upset the markets. Sure, we’ll get minor policy statements from both the GOP candidate and from Obama, but it seems rather unlikely that we would see Fannie/Freddie shut down, or really significant QRM regulation promulgated, or the mortgage interest deduction eliminated. Not in 2012, not with the political situation the way it is.

Last year, I worried about possible systemic risk from foreclosuregate. That risk hasn’t disappeared entirely, but it went dormant throughout 2011 as more and more institutions reached settlements to avoid upsetting the entire apple cart, and the small lawsuits are making their way through the legal system. In 2011, the Supreme Court denied cert on a CA case involving MERS; a decision there could have been dramatic, but we soldier on without clear legal guidance for now.

But the “middle-of-the-road” doesn’t look as trouble-free as 2011 did, in retrospect. Europe is really, really, and I mean, really heating up. In case you’ve been living under a rock, or resolutely refusing to hear any news, there is a financial crisis in Europe that threatens the global economy. It isn’t just the poor cousins like Greece, Portugal, and Spain that are facing crises anymore; now we’re talking about Italy, Belgium, and France.

The reason why we should care, of course, is that most large banks — including nominally American banks like JP Morgan Chase, Bank of America, Citibank, etc. — have exposure to European debt crises in various ways. First, they might own some Italian sovereign bonds, which might default. More likely, however, they are sure to have counterparties, investors, depositors, borrowers, etc. who are European financial institutions. If they go belly-up, then American banks will not remain unscathed. If you really want to scare yourself, spend some time on the Zero Hedge blog enjoying some “doom-porn” as they call themselves.

The impact on real estate is obvious: the private mortgage market cannot recover if Europe gets any worse. Without available financing, fewer people will buy homes. Even the foreclosures and short sales can’t be moved if there are no funding sources. Furthermore, banks will turn off credit to companies because they themselves have to preserve capital to survive; that in turn means layoffs, rising unemployment and so on down the awful cascade road.

The hope today is that the smart guys in NY, DC, Brussels, and elsewhere could somehow manage the decline, reassure the markets, and keep things lurching along for a while. We’ll see if that effort is successful in 2012. My guess is that it will be moderately successful, preventing all-out panic and bank runs, but that we’ll continue to see banks being very skittish, economic growth being sluggish, unemployment not improving at all, and general malaise throughout 2012.

One possible bright spot for real estate in 2012 is that investor activity could be very high, since the global economic crisis is financial in nature: meaning, keeping money in the bank is a dangerous thing if you’re really, truly, stupendously rich. Sure, you can stock up on gold and silver as a hedge, but at some point, you’re going to want to look at putting some money into income-producing real estate. If I were a German millionaire, I know I’d want to look at some apartment complexes in high-growth places in the United States… like Houston.

Relatedly, I think we’ll see an all-time high in rental activity in 2012. The real estate company that figures out how to do rentals profitably stands to reap the whirlwind in 2012.

Click here to view the embedded video.

2. The Start of the End for IDX

Note that I am not predicting that IDX itself will go away in 2012. I am predicting that 2012 is the year when the conversation turns to whether IDX is necessary at all.

Most industry data people know that the issue of 2012 will be listing syndication. Edina Realty’s move to pull listings out of syndication was just the first; most people expect to see a wave of brokerages pulling listings from syndication, to replace it with something they can control far more effectively. I suspect that the major franchises have to be laying the groundwork to do the same. It makes little sense for Coldwell Banker or REMAX to continue to spend tens of millions of dollars on their corporate websites to then have all of its franchisees help the portals beat the pants off of them. If the name of the game is consumer attention, then everybody is in competition with everybody else. The third party portals are the first up on the data-based competition.

I don’t believe that is where things will end. Most people think I’m nuts, so I’m more than happy to be wrong on this prediction. But logic has its own force that might take some time to develop, but develop it will. I think the timeframe is towards the second half of the year.

The essential struggle is not “who should control the data” and so on. Those are actually surface symptoms of the underlying question, which goes to the heart of American real estate: “Why should I make my data available to you?”

I keep going back to this testimony by Geoffrey Lewis of REMAX during the 2006 Congressional hearings, but I think it’s 100% the issue in real estate today:

The concept is simple: you earn a customer, you get to use the MLS with the customer. The concept is not: you get free access to the MLS and then you use it to advertise the properties of your competitors in order to attract customers.

Lewis was testifying about the MLS, but you can easily replace the word “MLS” with “listing data” and you have pretty much the hot and heavy issue of today. More and more brokers are uncomfortable with syndication, because it allows other agents and brokers to use listing data to attract customers. The whole raison d’etre of a third party portal — all of them describe themselves as media companies — is to generate traffic and leads. And abuses and mistakes and bad policies in the syndication world led to what we see today.

However, the logic of “you earn a customer, you get to use my listing data with the customer” applies with exact same force to IDX, a policy that has been the source of so much drama over the past few years. I know I’ve begun hearing some opinions from strong listing brokerages that just like the portals bring a fork to a potluck, so do the buyer brokerages who do nothing but use IDX to rank high in Google and bring precious few listings to the table.

I expect that by November, at next year’s NAR Annual, we’ll start to see a small movement away from IDX at least in some markets where certain brokers have market power.

Click here to view the embedded video.

 3. Mobile Finally Arrives, At Last

I know mobile has been one of the hot topics in real estate for a few years now. And I’ve always been a bit of a skeptic, despite the fact that mobile makes all sorts of sense for real estate, because of the issue of battery life. Two years ago, I wrote that 2010 will not be the year of the mobile based primarily on issue of battery life. I still don’t believe that mobile phones will be the dominant technology for real estate consumers.

So why is 2012 the year when mobile arrives? Because of tablets. The iPad’s success can hardly be doubted, and with the larger device, battery life is no longer a major concern. Furthermore, because a tablet is not a mobile phone, there isn’t the same incentive to preserve battery life. Nonetheless, the iPad and its competitors remain high-end luxury goods for people with money. Even the base non-3G iPad ends up costing north of $700 when it’s all said and done. The 3G models can easily reach $1000 with accessories and such. The competition, like Samsung Galaxy, Motorola Xoom, the Blackberry Playbook, was not exactly setting the world on fire.

Then Amazon releases the Kindle Fire. It is priced to be affordable for most consumers, and only Amazon has the content ecosystem to compete with Apple’s iTunes universe. Both Amazon and Apple are big players in Cloud infrastructure that is a natural add-on to mobile computing platforms. I do know from some friends that Amazon has big plans for mobile, and I suspect further that Apple won’t just lie down and take it; they will come out with new products and services to compete. This is not to mention all the other companies and software developers who will be getting into the game.

All that competition implies that consumers will have a wide variety of platforms at different price points to get into mobile computing. And battery life will not be as big an issue, as most tablet devices boast 8+ hours of battery life, and that big battery is meant to be used for mobile computing, not for taking and making phone calls.

Oh yeah, and 4G rollout continued throughout 2011, and will continue in 2012. Wifi-class bandwidth over the airwaves is transformative, and more and more consumers will have tablets connected to 4G networks. Just a matter of time.

Furthermore, at the HearItDirect Charleston event (video footage coming soon, I promise, as we’re still editing more than 8 hours of video), I asked the consumer panelists about mobile, and heard some amazing things. One of them was the fact that unlike web search, consumers looked at every single real estate app in the AppStore. In a couple of cases, they downloaded them, tried them out for a while, then deleted them if the app didn’t meet their needs. I asked them specifically, “So if a brokerage or an agent had an app, you’d have found it and used it?” and the answer was unanimously, “Yes.”

That’s amazing. Considering the difficulty and the SEO gamesmanship that goes on for a website to be found in Google, mobile apps will be the Blue Ocean strategy for 2012. Yes, eventually, the space will get so crowded that the impact will be less. But at least in 2012, I see major gains for companies that develop and launch mobile apps.

Click here to view the embedded video.

4. Broker-centric Models go Mainstream

I believe that 2012 is the year when we see broker-centric models start to go mainstream. A combination of factors is making the current agent-centric model, born of the RE/MAX revolution of the late 70′s, less and less viable. Most of those factors are items regular readers of Notorious ROB have already seen here:

• Terrible real estate market leads to the growing gap between the Haves and the Have-Nots in real estate — the middle is disappearing, and that’s where conventional brokerages make their money.
• Technology continues to become more and more important, yet the cost to compete in technology continues to rise (for example, consider #3 above about mobile: app development is likely beyond the reach of most small brokers and individual agents).
• Agent teams are growing in popularity and importance, but those are nothing more than proto-brokerages without the legal liability; crucially, however, an agent team is the broker-centric model of real estate.

The battle over data syndication (and the soon to be coming battle over IDX) is at its surface about data. At the core, it’s about who should be at the center of the real estate industry: the broker, or someone else. For decades, the answer was, “someone else” — the agent, the portals, the franchises, the MLS, the vendors… anybody but the broker, who focused on recruiting.

For the past couple of years, we’ve seen the counter-movement to that agent-centric model. The poster child for the movement is  Krisstina Wise of the GoodLife Team, who is very active in writing about and speaking about the broker-centric model of her company. But for whatever reason, GoodLife Team remains very much a small boutique — it is, as a matter of fact, an agent team that became a brokerage, thereby proving my point about teams = proto-brokerage.

I believe that 2012 will see the first mainstreaming of the broker-centric model. I think it is quite likely that one of the companies active in the syndication/IDX debates — a HomeServices of America company perhaps, or someone like Shorewest, or a Leading RE company — will be the first to really implement a broker-centric strategy. Such a company is likely to have dominant market share to try it, but upon trying it, they will find that they do not lose market share, do not lose agents to competitors, but increase their profitability and ultimately gain market share by leveraging superior capabilities in technology and by managing consumer relationships centrally with a strong brand.

That is when broker-centric models go mainstream. And I believe it happens in 2012. It is unlikely to be reported widely when it does happen, since it will be implemented incrementally, step by step. But happen it will.

Click here to view the embedded video.

 5. Keller Williams Overtakes Coldwell Banker for Top Spot

It seems contrary to prediction #3 above, but I think there’s a decent chance that Keller Williams will overtake Coldwell Banker for the top spot as the largest real estate company (i.e., franchise) in the United States.

In 2011, we saw Keller Williams overtake Century 21 to become the second largest company. Only two years earlier, in 2009, Keller Williams surpassed RE/MAX to become the third largest. On that timeline, 2013 is probably the more likely year for the KW dominance, but I think there’s a decent chance of it happening in 2012.

Big part of the reason is that Coldwell Banker continues to shrink. In 2007, Old Blue boasted 120,000 affiliated agents; in 2011, Coldwell Banker talks about having “more than 86,000 sales associates and brokers“. (Note that in 2007, Century 21 had 144,000 agents, while KW had 74,000.) KW isn’t growing explosively: in 2009, when it took over third place, it had 73,000 agents, which is fewer than it had in 2007. In 2011, it has some 77,000 agents (almost 80K counting Canada, which Coldwell Banker surely does). But it is growing, while the others are shrinking.

Big part of the success of KW, I believe, is related to the success and popularity of agent teams. Of all of the companies in real estate today, KW understands and supports agent teams the most. Its operations, its technology platforms, its training courses, quite a lot of its activities in fact, are built around agent teams. In a sense, KW is a franchise of franchises — each of its brokerages (or “market centers” in KW lingo) is effectively a franchisor with a bunch of proto-brokerages underneath it.

As the bad market continues, the highly profitable and successful agent teams continue to accelerate their growth… at the expense of somebody. And market share and success beget market share and success, and so the snowball keeps rolling downhill.

It is a bit of an out-on-a-limb prediction, but it seems to me that if the trend continues, KW should gain a bit, while Coldwell Banker will lose a bit. Supposing KW gains 4% and CB loses 4%, at the end of 2012, we should have KW with about 83,000 agents and CB with about 82,500. There’s a decent chance that KW ends the year as the largest real estate company.

Click here to view the embedded video.

 6. Watson Makes an Entrance

I wrote about Watson in 2011; I think this might be one of the most significant technologies in years. And I believe that we will see Watson implemented, in some way, in real estate by the end of 2012.

The issue is money. Watson technology is brand new, and it took IBM years and years of work, and tens if not hundreds of millions of dollars to develop. IBM isn’t likely to be giving it away for chump change. Then there’s the matter of programming Watson so it works, which means feeding it terabytes upon terabytes of data. Deploying Watson, then, is likely to be a bet-your-company strategic decision costing in the tens of millions of dollars, and thousands of engineering/programming manhours. So who in the real estate industry has that kind of cash laying around, technical talent, and access to terabytes upon terabytes of data?

My bet is on Zillow, flush with its IPO cash, and a business model that doesn’t really rely upon political approval from REALTOR organizations. But I wouldn’t count out other big organizations with money: Move, Inc., Trulia, and possibly one of the major companies (Realogy? KW?) and/or NAR via the RPR subsidiary. A possibility is a MLS like MRIS or HAR that has the mandate to compete head-to-head with the portals for consumer traffic. And an outside possibility is a company like Redfin.

And a major question will be whether the Real Estate Watson will be consumer-facing or professional-facing: will it be deployed more as a “customer service” type of machine that answers consumer questions directly, or an expert system designed to provide quick answers to professionals (i.e., affiliates of major franchises, subscribers to a MLS, etc.)? If we are fortunate, we might see both varieties, to see which one will ultimately win out in the next few years.

Click here to view the embedded video.

 7. The MLS Transforms

All of the above should work towards the beginning of a transformation in the MLS: the backbone of the residential real estate industry. I believe we start to see it take root in 2012.

The broker-centric models that are the future of the industry require substantially more in technology investment than we have seen in the past decade or so. One of the things that the Internet era brought to businesses everywhere was lowering the cost of communication, particularly mass communication. Indeed, if we think back to the birth of the RE.net, one of the promises that the third party portals brought to the industry was to save on advertising costs over the then-dominant model of newspaper advertising. As the Web advanced, and brought with it things like blogs, social media, and Twitter, the cost of advertising and lead generation technology continued to drop. Back in the beginning, even the simplest website might have cost tens of thousands of dollars; today, you can buy one for $9.99 a month from any variety of website vendors.

The next wave of technology does not appear to be heading in that direction. If anything, the cost of entry is getting higher and higher, rather than lower and lower, because market power is becoming more and more concentrated. Making a website on the open World Wide Web was and is a simple matter. Making an iPad app in the closed Apple ecosystem is a different proposition, and dealing with the complexity of competing platforms (Apple, Android, and who-knows-what-else) is different still. And the cost of entry into the AI/expert systems space will make all of those costs pale in comparison.

Once, the MLS was created because computers were expensive. A single brokerage couldn’t really justify the cost involved in setting up a server room. As the cost of technology dropped, and performance rose, the need to have a MLS as a way to pool resources for technology decreased. I believe all that is about to change. We are going back into a tech cycle where doing things on the cheap won’t cut it anymore, at least not if a company wants to become a broker-centric operation.

The Web will not be the primary space for competition for consumer traffic and customer loyalty; mobile will be. And competing with Zillow for local SEO is one thing; competing with Zillow on the AppStore is a different proposition. There will be a few brokers who can afford to do so; everyone else will need to look elsewhere. And I think they’ll look increasingly at the MLS. It is the logical vehicle.

The issue that stands in the way, of course, and the debate and discussion that will begin in earnest in 2012, is MLS governance. Who will make the rules? Who will make policy, set priorities, and investment decisions? Who will, in short, control the MLS? Today, most MLS are Association-owned, and follow the rules of NAR. The Franchise IDX issue raised the possibility that at least some brokers don’t care for the status quo; the upcoming syndication fight will tell us all much about who will make policy in the end.

However it all shakes out, the role of the MLS will begin to transform once again. In the past ten years, we have seen the MLS go from an exchange for members, into a data repository for pass-thru to the Internet in various ways. What’s next for the MLS? And how many can make that transition before it’s too late?

Click here to view the embedded video.

Happy New Year!

If you’ve reached this point, it means you actually read through some 3700 words. Hey, I got nothing but love for you, the few readers who actually read this blog, instead of just the headlines. You are the few, the bored, the Notorines.

Remember, all predictions guaranteed wrong, or your money back! We’ll revisit this post at the end of the year for the grading session.

Happy 2012 everybody. May it be your most prosperous year ever, filled with hope, faith, and love.

-rsh

Related posts:

1. Seven Predictions for 2011, With Music Videos!
2. On Google’s Latest Real Estate Foray: Implications & Speculations
3. Have You Seen Me? The Role of the Broker in Contemporary Real Estate

In 2009, I batted .600 in predictions for 2010.  And I thought that was fun. It’s one thing to make predictions; it’s another to look back and see how those predictions fared.

How did I do last year in predicting events of 2011? I was hoping to be maybe 1 out of 7, since most of my predictions last year were of the doom-n-gloom variety. Sadly, I think I’m 4.5 out of 7 for a .642 batting average. Hall of Fame (Infamy?), here I come.

We’ll review my take on the predictions for 2011 after the jump.

1. The Beginning of the End of the Homeownership Society – NO

The trend towards government policy pullback from homeownership remains, but thankfully, we did not see the kind of pullback I was predicting. In fact, Congress acted to keep up support for housing by raising the FHA loan limits in November.

A lot of the news-making that happened in 2011 — the proposal by Treasury and HUD to eliminate Fannie/Freddie, the QRM regulations, the threatened end of the mortgage interest deduction — simply fizzled out in the latter half of the year. That isn’t to say those proposals are dead. But the dysfunction in Washington DC in the grips of an election season meant that nobody was willing to take bold steps backwards or forwards. So status quo it is, at least for another year.

2. Mass Confusion in Real Estate Finance – NO

Once again, thankfully, I was wrong on this prediction. The seeds of confusion and discontent have been sown, and there are lawsuits in various courts making their way through the system, but at least in 2011, we didn’t see an implosion in housing finance of the sort I was worried about. The infamous company MERS at the heart of the crisis withdrew from the foreclosure business in 2011. The institutional lawsuits I was worried about have not blown up; instead, it looks as if the big banks and investors are settling things amongst themselves. We’re not out of the woods (and likely won’t be without a Supreme Court decision), but at least 2011 wasn’t the year.

3. Double Dip in Housing – YES

Unfortunately, I have to say I was right on this one. CNN Money reported on a “double dip in housing” in the summer of 2011. Then we had the most recent report about housing prices sliding in November:

However, worse than expected sales of existing homes also pointed to sluggish housing market recovery. Existing-home sales for November rose 4% to a seasonally adjusted annual rate of 4.42 million units from 4.25 million in October, according to the National Association of Realtors. The reported figure for November was a disappointment given that October sales were downwardly revised from 4.97 million to 4.25 million units.

The average house price in the United States at the end of 2011 is the lowest it has been since 2003. I don’t know what else to call these numbers but a double dip in housing.

4. The Age of Less Will Arrive – SORTA

I think I’m giving myself half a point here. The fullblown Age of Less did not arrive in 2011 — once again, thanks be to God/Zeus/Gaea/deity of your choice here — in large part because predictions #1 and #2 did not come true. We did not see the sort of mass exodus from the real estate industry of brokers and agents.

On the other hand, the industry is continuing to shrink. NAR’s Monthly Membership Report shows that in November of 2010, there were 1.08 million members of NAR; in November of 2011, that number is 1.02 million. It’s another 5.4% drop year over year, as some 50,000 REALTORS either (a) left the Association or (b) left the industry altogether.

Anecdotal reports from various vendors who sell to the real estate industry is that it is getting harder and harder to get realtors to spend money. Many simply can’t afford it; others are taking a wait-and-see approach. Conference attendance numbers are down as well. It isn’t hard evidence, but there you have it.

Either way, based on a 5% drop, I’m giving myself half a point here.

5. The Real Estate Industry Will Fail To React – YES

Here’s what I wrote back in 2010:

Unfortunately, on the whole, I think the real estate industry will fail to react to the Age of Less. There will be exceptions, of course. But I fear that the vast majority of companies, brokers, agents, Associations, MLS, tech vendors, and others will spend an inordinate amount of time and energy rearranging deck chairs on the Titanic. There will be much effort spent focusing on ancillary issues like agent ratings, franchise IDX, the DotMLS domain, QR Codes and so on while the entire infrastructure of contemporary real estate crumbles around them.

You tell me how I got this one wrong.

6. Return of the Broker – YES

A heartening sign is that this prediction appears to have come true in 2011. Brokers large and small are starting to react to changed business realities by reasserting themselves. Two most obvious examples are the Franchise IDX issue and the recent efforts by brokers to regain control over their listing data. Edina Realty’s decision to pull listings off syndication made waves, but that’s just the tip of the iceberg. MRIS, the nation’s second largest MLS, recently put up a guest blogpost from Jon Coile, the President & CEO of Champion Realty. The money grafs:

As their business models matured and our “partners” experienced pressure to create new revenue streams, many of these same companies started quietly selling the right to be positioned on a property results page as “the agent,” as in, “contact the agent for more information on this listing.” The only problem is, “the agent” that these aggregators put forward as an expert doesn’t necessarily know anything about the property, the neighborhood or the community. They are merely agents who have bought the rights to receive a percentage of all listing inquiries for a particular zip code.

…

That erosion of data oversight and accuracy  – plus the variety of methods of inserting other agents on our listings as “the agent” – is why you are now hearing about agents and brokers making the move to remove their listing inventory from the national aggregators. [Emphasis mine]

Actually, it goes beyond that simply because of that “…and brokers”. Why brokers? Under the old model of brokerage — that of warehousing as many agents as possible — why would a broker care all that much? He didn’t for ten years. Why now? Plus, we should have heard a far louder outcry from the actual listing agents themselves; we have not. If anything, the wide disparity of opinion on the wisdom of syndication amongst the agent population suggests that there is nothing like consensus there. So what’s this all about?

To me, the answer is that the broker is reasserting himself. We’ll see how this plays out in 2012, but it happened in 2011.

7. No Groundbreaking New Technology – YES

Yeah…

Nuff said? Feel free to name a single groundbreaking technology from 2011. Coz I can’t.

Forward, Into 2012

I’m working on my predictions for 2012, along with music videos, of course. Feel free to send suggestions my way ( works) or post them in the comments. As always, your thoughts and comments are welcome.

Thanks!

-rsh

Related posts:

1. Seven Predictions for 2011, With Music Videos!
2. Quick: The Prezi From My NRG/HAR Talk Today

Click here to view the embedded video.

As a blogger, rather than a “credentialed journalist” (whatever that means), I have the freedom to just pass on rumors, as long as I label them as such. Well, consider this one of those rumors I have not confirmed yet. [UPDATE] I just got a second person to confirm the rumor. Two people saying the same thing now moves this past the realm of rumor into a confirmed report. More detail below..

I’ve heard from a reliable source earlier this evening that there are some major changes afoot at NAR. The biggest upshot of the changes is that starting in 2012, portions of the dues from NAR members will go towards supporting RPR, REALTORS Federal Credit Union, and other so-called “Second Century” Initiatives. A few minutes of Googling suggests that the original Second Century Initiatives program — which included a line item for “The creation of a national gateway for real estate information, not a national MLS” – was funded by a $16 increase in dues in 2008.

But from the start, RPR was presented as a wholly-owned for-profit business unit of NAR that would be self-sustaining, after the initial investment of roughly $25 million to buy the Cyberhomes assets from LPS and a few million for LPS data. The idea was that the data generated by RPR would be very valuable when sold to financial institutions, government agencies, and the like, and the operation would throw off enough cash not only to continue providing the system to REALTORS at no charge, but also to generate enough profit to pay back NAR.

For reference, here’s a report of a Q&A session with Dale Ross, CEO of RPR, back in March of 2010:

Why should Second Century need to be paid back?

NAR’s Second Century fund is a venture capital fund which must paid back for its investments. However, that’s not the source of RPR’s funding. RPR money comes from an NAR technology fund set up with $100 million fund (from investments); NAR’s Finance Committee stipulated that monies must be paid back to replenish fund.

Since you’re providing RPR for free, where is money coming from? What happens if your revenue models are way off?

Three scenarios: app doesn’t work, we shut down; app works and rev model works, win-win; app works but rev model off. We project we’ll need $50 million/yr to run it… if it is valuable and not generating cash, we’ll figure up another funding source. If members want it and NAR Directors decide that is best way, that could be a member dues increase. I have never seen pro formas work; I have pushed the numbers around based on a 36-month breakeven. We’ll see. (Underline added for emphasis)

Well, if the rumors that member dues will start paying for RPR starting 2012 are true, then I’m gonna take a wild stab and suggest that the 36-month pro formas were way optimistic. Since we’re looking at a dues increase in two years (launch in 2009, dues funding decision in 2011 to take place in 2012) to support RPR.

A few questions arise. The first of which is, “So uh, is this true?” I’d love for anyone who can confirm or deny the rumor. Please feel free to contact me privately via email, twitter, Facebook, phone, whatever. My contact information is on the About page. More questions follow, all of which assume this rumor of dues funding for RPR and other Second Century Initiatives is indeed true.

So Uh… Just How Badly Is RPR Doing?

Since RPR was supposed to be not only self-sustaining to the tune of $50 million per year, but profitable to the point of repaying the $25 million to the $100 million “technology fund” over some period of time, I’m gonna have to guess that RPR is falling way short of projections. So, how far short is RPR of its revenue and profit targets?

Are we talking about a couple of million bucks as a short-term cashflow crunch? Or are we looking at permanent downward revisions to estimates?

If we are looking at permanently lowered expectations… how much lower are we talking about? In other words, Dale Ross thought it would cost $50 million per year to provide RPR. Three year breakeven would suggest $50 million in revenues by 2013. So going into 2012, when the NAR subsidies start, are we talking about $48 million in revenues, therefore requiring $2 million a year in subsidies? Or are we talking about the reverse: more like $2 million in revenues, requiring $48 million in subsidies.

There’s a rather large difference between the two numbers. For reference, the whole REALTOR Party Political Survival Initiative that caused so much drama last year, only raises $40 million per year.

[UPDATE: I just got word that the amount is in the $20 million range for support to RPR. It is unknown at this time whether that is $20 million per year, which would be a gigantic number, or $20 million over some period of time during which RPR could/should/might become self-supporting. This is not yet confirmed.]

Speaking of RPPSI…

Relatedly, one wonders whether the passage of RPPSI had anything to do with this dues support decision for RPR (and other Second Century Initiatives, like the REALTOR Federal Credit Union).

At the time of RPPSI being passed, it was explicitly stated that the $40 dues increase would be dedicated to political activity, and that it was impossible to get the kind of money NAR needed to fight off banks, unions, and other moneyed interests after the Citizens United ruling by the Supreme Court. The financial impact on NAR was to be significant:

To fund such a nationwide effort, the REALTOR^® Party Political Survival Initiative proposes a dedicated dues increase of $40. Because it is “dedicated” to this initiative, the dues increase would be used exclusively to fund political advocacy efforts. Nearly 70 percent of this money is earmarked for state and local issues. If it is approved, over 50 percent of the NAR budget would be devoted to political advocacy, which consistently ranks among members as the number-one benefit they receive from NAR. (Emphasis added)

Furthermore, much was made of all of the cost-cutting that NAR had done, was doing, and was going to do:

What is NAR doing to cut costs and operate more efficiently?

Much of what NAR does, including all governance activities and meetings are NOT funded by dues dollars. Dues dollars are spent on products and services that directly benefit the members. With this proposed increase, more than 50 percent of NAR dues will be spent on the number one service that members want from NAR — political advocacy. Additionally, recognizing the impact that the current economic environment has had on Realtor members across the country, beginning in 2011, NAR has instituted stringent cost cutting measures across all operational areas of the organization. In addition to a hiring freeze that will serve to reduce NAR’s staffing levels by 10%, remaining staff are also impacted by salary freezes and reductions to benefits.  Every operating area of the organization has instituted austerity measures designed to trim up to 20% off their expenditures, resulting in an overall savings plan of $12 to $15 million per year for the next three years.  These cost savings are designed to be able to provide the most efficient and effective program services.

The basic argument was that NAR had cut to the bone, but this political issue was so big, so important, so momentous that it required the dues increase.

So, um, if over 50 percent of the NAR budget is devoted to political advocacy, and NAR dues are $85 per year plus the $40 for RPPSI, it would imply that half of the $125 million per year would go towards politics. NAR had put in austerity plans to cut $12 to $15 million over the next three years, so as to be able to operate member services on $62.5 million.

Where is the money to support RPR and the other Second Century Initiatives coming from? There is a legitimate question as to whether the RPPSI funding passing allowed some re-allocation of the NAR budget away from political advocacy (the most important work of NAR, to face monumental issues) towards these initiatives.

Is the Decision Made?

Finally, my source told me that the decision to financially support RPR and other programs was presented as a done deal. It was already made, and would start in 2012.

But if we take Dale Ross’s word for it, member dues would go towards paying for RPR only if “members want it and NAR Directors decide that is best way”.

The NAR Convention in Anaheim is some two weeks away. The Board of Directors of NAR has not yet met to vote on this issue. If there has been a member survey of any kind, or any sort of outreach to membership to find out if they want RPR or not, I’m not aware of any such effort. (Of course, not being a member of NAR, I couldn’t say whether such a thing was done or not. But many of you are members, and could tell me if you’ve seen such outreach.)

So if the decision has already been made, who made them? Did Dale Ross simply mis-speak back in 2010? Was it just marketing-speak, as opposed to actual policy?

[UPDATE: I am hearing that yes, indeed, the decision has already been made. This will not be put to a vote of the Board of Directors in Anaheim. This is as yet unconfirmed.]

Rumors, Questions… Confirmation?

As I’ve noted, this is just a rumor at this point, but I trust my source, who has been reliable in the past. I’d love to be able to confirm or deny the report, so that’s step one.

Assuming the rumor is true, then the questions I raised are ah… interesting ones to say the least. And there are, probably, other questions that could be raised given a little bit of thought.

So I want answers. And many of you are entitled to them.

Click here to view the embedded video.

Related posts:

1. Liveblogging Dale Ross and Marty Frame Presenting RPR to the MLS Executives Session
2. No More Drama and Hype: Known Facts on RPR

Don't Tase Me, Bro!

Ah, the horse ain’t quite dead yet, Matt Dollinger. Nor is the discussion a moot point.

I testify, cuz at the September dinner of the Wired Straits Social Club (kinda like a Houston-based Lucky Strikes, which I started in NYC), we discussed this issue at some length. And got something out of it.

I figured I’d share at least one insight from that with you.

First Of All…

I need to clarify something from my original post. I don’t think I did a good job of stating the point.

I wrote:

If “real estate used to be about relationships” because it was, at its heart, a service-business rather than a skill-business… what is it today? And if the answer is, “real estate is (or needs to be) a skill-business, the way law and medicine are”… then consider the wide-ranging changes that would need to occur throughout every level of the real estate industry.

What I should have made perfectly clear was that I do not necessarily agree with Chris that real estate is not a relationship business. I was asking what real estate would look like if it were not a relationship business.

The various responses to the post took a straw man, I think, and beat him dead. The straw man is the idea that relationships are unimportant in business, or that real estate agents and consumers do not have a relationship. Many people would ask, “Well, what do you mean by ‘relationship’?” or say that it isn’t so much about a personal relationship as much as it is about being “top of mind”.

To avoid killing straw men and red herrings, let’s be clear that relationships are important in real estate, as they are in any business involving human beings. Hell, even in a pure-skills business like professional football, guys like Randy Moss sit on the sidelines despite having mad football skillz because his relationship skillz suck.

My point was, however, and remains this: I do not believe that consumers hire real estate agents because of the agent’s skill. The reason is largely that the consumer has no real way of evaluating agent skill.

One result is that referrals become incredibly important, because consumers figure that if their friend had a good experience with a particular agent, then they’re likely to have a good experience. Another result is that agents have to stress service, service, and more service, because they have so few ways to distinguish themselves from others on the basis of superior skill.

You can understand this if you consider a profession on the opposite side of the skill vs. service spectrum. Say something like commodity traders. For whatever reason, there are men and women who are just somehow gifted with the ability to trade large sums of money, make correct bets on market movements, and earn literally billions of dollars for their employer/client. If you want to make your $1m into $5m, and this guy has the track record of somehow being a step ahead of the market all the time, but he’s a total prick, you’re gonna hire him. It’s that simple. You could be like, “Man, he’s a jerk, and he smells bad, but… damn, if he doesn’t know how to make money.”

Other professions that are similar are in the creative fields. A top notch fashion designer might be a total nightmare to deal with, but if she creates amazing products year after year that sell for hundreds of millions, you’ll put up with it. A brilliant computer programmer, who is socially stunted, is still someone you’d hire. Steve Jobs is absolutely famous as a tyrant and a world-class prick; a “lovecat” the man is not. But that doesn’t stop you from buying his stuff, or from wanting to work with and for him.

Those people, you hire because of their skills. And there are plenty of ‘proof statements’ of their skills, whether that is a track record of investment returns, the actual designs themselves, or computer code.

Real estate, however, is a business that is today, as of this writing, one in which it is difficult to find ‘proof statements’ of skill. What exactly would you look at? Time on market? Sale-to-list ratio? That doesn’t help if you’re looking for a buyer agent. Any statement like, “I save my clients 15% on average in buying a home” is impossible to prove, since you’re looking to prove a counterfactual (that is, “what would the home have sold if you weren’t working for me?”). At best, you could try to compare to comparables, but since each property is unique, who can really say that the reason for the 15% discount is the skill of the agent vs. something about the house?

Even someone like Chris or Inna Hardison would find it nearly impossible to evaluate just how brilliantly an agent handled his/her transaction. Here’s Inna, from her wonderful post on the topic:

I think that as a consumer, I’d want the same thing from my real estate agent as Chris – save me the headaches of dealing with paperwork, listen to my needs, make the process as painless (for me) as possible and be there when I need you. In short – handle my transaction seamlessly, brilliantly. I don’t flip houses, so statistically, you probably won’t sell me another home, but if you handle my transaction brilliantly and I don’t hear from you again unless I have a problem with the home – I will recommend you to my friends and family. I will even dig for your name if I’d forgotten it, even if I have to resurrect my HUD statement to do that. What I know for a fact is that I will never refer business to someone just because they keep sending me cards or gifts or because they are my FB friends or twitter followers. I will NEVER risk my reputation with people I actually do have a relationship with because of convenience.

This strikes me as absolutely correct. But… how would Inna know that the agent handled her transaction seamlessly, brilliantly? If she is evaluating an agent on the basis of lack of headaches… someone who truly moves heaven and earth, rescues a seemingly impossible deal from the brink, through her experience, expertise, knowledge of the market, negotiating ability and the like would end up looking crappy, because… oh boy, there were a lot of headaches.

Meanwhile, perhaps the smooth as silk, no problems whatsoever transaction was so smooth because Inna ended up overpaying by $20,000 and just surrendered all sorts of rights because her agent did not know what she was doing. How would you know?

And Yet, The Discussion Is Not Moot

With the above, it would perhaps appear that even discussing this is a waste of time. And yet, it is not.

Because the issue of relationship vs. brilliant execution, which strikes me as a good stand-in for “service vs. skill”, is implicated in what brokers, agents, trainers, vendors, and the industry as a whole does today. And that’s what we discussed at Wired Straits.

Ken Brand, an industry expert if there is one, who wrote a book trying to help agents reach their full potential, is a member of Wired Straits. And he would disagree with Chris Smith 100% about the importance of relationships.

But in our talk, here’s one thing that became obvious:

Whether real estate is or is not a relationship business, fact of the matter is that it is taught to agents as if it were.

Consider all of the training available to the real estate agent. Consider what the typical manager stresses in a company meeting. Consider what the industry values when award time rolls around. Consider all of the conferences you might have attended in the past few years, and the major topics that were drawing huge crowds. Consider all of the vendors selling solutions to the industry.

Almost all of them have to do with marketing, with sales, with lead generation, and with generating business. Precious few have to do with actually servicing the actual client.

The agents behave the same way. How many spend their extra time reading up on the latest local laws and regulations that might have a tremendous impact on their local market, versus spending hours writing blogposts to “establish local expertise”? How many would attend the local zoning board meeting, versus attending a webinar on using Facebook for real estate? How many choose to spend money on an IDX website, versus spending money on transaction management?

In terms of time spent, I recall seeing one statistic that the average agent spends 90% of her working hours trying to get new business, and 10% of her time actually working on the client’s transaction.

I remember talking to a longtime professional about this phenomenon a while back: Why do real estate agents spend so much time on marketing and so little time on, y’know, real estate? The answer I got was, the real estate part is easy; the hard part is getting business in the door.

So… What?

I’ll leave the detailed takeaway for managers like Matt Dollinger and Ken Brand and professionals like… well… you. But at a high level, here’s one takeaway I might want to spend time thinking about.

If the consumer is more like Inna, wanting someone who handles her transaction brilliantly (however that’s defined, however that’s evaluated), then shouldn’t the broker, the manager, the trainer, the vendor, and the agent spend far far far more time thinking about, improving, and providing that “brilliant transaction experience” and less time worrying about lead generation?

Shouldn’t every sales meeting start and end with ways that the agent can provide even more value, understand the local market even better, learn more about local regulations, or building codes, or whatever else the civilian doesn’t know and has no reason to know? Shouldn’t Associations be giving out awards not only to the top producer but to the agent who has delivered the most brilliant transaction experience?

Is it unrealistic to think that if you spent less time trying to build relationships and more time being the best damn real estate professional in the world, that you’d end up being top of mind far more often? That if you took all the effort you put into talking about yourself into just blowing the client away, that you might get more referrals than fewer?

Or to put it into Twitter-friendly terms, how about… “Less talk; more doing“.

The Wired Straits Takeaway

With all that said, here’s the one takeaway from our meeting, which we got to after much discussion:

In every single transaction, there is at least one opportunity in which the agent can do something memorable. It doesn’t matter how vanilla, how routine, how run-of-the-mill the transaction is for you the agent. For the consumer, this is a major, major transaction. There is at least one opportunity to leave a lasting impression of brilliant execution. If it doesn’t exist, you’re not looking hard enough. Find that opportunity. Do that thing. Leave one lasting memory in the client’s mind.

It will come back to you hundredfold.

-rsh

[Republishing in an effort to eradicate FB spam...]

Related posts:

1. If Real Estate Is Not a Relationship Business, What Business Is It?

RealTrends does some great work. I love playing with their numbers, when they become available. The most recent one is a project they did with the Wall Street Journal ranking the top 1000 real estate agents and teams in the United States. (And, no, I have no idea how they got the data, what their methodology was, etc.)

Click through to the RealTrends site to see the top 250 real estate agents and agent teams. Congratulations to all Notorious readers who made the list, in case such a person exists.

I had a few minutes so just played around with the numbers a bit. Some interesting, or not so interesting, findings there.

The Keller Williams Dominance

First, it’s impossible not to note the continued dominance of Keller Williams brand in any of these “Top XYZ” lists for real estate. By my count, 122 of the 255 “Top 250″ teams (there are a bunch of ties) are part of a Keller Williams office. Seeing as how KW recently overtook Century 21 as the second largest real estate brand (by affiliated agent count, anyhow), and not a single Century 21 agent/team makes the list (I’m not even sure if C21 allows agent teams)… I have to wonder if there’s a relationship between the two things.

The other factor of dominance is the gap between KW and everyone else. In second place is Coldwell Banker with 38 agents/teams on the Top 250 list; in third, we have REMAX with 31. KW more than triples the second place brand. That’s amazing. By the way, Prudential comes in fourth with 19, and then no one else even breaks double digits.

Maybe the numbers are not as stark in the full Top 1,000 list as it is in the Top 250 list. But based on this list, the domination of KW over everyone else is pretty thorough.

More Fun With Numbers

The average number of sides for the “Top 250″ list is 241.2, while the median is 205. That means the average Top 250 agent/team is doing 4.64 transactions per week, assuming a 52-week year with no time off. I wish the study/list had the number of team members listed as well, so we could see how many transactions per team member that is… but hey, I’m happy to get whatever data I can.

Using the national median house price for July 2011 of $222K (from Census Bureau), 2.5% commission rate per side, I calculate that the average agent/team in the Top 250 brought in $1.4 million in GCI. Assuming a 80/20 split (which is likely very very low for such top producers, especially at KW where you go to 100% after capping), each agent/team took home a million bucks on average ($910K for median).

It goes without saying that using national median numbers is highly inaccurate. In markets like Las Vegas, the median price is likely to be far lower than $222K. In markets like Reston, VA, $222K might get you a couple of parking spots.

RealTrends did do a Top 250 Teams by Volume, which would take the local market prices into account, but I didn’t feel like playing with those numbers today. Maybe tomorrow… or someone else could do the Volume-based post. But one quick thing. Take the top team, according to that list, the Creig Northrop Team of Long & Foster in Maryland. It did $308 million in volume in 2010. I’m pretty sure (though I haven’t seen the 2010 RealTrends brokerages list) that if the Creig Northrop Team were a standalone brokerage, it would place in the Top 250 Brokerages as well.

Quick Takeaways?

I don’t know what sort of real conclusions you can draw from any of this. The data is wonderful to have, but sort of thin on all sorts of important information (number of team members, paid staff vs. commissioned agents, etc. etc.), and I really haven’t done a deep dive here. Having said that, there are three quick impressions that I think one would be justified in having.

First, the dominance of Keller Williams as a brand in these “Top XYZ” lists is clear and convincing. I’ve long held that Keller Williams is the logical conclusion of the agent-centric business model, and likely the optimal business model for “traditional” real estate as it is practiced today.

Second, the numbers show that the top agents and top teams are doing very, very well indeed, despite the ongoing recession/depression/whatever. I’m a bit conflicted about how to think about these entities. On the one hand, they’re really nothing more than brokerages of the pre-REMAX age, when the broker controlled everything and agents simply worked for the broker. On the other hand, agent teams are not brokerages, neither in the legal nor in the financial sense. They’re not responsible for all of the costs and risks of operating a full-blown brokerage company.

Something I’d love to find out more about is the tipping point at which these super teams transcend the individual super agent. For example, take the Creig Northrop team, the top team by volume. How many deals does Creig Northrop himself actually do? How much could he actually do for the client who is ostensibly hiring Creig? Or the top team by sides — the Ryan O’Neill team — which did 764 sides in 2010, or almost 15 sides per week over a 52 week period. It is simply impossible for the agent whose name is on the team to have had much (if any) involvement with 15 transactions per week.

I do wonder if there are consequence to ideals of professionalism and customer service from these super teams where the lead agents simply could not have enough hours in the day to pay personal attention to client service. But then I wonder if those ideals are just that: ideals.

Third, the volume and revenue numbers raise some questions. If you’re really doing $308 million in volume, resulting in some (let’s say, ballpark) $7.7 million in GCI, are you really paying 20% or $1.5 million to the broker for his split? I doubt that very much. Maybe such super agents are on 95/5 splits or better. Which raises the question in my mind of whether the brokers — who take on much of the overhead, the liability, and the like — are really making any money on these super agents/teams. If they’re not, how long could this system continue?

Eh… most of these are wholly unjustified conclusions given the brevity of the analysis, and the thinness of the data. But boy, it sure would be fun to get real detailed data and do real detailed analysis, wouldn’t it?

-rsh

Related posts:

1. Power Agent Teams, Revisited
2. The Firm As Model Actually Happening?

Future REALTORS of America!

My good friend Michael McClure (@ProfessionalOne on Twitter) has been banging the “Raise The Bar” drum for quite some time now. Recently, he wrote a post accompanying a survey in which he wants to establish “the baseline for professionalism” in the real estate brokerage industry:

All that being said, let’s get to the point of THIS post: to begin to formulate some kind of consensus on what it means to be a “professional” in the real estate industry.

Should it be based on experience? Number of transactions? Number of satisfied past clients? Perceptions of the agent’s peer group? Or some combination of these or other factors?

When the public – in the form of the Harris Polls – and Realtors themselves – in the form of the aforementioned Realtor Magazine survey – agree that there is such significant room for improvement, we think practical steps should be taken to begin to move the industry in a more professional, and more uniformly professional, direction.

Of course, I heartily agree with Michael’s goals. I did have a small quibble with him about the survey itself, as many of the questions were frankly leading questions, but I suspect we’d have seen mostly the same results anyhow.

There is one result, however, from the survey that’s frankly interesting given what’s going on outside the industry. Question #5 of the Survey asks, “How important is it that a Realtor provide evidence of some level of “minimum educational experience”? 57% of respondents say “Mandatory” and another 25% say “Very Important”; 84% of those responding have said that educational experience is at least very important to be a realtor.

Why?

The Education Bubble

See, one of the more interesting phenomena of the Nation in Decline is the growing awareness on the part of the public that we have a bona fide education bubble inflating in society. I happened to be in Boston this Labor Day Weekend for a family event, and with some free time, have gone by the campuses of Tufts University that is starting to fill up with students. The idyllic scenes of young, fresh-faced undergraduates, laying under the shadows of ancient trees, talking to each other (either about the upcoming class schedule, or flirting I suppose) and throwing a football around clashed in my head with the knowledge that most of these young people are screwed.

Then you have posts like this one from a well-respected career advisor, Penelope Trunk, that more or less eviscerates the idea that education and degrees help in a career:

It’s pretty well established that non-science degrees are not necessary for a job. In fact, the degrees cost you too much money, require too long of a commitment, and do not teach you the real-life skills they promise.

She’s writing about graduate school, but I don’t see why her arguments wouldn’t apply to college as well.

The Value of A Degree for a Realtor?

So… I guess I’m curious why the 84% of respondents feel so strongly that some minimum educational requirement exist for realtors. I can think of a few reasons.

1. Getting your college degree is evidence of discipline.

All I can say to that is… have you been to a college campus recently? What discipline amongst the fair youths of the most pampered generation in history? How much discipline could it possibly take to attend minimum number of classes and combining that with as much drinking, partying, and sexual experiences as possible?

2. Brokering real estate requires certain skills that can only be taught in college.

I’d like to know which skills those are. Real estate isn’t electrical engineering, or biotechnology. I can’t imagine calculus would be required.

Plus, were it true that real estate does require certain business skills, then wouldn’t the educational requirement exclude 4 year degrees in Women’s Studies or German Literature?

3. It’s All For Perception

The idea here is that because realtors are held in such low esteem by the public, one way to fight it is to set forth stringent standards that only a few could reach, thereby reassuring the public that realtors (or perhaps REALTORS, members of NAR) are truly amazing, trustworthy, and skilled practitioners of an ancient art.

I suppose I could see some PR benefit. But shouldn’t we ask whether such public perception benefits do in fact exist? For example, shouldn’t we look to see if there is any correlation (nevermind causation, but at least correlation) between top rated agents (not top producers, mind you, but top rated agents by public perception) and their level of educational achievement? That is, if the PR benefit is real, shouldn’t we see that a realtor with a MBA would receive higher ratings from the public than one with just a BA?

4. College Graduates Are More Ethical

A final reason, at least one that I can think of, is that a person who has completed a 4-year degree is somehow more ethical than someone who only has a high school diploma. Given that some of the truly heinous unethical crap in our society appear to have been perpetrated by people who have not only college degrees, but oftentimes, far more advanced degrees (Jeffrey Skilling of Enron comes to mind)… I’d like to know the basis for this belief.

So… Why Value the Sheepskin?

If you’re one of the 84% that answered that educational attainment is at least Very Important, I’d like to know why you answered that way. Was it one of the four reasons above? Some other reason? Or a combination of them?

-rsh

No related posts.

Click here to view the embedded video.

“No servant can serve two masters.”

- Jesus Christ, Luke 16:13

Judith Lindenau, a consultant to MLS and Associations with decades of experience, recently wrote a post in which she took up my modest suggestion of making brokers pay for the MLS. It’s worth reading the whole thing, as she presents some countering views both to things I have suggested, as well as to things I have not suggested.

I thought it worth musing on some of her points — as well as the points raised in the comments by luminaries such as Gregg Larson of Clareity and Victor Lund of WAV Group, men who have been in this industry far longer than I have, whose opinions I always take seriously.

In her post, she lays out two main counter-arguments:

1. Making brokers pay doesn’t solve anything, and it’s been tried before and is being tried today by various MLS’s.
2. The problems facing the MLS requires dynamic solutions, tackling complex issues such as governance, vendors, NAR policies, and the like.

As Gregg Larson puts it succinctly in the comments, “This is a lame discussion.”

Well, as much as I’d hate to extend a lame discussion, there is something worth exploring here, so I’m gonna indulge myself and do just that.

Making Brokers Pay

The first thing to address is the apparent uselessness of my suggestion. Judith did all of us a great service when she actually reached out to her vast network of contacts and asked about the idea. Here’s the result:

The response was a fairly resounding yawn. One industry analyst wrote, “I did read this (article) earlier, but I didn’t have a lot of interest in commenting on something that the industry talked about quite thoroughly 15 years ago or more.” An MLS manager said, “I wrote an essay on this topic back in 2004…nothing has changed.”  A former colleague reminded me: “I’m sure you can remember when many more MLSs were billing brokers rather than agents – we’ve been there, and we’ve done that and I don’t remember it making MLS more complicated when it changed. And brokers putting increasingly more responsibility on the agent for costs has been a trend that has only increased – a trend entirely initiated by brokers.”

Personally, I’m grateful to Judith for doing this.

But what strikes me about these responses is how the focus is on billing and cost-shifting, rather than the point of my post: Who is the customer?

The other thing that strikes me is the timeline: 15 years ago, the Internet was a little-known domain of computer geeks. In 2004, we were in the midst of the biggest property bubble the country had seen.

Am I alone in thinking that maybe things have changed a bit since those halcyon days, and that those changes force a re-examination of the question?

Re-Examining the Question: Who Is The Customer?

Thankfully, Judith goes on to provide some answers to that question. She interviewed a CEO of an MLS, and writes:

Bob, an MLS CEO agrees that the problem isn’t easy: “Fiduciary responsibility of an MLS is not as easy an issue to grapple with as it is in a traditional business. An MLS has many masters, all of whom must be served, sometimes to varying degrees at different times.

(1) Most are owned by associations, some of which expect a dividend payment (in a wholly owned subsidiary situation) or at least financial support (in a committee situation) from the MLS so they don’t have to raise dues;

(2) Brokers are the business owners that rely on the MLS to maintain a modicum of arm’s length control in an environment of cooperation between competitors;

(3) Agents on the street are the consumer of the lion’s share of the services the MLS provides; and

(4) Consumers are the beneficiaries of those services since ultimately they are the ones writing the checks (either to buy the house or to pay the commission). “

Bob’s final observation is one that all MLS administrators fully understand: “It’s the brokers who have the capacity to take their ball and bat and go home if they don’t like how the game is going. Because if they don’t like the practices of the MLS and no longer see a benefit but instead a liability, they will find another way to stay in business.” [Emphasis mine]

Reading that, I thought, hmm, I guess I was more right than I had thought.

I don’t know who this is (Bob Bemis of ARMLS? Bob Hale of HAR? Someone else?) but I readily grant that any of them have likely forgotten more about the MLS and the business than I ever knew. Let’s make sure we all understand that.

But sometimes, it does take a newbie unafraid (or uneducated) to ask seemingly obvious questions. So like a “highschool freshman who just figured out that pocket protectors and bellbottoms are oh, so yesterday” (to quote Victor Lund), I’m going to indulge further.

My proposal to make brokers pay had at its heart an attempt to resolve the distinction between customers and stakeholders. All of the above groups are stakeholders in the MLS to one degree or another. But not all of them are customers. It is this confusion between customer and stakeholder that lies at the heart of some of the biggest issues confronting the MLS (and the industry) today.

Take, for example, the issue of syndication compliance. How is a MLS to decide what to do on that complex, thorny issue? Balancing the interests of the Association (shareholder), the broker, the agent, and the consumer is well-nigh impossible. The shareholder might simply want more profits, so encourage syndication compliance if it’ll generate more income. The broker might resist it or embrace it depending on whether they do their own syndication compliance. The agent on the street might resist if it means less exposure for listings. And the buyer and seller might want as much data dumped on them as possible. Who knows? And we haven’t taken into consideration the interests of stakeholders like national franchises, of NAR, of the state and federal government, of technology providers, etc. etc.

The wisdom of Solomon himself is inadequate to the task of unravelling all these tangled skeins of interest.

Hence, Judith’s blogpost title: It’s Complicated.

Uncomplicating The Complicated

In my view, one way to simplify complex situations is precisely to ask, “Who is our customer?” Businesses that fail to ask and answer this key question cannot avoid real problems (see, e.g., General Motors). It is also my firm belief, as per the strategy consultant Jesus of Nazareth, that no one can serve two masters for long, or have multiple customers whose interests do not align.

A company should be thinking about the customer’s customer — but only insofar as such concern benefits the company’s own customers. In my scenario, if the MLS’s customer is the Brokerage, and the brokerage’s customer is the agent… then how a brokerage decides to “pass on the cost of MLS fees” to the agents should not be of ultimate concern to the MLS. That’s the broker’s business how he wants to handle it; the MLS’s business is to handle the broker.

Conversely, if the MLS thinks of its customer as the agent (since that is who pays the MLS), then thinking about the consumer is important (the customer’s customer), but ultimately, it is the agent’s job to think about the consumer.

Judith is correct that the issues facing the MLS are not subject to static solutions; for one thing, new problems will arise that require new solutions. I think her mistake — as well as the mistake of others — is in looking at the “broker pays” model as any sort of a static solution to any sort of a dynamic problem. It is not. It is, rather, a proposal to force a rethink of the fundamental guiding principle of any business: Who is the Customer?

With that principle firmly in place, it is possible to navigate difficult issues much more easily. Take the syndication compliance example above. Suppose that a MLS decides that the broker is the customer, period, end of story. The issue then gets simplified down to: How does syndication benefit our customer, the broker? One can do a survey, call around or whatever and get answers. And the ultimate test would be from the market: did we make more money (i.e., customers were willing to pay more) or capture greater market share (i.e., we got more customers) or save expenses (i.e., more profitability) as a result of offering out this service?

In that analysis, whether the Association did or did not want syndication compliance is ultimately irrelevant: they’re not paying you. (Indeed, as per Bob’s point, the Association as the shareholder is getting paid by you, and should be pleased if the service resulted in higher profits, and displeased if it resulted in lower profits.) Whether the consumers would be unhappy or not is irrelevant: they also do not pay you. Whether the agent wants far more syndication or not is irrelevant: they are not your customers.

None of this suggests, by the way, that any solution would be easy. Not at all. Solutions are difficult, and the simpler the solution, the more difficult it is to implement. But they do have the virtue of cutting through the morass of complexity to get to an answer, even if that answer isn’t going to make your life any easier. Keeping things complicated often results in no answers at all.

Two Problems

The first problem with this approach is (or should be), well, all that hardheaded capitalist gobbledygook is fine if the MLS is a money-grubbing corporation like Apple, but many MLS’s are nonprofits operated for the benefit of its members. What now, brown cow?

To some extent, my answer doesn’t change simply because the MLS is a not-for-profit vs. a for-profit. All that profit status means is that the earnings of a company are distributed to its shareholders. The actual business discipline of figuring out who your customer is, delivering value to them, and making a difference does not change. It especially does not change if the source of funding for your non-profit is not some foundation or government grants, but the members being so served. (As a matter of fact, if a nonprofit is supported primarily by grants, then guess what? Its “customer” is the grant-giving organization. Said nonprofit is highly unlikely to do things that are going to piss off the foundation officers and result in funding getting cutoff.)

The principle holds.

The second problem, and this is the more applicable one for us, is that the issue of “who is the customer” simply doesn’t have as great a resonance when we’re talking about monopolies. Who is the customer? Why, everybody. It isn’t as if a monopoly has to compete all that hard on keeping customers happy, since they don’t have a choice to go elsewhere.

But even monopolies have a limit. Bob’s last statement — that brokers do have the option to take their balls and go home — illustrates that at least for the MLS, an organic local monopoly, there is a limit to what they can do before one of their key stakeholders elect to do something else. But of all of the stakeholders, in reality, only one has the actual ability to break the MLS: the broker. The Associations that own the MLS might fire the management, but won’t destroy it; the agents might complain, but (assuming the copyright issue is settled in favor of brokers, via contract or other means) can’t actually destroy it; consumers can affect the agents and brokers, but they don’t even know what the MLS is most of the time.

For that reason, I feel it makes sense to make the broker the customer, the focus of the MLS’s concerns, and go from there.

Answering Judith

With that out of the way, let me comment further on Judith’s ultimate conclusions. She writes (and my response after each one):

1. It doesn’t make any difference who pays the bills, Rob. MLSs will never act as an efficient technology-based business service as long as the decision-makers (i.e., the board of directors) are neither business oriented (as opposed to being guided primarily by the profit and loss statements of their individual companies) nor technology proficient. User groups and technology-based business decision-makers are not the same thing.

As long as the decisionmakers behave this way, nothing makes any difference. I’m all for reforming governance, but if that’s her point, I wish she would state it much more directly and start working towards making that happen: convincing the existing Associations and Board members to step down, and change how the MLS is actually governed.

Having said that, should the decisionmakers one day become business oriented, they will certainly benefit from having clarity on who is the customer of the MLS.

2. There are only so many resources in any one organization’s bucket. We’ve spent most of our resources chasing after diversionary issues like this one. Real Estate is an industry in peril. Get used to it and address what we can of the real problems we’re all facing. Examine the dead elephant in the room—the corpse is getting smellier and smellier.

I’m at a loss as to why a simple, modest reform proposal would require some huge investment of resources. I’m also at a loss as to why failing to address the question of who is the MLS’s customer (and far more broadly, what role each entity serves in the industry-in-peril that is real estate) is a benefit to examining the dead elephant in the room. For that matter, I suppose I’m curious what the dead elephant is.

3. The current MLS dependency on single vendor relationships is one of our biggest weaknesses. Our vendors need to stay in business, sometimes at the expense of innovations which members require and technology makes possible. Data collection and information extraction, interpretation, and presentation are different things. It’s best if MLSs are not tied to a one solution provider for all of these functions.

I can agree with this 100%, but see nothing in my post that suggests MLS should only have a single vendor. Furthermore, I see no reason why a MLS can not both understand who its customer is, and go reduce reliance on a single vendor.

4. As MLSs, some of our most pervasive problems come from the NAR organization itself. The issues of who should be members of the real estate business community is tied to licensing structures and job descriptions which are outdated at best, and NAR’s insistence on antiquated geographical boundaries for servicing members’ professional needs has consumed an inordinate amount of our collective resources.

Again, I can agree with this 100%, and see no reason why “broker pays” is incompatible with reform in NAR. I assume this is an issue Judith is passionate about, and wish her much luck in addressing it. I can only imagine improvements here would help everyone out.

That Didn’t Help Me At All, Rob

A final note. I did not set out in my first post, nor in this one, to provide actual solutions to actual issues a MLS might be dealing with. Instead, I set out to suggest a method that might help organizations come up with actual solutions to actual problems. To me, clarifying the difference between customer and stakeholder, and then aligning the customer with the one stakeholder who has (I thought) the copyright to the data, provides the framework for thinking through the actual problems to find actual solutions.

But to the extent that anyone was seeking direct answers to their burning questions — as Victor Lund points out, “discuss something with a little more meat – how about Associations that pay NAR for ghost members to keep votes and seats at convention” — I apologize for failing to be helpful. I admit freely that I have no answers to ghost member corruption problem at NAR. But then, if you’ve been around a bit, you know I write this blog for myself, not for you, right?

And even to those MLS’s that do currently bill only the broker, that sets the groundwork for the real conceptual work ahead. Billing the broker certainly helps clarify who the customer is, but it doesn’t mean much if the MLS organization itself does not recommit to thinking of the broker as the customer, rather than just the administrative means by which it collects payment from its real customers. No, the conceptual framework necessary is just answering that question: Who is the customer? Then using that answer to think through complex issues and problems to see if answers can be found.

Much appreciate the discussion and debate, both here on Notorious and elsewhere.

-rsh

Related posts:

1. A Modest Proposal On Fixing the MLS

Over at 1000watt, there is a rather interesting debate going on with some heavy hitters contributing, on whether big brokers should or should not support innovations and tools by the MLS or Association. Go check it out if you haven’t already.

The general thrust is that Brian Boero and Marc Davison both believe that innovations are an unqualified good, and that big brokerages have no reason to oppose innovation wherever it occurs — even if that is at the MLS, at the local Association, or at NAR. As Marc writes:

If you share this belief, then I submit it would be impossible for you to ever stand in the way of any innovation or impede anyone from offering that innovation. Even an MLS.

If you share this belief, never fear a tool. And always proceed by having supreme confidence in what you could do with any tool versus others.

The basic idea is that the big brokerage, with its superior execution ability will benefit more from any tool or feature offered by the MLS/Association.

The counterpoint, articulated well by a few folks who are in a position to know, is that brokerages invest heavily in technology, in tools, and in innovation. And that the MLS or Association offering those same capabilities out results in an unfair leveling of the playing field. For example, here’s Pam O’Connor, CEO of Leading Real Estate Companies of the World:

Many brokers (and not just the largest ones) invest heavily in tools for their agents for the purpose of differentiation with consumers and attracting the best and brightest. It’s called competition. To have their local association or MLS then offer the same thing dilutes that investment and competitive edge.

It’s an interesting discussion.

Well, I have a concrete suggestion to every MLS that I think would go a long way towards solving this particular conundrum. I happen to think it’ll help some other conundrums as well.

The MLS should cease collecting payment from the agent/member; it should, instead, collect payment directly from the broker, and only from the broker. Change the customer of the MLS to be the brokerages, and some of these problems become easier to think through.

The Customer Conundrum

Art Carter, CEO of CRMLS, said something at the Data Summit that stuck with me. And it turns out, many of our issues revolve around this issue. He said that the MLS uses data belonging to the broker to run its business, but gets paid by the agents. This division of property and customer relationship is the root cause of the “level playing field” issue — and a few others.

The customer is the guy whose name is on the check. The MLS’s customer, therefore, is the individual agent.

Since no business survives for long without meeting its customer’s needs, it seems obvious that the MLS would release products, features, and engage in projects that would deliver value to its customer: the agent. But as Pam pointed out, the broker does the same thing — release products, features, tools, and other stuff to deliver value to its customer: the agent.

Yet, the copyright to listings data, as well as the legal liability for the buyer-seller relationship, the legal responsibility for the transaction itself, all belong to the broker. In theory, the agent is under the supervision of the broker, who holds the actual relationship with the consumer.

The simple fix, then, should be to have the financial relationship with the MLS at the broker level. The brokerage can pass on its costs, if it wants to do that, but the MLS’s own customer should be the broker.

With this simple change, the MLS realizes that it has to deliver value to its customer: the broker. Whether a project or an innovation helps the agent or not becomes less relevant; the real issue will become whether the MLS’s own innovations deliver value to the broker, who pays the bills.

Who Pays and Innovation

One consequence of shifting the payment responsibility from the individual agent to the broker is that these “innovative tools” get evaluated a bit differently.

Today, there are two broad ways that a MLS releases a tool: as a “member benefit” or as an add-on service. Keep in mind that vanishingly few (if any) MLS’s have actual developers working there; third party vendors develop the tool, maintain it, and offer it to the MLS and its members.

Member benefit tools are those offered to the entire subscriber base at no additional charge. In these arrangements, the MLS would typically pay some fee to the vendor, usually based on number of seats. A MLS with 5,000 members would pay some fee calculated on the basis of 5,000 users, while a MLS with 200 members would pay for 200 users. Typically, volume discounts kick in, lowering the per-seat cost, while raising the absolute dollar amount.

For add-on services, the typical arrangement is for the vendor and the MLS to market the product to the members/subscribers, and split the revenues in some fashion. There may or may not be out-of-pocket expenses to the MLS (setup fees, etc.) but overall, the MLS takes on no major financial burden for releasing one of these add-on tools.

In the former case of member-benefit tools, the MLS is the purchaser, and the executives and the Board of the MLS would investigate the tool and make a determination that the MLS would benefit by offering it to the entire membership base. Tax and sold data are good examples of this. Note, however, that the analysis would start and end with the principle that the customer of the MLS is the individual agent, irrespective of which brokerage, which franchise, or any other network said agent may be part of.

A major issue with these member-benefit tools is the usage rate. Given that on average, roughly half of the membership of any given MLS does not a single transaction, it may be surmised that in fact, only a minority of the membership actually uses the tool/innovation. The fee, however, is normally based on simple headcount, rather than on usage. The net effect is that the low-usage subscribers are subsidizing the high-usage subscribers, and if the numbers are skewed enough, there is significant economic inefficiency.  (E.g., 1,000 members at $10 a month, but only 100 users = $100/mo real price per user.)

In the latter case of add-on benefits, the calculation is usually made on the basis of “how many of the membership base would actually purchase”. If there are 5,000 members of the MLS, both the vendor and the MLS make some guesstimates on how many of the 5,000 would pay the extra $9.99 or whatever per month to have Shiny Tool ABC. Once again, these calculations are made without regard for the brokerage, franchise, or other affiliations of the individual agent.

Add-on models avoid the economic inefficiency of the seat-based pricing, but the downside is financial risk undertaken by the vendor or the MLS or both, depending on how the deal is structured. Furthermore, because many brokerages, franchises, and other networks offer similar tools/benefits to its agents, you get significant overlap at times, and the MLS tools either knock out the offerings of the brokerage/franchise (thereby setting up all of the complaints) or are useless since what the broker/franchise offers is better/cheaper/faster.

Normally, competition in the marketplace is a good thing for the consumer (the agent in this case). Except that as it comes to the MLS, the main “product” that creates value belongs to the broker. The broker holds the copyright to all of the data; the MLS holds the copyright to the compilation, but the base property-level data copyright belongs to the broker, not the agent.

And so we come to the core of the conflicts.

Make The Broker Pay

My modest proposal, therefore, is to make the broker pay for everything, on a per-seat basis.

The MLS may offer “member benefit” products, but it will consider the value to its customers: the broker. There may be certain products, certain types of innovation, that are simply too expensive for any individual brokerage to undertake: those are precisely the kinds of innovations that the MLS can provide for its customers, achieving economic efficiency. Add-on products would also be analyzed on the basis of how many of the brokerages in the MLS’s market would adopt them, rather than how many agents would.

Payment for these products would be made by the brokerages, which creates enormous incentives for the brokers who want those products to drive usage rates among its agents. After all, the brokerages would pay on a per-head basis, and would recognize the real benefit of getting their agents to use the products that they’ve just spent a bunch of money acquiring via the MLS.

And of course, the whole conflict of intellectual property fades significantly when the broker is the one making the decision as to whether to buy a particular product or not for all of his agents.

Smaller brokerages may opt to pay for a bunch of products from the MLS, because they don’t have the capability to develop (or have a vendor develop) unique products. Big brokers may elect to “opt-out” of such products, and spend money themselves on developing innovations for their agents. We still have competition in the marketplace, but with far less conflict. Member-benefit tools offered out to everyone at no additional charge would be those that the majority of the brokers in a MLS find valuable.

And of critical importance, brokerages could make the determination of whether they would benefit more from such universal member-benefit products because they can train, implement, customize, etc. better than others before the fact. They can be proactive in those decisions, rather than reactive, and make their own investment decisions accordingly. Marc’s view that big brokers have nothing to fear from innovation because they can out-execute may be correct, but the missing piece is timing: out-execute, yes, but be able to prepare and plan for it, rather than having to react and respond to events.

Ch-Ch-Ch-Changes

I think this relatively simple change would go a long way towards restoring order while lowering conflicts in the real estate industry. Frankly, I don’t see a huge amount of downside. And it would be relatively easy to implement: some changes to billing practices are what’s required.

Furthermore, it isn’t as if change isn’t coming anyhow. There are changes coming, like it or not. The current system is not likely to be sustainable, and that which cannot last won’t.

But I’d like to hear if I’ve missed something. Is there a downside to the broker-pays model that I haven’t considered? Is all this too late? What do my readers of wit and wisdom think?

-rsh

Related posts:

1. Introducing: Aybaf – A New Virtual Brokerage
2. On Institutional Advantage, or Renouncing Aybaf
3. Repositioning vs. Reengineering: Real Estate Brokerage

Image: Nick_T at http://www.flickr.com/photos/nicholas_t/

One advantage of long road trips, particularly with say… one’s spouse, is the opportunity to talk without interruption. The car moving down the highway at 75 65 miles per hour (or whatever the legal speed limit is, officer) becomes a sort of isolation chamber without TV, without the kids demanding attention, and without any other distractions.

So it was on a recent trip to San Antonio. Having left the kids home with the grandparents (truth be told, we were sort of asked to leave so they can monopolize the time with The Spawns), Mrs. Notorious and I found ourselves with all this time to talk about things and catch up. Eventually, you run out of the domestic, immediately relevant, personal topics… so being that the Missus has a MBA and some twenty years experience in fashion retail, we got to talking about business.

She raised a complaint, and an ancillary point, that I thought was interesting enough to share, especially with the audience of this blog that tends to be almost all real estate people.

She thought that the retail industry needed to “go back to basics” in a profound and fundamental way.

I agree, but it’s worth understanding what “the basics” are.

The Basics of Retail

Mrs. Notorious’s complaint, being an executive at a retail company, is that she was having to manage, work with, and train the young people coming out of school with degrees in business, in fashion merchandising, and marketing who didn’t know the basics of retail. For example, she would complain about these young women (they’re all young women in her company, it seems) who graduate from a four-year college program with a degree in fashion merchandising who didn’t know how to do retail math. There were business majors who couldn’t figure out whether “buy-one-get-one-free” is a better deal or not than “50% off”. (For retailers, the former is better since it results in faster inventory turnover.)

These young people were full of the latest ideas about e-commerce, about social media marketing, about using QR codes, and spent their time looking at the latest fashion trends in the pages of Vogue, Elle, and WWD, but did not know the very basics of the business of retail.

My wife’s idea: she wanted to put all new employees on a 90-day probation period during which she would teach them the basics, test them, and fire the ones who didn’t pass her standards. As she put it:

The business of retail hasn’t changed in a hundred years. It’s still about buying inventory at one price, selling as much of it at full price, then working the markdowns to get to a margin number. Marketing is still about getting people to want to buy something they don’t really need, because it’s pretty, or cool, or whatever. And all this Internet stuff is great, and e-commerce might be the future, but the retail business is still about factory to warehouse to stores to customer.

I, of course, concurred.

Jumping To Advanced Too Soon?

The car-ride conversation brought to mind all of the hundreds of conversations I’ve had in the past few years about the real estate industry. All the countless hours spent talking about “raising the bar”, about professionalism, about quality service, about marketing, about social media, about everything real estate. Even all of the data chatter, all of the technology talk, all connected in some way to the supposed lack of core skills on the part of real estate brokers and agents. How many conversations with smart technology guys ended with, “Yeah, that’s all great… but you know the agents are just too lazy to implement any of that, right?”

I spoke recently with a friend who is in the coaching business. He told me that one of his clients, a newcomer to real estate with all of nine months under her belt, spent more than $50,000 on websites, SEO optimization, print advertising, and even TV spots. She didn’t get a single deal from any of that, and hadn’t done a single transaction, but was arguing with him about the value of branding and long-tail marketing.

As a strategist and a marketer, I immediately wondered what someone who hadn’t done a single deal yet was doing thinking about, and worse, investing in, long-tail marketing. That sort of thing represents one of the most advanced topics in marketing. It’s a specific phenomenon applicable to a fairly narrow segment of the economy, although Allah knows it’s been tortured to fit just about every conceivable arena — usually by consultants and vendors who make a living selling “long tail marketing” solutions to various people.

Not being a real estate broker or agent, I don’t know what the fundamentals of the real estate business are. But is it so unthinkable that the basics haven’t changed in a hundred years, as they haven’t in fashion retail? Some people want to sell property; others want to buy property; helping the first group find the second group, and making sure that deal gets done… is it really that much more complicated than that?

The Fundamentals: Consumer’s Perspective

I may not have ever worked as a real estate agent, but I have now been a real estate buyer and seller multiple times. Here are the fundamentals from my point of view.

The real estate transaction can be divided into three parts: Marketing, Pricing, and Legal.

The Marketing part is where we all spend most of our time thinking about: how to market a house for sale, how to find a home for sale, what channels are most effective, how to stage a house, etc. I think most consumers know about the MLS now; that’s not going to be enough. As a seller, the basics I’m looking for is some knowledge of what buyers are looking for and how the agent can advise me to make my property stand out in some way. As a buyer, I’m looking for knowledge of the neighborhood, and alternatives to that neighborhood. I’ve probably done a bunch of research into an area; I may not know about some other development or some other neighborhood that could fit my needs better.

The Finance part really boils down to one thing: pricing. As many top agents have told me over the years, pricing is part science (involving comp analysis, economic forecasting, and number crunching) and part art (involving gut feelings, buyer preference trends, location knowledge, etc.). I want to know that the price I’m paying/getting is a fair one. And this is where consumer distrust is the highest, since we all know that agents get paid a percentage of the final price. But assuming that I trust your integrity, the fundamental I want is the ability to price a property and justify that price with reasoned argument. Some basic knowledge of mortgages would be useful, but I expect that I’ll end up working with some mortgage banker or broker on that. Negotiations are important, of course, since concessions, timing, etc. all play a part in the final price. But above all of those is pricing.

The Legal part is all of the procedural hurdles that a real estate transaction has to go through. Various towns, developments, counties, and states have laws, regulations, and rules that I don’t know and have no business knowing. The fundamentals here are just knowing what steps have to be followed, in what order, what papers have to be filed with whom, what authorizations are needed, etc. etc. Yes, I know that many brokers and agent teams employ transaction managers who handle these procedural things. I understand why that would be useful for the experience agent who already knows how to do those things; I wonder if it’s such a great idea to provide such a thing to newbies who don’t know.

Fundamentals: Teaching and Evaluating

The question I have now is… who teaches these fundamentals? Who evaluates them? And what is the impact of evaluations? Do the real estate schools really teach these and test them to ensure that every agent with a license knows how to do a comp analysis, how to price a home, and what the procedural steps of a transaction are? If not… what’s the point of these schools?

Does the broker teach agents how to market a property, or how to find a property for sale? Does he test agents for pricing knowledge, or negotiation skills? If not, what’s the point of the broker?

Coaches abound in the business; from what I’ve seen and heard, they coach primarily one thing and one thing only: lead generation. How to get new clients. How to market yourself. How to work the “sphere of influence” so you can get more clients. Does any coach teach the fundamentals? If so, how do they test them? What happens, if anything, if an agent fails?

There’s much talk about raising requirements for a real estate license, to include things like mandating a 4-year degree. I have a 4-year degree; I don’t know that I learned one frikkin’ thing about how to do a comp analysis. My wife’s experience is that people graduate with 4-year degrees in seemingly applicable areas like business or fashion merchandising, yet these people have no clue about the basics of retail.

There are a number of people who think that mentoring programs and apprenticeships are the way forward. Maybe they are. But who tests the mentors to see if they know the basics.

And finally, who stands in the way of the newbie with nine months of experience who can spout off theories on long-tail marketing, and spends time and money on organic SEO, but hasn’t done a single deal to say, “Hey, listen, maybe you should make sure you know the basics before you start dropping thousands of dollars on advanced marketing techniques?”

Back to Basics

It’s an appealing notion, this idea of returning back to basics. In fashion retail, where my wife works, there are well-settled principles, time-tested techniques, that constitute the basics: retail math, inventory management, supply chain and distribution, pricing and markdowns, etc. An experienced person like my wife not only knows what to do, but knows how to teach it to newbies, and how to test them to make sure they know.

My question now is, even assuming that it would be a good idea for real estate to return to the basics… what are those basics? And who is/should be responsible for teaching them and testing on them?

Your thoughts, answers, questions, and critiques are welcome, as always.

-rsh

No related posts.

The question is whether a REALTOR has a duty to disclose bad acts by a client, or more importantly, by an ex-client, if she knows that what the client is planning on doing is (a) illegal, (b) unethical, and/or (c) fraudulent.

Scenarios

For example, let’s say that a REALTOR takes a listing and starts walking through it with the client. She notices obvious structural problems — say a cracked foundation or something like that. She mentions it to the client, and the client instructs her to say nothing about it, that he plans on covering up the problem, and tells the REALTOR more or less in straightforward terms that he plans on committing fraud.

Our REALTOR immediately tells the client that what he’s planning on doing is illegal, unethical, and advises him not to do so. The client responds by firing the REALTOR: “If you’re not going to help me and work for my interests, then I can’t trust you.”

Does our REALTOR have any responsibility to tell someone that this house has a major structural defect, and that the seller is planning on defrauding the buyer as to the defect?

Keep in mind that she is no longer the REALTOR on the deal. She’s been fired. The client has gone and found another REALTOR who is ostensibly more flexible as it comes to morals and ethics.

My REALTOR friend thought that she had no duty to disclose, because she is no longer party to the contract. Can that be right?

Further Scenarios and Questions

Same situation as above, but our REALTOR heroine believes that the new listing agent who has come in after her does not know about the major defect, because the client has already covered it up. Does she have either a legal obligation or an ethical responsibility under the Code of Ethics to inform the new listing agent?

Suppose that a buyer enters into contract on this house. The buyer is represented by one of the agents in our REALTOR heroine’s brokerage. So legally, the buyer client is represented by the same broker. Does our friend have either (a) the responsibility to tell her broker/the buyer’s agent in her same office, or (b) the right to tell her broker/buyer’s agent? If the buyer is represented by another brokerage, can the REALTOR call the buyer’s agent to inform her of the problem with the property? Is she obligated to do so?

Suppose that the new listing agent is in the same office/brokerage. In conversation with the new listing agent, our heroine learns that he knows about the problem, and is willing to go along with the client’s plan to cover it up and commit fraud. Does our heroine have (a) duty to report the listing agent to the Association or to the State Board; or (b) a duty to report the agent to her broker; or (c) if no obligation to report, does she have the right to report him to either the authorities or to her broker?

What about issues and problems not related to the property at all? For example, in walking through the listing, the REALTOR notices a large stash of drugs, assault weapons, and cash suggesting that the client is a major drug dealer. This has nothing to do with the property, of course, but is clearly an illegal activity. Does she have an obligation to report the client to the authorities?

Matter of Degrees

However you answer the above hypotheticals, any duty or right to divulge client information learned in the course of professional representation will be fraught with judgment calls. A situation where the client is explicitly planning on committing fraud might be an easy call. One can imagine a range of more difficult choices.

Something minor — like say, a window that gets stuck often — is probably not going to warrant any duty to disclose or major ethical issues. But one can easily imagine a host of situations between stuck window and cracked foundation. With so many grey areas, one can imagine a host of ethical dilemmas arising from the client’s understandable desire to maximize the value of his property and the REALTOR’s duty to work for the client’s best interests, counterbalanced by some sort of duty to the public.

Is there any guidance out there, either at the state regulatory level, or at the Association level, as to how REALTORS should conduct themselves in such ethical situations?

I’m asking these hypotheticals because I don’t know the answer. My friend and I spent a pleasant hour or so over wine and Thai food discussing these dilemmas, and didn’t come to many conclusions.

So what do you say? Obligations? Rights to disclose?

-rsh

No related posts.