If you’re responsible for real estate brokerage operations, you owe it to yourself and to your company to read this post by Glenn Kelman at Redfin.  I have said for a while now that I believe Redfin to be one of few viable models for real estate brokerage of the future, and this post helps confirm that belief.  It’s a long post, and worth reading in full, but here’s the money graf:

But outside of calling one agent after another, the CB CEO has no way of knowing what his agents are doing; most work as contractors, for franchises, recording their deals in spreadsheets and notepads. Redfin on the other hand has a system for scheduling home tours and writing offers, which means we also have a system for storing data about every tour & offer. Months before the numbers are recorded at county courthouses or by federal agencies, we know when bidding wars are back, or when tire-kickers have taken over the market. We can see the whole elephant, and we’re minutely sensitive to when he’s about to roll on top of us or stampede through the jungle. [Emphasis added]

Fact is, far too many real estate brokerages pay lip service to the importance of technology.  Even the ones who do invest are putting money and resources towards marketing technology rather than information technology.  In the long run, I think the companies that survive the Great Recession will be ones who invested in information technology, rather than just another pretty website.

If You’re in the Knowledge Business…

A lot of real estate people say that they’re in the knowledge business, that what clients pay them for is their expertise, information, and knowledge of local markets, of real estate, of transactions, of laws and regulations, and so on. Well, act like it then.  Invest in knowledge and information and data.  If your spend on marketing is 100 times your spend on knowledge, it’s sorta hard to be convincing as someone whose value rests on what you know.

MLS data is great; it’s valuable, in fact, it’s invaluable.  But Redfin collects data outside of what’s in the MLS.  What’s stopping you?  ”Well, Redfin has millions in venture capital” is not a good excuse, since The GoodLife Team in Austin, a tiny little brokerage with less than a dozen agents, also collects that data.  There’s a reason why GoodLife is now up for an Inman Innovator Award.

But My Agents Won’t Do It!

An excuse I do hear often whenever I discuss collecting data from brokers is that their agents simply won’t do it, or can’t do it, or have no time to do it.  I term that an excuse because, well, it is one.

Fire them!  If your brokerage is in the knowledge business, if you pride yourself on your local knowledge, if your brand promise to clients is that you and your agents are fully on top of what’s going on locally, then why would you continue to tolerate the existence of agents who don’t care about collecting data?  It’s like being in the customer service business but tolerating rude and unfriendly staff.  Get rid of them.

Of course, if your brokerage is not in the knowledge business, that’s fine.  But do tell your clients that so they’re not misled as to what to expect from you and your people.

All Your (Data)Bases

Finally, let’s not confuse a blogpost about the new restaurant down the street with actual knowledge your clients are likely to care about.  The client is looking to hire a real estate expert, not a local tour guide.

Read again what Glenn Kelman wrote:

Months before the numbers are recorded at county courthouses or by federal agencies, we know when bidding wars are back, or when tire-kickers have taken over the market. We can see the whole elephant, and we’re minutely sensitive to when he’s about to roll on top of us or stampede through the jungle.

Yes, a huge part of your value as an individual real estate agent is to be able to interpret the data for your clients and offer your wisdom, rather than just raw data.  But without the data, what the hell are you interpreting?  And if you’re simply outsourcing data collection to some third party vendor (which, by the way, includes your MLS) who is selling the exact same thing to all of your competitors, how are you different from them?

More Knowledge, Less Pizzazz

Do yourself, your company, and your clients a huge favor.  Invest in knowledge.  That doesn’t mean just buying computers and off-the-shelf databases.  It also means spending time — your time, your agents’ time, your staff’s time — to collect and interpret the information.  It means turning data into knowledge.

In a tough market, where nothing is particularly certain, clients want experts who know what they’re talking about.  They also want to know on what basis an expert is rendering an opinion.  Do give that to them, please.

And if that means not investing in some newfangled animated property flyer technology… well, so be it.  More knowledge, less pizzazz.  More substance, less dazzle.  For the good of us all.

-rsh

"A" in A-Team stands for Agent?

In 2007, Ralph Roberts, then the “official spokesman” of Guthy-Renker Home, published a brief essay on RISMedia called “How to Soar High with Power Agent Teams“.  In it, he recommended an approach to teaming that is much more based on division of labor and functions:

I was recently flying home from the National Association of Realtors convention in Las Vegas, and I began thinking what would happen if airlines followed the same approach that most Realtors practice. I would call the airline to book a flight, and the pilot would answer the phone. When I arrived at the airport, the pilot would check me in, check my bags, follow me to the inspection point to make sure I wasn’t trying to carry any prohibited items on the plane, and then escort me to the gate to make sure I boarded the right flight and secured a seat.

He also wrote a book on the topic, which I havent’ read so it may be that many of my questions and thoughts are answered there.

Nonetheless, with more and more brokerage companies enabling agent teams of various kinds, and more and more successful agents creating de facto agent teams by hiring administrative assistants, listing coordinators, transactions managers, and the like, it appears that the ideas of “Power Agent Teams” have taken firm root in the industry.

Those ideas, however, have not been fully developed to their logical conclusions — at least not yet by anyone I’ve read or heard from in the past three years.  I’d like to revisit the topic, therefore, to sketch out some consequences of the Power Agent Team idea and pose some questions.

Team Based on Functions

The dominant model of the Real Estate Team today isn’t really a function-based team; it’s closer to what the brokerage company used to be.  The team leader generates leads, distributes them, provides admin and tech support to the team members in exchange for a split of their GCI.  That’s a broker in all but name (and liability insurance, I suppose).

In theory, the Power Agent Team is merely a permutation of this team-as-brokerage concept.  The team leader might hire some staff to deal with administrative tasks, and team members may function mostly as buyer agents (since buyers take up more time and typically pose greater risk to the realtor), but once assigned a lead or a client, each agent works exactly as a solo agent would within a brokerage that provides admin support.

The functions-based team, however, is merely the rest stop on the highway.  I believe that the ultimate end of agent teams will be either (a) standalone brokerage, or (b) a true team of specialists.

Specialization

The logical conclusion of any functions-based team is either full-blown brokerage or specialization.  Becoming a full-blown brokerage is not especially difficult in any of the 50 states, especially for a team leader who is likely a top producing agent with years of experience.  As described above, many agent teams fill virtually every need that the brokerage used to provide; at some point, the gravitational pull of both reducing costs (splits with the broker) and freedom (no need to adhere to broker’s rules and regulations) will be difficult to resist.

The other path, however, is one of specialization.

The same person who is a powerhouse rainmaker may not be the same person who is a detail-oriented project manager.  One might be fantastic at marketing a property for sale, but be awful at negotiating.  A particular agent may be a real expert in one town, but know next to nothing about others within the market area.  By true teamwork — in which multiple professionals work on the same transaction on behalf of the same client — superior service may be delivered to the customer.

Rather than being assigned to a particular buyer agent, who takes care of everything, the client might work with Agent A to define needs and find a property, Agent B (who is a strong negotiator) to negotiate the price and terms, then Agent C to close the deal as she is an expert at ‘bulletproofing’ transactions.  A transaction manager might work with the client throughout the process, and the “team lead” might serve as the lead client relationship person who steps in as needed.

This is, actually, pretty close to how large commercial real estate deals are done today.

Unbundling?

The final step, then, is unbundling.  Is it possible that the best person for a particular function happens to work on your team?  Sure it is.  Is it likely?  Not really, no.

In some litigations, firms will partner up to provide specialists for a particular area, in service of the client.  For example, the “lead firm” might set strategy and manage the overall lawsuit, but bring in a lawyer who is particularly gifted at oral argument, another firm that specializes in scientific evidence, a specialist on international tax issues, and so on.

Why not in real estate?

As we’ve heard time and time again, the sale or purchase of a home is among the largest financial transactions of the average American.  It’s not something to be undertaken lightly, without competent professional assistance.  So why wouldn’t it make sense for the consumer to expect that he would get the best of the best, no matter what team or brokerage that person works at?

So Team XYZ might have the client relationship and pride themselves on smoothing the transaction process, but Team ABC has the best marketer in the area.  Collaboration between the two would provide the customer with the best marketing and the best transaction experience.

The C-Word

The issue, of course, is compensation.  The current model of splitting the commission between the listing broker and the buyer representative is inadequate for multi-broker, or even multi-team, deals.

Updating the compensation structure is a heady challenge.  It would require defining the relative value that each activity contributes to the overall transaction.  For example, is negotiation worth 5%/10%/15% of the overall value that the team provide to the client?  Maybe it’s more?  What about proper marketing of a property to the seller?  What portion of the value does that provide?  Is it more or less than the value provided by proper pricing, or by managing the transaction?

Do these percentages change depending on whether the team is representing the buyer or the seller?  Do they change depending on the property?  Perhaps a REO transaction has different value composition compared to a luxury property.

Commercial realtors frequently get together after the closing and divvy up the commission between all of the firms, agents, and others who took part in the transaction.  While many of these ad-hoc informal sessions are problem-free, just about any commercial broker could tell you war stories of infamous fights over commission splits.  In some cases, at the time a team member is brought in, the split will be negotiated in advance: “You do the environmental impact studies, okay?  For that, you’ll get 15% of the total GCI.”

Such informal structures might suffice for now for those teams (and brokerages) who might be interested in providing the absolute best level of service to the client.  Over time, and with research, the industry might settle on a standard set of splits for various services.

Regardless of the difficulty and the challenge of figuring out compensation, it does appear to me that an industry that prides itself on client service and seeks to distinguish themselves by invoking fiduciary duty ought to be thinking about specialization, about unbundling, and true collaboration across teams and brokerages.

Is this possible?  What needs to happen to make it possible?

-rsh

We worship creativity.  In describing a business, a leader, a product, or a service, I can think of no higher praise than to say it is creative, or visionary, or innovative.  Whether in marketing, or technology, or business process, or a blogpost, all of us admire creativity, strive for creativity, and think about creativity.

The real estate industry in particular has a love-love relationship with creativity.  NAR has its Game Changers, Inman has its Connect Create developer challenge, companies are lauded for their innovations, individuals praise for their creativity in using social media for real estate business (or whatever new creative thing they’re doing).

What I wonder about today is whether people truly worship creativity, or pay lip service to it.  Do you really want innovation?  Are you sure you’re prepared for what creativity means?  Are you certain that you want creativity in your life, in your business?

The Hindu deity Shiva is often said to embody destruction and regeneration, like the forest fire that clears out the dead leaves and old growth to enable new shoots to emerge.  To embrace creativity and innovation, then, is to embrace destruction.  Are you ready?

Destruction, Harbinger of Creativity

Something proponents of creativity rarely consider, and even more rarely mention, is that destruction is the prophet of creativity.  Meaningful creativity is not always an incremental good for everyone.  There are often losers when something creative appears; indeed, destruction of the existing order is often a pre-requisite for creativity.

This post on Orgpreneur.com scratches the surface of the creative destruction:

Innovation solely through growth is inherently unsustainable. At some point all organizations hit a plateau. Those that never bothered to learn how to stop something go from radical growth to radical stagnation.

Most of us assume that creativity can only help us, can only make our lives better somehow — like adding an iPad to our repertoire of gadgets.  But there’s a very good chance that the iPad will destroy the netbooks market, as the iPod destroyed the portable MP3 player market.  And before the iPod could even become reality, CD’s and digital music had to destroy the world of analog tapes and LP’s.

As one thinks about the real estate industry over the past several years, doesn’t the term “radical stagnation” fit perfectly?

Economists talk about ‘creative destruction‘ as the engine of long-term growth in capitalism.  The new kills the old, as automobiles killed the buggy whip manufacturers, as digital photography killed Polaroid, as the web and social media are killing newspapers.

It may be that true innovation requires destroying something else.  What are you prepared to destroy?  For that matter, are you prepared to be destroyed, as innovation marches on?

Real Estate and Destruction

So one question might be, what are the sacred zombie cows in real estate that need to be killed off, in order to unleash creativity?

Or thought of another way, when you look at the innovations in the industry today — whether mobile apps, CRM technologies, social media, RPR, or whatever — you might ask, “What part of the industry does this innovation destroy?”

If the answer is “none”, then that thing, whatever it is, is not innovation.  It is, rather, incremental improvement; a marginal gain in efficiency.  It isn’t the automobile, but faster horses.

Maybe that’s not a bad thing.  Maybe incremental change is all that we need.

But if not, if what is required to deal with the tectonic shifts in consumer behavior, consumer expectations, nature of the business, and all of that is real innovation… then ask yourself, are you ready for the destruction?

-rsh

Which then led to a thoughtseed — nothing fully fleshed out, but an idea I’ll be exploring more in the days ahead.

Basically, the idea is that we are experiencing the transition from the Industrial Age to a New Artisan Age.  The Industrial Age is marked by large organizations leveraging the efficiencies of things like the assembly line, division of labor, vertical and horizontal integration, etc. to create mass-market products.  Levi’s can go from a one-man tailor shop to a global corporation on the basis of the Industrial Age.

The New Artisan Age, however, is marked by at least an homage to craftsmanship, the idea of a more personal, more customized, more intimate product created by a single artisan for a particular customer.  Maybe some designer might offer a custom-made bespoke pair of jeans, at $500 for a particular customer to fit her body and her preferences.

It seems to me that the general consumer behavior is heading in that direction.  Think about the explosion of microbreweries, artisanal farming, and so on.  People are willing to pay a premium for products they believe are more than just the bare product and its functions.

In my conversation with Garron, it seems to me that his brokerage M Realty, is practicing a form of artisanal real estate brokerage.  He spent a lot of time talking about how he works with each and every agent on an individual basis, creating strategies, offering advice, and offering technology that are custom-tailored to that particular agent’s strengths and weaknesses.  The best example is an agent who wanted an IDX website; Garron found that this agent got most of his production from five people in his sphere of influence.  The advice, then, is to forget about the IDX website, and spend more time with those five people, and maybe make that eight people in the sphere.

Customizing activities to the particular idiosyncracies of the particular agent… isn’t that sort of artisanal real estate (brokerage)?

Krisstina Wise of GoodLife Team also does this, in a different way by building a brokerage around the principle of coaching.

If you will, Keller Williams — a company whose mission statement says that it is a training organization that happens to run a real estate brokerage — is a product of the Industrial Age.  M Realty — a company that turns out to be a coaching organization that happens to run a real estate brokerage — is a product of the New Artisan Age.

Something to think about.  When I have more time.

One question is whether this difference between Industrial and Artisanal extends to the relationship between the agent and the consumer.  (Or better yet, a question might be whether the real estate transaction was ever Industrial to begin with….)

-rsh

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

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

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

Technology: Size Matters

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

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

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

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

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

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

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

One reason why Big Law is in trouble...

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

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

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

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

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

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

Branding & Marketing: Size Matters

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Pricing: Size Matters

Yes, size matters... why?

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

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

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

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

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

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

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

Politics: Size Matters

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

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

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

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

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

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

Conclusion

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

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

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

This is the way the world ends

Not with a bang but a whimper.

- The Hollow Men, T.S. Eliot

-rsh

First, the setup of the debate:

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

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

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

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

So here’s the point:

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

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

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

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

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

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

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

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

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

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

Incentives = everything.

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

-rsh

In Part 1 of this series, I examined a scholarly paper by one Glenn Reynolds(aka, Instapundit, who is a law professor, the author of Army of Davids, and one of the most important and influential bloggers in the United States today) about the future of big law firms and drew some lessons about how big law firms and big real estate brokerages are similar.

In this part, we focus on how they’re different.  And before you say, “Duh, Rob” (or since you’ve probably already said that, before you say it again), of course lawyers are not realtors, and law firms are not brokerages.  But there are lessons to be drawn from some of the fundamental differences as they go to issues of business models.

The Importance of Brand

I wrote in Part 1 that the focus on the value of brokerage brand is in some ways deeply irrelevant: “It would be more accurate to say that whether brand matters or not to the consumer is almost entirely incidental.”  The reason is that real estate brands are, for the most part, bear no relationship to professional quality.  We see this clearly when contrasting real estate brokerages to law firms.

As Reynolds wrote, big prestigious law firms provide a sort of filtering mechanism for excellence, at least in theory:

The lawyers they hire, you can assume, will be first class, and if you’re like most clients, you can figure that the folks at Sullivan and Cromwell or other top law firms know more about picking top lawyers than you do. It’s more efficient to let them do it.

Having been through the ringer a couple of times myself during law school recruiting, I can personally attest to some of the (ridiculous) considerations.

There are law firms who simply do not bother recruiting at the so-called “second tier” law schools.  You show up at first day of the summer associate orientation and realize that 46 of the 50 fellow summer associates went to the same five schools: Yale, Harvard, Columbia, NYU, and Stanford.  There are firms who discourage students even from these elite law schools from interviewing with them if they have less than a A- average… after only one year of law school, this is.  If you’re not on Law Review, some firms become a long shot.  Keep in mind that these are students from a top five law school, which meant that every single one of them excelled in college — usually an elite institution with single-digit admit rates themselves — and did well enough on the LSATs just to get admitted to the law school.

In this and other ways, the big law firms send the message loud and clear that they’re interested only in the best of the best of the best, in the smartest, most motivated, most ambitious scholar-warriors that the country (and the world!) has produced.

It turns out that such careful screening doesn’t necessarily lead to the best legal work, as longtime practitioners could tell you in unguarded moments, but the effect of such recruiting process builds the value of the brand.  As Reynolds said, if you hire Sullivan & Cromwell, chances are that they’ve done the hard work of finding the best attorneys (or at least, the best law students) so that you don’t have to.  Whether true or not, the brand promise of big law firms is one of quality professionals.

Real estate, however, simply doesn’t have the infrastructure that the legal industry has.  Real estate school is a far cry from law school.  Few large brokerages (if any) have any sort of a degree requirement for entry.  This sentence is seldom uttered by brokers: “I’d love to hire you to come be an agent at my firm, but I see you have a B in advanced econometric techniques, so we’ll have to pass.”

Much attention is paid to the low standard of entry to become a real estate agent, focusing on the state real estate boards which set the educational and testing requirements to become licensed, or alternatively, on the National Association of REALTORS, which grants the REALTOR designation to anyone who pays the dues.  But that is the wrong focus.  It isn’t difficult to pass the Bar Exam (no matter what lawyers tell you), and once you’ve passed it, you’re automatically granted membership in the lawyer trade association (the State and Local Bar Association).  But getting hired by Cravath is another story altogether.

As a result, even if deeply flawed, a customer looking for a top-notch attorney could reasonably rely on someone having “Cravath Swaine & Moore” on her resume; the same does not hold true for a top-notch realtor.

One might reasonably ask, given that both law and real estate are seen by their respective practitioners as professions requiring fiduciary duty to clients, why is there such a huge difference?

The Answer: Compensation

It cannot be stressed enough that at the root of the difference lies money.  (Isn’t money at the root of all evil?)

First, clients pay their attorneys for their effort, rather than for the result.  This is especially true in the case of big law firms that typically do not take on contingency cases.  (When I say “typically do not”, I mean “never”.)  In contrast, real estate brokers are paid for the result (commission on a successful transaction), rather than for the effort.

Second, law firms pay their associates a salary.  They are an asset of the firm, human capital, whose costs are paid in advance of revenues.  Apart from a couple of recent efforts, such as Redfin and ZipRealty, the vast bulk of real estate brokerages do not pay their agents a salary of any kind — not even a “draw against commission” as is commonplace in other sales organizations.

Third, given the way that real estate has evolved historically, there is no price difference between brokerages (or agents) based on “quality”.  Whether you use the best, most experienced, most motivated, top performing realtor in the whole country, or an incompetent, ethically questionable agent, as the consumer, you pay the same 5% in commissions.

The combination of these compensation-related factors has the following consequences:

1. There is no advantage to using a big brokerage firm.  At the same time, there is no disadvantage either.  Unlike law, where hiring Cravath might mean $1000 per hour billing rates vs. $100 per hour from the small one-man shop down the street, in real estate there is no benefit and no cost to hiring the biggest and most prestigious firm in town.  In fact, one might reasonably ask, since price is a signal to buyers, what “prestigious” even means in real estate.
2. There is no difference in the transaction cost whether you use a top-notch REALTOR or a bottom-crawling licensee.  There may be financial consequences as the result of selecting a competent vs. an incompetent agent, as the price of the home may be impacted (though there is precious little research to support a conclusion one way or the other), or the time on market might be extended resulting in more mortgage payments, more taxes, or more carrying costs, but the commission you pay will be the same.
3. There is no incentive for brokerages to do any kind of screening in hiring.  Law firms have an incentive to hire the best lawyers, because they can charge a premium for their services.  Brokers have no such incentive, since the price of service is more or less fixed.  Furthermore, since agents are not paid even a draw against commission, there is no cost to the broker in advance of revenues.  A brokerage could literally have 10,000 non-producing agents on its “payroll” and not care as none of them are paid until a transaction closes.  At that point, however, payment comes after revenues such that each transaction equals a profit for the broker.  As long as fixed overhead costs are kept low, a brokerage could be very successful indeed simply by lowering its standards to the legal minimum (e.g., not currently serving prison time, etc.).

It is hard to overestimate the impact of compensation, which goes far beyond simply branding.  But the ultimate effect on brand is that big law firms serve as signifiers of professional quality, while big brokerages do not.  For the consumer, then, big brokers might have brand awareness (“Oh, I’ve heard of that company”) but do not have brand promise (“I know you only hire the best”).

I conclude that the value of the brand for big law firms (assuming there is any) accrues to the client, whereas the value of the brand for big real estate brokerage (assuming there is any) accrues to its agents.  Put another way, law firm brands are about helping clients select top-notch attorneys without extensive and costly interviewing of every single attorney; real estate brands are about lead generation to the realtor.

[Sidebar: A frequent debate I have with my friend Marc Davison of 1000watt Consulting could be characterized as a chicken-or-egg problem.  I think it's fair to say that Marc believes that big brokerages could adopt a strong brand promise, including one of professional quality, and thereby create a business advantage (which may ultimately lead to changing the compensation structure of real estate brokerage).  I feel that as long as the fundamental issue of compensation remains unchanged, no amount of branding could be successful.  It's an interesting debate if you're a real estate marketing junkie like the two of us, I suppose.  Horribly boring otherwise.]

So What’s This Got to Do With Size?

Whether a law firm or a brokerage, we have already granted that size does mean more ancillary resources: paralegals, secretaries, marketing assistants, transaction coordinators, technology systems, and so on.  The question isn’t whether bigness offers additional resources, but whether those additional resources (a) require size and scale to provide, and (b) are valuable to the customer.

Reynolds’s point is that at least for big law firms, those resources are not valuable enough to warrant the additional cost of big law firms.

My view is that for big brokerage, those resources (a) do not require size and scale, and (b) are of marginal utility to the customer.

Any agent can hire her own transaction coordinator.  It might be more efficient if the broker hired the coordinator then spread the cost out over a group of agents, but given the business model of brokerages (there goes that compensation issue again), it is entirely unclear whether brokerages can take on such overhead in advance of revenues consistently.  It is clear that big broker can not charge the customer more money as the big law firm can.

Advances in technology means that there is a very flat curve of diminishing returns for systems.  Microsoft Exchange might be awesome, but Google Apps gets 90% of the way there at a tiny fraction of the cost.  A multi-million dollar customized enterprise CRM yields benefits, but an off-the-shelf $99 program achieves much of the benefits.  (There are important exceptions, which we’ll cover in Part 3.)

Furthermore, it is a truism that such resources are of marginal utility to the customer, because those services are included in the price of brokerage (the commission).  If a different business model evolves, and the brokerages who offer such support services can charge a premium to the consumer, perhaps we can discover whether customers really value them or not.

Size Is A Disadvantage

Given these realities, big brokerages face a major challenge.  Size in real estate turns out to be a disadvantage one must overcome.

Any organization above a certain size must have overhead — even the CEO is administrative overhead if you think about it.  A small broker-owner with ten agents could reasonably manage all ten people effectively; no human being alive can manage 1,000 agents.

For big law firms, size grants certain advantages like reputation and resources that creates differentiation that clients are willing to pay for.  (Although, that is rapidly changing.)  Big brokerages do not have that luxury, because of the fundamental compensation models in real estate.  When advertising power was tied to size in the pre-Internet era, size did grant a certain advantage in brand awareness.  It still does, but that advantage is disappearing quickly.  And since real estate brands were never about the consumer’s benefit but about lead generation for the agent’s benefit, information technology has had a disproportionate impact on big brokerages.

So we have a situation where big brokerages have all of the negatives of large organizations (bureaucracy, expensive overhead, inefficiency) and none of the positives (higher price, greater efficiency for large-scale production).

Making Size Relevant

The challenge for real estate brokerages, then, is to make size relevant again.  As we’ll see in the next part, there are still areas where size does matter a great deal.  And if the experience of the real estate industry holds true for legal industry, the big law firms will also find out that the competition isn’t between Big Law vs. Independent Law.  It’s between Big Law and Big Technology, as it is in real estate between Big Brokerage and Big Technology.

-rsh

Pocket Hercules (Photo by Sam Greenwood/Getty Images)

Aaaaand I can hear the tee-hee’ing going on in Costa Mesa from here.  While I’m not above making cheap jokes in order to erect a logical argument about brokerage performance, business dysfunction, and customer satisfaction, this post is actually about serious issues in real estate, technology, and marketing.  So stop giggling.

We begin with a question: does the size of a brokerage matter in real estate?

I have argued in the past that the Big Broker holds the key to the future of the real estate industry, and that small independents and boutiques will end up surviving on the good graces of the various titans in their markets.  Of course, that argument was counter-factual at the time I made it (over a year ago now) and I conceded that as the industry was then, big brokerages were boned.  What I argued then, and still believe to some extent, is that the Big Brokerage with the will to change has the resources to do so.  But in the almost year and a full quarter since I wrote that post, I don’t know that I’ve seen too many examples of such visionary brokerages.

Meanwhile, technology continues its remorseless march.

Then comes this paper by one of the pioneers of the blogosphere: Glenn Reynolds, aka, Instapundit, the Beauchamp Brogan Distinguished Professor of Law at the University of Tennessee.  If you’re at all interested in the impact of technology and of the Web (and its offspring, social media) on the real estate industry, I urge you to read it in full.  While it is a scholarly paper published in a law review, it’s written in plain English for the layman, and does not deal with legal issues as much as it does with business and social issues.

The implications are profound, and the questions Reynolds raise are significant.  And insofar as law is the epitome of professional services, and one that many realtors look to as an example of client-driven professional services, changes in the legal business model are something we should pay close attention to.

This will be a multi-part post, as the topic is large enough and complex enough to warrant breaking up into bite-size pieces.  This first part focuses on understanding Reynolds’s argument as it applies to law firms, then extrapolating similarities to real estate brokerages.

The Reynolds Argument in Brief

Much of what Reynolds published in the Hofstra Law Review article comes from his book, An Army of Davids.  He posits that advances in technology, particularly computing, telecommunications, and the Internet, create efficiencies for small companies or even individuals that allow them to beat much larger competitors in the marketplace.  This, we’ve heard, ever since the first PC was shipped to the first customer.

What few of us have thought about is where Reynolds goes next:

This observation is commonplace now, of course, but its implications for Galbraith-era economics have gotten somewhat less attention. It‟s not just that fewer people can do the same work; it’s that they don’t need a big company to provide the infrastructure to do the work, and, perhaps even more importantly, they may be far more efficient without the big company and all the inefficiencies and stumbling blocks that its bureaucracy and “technostructure” tend to produce.

Those inefficiencies were present in Galbraith’s day, too, of course. People have been making jokes about office politics and bureaucratic idiocies since long before Dilbert. But in the old days, you had to put up with those problems because you needed the big organization to do the job. Now, increasingly, you don’t. Goliath’s clumsiness used to be made up for by the fact that he was strong. But now the Davids are muscling up without bulking up. So why be a Goliath? (p.105 in the PDF article; emphasis in original)

He points out that at the dawn and the height of the Industrial Age, size equaled efficiency:  “You can’t run a railroad as a family business” (p. 103)  But he also points out that the age of Big Companies was a departure from the historical norm:

Big organizations doing big things: it’s the story of the nineteenth and twentieth centuries. In fact, it was so much the theme of those centuries that it’s easy to forget what a departure this was from the rest of human history. But it was a huge departure, brought about by the confluence of some unusual technological and social developments.

The advances in technology, and the shift away from an industrial manufacturing-based economy to a knowledge information-based economy, brings things back to the pre-industrial era of artisans, cottage industry, and small businesses.

Size and the Law Firm

Home of Cravath, Swaine & Moore

In the second part of his paper, Reynolds argues that the efficiencies that the big law firms brought to the table in the 19th and 20th centuries (the height of industrial economies) no longer exist:

Like the clients, law firms were taking advantage of economies of scale and scope. A large firm could spread the costs of big investments—at first, a law library, later things like secretarial pools, duplication equipment, and expensive computerized research services—across a large number of attorneys. And, because of its size, it could maintain in-house expertise on a large number of subjects, allowing it to meet clients’ needs for advice on subjects ranging from bankruptcy to intellectual property to labor and employment, without the client having to search out these experts on its own. Big clients and big law firms went together because both were taking advantage of the efficiencies brought about through bigness—efficiencies that outweighed the undeniable costs that bigness also brought.

But in looking at big law firms today, it’s worth asking whether technology has eroded the advantages that once accrued to size. What, exactly, do big law firms bring to the table?

In essence, it seems to me, they bring two things: reputation and resources.

Reputation (or brand) is simply a way by which clients can rely on a big established prestigious firm’s screening processes to hire competent attorneys.  It’s the same reason why big law firms tend to hire at the top ranked law schools: it makes the search for smart competent lawyers more efficient.  (Although I could question the logic of relying on credentials alone….)

Resources refers to things like a large support staff (paralegals, typists, messengers, etc.) that perhaps makes an attorney’s work more efficient.  The less time your expensive attorney spends filling out form letters, the better off you are as the client (or so the theory goes).

Reynolds then goes on to theorize that other institutions, such as law schools, could provide the branding service that big law firms currently provide.  For example, an online directory of Yale Law School graduates broken down by practice area, years of experience, and so on, would make it easier for clients to find attorneys who carry the reputation/brand of their alma mater rather than of their firm.  Combined with advances in information technology like Lexis and Westlaw that render the big libraries of the big firms irrelevant, and telecommunications technology like email that renders the fleet of messengers of the big firms nonessential, it is now entirely possible that a solo practitioner working out of his home could produce legal work on par with the best of the big law firms at a fraction of the price.

Sound familiar yet?

Size and the Real Estate Brokerage

I’m struck by the parallels between the description of the big law firms in the Industrial Age and the big brokerages in the same period.  There was a time when size drove efficiency in both.  For example, when information technology was expensive, the larger firms had the resources to deploy things like databases, computers, and local area networks while the small boutiques simply couldn’t afford to do so.

Even in areas where real estate differs from lawyers, such as advertising (most attorney advertising is sharply restricted by law), in the Industrial era, there was a significant advantage to the purchasing power of a big real estate company.  For example, when newspaper advertising was the primary was to advertise a home for sale to consumers, the ability for a large firm to negotiate a 30-40% volume discount off of standard rates constituted a major competitive advantage.

All of these advantages, like the law firms’ one-time advantage of a fully staffed large in-house library, have become significantly less important with the advent of technology.  Even today, there may be discounts available to the large brokers (or large franchise networks) for online advertising; but the advantage, if any, tends to be small enough to be outweighed by the cost of the bureaucracy and the overhead that size tends to incur.

Furthermore, inherent in the practice of real estate brokerage is a lack of economies of scale that goes beyond even what other professional services like law possesses.  As Reynolds says, big organizations do big things.  But residential real estate is inherently small: it’s usually one family buying or selling one home.  The advantage of bigness was tenuous to begin with, and changes to business realities have driven that point home.

Note that “big real estate” still achieves efficiency from big real estate firms.  For example, for very large commercial real estate projects, a boutique is not likely to be able to match up to the capabilities of a CBRE.  For very large homebuilders, such as Pulte or Lennar, it may be more efficient to find a single big real estate company who can bring a legion of agents, support staff, and so on to take on a project like selling 4,000 units across multiple states.

But for the most part, residential real estate is a one-to-one, small scale transaction where the size of the firm never added much in the way of efficiency.  In the post-industrial world, that problem is magnified.

It used to be — and there may still be some evidence of life in this — that the big brokerages could spend more money on branding and brand advertising such that when a consumer gets around to wanting to buy or sell a house, the name that would pop into his head is that of the big brand.  But the general sentiment around the industry is that the brand of the brokerage doesn’t matter one bit.  Of course, that post (and the NAR study quoted in it) conflicts with studies like this one from Century 21 that suggests that brand awareness does matter.

What one could say with a degree of certainty, however, is that whether brand does or does not matter, the branding advantage that bigness might have conferred is no longer as large as it once may have been.  (In a sense, as we’ll see in the next part, the hoopla around real estate brand is entirely misplaced.  It would be more accurate to say that whether brand matters or not to the consumer is almost entirely incidental.)

And the parallels continue even in possible solutions.

Reynolds thinks that perhaps Bar Associations or law schools might provide the kind of reputational filtering that big law firms provide today to help clients find quality lawyers.  A fairly significant number of people in real estate believe that it is the MLS (Multiple Listing Service), or consumer rating websites, or Associations such as NAR, that could provide reputational filtering.  Houston Association of REALTORS recently decided to put realtor performance metrics online, drawing heavy praise from the guys at 1000watt (and yours truly as well).

Whether HAR’s move is good or not is secondary; the interesting thing is that both Reynolds and Boero both believe that the solution to the problem of reputational filtering should come from outside the law firm or brokerages.  Neither believes, I think, that law should disappear as a profession, or that realtors be disintermediated.  They both believe that the attorney and the realtor provide value to the consumer.  It’s just that they don’t think that big law firms and big brokerages do.

Real Estate is Ahead of Law

The post-industrial, post-big, post-Goliath vision that Reynolds has for the legal profession is starting to be the norm within real estate.  As much as realtors look to lawyers for things like client service philosophy, fiduciary responsibility, respectability, and the like… in this one case, lawyers could learn a lot from realtors.  Many realtors are already free agents in all but name.  Even if they are affiliated with a big real estate brokerage, they don’t report into the office, they don’t rely on the big infrastructure advantage, and have returned to the pre-industrial, artisanal way of doing things.

Such independence brings challenges and problems of its own, of course, and as lawyers might be looking over the horizon at what the future of the law firm looks like, they might look at real estate companies very carefully.

Next…

In the next part, we’ll examine some fundamental ways in which Big Law and Big Real Estate differ from each other, and the consequences of that difference.

-rsh

I love this new post by Brian Boero over at 1000watt blog.  Go read it in its entirety, right now.  I’ll still be here.

Back?  Okay, I don’t have a lot of time today to do one of my traditional 9,000 word essay, but this post raises such a set of good points that I had to address them briefly.

Brian writes:

First, technology is – in the real estate broker’s world – thoroughly paradoxical. That which offers brokers a promise of liberation (from legacy systems, from antique business practices, from burdensome costs) often ensnares them in a Web of confusion, dependency and waste.

That’s too often true.  But then Brian continues:

These words are relevant for any broker trying to reclaim brand equity with consumers and deliver long-term value to agents.

…

If you can pull it off, though, and once you determine who your target customer is and what it is you know that is most likely to engage them, then – and only then – think about the technology you’ll need to make that happen. (Emphasis mine)

This is where Brian — and the brokers who are trying to get un-confused — need to take it one step further.  The primary source of strategic confusion in real estate comes from not knowing who your customer is.

Who Is The Customer?

It is clear that Brian (and the good folks at 1000watt generally speaking) thinks that the customer is the consumer.  His prescription is for brokerages to tap into organizational knowledge, dress it up in the brand, then get that out to consumers.

I believe Brian’s idea is to segment the customer into addressable markets by demographic and/or psychographic factors, identifying the distinct needs of the luxury seller vs. the first-time home buyer and so on, and ensuring that one’s brand is effective and enforced throughout the organization.

This works.  Let there be no doubt about that.  The brand-centric strategy does work.

But it only works for brokerages that are prepared to treat the consumer truly as the customer.  In my judgment, there’s only one brokerage in the industry that does this: Redfin.  There are several that are trying to do this, but as long as the agents are independent contractors compensated through commission splits, the structure simply doesn’t support the business objectives.

To use Brian’s foodie analogy, this is akin to using the oven to make fried chicken.  It can be done, sort of, but the result isn’t exactly world-beating.

Not good for making fried chicken...

What has become clearer to me over the past couple of years in this industry is that the customer of almost every single brokerage in existence today is the agent, not the consumer.

We can decry this state of affairs, agitate for change, bemoan the fact that brokers are far more interested in recruiting agents than they are in providing customer service to consumers, and so on, but none of that changes the reality of the situation.

This is the source of confusion in the industry when it comes to technology.  Brokers believe that they have to build million dollar websites, embrace social media marketing, and dozens of other technology tools besides in order to serve consumers better.  That is incorrect (except in the rare situations cited above).  They need to pursue technology in order to fill their customer’s needs — i.e., the agent’s needs.

Brokerages today are essentially B2B companies whose value chain is intimately connected to the value chain of their agent-buyers, who in turn provide services to the consumer-buyer.  They’re less like Amazon.com, and more like Oracle (that powers Amazon.com).  The sooner brokers understand this, and the more they can drive discipline throughout the organization about who the customer actually is, and the more they can strategize around competitive models, the quicker they will escape confusion and identify where it is that they need to make investments and where they need to stop.

-rsh

Click here to view the embedded video.

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

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

Said blogpost follows.

What Brokers Said…

Let us first turn to what the brokers actually said in this report.  They spoke about government programs, HVCC, dual agency, about MLS and Associations, about first time homebuyers, about tech spending, recruiting, and then this gem:

When it comes to competing for buyers and listings, having experienced, trained agents trumps the size of a company or its brand, real estate brokers surveyed by Inman News say.

Carving out a niche market or area of specialization was also seen as a less important competitive advantage than staying abreast of technology and conducting online marketing.

Fair enough.  The report goes on:

Similarly, experienced agents were considered a “highly important” competitive advantage by 69 percent of brokers, but only 37 percent rated having a specialization or niche as “highly important” and 24 percent viewed the size of a company as “highly important.”

…When it comes to keeping agents happy, real estate brokers again emphasized training over their brand ap- peal, or even a company’s ability to provide leads and listings.

Brokers think the most important service they perform for agents is advice and training, including the mentoring market expertise they can provide, and the ability to answer questions and resolve issues with contracts, transactions and legal issues.

Interesting.  So I ran a wee little survey (highly skewed, not at all scientific, and completely unreliable) on my Posterous site earlier this evening.  With all of 20 results in (!) despite 360 views, which implies significant voter apathy, 40% of respondents (whole eight people) said Training and mentorship were the most important service their broker gave them.

So far so good.

But just a few pages above, here’s what brokers had to say about what government is doing wrong:

When asked what government law or regulation is needed to benefit the real estate industry, 22 percent of 133 brokers responding to that question wanted to see tougher licensing and education requirements for agents and brokers to raise the bar for entry into the business.

“Brokers ‘wholesale’ recruit, train lightly, (and) supervise even more lightly,” said a Lincoln-based broker who advocates a tiered licensing structure.

When new agents take on business they are not comfortable or competent to execute, the broker said, “the client feels the value received was out of balance, and all Realtors are branded with blame for the newbie’s performance.”

“Real estate is too complicated for many agents,” said the Pennsylvania broker who liked the state’s seller disclosures. “The bar should be raised in order to weed out part-time agents and … those who are incapable of representing their clients professionally.

“Make the admissions test harder. Raise the membership fees. Increase the number of (continuing education hours). Consumers and agents will benefit alike.”

To quote The Captain, what we’ve got here is a failure to communicate.

Making Sense, Out of Nothing At All

So on the one hand, we have brokers saying that brokers don’t train their agents much at all, and therefore, the industry, the people, nay the great nation of the United States of America, needs higher standards to have the privilege of being a licensed real estate agent.

And on the other hand, we have some 69% of brokers saying that having experienced agents is a “highly important” competitive advantage.  Far more than lead generation, far more than brand of the brokerage, far more than any other factor.

Then in the same breath, we hear that training and education are the most important services that a broker performs for the agent.

Am I the only person experiencing total eclipse of logic?

Turn around, bright eyes.

A threshold question is, “Does training equal experience?”

If a broker ran training classes non-stop, every single day, for four hours a day, after two years of that training, would that agent be considered “experienced”?  Or like any other industry, training is training, and wonderful in its own right, but not a substitute for experience?  If you need a heart transplant, do you go with the surgeon who’s gone to Harvard Medical School, interned at the best hospital in the world with the best doctors, but had never actually done a heart transplant?  Or do you go with the guy for whom this ain’t his first time in the operating room?

Presumably, the experienced agents who are such an important competitive advantage don’t particularly need the training or the mentorship.  Seems to me, these experienced agents might not agree with the broker who says “my knowledge of the industry and my ability to help (agents) through their problematic transactions” is the most important service the broker offers them.

So even if we agree that training is the most important service of a broker, that only applies to the inexperienced agent who is learning the ropes.

So uh… why are brokers agitating for higher standards for licensing?  Aren’t they training these agents? These newbies?  Isn’t that where their value is?  Who cares what the licensing standards are, since the most important value of a broker is in training these baby licensees into becoming superstar experienced Realtors, no?

Seeing as how training is the most important service, according to both brokers and agents, it would be a simple matter to look at what percentage of the total cost of operations goes into training and education.  Last time I checked (with the 2007 RealTrends report, that is sadly no longer published), most brokerages were spending less than 0.5% of total GCI on training.  They were spending more on office supplies.

Wow, must be some important service there, that training piece.  Whew!

Have things changed?  Really?  I know @Properties in Chicago employs two full-time performance coaches for their agents.  How many brokerages have full-time training or performance coach staff on payroll?

I know just how to whisper...

So let’s try to make sense out of what those in the To Be A Broker is saying.  A broker’s most important service is training, which is valuable only to the agents who provide no real competitive advantage at all, which is why brokers want the government to do much of the training for them, so that they can provide even less of a service to those who provide no real benefit to the brokerage.  o.O That’s making money, out of nothing at all.

May I, a humble observer of the industry and consultant who has never sold real estate or operated a brokerage, make a suggestion to brokers everywhere?  Spend time and money on the things that give you competitive advantage — try that for a change.  If that’s recruiting harder, better, stronger, faster agents, well.. do more of that.  If that’s providing technology, then do more of that.  Whatever it is that gets you competitive advantage, try doing more of that, and less of the other stuff.  What do you think?

Competitive Advantage

It’s too bad that my column for Inman didn’t go up today, as it was supposed to.  But I think it might be worth talking more about competitive advantage, what it is, how you get it, how you sustain it, in real estate.  Those of you who are familiar with the works of Michael Porter already know the basics.

Competitive advantage can only be gained through one of four ways: Cost Leadership (you can provide the service at the lowest cost), Differentiation (you can provide a unique value that no one else can), Cost Focus (lowest cost to a segment of the market) or Differentiation Focus (unique value to a segment of the market).  Note the emphasis: lowest, not low, and unique, not sings of different colors.  And we measure competitive advantage by profits, not by market share, not by revenues, not by awards won at national conventions, but by profits.

Having experienced agents is not a competitive advantage in and of itself; you might be losing money hand over fist with a stable full of experienced agents who are on 95/5 splits and demand the world and a bag of chips from you to have the privilege of having them grace your brokerage with their presence.  Having a great website is not a competitive advantage in and of itself.

Everything you do, taken together, that lets you earn higher profits than your competitors is.

So… (a) are you earning higher profits? and (b) what are you doing to earn said higher profits?  Think on those; therein lies the real course to recovery, through the fire and flames of the Hope and Change economy.

Click here to view the embedded video.

-rsh

EDIT: I edited this to clarify that my criticism was meant for some of the brokers and their response, not for Inman who did the report.  Heck, if anything, I think Inman did a grand old job of creating valuable information that fuels debate, and I rather think it’d be a nice if more people read reports like this one.