Notorious R.O.B.

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.

Read the rest of this entry »

As some of the commenters on my original thread have already surmised, Aybaf is not a real company.  It is a thought experiment that came about as the result of my hours-long conversation with an executive at one of the top web real estate companies.  My first thought was to call this new concept Trillow, but thought that would be too obvious.

The initial question that Mr. Executive (who wishes to remain anonymous for a variety of reasons) and I were tossing back and forth was this:

“Suppose this Trillow were to launch a virtual brokerage, backed up with all of the tools and resources currently available.  How does a traditional big broker or big brand compete?”

Hence, Aybaf (All You Brokers Are F***ed).

I do thank many of you for your thoughtful comments, and apologize for misleading you.  It was for a good cause.

Analyzing the Threat

Contra some of the commenters, I do believe that a Trillow Virtual Brokerage would take an enormous bite out of numerous brokerages as they are today.

I have on good authority that the vast majority of agents are more than happy to pay for actionable leads, as long as they are paying upon close.  Most people are much happier with a “pay-per-transaction” model than they are with any other, whether pay-per-click, or pay-per-lead, or pay-per-impression.  15% is not too high for a broker to charge for “house leads” because I know of several that are doing it, and their agents aren’t complaining — they’re happy.

Mr. Executive and I looked at the “desk fees” of a completely virtual brokerage, and they are negligible.  $19.95 a month easily covers the cost of a data center (which Aybaf would need to have in any event) and some of the software involved.  Liability insurance was the biggest line item, but at about 15,000 agents (about a tenth of what the NRT has today), that cost is easily covered.  Plus, transaction analytics coupled to risk management systems means you can continually prune the ones who pop up as a high-risk.

Finally, liability and screening are much less of an issue when you go after the experienced top producers who are already on 90/10 type of splits, already have their own operation setup, and already are disenchanted with the services they are receiving from their brokerage (or brand).  Sperry Van Ness has done this successfully in commercial real estate, an industry where big brand matters far more than it does in residential real estate.  They don’t need to “manage” their agents, because their agents are proven self-starters who “manage” themselves and their staff just fine, thank you.

2 million unique visitors a month is about the average between Trulia, Zillow, and HomeGain.  15,000 actionable leads is less than 1% conversion rate from that traffic.

This can absolutely happen.  Do not think it can’t.

So the question for brokerages and brands is, “How will you compete?”

Institutional Disadvantage

What Aybaf points to is the significant institutional disadvantage that brokerages and brands have in today’s real estate industry.  As Kris Berg points out, the old economies of scale do not work anymore:

It seems like only yesterday that I needed a company brand for credibility. I needed the resources of a big company, both the fixtures and the systems, because there was an economy of scale which I couldn’t touch on my own. Today, I can work from anywhere. I don’t need the desk and computer bank and copiers; I have my own. I don’t need the listing feeds; I can place my listings any place my broker might, and in doing so all roads lead back to me. I don’t need the brand; I long ago branded myself. Group print advertising rates which used to be a huge benefit of associating with the 1000 pound gorilla are now an antiquated concept. [Emphasis added.]

So the current brokerages of all stripes are stuck with the costs of operating an institution that generates economies of scale that don’t matter anymore to the experienced, producing agents.

I spoke with the Director of Technology for a very large brokerage operation who told me flat out that the facilities costs for his offices are crushing their P&L and balance sheets.  The annual rent for 15,000 sq. ft. of office space no longer makes any sense when 80% of agents are working from home, or better yet, working from their local Starbucks using mobile communications and laptops more powerful than the computer that sent Armstrong to the moon.

Plus, as any organization grows in size, there is inevitable overhead from bureaucracy.  Jay Thompson may be able to hand-route leads to his small team of agents, but once the agent count gets to a couple of hundred, and the lead count gets to hundreds a day, he’s going to be spending all of his time hand-routing leads.  So someone (human or machine) has to do that work for a large operation.

In my analysis, part of the institutional disadvantage that many brokers face today is the result of investment decisions made during the Roarin’ 00′s when real estate started to bubble.  I touched on this topic at some length on this post on OnBlog.  When you’ve spent years investing three-and-a-half times as much on dead-tree advertising instead of on your web operations, while the new generation of real estate players were investing 100% into the most powerful marketing and communications medium since television, you are going to end up with an institutional disadvantage.

Why?  Because technology improves productivity; dead-tree advertising has never, does not, and will never improve productivity.

So let’s come back to 2009.  Numerous large brokerages have thousands upon thousands of agents, but the smart, productive ones have figured out long ago that the broker isn’t providing enough value to them.  They’ve gone out on their own, followed gurus telling them to brand themselves, and to leverage social media to build their own following, and realized, “Hey, I can make more money doing this myself, with cheap or free technology tools!”

Result: the big brokerages are inefficient, behind in productivity, saddled with costs from the old economies of scale days, burdened with masses of unproductive, unprofessional agents who continually degrade the firm’s brand, and are watching their consumers transfer their loyalty to either Big Web or individual agents.

I Ain’t No Chicken Little McNugget

Enough with the doomsaying and the sky-is-rapidly-descending talk.  As regular readers of this blog know, I am a believer in Big Brokerage as the future of real estate:

Robnecks hold that Big Brokers are not dinosaurs doomed to extinction as much as they are sleeping giants.  Some will never wake up, and end up being devoured by the Swarm; but those who do wake up have established business models, established brand, established infrastructure, and most importantly, have the resources to invest in to technology.

It is not too late for brokerages and brands to turn things around.  Decades upon decades of success have built a cushion for Big Brokerages.  But it’s getting there, and the clock is ticking, and the forces of Kristiandom are not resting.  You cannot survive eating into the brand endowment that your predecessors have built up; you’ve got to start replenishing it.

The key lessons that Big Brokerage must learn in order to turn things around are these:

1. Technology gives an institution the ability to control the consumer relationship.
2. Institutional advantage is built on productivity and brand.
3. You reap what you sow.

The full discussion of these is probably going to have to wait for another 9-million word post, but let’s briefly touch on these.

Consider Home Depot.  As a homeowner, I have a relationship with Home Depot, not with the contractors who show up to install the windows I bought there.  If I need to have new doors, I’ll go to Home Depot, and never even think about the independent contractor who shows up to install the doors.

For a services business, technology gives you the ability to know consumers, to relate to consumers directly, to build feedback loops with consumers, and to drive the entire consumer relationship cycle.  Look at Amazon.com and what it has accomplished — though they are in retail, so caveat lector.

Rather than outsourcing your consumer relationship efforts to your agents, you need to take ownership of that effort, and be responsible for it.  That will certainly mean more than software; it will mean reforming your customer relationship process, customer service philosophy, and perhaps finding resources to handle service.  It is critical to your future survival.

Productivity and brand — these two thing dictate institutional advantage.

Productivity simply means more units per unit of labor — more sides, more revenues, per agent/employee.  Every single piece of technology you implement must improve productivity or it’s a waste of money.  Enhanced productivity leads to increased profitability which leads to cost-structure advantages.

In today’s economy, this means finding new economies of scale.  The old “group discounts on dead-tree advertising” isn’t cutting it.  Listen to your best agents, watch the industry, and understand where the new economies of scale are.  They will be, I’m guessing, in areas of CRM, content generation and management, and web-based productivity tools.

Keeping in mind that your brand is in the hands of your worst agent, consider how that changes the way you would approach recruiting, training, discipline, and brand enforcement.

In concert, these two things yield lasting institutional advantage.  At least until things change again, and you have to adapt or die again.

Finally, and you know this already, you reap what you sow.  Continue to invest in print over web on a 3:1 ratio, and you will reap the rewards of that.  Continue to ignore your brand equity in favor of short-term revenues from “more bodies, more desk fees” and you will reap the rewards of that.

Renouncing Aybaf

At the end of the day, I renounce Aybaf.  For much the same reason that Keith from the comments mentions:

Brokerage is not about being cheap, or about providing web leads, it is about oversight and policy.

Where he says “oversight and policy”, I hear “total consumer experience”.  A broker who understands not only the past of the industry but the future as well, will be a major force for positive change.  They will drive customer benefit, while enforcing discipline required to build true brand equity.

Aybaf (or any model like it) may make a ton of money, and may be the low-cost solution for a variety of independents.  It may even win the overall war, as has happened in the travel industry for example.  But it cannot, in my view, help to improve the industry as a whole.

Renunciation, of course, is not the same thing as denial.  Aybaf can happen.  Trillow can happen.  And that fact should raise the original question for those responsible for brokerage companies and real estate brands today:

How will you compete?

-rsh

According to this post on the Trulia Blog, Trulia is the #1 lead generator in the RE.net:

Threewide’s ListHub, the most widely adopted network for listing distribution, works in concert with MLSs, various franchises and brokerages, and core real estate technologies to bring real estate companies a single dashboard for controlling their online marketing strategy.  Analyzing the traffic that’s sent to clients from their syndication feeds, Threewide found some interesting results.  Here are some highlights:

• Study analyzed about 600k listings sent from MLSs and brokers to 16 of the largest real estate sites for the month of October 2008

• Trulia generated the most leads* in this period with almost 12,500 – over 30% of all client leads!

• The second closest competitor had just over 15% of all leads and the 3rd just over 12%, with the top 5 making up almost 80% of all leads sent

• Trulia had the highest percentage of redirected traffic** with over 35% of all traffic sent to ListHub clients

• Finally,  over 8,000 listings received at least 1 lead from a consumer coming directly from Trulia, with our nearest competitor sending traffic resulting in leads for  a little over 3,600 listings

These statistics show that Trulia delivers the most leads, and in these challenging times we all know how important that is!  AND, considering that some of the 600K listings sent to Trulia were already being displayed from other broker listing sources and thus not actively displayed on the site to prevent showing duplicate listings, the actual percentage of leads sent from Trulia to Threewide’s clients is even better than the original report shows.

This is, of course, great news for Trulia.  The data supports Trulia’s business model and its claims overall.  So first off, kudos and congratulations to the Trulia crew!

However, as much as I like the boys and girls and Trulia, I have been saying since the beginning of this blog that Trulia poses a threat to franchisors and large brokerages.  Trulia has steadily denied such a thing, pointing out that they work with and for brokers and agents.

The thing is this: I look at consequences, not intent.  I have little doubt that Trulia intends to be a helpful partner to brokers and franchisors.  But the consequences of that may be entirely different from what was expected.

Consider the above news from the perspective of the average agent.

What services do you get from your broker that keeps you paying him a share of your commissions?  Whatever they are, they comprise the broker’s capital; that together with your labor as the agent creates the economic value.  Elsewhere, I wrote about the relationship between capital and labor in real estate.  The basic equation is capital + labor = production.  So when capital costs go up, labor costs have to go down if production remains the same.  And vice versa.

When Trulia replaces the broker as the #1 source of leads, then the rational agent quite rightly asks, “If I’m getting more leads to my website from Trulia than from my broker’s website, shouldn’t I get a higher split of the commission?”

The same logic goes for franchisors, such as Coldwell Banker or Remax.  If the national Remax site generates fewer leads than Trulia.com, a broker’s incentive to keep paying for use of Remax’s capital (i.e., its website, its platform, etc.) decreases, barring a sufficient increase in production to smooth over such things.

Even if Trulia funnels those leads to Remax National, who in turn funnels it to the franchisee, the rational broker can conclude that they can simply cut out the middleman of Remax and go direct to Trulia.  For that matter, as Trulia continues to do deals with MLSes and REALTOR associations, the rational broker (and agent) can get around all those people taking cuts of their commission checks.

Is there a happy win-win solution here?  I’m not sure.  At the end of the day, the market will flock around the most efficient producer.  If that’s Trulia, then it’s Trulia.  The study results above suggests that it might be.  But then, none of us have any idea of Trulia’s financials… so all this wonderful lead-generation for Trulia might be coming at a loss, which would suggest that it won’t be around long enough to displace any existing players.

One thing that does come to mind for me, however, is that if I were managing a franchisor today, or a large brokerage company today, I might take a look-see at my own lead generation efforts to my members/agents, and compare it with what they’re getting from these various third parties.  Then either prepare to provide value in some other way to continue to justify the cut I am taking, or prepare to invest heavily into capital (i.e., website, lead generation tools, etc.) to compete.  Anything else is shortsighted in the extreme.

-rsh

Redfin has one of the best corporate blogs not just in real estate, but in…well, business.  Posts like this are the reason why.  Glenn Kelman takes the Freakonomics guys to task (gently, as is his wont) for relying on bad sample set to conclude that brokers have little to no value.

Stephen Dubner and Steven Levitt renew their argument that real estate brokers aren’t worth 6%, citing a study (PDF) conducted by Stanford economist B. Douglas Bernheim and one of his graduate students, Jonathan Meer, which shows that using a broker has no effect on a home’s average selling price.

We are an (online) broker ourselves, but have argued that consumers should be able to choose the real estate services for which they pay, so I’m not sure we have a dog in this fight. In the past, we have welcomed studies showing that buyers and sellers can get along without a broker, and argued that a client working with an online broker negotiates a better price. But in this case I was surprised that the Freakonomics team didn’t evaluate the Stanford economists’ methodology.

The Stanford study only evaluated 800 homes sold on the Stanford campus, “the ownership of which is limited to Stanford faculty and a limited number of senior staff.” In such an environment, marketing is much easier because of the small number of potential buyers, trust is high because of the buyers’ affiliations with one another, and supply is extremely limited: many academics would kill, or even teach an extra freshman survey course, to live on the Stanford campus.

It’s worth reading the whole thing for Glenn’s take on it.  He is, after all, the CEO of a fairly unique brokerage proposition.

As usual, Glenn is much nicer than I am.   One has to be willfully blind to the flaws of the Stanford study to make any conclusions about the value of real estate brokers based on that sample set.  That’s like drawing conclusions about commercial real estate based on a study of Class-A buildings in midtown Manhattan — the city that breaks the laws of physics.  (Did you know that Manhattan office buildings routinely have more rentable square footage than physical square footage?)  Neither place has much resemblance to other places, like say… planet Earth.

One of the biggest flaws of the Stanford study is the severe restriction not just on supply, but on demand.  These 800 houses are limited to Stanford faculty and limited staff (presumably, university brahmins).  Maybe I’m a wealthy VC in the area and would like to own a house right on Stanford campus — sorry, no can do.  And we’re going to make conclusions about pricing based on that?  It’s a neat trick to make statements about the free market once you’ve eliminated the free market from the analysis, no?

Glenn thinks college towns may be a signpost to the future:

In real estate and in life, college is a smaller, more perfect vision of how the rest of the world could be. We thought it was interesting that the previous academic study on brokers’ effectiveness focused on Madison, Wisconsin, because this is also a small college community where alternative approaches to real estate have reached critical mass. Maybe these communities point the way to a post-brokerage world waiting for all us, where both sides abandon their brokers, where we can access information for ourselves online, where we can come to terms more easily and economically.

I seriously, seriously doubt it.  For one thing, college housing may be immune to cyclical downturns.  For another, I’d imagine only military bases have higher turnover in population than college towns, even amongst the faculty.

This is not to say that real estate brokerage will survive in its current form.  There are enough broken things about how real estate works today that some change is inevitable.  It remains to be seen how things will evolve, and what the value of brokerage services will be in the future.

It may not be, as the Freakonomics team tells us, based on the idea that using a broker can get you higher prices on your home.  On the other hand, it may be that using a broker makes it easier to get you higher prices.  Huh?

I mean that presumably there’s a set of activities that one has to do in order to maximize price on a house.  Listing and marketing are a part of it, but so is something like staging a house.  The homeowner himself can stage the house, but maybe he’s a Professor of Economics and knows as much about proper staging as a real estate agent knows about the Black-Scholes theorem.  If there is some finite set of activities, then someone has to do them — otherwise, the price of the house will not be maximized.  A buyer will offer less simply because the homeowner forgot to clean his bathroom.

Real Estate agents may end up becoming something like a specialist in house staging, and extract value for that service.

Or it may be (as the Stanford authors admit) that using an agent results in faster sales, although not necessarily higher price.  There’s value in that.

Heck, there’s value in not having to be around to show my damn house to some damn couple.  It’s a convenience thing.

Now, none of those things may be worth 6%.  That’s a different kettle of fish.

For what it’s worth, I believe the future holds variable pricing for real estate brokerage services.  Rather than trying to enforce a one-price-fits-all model on consumers who don’t want all those services, brokers may end up offering a buffet-style set of choices.  Want me to show your house?  That’ll be 1%. Want flyers made up?  That’ll be 0.5%.  Want me to make a website for your house?  That’ll be $500.  That provides flexibility and choice to both consumers and professionals, allowing both to feel that they’re getting what was bargained for.

But even that model may not work on the Stanford campus with its restriction on supply and demand.

-rsh