Notorious R.O.B.

Thinking about the dawn of a new day

I had promised in Part 2 of this series that I would tackle the so-called “K-Dub” model in this part.  Well, I’ve decided against it.  Looking at the numbers, it seems to me that from a model perspective, there’s nothing particularly novel about the K-Dub (based on Keller Williams) model.  Its appeal and power lie elsewhere — power of recruiting, passive income streams, etc. — but on paper, K-Dub is clearly inferior to an optimized Traditional model and to the employee-based TerraFirma model.  In the real world, of course, Keller Williams is the fastest growing real estate company in America for a reason.

Instead, I think it might be time to get into a meatier, opinion-based discussion about what the future might look like, based on the models thus far.  So first, for those of you inclined to mess around with spreadsheets and such, I’m attaching the actual Excel spreadsheet I’ve been using for my analysis: Brokerage Models 2.0 (.xlsx workbook file).

Also, before we dive in, please take a moment to go read this post by Nicolai Kolding, the guy who sort of started this all with his prescient post on the status quo.  Some of the comments to that post are just excellent, and this post of mine can be thought of as an extended comment to his post.

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In Part 1, we explored the traditional brokerage model by the numbers and found that there are significant issues with the current model as constructed.  It may be, of course, that my hypothetical numbers are just way off, and therefore, the entire analysis ought to be trashed.  I get the feeling, however, that in the main, the assumptions — and therefore the analysis — were mostly correct based on comments in the thread, as well as the simple fact that traditional brokers aren’t out buying luxury yachts and private planes by the hundreds.

But simply because “traditional” models — and please note that I exclude Keller Williams from the “traditional” model, as would Keller Williams itself — are broken does not mean that other models are sustainable.  We have had a number of discussions within the industry about how to address the flawed model for real estate brokerage, from low-overhead virtual models to heavyweight full-service/low-split models, to employee-based models.  Going forward, all of these models have to be put to the same test of (at least) hypothetical numbers.  If the hypothetical numbers don’t make sense, there’s little reason to think that the real world numbers (which are usually worse) would lead to the Promised Land.

One of the first I’d like to explore is the “brokerage as a law firm” model — simply because it was one of the first I had suggested back in the misty days of bygone memory.  The theory here is that producing agents — the rainmakers — would band together and form a partnership, much the same way that experienced lawyers get together to make a law firm, and employ associates who are on salary.  To test this, let us create another hypothetical brokerage for the purposes of discussion, debate, and comparison: TerraFirma.

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Math is FUN-damental!

One of the more insightful posts on the industry came earlier this week from one of the more insightful people in the industry: Nicolai Kolding, COO of Better Homes & Gardens Real Estate, and former head of M&A for Realogy. This is a man who knows what he’s talking about.

He gave a presentation (PDF) at Inman Connect in San Francisco that I unfortunately missed due to meetings and such but I think his blogpost covers most of his basic points:

- The current business model for real estate brokerage is unsustainable.

- There are four financial factors that drive revenues:

1. The number of homes sold (with each sale having two “sides”),
2. The average price of the sales,
3. The brokerage’s take after the agents’ commission splits (”percent retained”),
4. The amount (in percentage) received per transaction (”average broker commission rate” or ABCR).

- Three of these four factors have been going in the wrong direction over the past decade or so. The deterioration was covered by rising home prices during the Bubble, but sides, percent retained, and ABCR have all been headed down.

- Even if home prices recover, without changing these fundamental dynamics, the current brokerage model is unsustainable.

- The sustainable model of the future will, in Nicolai’s view, do four things:

1. Maintain (or increase) ABCR by constantly updating and improving the value proposition to consumers;
2. Increase average agent productivity;
3. Increase percent retained through brokerage-generated business;
4. Generate a far higher output per square foot of office space.

Nicolai recommends a bunch of action items in his presentation.  For example, he talks about reducing office space to 50 sq.ft. per agent, restructuring commission plans and compensation plans, consolidating certain functions such as accounting and marketing, and eliminating technology/office items such as printing, copying, extra landlines, etc.

As it happens, I think Nicolai is right on target in many many respects.  In the comments to his blogpost, there are some heavy duty thinkers weighing in on how to fix the status quo and structure a business model for brokerage that makes sense going forward.

One of the things I wanted to do — and I’ve asked Nicolai for some help on this, which he was kind enough to supply as he could — was to contextualize the discussion by looking at the numbers involved.  A lot of the talk about business models feels to me like a bunch of hot air unless we can start looking at numbers, even if manufactured/fake, just to have some basis for discussion.

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

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

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

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

Having said that, let us dive right in.

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Something to consider from the world of commercial real estate, Brokerages Retool Rainmakers:

With office leasing and investment sales volume reaching new lows across the country, big brokerages are retraining idled dealmakers to become service providers rather than cowboys intent on roping the next mega deal. Brokerages have enormous fixed costs and in this challenging economy they are under pressure to provide tailored client services, such as mortgage workout programs.

And:

Betsy Peck, chief administrative officer for brokerage in the Americas with Chicago-based Jones Lang LaSalle, oversees the company’s training programs. “Understanding the multiple levels of service that can be provided beyond the transaction is clearly something that clients are looking for as they look into outsourcing and expanding their reliance on some of our professionals,” says Peck. “We try to anticipate the next client need. You’re not selling a service unless you’re listening to the client.”

Now, as I’ve pointed out before, on the whole, commercial real estate is to residential real estate as investment banking is to used car sales: totally and completely different industries in many respects.  There are indeed services in the CRE world that does not exist (yet) in residential world, such as portfolio management and capital markets work.

However, as residential real estate practitioners begin to talk more and more about professionalism, about need for local expertise, and how such expertise can be turned into money, I think the worlds are getting closer together.

First point to note is that even CRE firms cannot transform cowboys into consultants.  The personality type demanded of a rainmaking deal originator is so different from the personality type demanded of a consultant that “retooling” one to become the other is futile:

Rather than focus on training individual brokers, Lipsey has identified training that works best in team environments. “Let’s say a broker sold a property two years ago and now the mortgage is greater than fair market value. That broker can go back and say, ‘We’ve got some services for a fee that we can provide you until things get better.’ The broker brings the work in and the work is performed by the junior broker and the technician [researcher/analyst], and the bill gets submitted.”

So the cowboy remains a cowboy: he’s just roping different kinds o’ steer.  Rather than trying to sell properties or lease space, the cowboy-rainmaker is still out there beating the bushes for services deals.  The work itself, however, is to be done by the “junior broker” and the “technician”.  Not much retooling here; more of a change in the offerings menu.

The second point to note is that this can, and probably does, work in residential real estate as well.  Highly relevant is this post by Chris Johnson at Bloodhound Blog, especialy this part:

But I said I am a rake.  I cared about my clients–to a point.  To the point that they didn’t trouble me, expect anything, or need sympathy, I really cared.   I’d return phone calls, and the noisy ones could compel me to make a flyer or whatever.  I looked around and the sheer volume of work that other agents were doing astonished me.  I figured–deliberately–that a higher churn was acceptable if I didn’t have to mess around with e-neighborhoods and stuff like that. The path, then, was to burn through people.

Now: at some point, I’ll post how to use a Rake to be part of a team.  Best use of me would have been to join a mega agent and prospect more.  If that had fed a team somewhere, or if I’d built service people…the love of prospecting is a lethal way to sell.

Is this not the ideal rainmaker personality you would want?  Why burden such a pure cowboy mentality with the need to ‘make a flyer or whatever’?  Just have “technicians” do that, especially since some of them take the same attitude towards making flyers, marketing listings, or staging houses that Chris takes to making phone calls, and unleash both parts to do what each likes to do.

Individuals cannot be ‘retooled’ quite so easily, as if they were a piece of machinery.  There are skills, experiences, and personalities that suit one person to a particular kind of work, while making him unsuited for a different type of work.  But firms, teams, and organizations can and should be retooled constantly to adapt to changing market conditions and changing consumer expectations.

-rsh

I recently discovered Brandie Young, a fellow marketer, via her first blogpost on Agent Genius.  That post is interesting in and of itself.  And I’ve added her blog to the blogroll here.

But this comment from a Barry Cunningham on that post is really interesting to the whole Robnecks v. Kristians debate:

You have described my business model EXACTLY. I do all the marketing, I drive SERIOUS traffic via opt-ins and registrations to our various points of entry, and each day I see loads of buyer regs coming in ASKING to be show property. So what do I do? I’m not interested in doing grunt work…I have found 25 HUNGRY almost starving agents and if they are real nice and do EXACTLY what I tell them, I shove them ready , willing and able buyer manna under the door for them to feed upon. Oh yeah…we take in EXCESS of 50%..WAY in excess!

If an agent doesn’t like it..then fine..go away. I run one ad, and have a bevy of agents to choose from.

So… if this works so well with 25 agents… why wouldn’t it work with 250?  With 2,500?  Backed up with actual enterprise technology and professional teams?

Anecdote is not the plural of evidence.  Still… seems to me controlling the customer relationship leads to everything else.

-rsh

Stop Global Warming! Drive A Prius Today!

So let’s say that some brave soul out there has decided to gamble away his life at the urgings of a certain blogger who works for a certain data company in New York City. To him, I offer my deepest sympathies.

But courage! If this works, please do remember to look down upon us peons as you fly overhead in your Gulfstream G650. (Damn, even the website for that plane looks like it cost more than I make in a year.)

This brave soul would have gone forth, found rainmaking partners, installed an institutional CRM system, and is ready for business!

Well, not quite… there are still more steps, more things to consider.

One of the things this brave soul and his partners must do is to think about redefining the profession of “realtor”. [ED: Oh, is that it? I was worried they might have to do something hard.... /rolleyes]

Keep in mind that by going the institutional route, the Firm has taken on a very different cost structure than traditional brokerage. Instead of commissioned 1099 independent contractors, the Firm has 1040 salaried employees with benefits (which are costly). It has to take on the cost of CRM, of support staff, and of support professionals in IT and marketing that a traditional brokerage simply does not have. As older and wiser heads have pointed out, the Firm forgoes the very sweet IRS rules treating real estate agents as Statutory Nonemployees.

The 1099-based approach rewards brokerages that unleash a horde of low-training, low-skill agents to go forth and blanket the marketplace. They will make up in volume what they lack in quality, because even the worst agent will probably get her sister to list with her, at least once. Since the 1099 doesn’t actually get paid until some sort of transaction has closed, the brokerage could have nearly an unlimited number of such agents running around. For that matter, it almost appears as if some traditional brokerages have become de-facto landlords to their agents based on some of the desk cost oriented business model.

The 1040-based approach simply cannot compete with this low-cost, low-skill, high-turnover model on the same basis. At the same time, it should be pointed out that the 1099′s simply cannot compete with the high-cost, high-skill, low-turnover model of the 1040-based Firm on its home turf.

Therefore, for the Firm, it becomes necessary to shift the grounds of competition. If your thoroughbred can outrun any other horse running in a straight line, you don’t take him to a steeplechase competition. You take him to the Kentucky Derby. Read the rest of this entry »