Notorious R.O.B.

In part 1, I laid out some hints of what the Obama Administration has in mind for a new federal housing policy that would “reset the rules of the market” and engage in a “fundamental rethink” not just of the mechanics of housing finance, but of the objectives of housing policy themselves.  The Treasury now has all of the comments that it requested from the public and we can expect to see a proposal from the Administration sometime this fall or early next year.

In this post, I’d like to engage in the purest conjectures about what such a policy might look like.  I know that assumptions are dangerous, and any conjecture at this early stage is more likely to be wrong than right, but… hey, this is fun.  (If you’re a real estate and politics geek like me anyhow.)  So here we go.

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1906 San Francisco earthquake

There was, apparently, an earthquake in Washington DC not too long ago.  Thankfully, no one was hurt, and no serious property damage occurred as the 3.6 magnitude tremor rolled through.  Mere days later, however, I learned that another tremor — this one not registered on any geological survey — centered around Washington DC occurred.  From the Washington Post:

Responding to the collapse in home prices and the huge number of foreclosures, the Obama administration is pursuing an overhaul of government policy that could diverge from the emphasis on homeownership embraced by former administrations.

“In previous eras, we haven’t seen people question whether homeownership was the right decision. It was just assumed that’s where you want to go,” said Raphael Bostic, a senior official in the Department of Housing and Urban Development. “You’re not going to hear us say that.”

While this particular tremor hasn’t developed yet into anything earth-shattering just yet, and there are absolutely no details available just yet, for anyone even remotely connected to the real estate industry, these statements amount to a tectonic shift of realignment.

What rough beast, its hour come around at last, slouches towards DC to be born?

Conjectures follow.

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On November 6th, at roughly 3:15PM Eastern Standard Time, the National Association of REALTORS declared war on the rest of the real estate industry.  To be fair, NAR probably did not realize that it did so.  Judging by the initial responses, it doesn’t appear to me that most people see what I saw.  But, probably because of my twisted nature and my penchant for focusing on the dark side of human nature, I am predicting nothing short of civil war in the real estate industry going forward unless REALTORS Property Resource (or RPR) in its current form is immediately scrapped.

What brings forth such hyperbole?

RPR, or REALTORS Property Resource, was a project shrouded in secrecy.  Brian Larson’s post of October 19th, 2009 is a pretty good pre-unveiling summary of the questions and concerns around RPR.  Brian Boero’s initial take is a very decent summary of the post-unveiling.  But since Brian is a much nicer, much sunnier, much more positive guy than I am, I believe what you’ll get from Brian is the “Glass Half Full” vision.

Strap in for the darker vision.

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Thinking about the dawn of a new day

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

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

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

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

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

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

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Math is FUN-damental!

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

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

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

- There are four financial factors that drive revenues:

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

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

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

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

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

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

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

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

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

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

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

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

Having said that, let us dive right in.

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In a time lost in memory, in a world far far away, I openly hypothesized that the future of real estate brokerage might look more like a law firm than brokers of today:

Everyone else is an employee. They get a salary, they get benefits, and if business is good, and they’re good, then they get a bonus. If they’re not, then they get fired. The firm is legally responsible for their actions in the course of work (respondeat superior) but in return, the firm clearly directs the how, when, what, and where of the employee’s activities. And the firm takes 100% of the revenues, with no splits, no commissions, and so on.

Junior agents in particular are valuable to the firm only insofar as revenues generated > money spent on that agent. What could a junior agent do to prove such value?

1. They can do the actual work, freeing up the partners to go out and bring in business.
2. They can bring in business.

It is a waste of the firm’s time to have a senior partner spend time showing houses; that’s for his associate, who may in fact be better at doing that. He might spend that time either calling on more potential sellers, or speaking at local Chamber of Commerce events, or writing blogs proving how much of an expert he is in investment real estate in the Modesto, CA market.

I went on to theorize further on a bunch of things, and have had some really interesting conversations with realestistas about whether this model was possible.

Now, I see this come across my RSS reader — Independent Contractor Model Outdated; Mimic Teams Instead:

If you could re-invent your company in any way possible, what would it look like?

We would begin with employee agents only, not the out-dated “independent contractor” model currently in place. The premise would be that these brokers can make more money per hour than under the current model, have more time off than current agents do, have more regular hours they could count on, have a team of specialists to assist them, in the form of transaction managers, marketing specialists, etc., leaving the agents free to do what they do the best, i.e., interface with willing buyers and sellers. In this model, employee agents could handle many more transactions than any current agent can, because others on the team handle the ancillary details.

The profile for the employee agent does not exist typically in the current “independent contractor” brokerages; the pool is external, perhaps younger, needing income, prospects in place, and perhaps benefits. The business in this model is created by the brokerage and retained by the brokerage, affording the broker/owner the control of business created and closed by the employee agents. The model for this is not new; we need only to look within our brokerages at the “teams” that exist there and mimic that model right in our own offices! This new model requires a shift from the “agent-centric” past to the “consumer-centric” present and future, which is where our consumer really lives! We need to show up. [emphasis added]

O.O

The writer here is not some random blogger like yours truly spouting off theories.  Nancy Rusinak is the broker-owner of a successful brokerage company in Colorado.  She has the actual ability to make this happen.

The blog she posted this on to share with the world is not some random blogger’s personal playpen either; that’s the official blog of the Leading Real Estate Companies of the World, the largest network of independent brokerages in America.

Dare I think that we may see the whole “Firm as Model” actually happen?

-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

Do Not Wake Sleeping Gorilla

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.

So... About This Disadvantage Thing...

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.

Tasty, But Not Me

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