Notorious R.O.B.

At last.

We have arrived at the destination of this series.  (See parts 1, 2, 3, and 4).

In Part 2 of this series, I spoke at length about institutional CRM and why that can be an unbeatable competitive advantage when properly implemented and used. In Part 3, we examined whether an institutionalized brokerage could shift the grounds of competition in such a way as to obtain a competitive advantage.  In part 4, we looked at specialization in real estate.

The culmination of all of these factors is something I am calling “systemic brokerage”.   Systemic brokerage is the future of real estate.

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Brian Boero of 1000watt recounts a dinner conversation and throws down some challenging questions and assertions:

This particular debate centered on the following question:

“Have we reached the end of the real estate story now that FSBOs and discounting have lost their menace?”

As Brian puts it, there were two camps, comprised of him in one camp and everyone else in the other camp:

Methods have changed. Markets have changed. The balance of power between brokers and agents has shifted. Consumers have access to enough data to choke a horse.

But the basic structure of this business remains remarkably intact.

There are two possible conclusions to be taken from this:

A. Real estate is exceptional. The complexities and emotions that characterize the real estate transaction will forever shield it from structural change. Bill Gates, Barry Diller and about a billion dollars in VC have been thrown against the barricade with no transformative impact. The story is over.

B. We’re due for a cataclysm. The forces of change, of technological innovation, of inchoate consumer frustration, are stacked high against the dam of Real Estate As We Know It. It will not – it cannot – hold. The story is far from over.

My dinner pals were in the “A” camp. I argued for “B.”

Given that the whole thrust here is theoretical and futuristic, I can’t help but charge in foolishly where wiser men fear to trod.

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In part 1, I started to talk about marketing in a consumer environment when the middle is disappearing.  My basic hyopthesis is that the American consumer today operates in one of two modes: Thrift and Aspiration.  Thrift mode means a focus on price above all; Aspiration means a focus on luxury, lifestyle, or something more than “mere product”.

To apply these thoughts to the marketing of real estate, I asked a few questions, of which the first one is the topic for this post:

If the Middle is disappearing, and the two dominant modes of consumers are Thrift and Aspirational… have you considered how you are positioning properties not only to demographics, but also to psychographic profiles?

Let me attempt to tackle this question and explore what real estate marketing of a property in a post-middle era might look like.

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Thanks to Brandie Young‘s wonderful post, I found David Amano’s thought-provoking post on “Marketing in a Post-Consumer Era”.  It’s worth reading in full.  Actually, they’re both worth reading in full.

I couldn’t help immediately reacting, however, with skepticism.

Perhaps it’s because the last time we were in a recession, we heard the same thing: conspicuous consumption is out, and frugality is in!  Since then, we have seen an absolute explosion of conspicuous consumerism, celebrity worship taking over as the official culture of the United States, and a continual denigration of the average middle American lifestyle in our cultural institutions.  (I for one do not recall “Walmart” being a dirty word back in the recession of the early 90′s.) Read the rest of this entry »

So it turns out that in addition to ruling the world from the Skull & Bones tomb, Yalies also get involved in real estate from time to time.  There’s even a group called Yale Alumni Real Estate Association (YAREA, pronounced Y-Area) that just held its annual conference.  I was invited, so… I went.

Since the theme of the conference was on “Green Real Estate”, and this was an area about which I was more or less wholly uneducated, the day turned out to be one of the most enlightening of my career in real estate.  A blogpost is really not the place to describe everything I’ve heard and learned, and the people I’ve met, but I do want to touch on some of the high points.

Green Capital also means y'know... the other Green

Green Capital

It turns out that in the world of real estate high finance, green is more or less a requirement.  Panelists such as Cherie Santos-Wuest, the Director of Global Social and Community Investments for TIAA-CREF, and Victoria W. Kahn, Managing Director of ING Clarion, made it clear that for them to consider investing in real estate projects, those projects have to meet certain green standards, such as LEED.

Considering that these folks have billions-with-a-B dollars under management, and make eight and nine-figure investment decisions… one would do well to take notice.

Which makes me wonder whether large-scale residential developers, such as Lennar or Hovnanian, ever put together a green subdivision.  And by that, I do not mean — and the folks at the conference do not mean — slapping solar panels on McMansions and calling them “green” houses.

My thought is that while this development is still limited mostly to high-end commercial real estate projects, I see the requirement to be much more environmentally conscious filtering down the ranks first to regional banks then local banks.  It might not be tomorrow, or next year, but I could see a time in the near future when your local S&L will be demanding that the local developer putting up a spec home include rain harvest and greywater recovery systems.

Green Ain’t Mainstream Until It Can Move to the Suburbs

One thing that was very evident — primarily because one of the panelists on the Green Cities panel said it — is that there is a very strong hostility to suburbia.  The green movement is the urbanist movement is the green movement.

The reasoning is extremely solid.  Cities cut down on transportation from one building (your house) to the next (your office, the store, etc.).  Cities enable walking or biking to locations, or public transportation, whereas suburbs are inherently built for the car culture.  Indeed, one might say that the American car culture would be impossible without suburbia, and that suburbia was made possibly only because of Henry Ford and his progeny.

Having said that… unless there is a wholesale change in American culture, most families and people are going to head to suburbia at some point in their lives.  Homeownership is the American Dream, and for whatever reason, owning a co-op ain’t really the same thing psychologically.  Also, people tend not to feel the need for more space and a backyard and such until they are expecting their second child… but once they do….

Plus… let us face facts.  Living in the city — in any city — is far more expensive than living in the ‘burbs on a per-square-feet basis.  I would have loved to have stayed in New York City with my two kids, but the equivalent space I have in my tiny little house in Millburn would have cost not double, not triple, but quadruple in NYC.  To me, it seems a simple matter of supply & demand.  Cities have less land; more people want the convenience of city living; ergo, prices will be high.

My sense right now is that this movement is here to stay, whether you believe in the whole Anthropogenic Global Warming thing or not.  (For the record, I do not, and I think Al Gore is a buffoon.)  Because there are other economic benefits to green buildings — lower energy costs, less water usage, and better health are all great things to have even if you think carbon footprint is something to be maximized if at all possible.

But equally clear at the moment is that the green building movement is still restricted to large commercial developments or large multifamily projects, and remains a fairly small niche.  Until it can cross the gap into the suburbs, impacting single family residences and suburban buildings, and leave behind the elitist disdain for suburbia, I don’t think green buildings can be a mainstream phenomenon.

Costs of Green Technology Must Come Down

A big part of the equation is the cost of green technology and green building techniques.  I got to listen to what was one of the most fascinating discussions about Green Buildings by some of the premier practitioners of the craft.  Architects such as Mark Simon of Centerbrook, Stephen Kieran of KieranTimberlake, and Rafael Pelli of Pelli Clarke Pelli gave presentations on some of the techniques they used on their green building projects and… let me just say that my respect for the architect profession increased by orders of magnitude.

The amount of thought these talented architects put into things like designing a wall — a topic to which I have never given a moment’s thought — is simply amazing.  And the impact of that design is similarly amazing.  I wish I had slides of Stephen Kieran’s presentation where he showed that a properly designed wall has three times the impact of solar panels on energy efficiency.

This intellectual work has to make its way into the mainstream of American homebuilding industry before the crossover can truly happen.  We’re starting to see it with EnergyStar appliances, and with double-pane windows and such.

But technology like geothermal heat pumps, dual-flush toilets, greywater recovery, rainwater harvesting, and of course the photovoltaic cells have to all come down in price and become far more widely available.  I was privileged to take a tour of Kroon Hall, the new home for Yale’s Forestry and Environmental Studies Department, and the building is simply a marvel.  I wanted almost all of the features in that building in my house — and keep in mind that once again, I do not believe in AGW — but the cost is still exorbitant for single family homes.

Last, But Most Important… Consumer Demand

Today, the consumer demand for green buildings is simply… meh.  In other words, all things being equal, people would prefer to be in a green building.  But all things can’t really be equal when you’re investing in green technology.  Yes, for large multifamily or for big commercial buildings, the savings in energy alone could probably pay for the investment.

But as yet — and based on like, no evidence, but plenty of anecdotes — consumers aren’t willing to pay a significant premium for green homes.  There has to be a relatively short horizon for payback on any investment for consumers to take green buildings really seriously.

Having said that… the Green Building trend is here to stay.  And it will accelerate and continue to do so.  Even after the whole global warming fraud is exposed as pseudo-science, the green building trend will stick because so much of what it proposes is common sense: use less energy, use less water, be smarter about designing buildings, and don’t stuff your home with dangerous chemicals if you don’t have to.  As prices of technology come down, and smart architectural and materials design continue to filter downwards from the big commercial projects, I think consumer demand will be there.

I think I got a glimpse of the future last Friday.  And the future is green.

-rsh

Matt Dollinger, of @Properties in Chicago, raised a very interesting question at the Leading RE conference that just concluded.  He then raised it again over Twitter (Matt is @mattdollinger) and the discussion threatened to overwhelm the 140-char limit.  It’s time for bloggery.

Matt’s question was this (in essence):

In 2015, with companies like Trulia, Zillow, Roost and others really advancing the technology of real estate search, should brokers have their own search site?

Since the panel was titled “Real Estate 3.0″, it naturally lends itself to these kinds of speculative questions.

This is an important question.  Money is not unlimited.  Brokers have to make decisions today to align their strategy going forward.  And as Matt himself pointed out during session, brokerages are not technology companies at heart.

The answer seemed to be from the panelists that brokers have to do both: create a top-notch brokerage website that is optimized for SEO, has great user experience, and captures leads all over the place, but also send listings to all of the aggregators to drive additional leads, because the big guys have national (global) reach and can grab so many more eyeballs than a single brokerage site could.

Trouble is… that just doesn’t jive logically.

Internet is Not Local

Fact is, while a brokerage may be local, and real estate may be local, the Internet is most assuredly not local.  There is no reason why someone searching for “chicago real estate” from New Jersey would not find a local website.

Granted, @Properties apparently needs some SEO consultancy love, seeing as how it doesn’t appear on page one, two, or three, but other local brokerage sites are right there: Baird & Warner, Rubloff, Dreamtown Realty, etc. all show up.

And Trulia also shows up.

As a consumer, if I go into a local brokerage site like Dreamtown’s, then go into Trulia, there is a world of difference there from a user experience standpoint.

The one has all manner of busy advertising, bullshit marketing messages that I would immediately ignore, and so on.  The other has a clean interface, a nice Google map mashup, and easy to use search filters right there on the page.

For Dreamtown to come up to par with Trulia, it would need to spend a pretty serious amount of money and time.  And the Dreamtown website is actually pretty darn good as far as local brokerage sites go.  Having worked on corporate brokerage sites, I think it is no stretch to say that a top-notch custom-coded website with developers, designers, UI design, SEO, and the like can easily top $250K in cost.

That isn’t even taking into consideration what it would cost to develop something actually new and innovative.  A new kind of search, a totally new way to interface with listings data, etc. could mean literally millions of dollars in R&D costs.

In theory, the aggregators and web portals like Trulia are technology companies first and foremost, and have core competencies in design and development.  They should always be ahead of the brokers in terms of technology and user interface.  (And in theory, they should dominate the brokers in SERPS… though often, they do not.)

Branding & CRM

Matt would argue — and correctly — that a brokerage company still needs a website for branding and CRM purposes.

For instance, you have to have a site where your existing seller clients can go, login, view all activity reports on their listings, see where the transaction is, download paperwork, upload paperwork, etc.  (You all do have this, right?)

And it would be difficult to brand your brokerage and your agents as local experts (since real estate is local, even if the Internet is not) without providing some heavy duty in-depth information and data about your local market.

But neither of these things need a SEARCH experience.

In theory, @Properties could have an awesome local website, filled with information about the area, a series of hyperlocal blogs written by their agents, and so on.  But rather than a search experience, just offer a “Search Our Chicago Listings on Trulia” or some such.

Either/Or?

Of course, most folks would assume that like in all debates, the real answer is a “bit of both” rather than an “either/or”.

So a broker would go invest a few thousand bucks to get a templated site from some low-cost website creator, or frame in a search solution from some IDX search provider, and still spend thousands more to feature listings on Realtor, or on Trulia, or pay for leads from some aggregator.

This is, however, a case of “either/or”. One of the following is true:

1. The money spent on putting in a search into the local broker site is wasted, since consumers would naturally prefer (and only find by year 2015) the tech-sites that emphasize the whole search user experience and functionality, and leads would be sent directly to the broker.  Instead, spend that money on enhancing local info, the brand presence, and the CRM applications.
2. The money spent buying traffic/leads from Third Parties is wasted, since all searches begin with Google anyhow.  The name of the game is to rank higher in Google, and not having search and all those results pages kills you.  Plus, you don’t need super-duper search; you just need good clean intuitive search that connects the consumer to your agent as quickly as possible.

Both cannot be true as a matter of logic.

Traffic vs. Lead

An important distinction here is between ‘traffic’ and ‘leads’.  Louis Cammarosano of HomeGain is fond of pointhing this out.  A broker or agent, in his view, could care less about a site sending him a billion visitors if all of them are bored-ass tirekickers who wouldn’t convert to a customer anyhow.  They would rather that HomeGain (or whoever) send them ten people who are solid ready-to-buy or ready-to-sell consumers.

In theory, the third-party sites can send enormous amounts of traffic to the spiffy brokerage site with a great search experience.  Since these are just random visitors, the brokerage site would need to do a lot more — including offering a search experience — in order to convert them to actual leads.  And it is possible that these sites could send millions of visitors, not one of whom will ever hit “Request More Info” or “Request a Showing” or pick up the phone.

That traffic, however, is sourced more or less from Google, which brings us right back to “SERPS are what matters, not SEARCH”.

Or, the third party sites are sending enormous amount of leads, which are consumers asking to be contacted.  In which case, they’re past the whole “search for a home” deal and into the “I need more information” deal.  And the brokerage’s spiffy new search technology is completely bypassed.

Real Estate in 2015

So let’s fast forward.  2015.  Hard to make assumptions based on technology today, with our rapid speed of change.  But let’s go with it.  Let’s assume that search technology is so advanced by 2015, and computing has totally changed, with multi-touch computing the norm.

What happens to search-based broker/agent website then?  The answer is directly related to what happens to the big aggregators by then.  And where search technology is by then.

As the fast and furious twitterstream on this topic indicates, this is a bigger issue than one might think initially, with implications across the entire spectrum of online real estate.

I’m looking forward to the discussion and exploration.

-rsh

At the recent RE Tech South conference, I had the opportunity to meet Eric Stegemann — a self-described 25-year old going on 40 — who is the founder and CEO of a company called Tribus as well as the “Head Honcho” of River City Real Estate, a brokerage in St. Louis.

Eric is really one of the brightest guys in the next generation — the Millenials — with a singleminded focus on real estate, technology, and improving the former with the latter.  That he makes terrible drinks (some sort of Cherry-Nyquil tasting concoction with a bitter aftertaste) really can’t be held against him.  He’s 25-going-on-40; he’ll learn by 30 to savor the mysteries of fine cognac and single malt scotch.

In any event, Eric and I got into conversation and it turned out to be tres interessant.  It appears that Tribus is the “un-Franchise” that aims to eradicate the big real estate brands from the industry.  The idea essentially is to offer brokers and agents everything they need to operate a real estate brokerage, except for the brand itself and any rules associated with the brand.  So, for example, Tribus will give its “affiliates” a CRM system, a listings distribution system, a website, social media tools, accounting package, and so on.  But there won’t be a brand like “Century 21″ or “Keller Williams”, and no brand identity guidelines.  Nor will there be service standards at the Tribus level or any such thing.

Eric believes that the value of these franchises lies in the backend systems and tools, and not in the brand.  In fact, he believes that entrepreneurial broker-owners want the freedom to run their business as they see fit, without the baggage that national brand franchises impose on them.  They, however, want the support of a national entity for technology and backend processing.  So Tribus will provide everything the broker-owners want, and nothing they don’t want, and charge anywhere from 3% – 6% of GCI for those services.

<Geek Detour>

In the World of Darkness fantasy setting, published by White Wolf, an antitribu is a vampire (or Kindred, or Cainite) who has turned against his clan.  Since Eric’s company’s name is Tribus, the notion of Anti-Tribus comes naturally to mind if one wishes to poke holes in the concept.  But then, that leads to the thought that either Tribus will bring about the end of real estate as we know it (Gehenna = end of the world) or that Tribus is just another rebellion against the existing power structures (another Anarch Revolt).

</Geek Detour>

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Unless you have been living under a rock, you’ve heard of this “social media” thing. But if pressed to define it, you — like the rest of us — would stammer out a few words about Twitter, Facebook, and blogs and then… realize that the term is more or less undefined.

Well, here’s the Wikipedia definition of “social media”:

Social media are primarily Internet- and mobile-based tools for sharing and discussing information. The term most often refers to activities that integrate technology, telecommunications and social interaction, and the construction of words, pictures, videos and audio. This interaction, and the manner in which information is presented, depends on the varied perspectives and “building” of shared meaning among communities, as people share their stories and experiences. (Emphasis mine)

And the entry goes on to note things like World of Warcraft is social media. Okay, then so is internet gambling.

Furthermore, the highlighted portion suggests that email is also social media. So is a fax machine. Or that cutting-edge (for the 19th century) device, the telegraph. They all “integrate technology, telecommunications and social interaction.” In theory, so do messenger pigeons and smoke signals. In other words, “social media” doesn’t actually mean anything.

And yet, it does. The real meaning of “social media” may be difficult to define, but everyone knows what it is — and more importantly, knows what it is not. Stories in the New York Times is not “social media” despite being an activity that integrates technology (the printing press), telecommunications (the Associated Press wire service), and social interaction (the reporters write, the audience reads).

Some might say that “two-way communication” is the essence of social media. This too is wrong. There are blogs that don’t allow comments — yet they are very much “social media”. YouTube is considered “social media” but it’s hard to call what goes on in the comments section to be “two-way communication” in any meaningful way.

The Internet is not “social media” since mobile applications can entirely bypass the Internet and still become social media. Meetups and Tweetups often fall into “social media” categories, but it’s hard to see how people sitting in a room together talking can be conceived of as web-based simply because they arranged to meet via the Web.

So what the hell is “social media” in its essence?

Social Media Defined

My personal definition of social media is this:

Communication channels that enable the authentic and personal engagement of one human being to another.

Admittedly, my definition is heavily influenced by Cluetrain principles. While each and every one of you needs to go read the whole thing (free, online!), this passage from the Introduction speaks most eloquently to how I define social media:

The Internet became a place where people could talk to other people without constraint. Without filters or censorship or official sanction — and perhaps most significantly, without advertising. Another, noncommercial culture began forming across this out-of-the-way collection of computer networks. Long before graphical user interfaces made the scene, the scene was populated by plain old boring ASCII: green phosphor text scrolling up screens at the glacial pace afforded by early modems. So where was the attraction in that?

The attraction was in speech, however mediated. In people talking, however slowly. And mostly, the attraction lay in the kinds of things they were saying. Never in history had so many had the chance to know what so many others were thinking on such a wide range of subjects. Slowly at first, a new kind of conversation was beginning to emerge, but it would achieve global reach with astonishing speed.

For those of us grizzled old dinosaurs who got onto the pre-Netscape Internet, and were absolutely floored upon discovering IRC know the feeling. The strange combination of utter freedom and complete anonymity brought out levels of authenticity in many people — while others invented online personas with a wild variety of roleplaying.

What makes a blog a blog and not an online magazine is the authenticity of the voice, and the personal engagement of the blogger. I’m a big fan of Instapundit, where Prof. Glenn Reynolds holds court on a variety of political, kitchenware, photography, and nanotechnology topics. There are no comments on Instapundit. Yet, it is social media because Prof. Reynolds never fails to speak in his voice. He never fails to be personal.

Another great example is contrasting the National Review Online (an online magazine) with The Corner on National Review Online (a group blog). [So sue me, I read conservative websites. The point is on social media, and these came to mind.] These are two sections of the same website, yet the flavor, the tone, the feel is very different. The NRO proper has articles that have been edited, written to professional standards. What it lacks in personality and authenticity, it makes up with authority and seriousness. The Corner, in contrast, is full of the authentic voices of the bloggers — many of whom are also writers and editors of the National Review — and a personal human engagement exists there that is lacking in NRO itself.

I believe, therefore, that social media is not defined by the tools or the technology, but by the authenticity and the personalness of the engagement.

The Corruption

Trouble is, marketing departments worldwide in every major and minor corporation could not see (and in some cases, have never seen) what the big deal with the Internet was, and what is so important about Cluetrain, and about social media. To far too many marketers, “social media” was just like “any other media”, but “more social” — whatever that means.

The same strategies and the same models for putting ads on magazines were used to put ‘banner ads’ on this newfangled World Wide Web thingamajig back in the late 90′s. When Facebook became the flavor du jour, companies regarded it as just another place to have a branch office. And as Twitter starts to take off, we are finding more and more companies regarding it as something like a streaming billboard:

@XXXXXX You kin’ buy DD coffee online: http://bit.ly/4lwB65 … see drop down menu for whole bean options. Cheers!

That tweet is from @DunkinDonuts. Cheers! Sounds just like a micro-ad! Gee, thanks!

Is this social media? Or it is just a variant of email spam, TV spam, mailbox spam, and billboard spam we have to live with in our commercialized world?

And now, we apparently have a “directory of brands” on Twitter: TrackingTwitter.com. First, the Yellow Pages, then the Web (and Google), and now Twitter. Cheers?

The Fundamental Misconception: Social Media = Media, Social

The fundamental misconception about social media — held mostly by marketers — is due to that word “media”. We understand “media”. Many of us have frikkin graduate degrees in media management, public relations, and communications. We come out of advertising agencies where dealing with various forms of “media” was a settled practice. So we apply those same principles to “social media”.

“Hey, we really need to get a corporate Twitter account!” likely passes for innovative thinking inside many corporations today. “That way, we can really engage the audience with our brand message!”

Trouble is, the audience doesn’t really want some faceless, identity-less brand to ‘engage them’ with their brand message. What the audience really wants is for a human being that works at your brand to engage them in an authentic, personal way.

Once again, Cluetrain:

In the market, language grew. Became bolder, more sophisticated. Leaped and sparked from mind to mind. Incited by curiosity and rapt attention, it took astounding risks that none had ever dared to contemplate, built whole civilizations from the ground up.

Markets are conversations. Trade routes pave the storylines. Across the millennia in between, the human voice is the music we have always listened for, and still best understand.

So what went wrong? From the perspective of corporations, many of which by the twentieth century had become bigger and far more powerful than ancient city-states, nothing went wrong. But things did change.

Commerce is a natural part of human life, but it has become increasingly unnatural over the intervening centuries, incrementally divorcing itself from the people on whom it most depends, whether workers or customers. While this change is in many ways understandable — huge factories took the place of village shops; the marketplace moved from the center of the town and came to depend on far-flung mercantile trade — the result has been to interpose a vast chasm between buyers and sellers.

I don’t want to twitter with @DunkinDonuts. I want to twitter with Amy, who works in marketing or customer service or sales or whatever for Dunkin’ Donuts, and is allowed to communicate openly, honestly, authentically, in a human voice with me.

Social media is not media; it is conversation. Theses 62 to 65 of the 95 Theses of Cluetrain Manifesto read as follows:

62. Markets do not want to talk to flacks and hucksters. They want to participate in the conversations going on behind the corporate firewall.

63. De-cloaking, getting personal: We are those markets. We want to talk to you.

64. We want access to your corporate information, to your plans and strategies, your best thinking, your genuine knowledge. We will not settle for the 4-color brochure, for web sites chock-a-block with eye candy but lacking any substance.

65. We’re also the workers who make your companies go. We want to talk to customers directly in our own voices, not in platitudes written into a script.

I have learned so much more about what the real estate community thinks, what its needs are, its pains and joys, and so on simply by being myself on this blog, on Twitter, and in personal conversations. They are all the same to me. In some cases, individuals who have decision-making authority at clients or prospects for my employer share their issues with me, not because I’m trying to sell them something, but precisely because I’m not. I think I do a better job of marketing Onboard simply by being myself, speaking in an authentic voice, and engaging in a personal way.

Could I really do that hiding behind a @onboard persona? No, not really.

The fundamental misconception about social media is that it is media, just more “social”.

The Beginning of the End

If companies and marketers continue to treat social media as just another variant of media, then it spells the beginning of the end for social media.

What makes Twitter interesting is not that I can get bombarded with offers from Dunkin’ Donuts, but that I can have real conversations with real people thousands of miles away.

Once misguided marketers and brand chieftains start to corrupt Twitter with fake-personas, with brand twittering, and so on, it will become just like blog comment spam. People will begin to retreat further and further into smaller and smaller niches where they can be left alone to have the conversations they are craving.

And companies who do not understand social media as authentic human engagement will lose out on the opportunity to empower their people to converse with those consumers.

There lies the beginning of the end.

Real Estate & Social Media

For whatever reason, social media has been a buzzword in real estate for years. Blogs, blog networks, twitter, Flickr, Facebook, and all these social media tools have been enthusiastically embraced by our industry with varying degrees of success.

The first wave of pioneers — people like Todd Carpenter — did social media as individuals. They blogged, they emailed each other, they linked up, they facebooked, and they twittered and so on. People got to know each other as people, as authentic human beings first and foremost. This early adopter group used (and still uses) social media primarily as a platform for socializing and making connections.

The second wave saw how much fun that first wave was having, and was starting to hear various ideas being floated about how these new communication technologies might be used to drive more business, sell more homes, do more transactions, and the like — and jumped on the bandwagon. Most of these people are also having a blast networking with people, meeting new and interesting folks, and having great conversations… but they’re a little concerned that all this social media stuff isn’t throwing off much cash. Because this group looks at social media as some newfangled innovative way of marketing — predictably, for realtors, that means marketing homes, listings, and themselves.

The third wave either has arrived, or is coming. This is the “professional marketer” brigade, and the future of social media in our industry depends on what happens with this group.

If the numerous newly-minted social media directors, and the VP’s of Marketing who oversee them, overcome the fundamental misconception about social media, then we may be the industry to drive change in how people who work for companies relate to other people who want to buy from those companies. If the social media directors become, in my formulation, “Cluetrain conductors“, then we have a chance to alter the relationship between consumer and service provider in a profound way.

If, on the other hand, the third wave consists of folks who think that Twitter is just another marketing channel, that blogs are just a new way of publishing listing brochures, and that branded corporate identities (which are both opaque, and speaking in that stilted “corporatespeak” we all have learned to detect) online are the answers to the challenge of “social media”… then it’s just a matter of time until these communication technologies also become just another spam-filled cesspool of fakery.

And we all, consumers and professionals alike, will move on to our next fix.

I know which way I’d like things to come out.

Markets are conversations.

Commerce is a natural part of human life.

Markets do not want to talk to flacks and hucksters. They want to participate in the conversations going on behind the corporate firewall.

-rsh

In the comments section of my post on Alex Perriello’s confidence in denying a bankruptcy for Realogy, a commenter by name of “Still Don’t Agree” raises several very interesting points.  And because SDA wasn’t a raving lunatic, but apparently a very smart, very logical, and a calm & measured commentator, I thought it worth using his comment as the springboard to challenge some of the conventional wisdom circulating out there.

[And just in case some non-regulars don't realize, I used to work at Realogy, but never in the corporate executive suites, and haven't since November of 2007.  I have no special access to anyone, no inside info (although I would love to get some *hint, hint*), blah blah blah.  These are just my opinions as an industry observer.]

So SDA raises three points worth countering: Unprofitability, Cut in Services –> Loss of Revenues, and the Apollo Factor.

Unprofitability

First, the whole unprofitability issue.  SDA writes:

But bottom line, Realogy has little to no cash reserves, is running out of credit and their revenue isn’t covering interest payments AFTER making $350 million in operational cuts.

Sure it’s a profitable company without that debt hanging over their heads, and kudos to their managers for that, but that debt IS there and it isn’t going to just go away- so looking at revenue before the interest is quite frankly irrelevant. Spin it anyway you or Realogy wants, THEY ARE OPERATING IN THE RED.

To survive, they either have to make more cuts that don’t hurt revenue, increase revenue, find a lender to extend them more credit until the market gets better or get their lenders to restructure debt and/or wave interest payments.

Now, to be fair, SDA makes a great point here.

It is an indisputable fact that Realogy is losing money; it is in fact operating $50M in the red.  In SDA’s view, the reason why they’re in the red is irrelevant, since Realogy doesn’t have cash reserves, and lenders don’t care.

In my view, it’s highly relevant why a company is in the red if I’m a lender.  If a company is in the red because their core operations suck ass, then my likelihood of seeing my money back decreases, and I’m going to freak out.  But if their core operations are profitable, and they’re throwing off cash in desperate economic times, and they are making interest payments… and because of said interest payments to me, they’re in the red, well, then I’ll be cautious and watchful but happy to cash their checks.

Why would I want to mess with someone making payments and bring lawyers and bankruptcy judges and special masters and such into the picture?  Because I like the idea of going a couple of years before a distribution is made in which I’ll get a few pennies on the dollar on my unsecured debt?  And that only after I’ve spent a couple of million bucks paying my own creditor counsel?  Yeah, okay.

Now, let’s examine this “Realogy has no cash reserves” statement.  During to the Q3, 2008 Earnings Call, which is the latest available, Tony Hull the CFO said this:

Turning to the balance sheet on page 7 of the 10-Q, we ended the third quarter
with a $280 million balance on our revolving credit facility along with a reported cash balance of $269 million. This total includes $226 million of available cash from a draw-down on our revolver. We elected to hold cash because of current market uncertainty.

So they’re holding $269M in cash, and $280M on the revolver of which $226M is available?

Since Realogy’s net loss after interest and depreciation was $50M in Q3, this would imply that Realogy can limp along under Q3 circumstances (the latest quarter for which we have data) for some ten quarters, or two-and-a-half years?  Geez — call the lawyers and get to the courthouse!  They’re going down!

So in brief, to survive, Realogy doesn’t have to make any cuts, doesn’t have to get any more loans (assuming that the revolver is appropriately papered by sophisticated lawyers and relatively ironclad), until Q3 of 2011.

Could business get worse and shorten that timeline?  Sure.  It could also get better.  But the “Realogy ain’t got no cash” argument rings hollow to me.  Then again, what do I know?  I’m not a Wall Street analyst….

Cut in Services –> Loss of Affiliates

The second point that SDA brings up — and others have brought this up as well — is that the $350M in cuts at Realogy, and the expectation of further cuts down the line, will lead to affiliates and agents leaving Realogy family:

After $350 million in operational cuts I question how they could make further cuts that wouldn’t impact revenue. The company’s customers aren’t people buying homes, rather it’s the agents and franchise brokers they service. At some point in time if services are cut too drastically, franchises will leave and agents, who are independent contractors, will find other brokers to work for.

With the market and economy as they are and all the negative media starting to swell around their company I doubt they can drastically increase revenue. That would mean recruiting successful agents away from other companies at a time when ever competitor is waving that US News report in front of the agents they already do have.

Okay, let’s take this at face value for now and agree, for the sake of discussion, that SDA is absolutely correct that the budget cuts lead to service cuts.

For those service cuts to lead to mass exodus of productive affiliates, Realogy has to be providing some set of franchisee/agent services that these cuts is impacting.

For the vast majority (and I mean well over 90%+) of franchisees, the reason they became franchisees in the first place was not because of some ill-defined service Realogy provides but simply because of the (perceived) power of the brands like Coldwell Banker and Century 21.

I’ve sat in on some of the “VIP meetings” where corporate staff try to sell a franchise to an affiliate.  I’ve even made presentations at those.  And you know what?  Despite all the goodies we dangle in front of them (“10% off at Staples!” and “Discounts on your cellphone plan!” and so on), at the end of the day, the decision to sign up is based on the principal broker’s feeling that the brand will bring them business they wouldn’t otherwise get.

The argument that service cuts will inevitably lead to loss of affiliates is somewhat like saying that folks aren’t going to buy Gulfstream G650′s because of the price of fuel.  It’s completely ancillary to the core decision.  Keep in mind that affiliates sign a ten-year agreement during which they fork over 6% of all commission income in exchange for use of the brand.  They’re going to jet because the Realogy field rep only comes once a quarter instead of once a month?  Come on now.

Further, to claim that even if the affiliate broker won’t leave, the agents will is to not understand agents very well.  And it is to be ignorant of the real revolution going on at the heart of real estate today.  If even a single agent really leaves his Coldwell Banker branded brokerage to go to some other franchise brand over the “cut in services”, I’ll print this blogpost out and eat it.  In fact, that the agent cares not at all about the services provided by the Realogy brand is the real problem here.

You can verify for yourself if you’d like — go grab your local Century 21 agent and ask her what services she’s afraid of losing when Realogy cuts another $20m in costs.  If her answer is anything other than “Nothing”, please come back and tell us.

Now, let’s actually examine that assertion for a moment.  Again, from that same earnings call transcript, here’s Richard Smith, Chairman of Realogy:

As to NRT management’s ability to attract and retain top-producing agents, as in prior periods, NRT retained approximately 92% of GCI from its top two quartiles of sales associates in the third quarter. The top two quartiles generate approximately 88% of NRT’s revenue.

Consider that the NRT is Realogy’s company owned stores (if you will).  If the budget cuts have a service impact, the NRT agents are the ones who will be most directly impacted.  Affiliates have their own budget, their own issues, but the NRT is directly tied to Realogy’s financial problems.

If cuts in services lead to mass defections, then the NRT should have been losing droves of these top producing agents.  They have not.  I have no idea whether 92% retention is good or bad for brokerages, but it certainly doesn’t smell like panic to me.

And one final piece of counter-evidence from the wider agent world.  This is from a Keller Williams agent in Boise ID speculating on the coming bankruptcy for Coldwell Banker and ERA (this is the “competitor waving that US News article” thing):

It seems a high debt load and low cash reserves may be signaling a likely default in a troubled market. Why am I surprised? Well mostly because the of number brokerages Coldwell Banker has been buying up in the Boise area. I’ll be watching this one closely in the weeks and months to come.

Here’s a hint: when someone is buying up competing brokerages, that someone ain’t hurting that bad.

The Apollo Factor

The final point that SDA raises is that lenders might want to push things to force Apollo to cough up some dough:

That means Realogy’s survival basically hangs on the charity of lenders who, at some point in time in the near future, will more than likely have to wave interest payments in order to allow the company to make payroll. Problem is, Carl Icahn, their largest lender, isn’t exactly known for his charity and other lenders have their back so far against the wall right now that you can’t be sure they will always do the logical thing.

More important, if you’re a lender in this situation, it’s pretty hard to forfeit the interest you are owed when equity holder Apollo has mighty deep pockets.

Okay.  Maybe this makes sense to someone on Wall Street, but as a former bankruptcy guy, I just don’t get it.

Unless Apollo signed a guarantee of some sort on Realogy’s debt that puts them on the hook in the event of a default or bankruptcy, that Apollo has deep pockets is completely irrelevant to bankruptcy.  Because Apollo presumably is the equity interest here.  With such a high debt load, in the event of even a Chapter 11, Apollo’s interest is likely to be extinguished completely.  That sucks for Apollo, but it isn’t as if Apollo is going to then be liable to the creditors.

An equity holder’s liability is limited to the amount of equity in the company.  That’s the whole premise of limited liability.

So all that a lender would achieve here is taking over Realogy’s equity from Apollo in some sort of satisfaction for the debt.  Think of it as a giant foreclosure.  But to do that, we’re talking about years — and I mean years — of litigation in bankruptcy court with Realogy, with Apollo, with other creditors, with the Trustee possibly, with vendors, with unions, with landlords and so on and so forth.  And during these years of litigation, no one gets paid a damn thing.

If you’re a lender — even a nasty one like Icahn — and you’re actually making a vulture play to take over Realogy via the credit path, you’d be far far better off just offering Apollo a private deal to swap equity for debt.  Everyone keeps getting paid, Icahn takes over Realogy, and Apollo goes away, and no one is much affected.

Anyhow, I have no earthly idea why I keep writing on this topic, but I do confess a weird sort of fun in it.   But then, I’m not a Wall Street guy, and those guys are financial experts who wouldn’t ever make a mistake on debt valuation or things like that now… would they?

-rsh

PS: Final parting thought.  Why is this robust defense of Realogy happening on my widdle WordPress blog and not on the Realogy corporate blog?  By people who know what the hell they’re talking about?  Mark (Panus) — call me, I can help you with a social media strategy.

Now this is not the end. It is not even the beginning of the end.  But it is, perhaps, the end of the beginning.

- Sir Winston Churchill

.

One of the true pioneers of the new generation of real estate companies, Redfin, has launched a new partner program:

Redfin released a sprawling, glorious update to our website last night that changes Redfin in two fundamental ways:

1. We built data-driven agent profiles, showing every deal our own agents have done and every customer review, even on deals that failed.
2. We opened up our business to partner agents and we published all their deals too, surveying old customers for reviews.

How does this change Redfin as a company? Well, when we upgraded our own service last November to offer unlimited home tours and a choice of agents, everyone said we were becoming less virtual. And now that we’re connecting consumers with partner agents, folks will say we’ve become more virtual.

Actually, I think the change to Redfin as a company is far deeper and far more subtle than what folks will say.

The Peanut Gallery

A hint of what’s changed comes from Gregg Swann of the Bloodhound Blog:

If Redfin can make five figures a day on what may not even amount to a single full-time staff line, that’s a killer business.

Maybe even such a killer business that it will replace client-representation altogether. Implausible? One of Redfin’s planned expansion cities is Phoenix — where our numbers are worse than Kitsap’s. Of the RE 2.0 players, only Estately.com does anything like this, but Redfin could go into the referral business virtually anywhere, virtually overnight.

And Louis Cammarosano of HomeGain said with maximum succinctness, over Twitter: “It means they are becoming like Homegain.”

John Cook at TechFlash took Redfin to task:

The concept is not new. In fact, Seattle area companies such as Estately and HouseValues.com also earn money through agent referrals. But the program is a big switch for Redfin, which has always touted the customer service focus of its agents. Kelman said he was “terrified” that the partner program “could screw up the brand.” That’s why the company interviewed all of the partner agents and implemented an agent review system on the Redfin Web site. It also reserves the right to remove partner agents that are not living up to customer service requirements.

Kelman downplayed the possibility that Redfin would move entirely to a partner model. “There is something in Redfin’s blood that we like having direct relationships with the customer,” he said.

This change is a fundamental one.  This is not a mere extension of the Redfin model and philosophy.  It’s something else.

What Was Actually Done

TechFlash post above actually has a pretty good brief description of what Redfin actually launched:

Starting today, the company has aligned itself with 35 real estate agents from 13 different brokerage firms in nine counties. The agents, which receive a profle page on Redfin and must have completed 15 transactions, pay Redfin a 30 percent referral fee on any completed deals. Redfin then refunds 15 percent of that fee to home buyers, keeping the other 15 percent.

But Redfin has more info on this front:

Every single one of these partners committed to our consumer-friendly values as a prerequisite to joining the program:

1. Technology: the partner refunds part of his commission to the client because the client asks for service online using our tools.
2. Service: the partner is not allowed to do any of the funny-business around forcing someone to use him when buying a house; the partner earns more when the client is satisfied.
3. Transparency: the partner publishes information about all his deals, and all his reviews; the partner provides the service requested by the consumer and nothing more unless asked.

Furthermore, rather than sending the “leads” to the agent (or multiple agents), the Redfin model places that power in the consumer’s hands.  The consumer sees the deals, failed deals, activities, etc. of the partner agent, then actively chooses to contact that particular agent.

So, the major differences between Redfin and other models are:

• Power to choose in the hands of consumer
• Transparency on agent quality metrics
• Refund back to the consumer

But all of that, still, fails to address the central, subtle, and fundamental change.

The Change

Basically, by going to a ‘partner’ model, Redfin is no longer responsible for the consumer service experience.

Now, Glenn Kelman and others at Redfin vigorously dispute this:

The story said that we had been “terrified” about potential problems in our partners’ customer service without explaining that we said that to introduce the steps we took to avoid those problems. (emphasis added)

And

We planned for Redfin’s partner program in a financial model built in 2007. We experimented with it earlier than that, canceling the program in 2006 after it became clear that we had no way of being accountable for good service to the client.

…

We could have offered a year ago the referral programs typical in the industry, selling the client out to multiple unnamed agents for a fee. There was ample financial pressure to do so. We stuck to our guns to create something much better, building an entire accountability system and a set of tools for a client to ask a particular agent to perform a particular service, interviewing every partner agent in person, and checking each agent’s references over a year back, so we could offer a partner program consistent with our values. These values are why we radically cut the profitability of the program by offering half our fee back to the consumer. (Emphasis added)

For what it’s worth, I completely believe Redfin.  And furthermore, Redfin might very well be successful.

However, there is a large gap between “building an entire accountability system” and actually being accountable.

Redfin is a brokerage in the markets in which it is active.  The agents who work for Redfin are employees of Redfin, and Redfin as an entity is accountable to the actual consumer for the service experience.  In fact, while I don’t know for sure, I’m going to guess that Redfin has a certain “Redfin Way” of “Redfin Service Standards” or whatever that it enforces on its agents.

If I’m a Redfin agent, and I don’t live up to Redfin’s performance standards, then Redfin has a variety of tools and methods at its disposal to enforce standards.  With these partner agents, no matter how well Redfin screens ‘em, Redfin only has one way to enforce standards: remove them from the program.

If I pick a partner agent, and have a terrible experience, who do I get to blame?

The Liability Question

A way to crystallize the issue is to consider legal liability.

Suppose that some unhappy consumer sues the partner agent after a deal goes south.  (Not saying this would happen, but thinking about lawsuits help clarify some issues.)

The agent’s actual broker would be named in the lawsuit, since legally, the agent is just representing the broker.  The broker’s E&O insurance would come into play, and the lawsuit would then focus on whether the agent’s acts/omissions rose to the level of professional malpractice.  The broker’s processes, standards, training, screening, etc. would all become relevant as to establishing liability under respondeat superior theory.

Where does Redfin fit into this?

On the one hand, the consumer would absolutely sue Redfin.  After all, Redfin supposedly screened all of its partners, and built an “entire accountability system”.  That a crappy agent slipped through resulting in a big loss for the consumer means that the consumer has a reason to sue Redfin.  After all, he went to Redfin to find an agent, and relied upon Redfin’s representation as to quality, professionalism, and ethics.

On the other hand, Redfin’s defense would presumably be along the lines of, “We ain’t the boss”.  They would presumably assert that respondeat superior does not apply in their case, because the agent doesn’t work for them.  They don’t control the agent’s actions.  All they’ve done is made an introduction between the consumer and the partner agent, and the consumer chose to work with that particular agent.

(I suppose, in theory, Redfin could choose NOT to fight liability and embrace it wholeheartedly in order to preserve their ideal of customer service… but I doubt that very much.  Lawsuits focus the mind in interesting ways.  Plus, does Redfin’s E&O insurance even cover these ‘partner agents’?  Would Redfin’s insurer really agree to that without a substantial hike in premiums?)

If the agent’s broker — the actual “boss” in theory — is held liable, would they not consider bringing Redfin in as a third party defendant?  Or bring an indemnity claim that goes something like, “Your program caused our otherwise ethical agent to do bad things, so now you owe us money”?  I know I would advise the broker to bring such a suit, were I representing them.

With the other lead-gen sites, like Homegain or HouseValues, these issues never arise.  All that those sites promise to consumers is that someone will be in touch, and they pass the lead on.  They’re merely a marketing conduit.

Redfin’s program goes far, far beyond that… but they’re not ultimately accountable to the consumer client from what I can tell.

The Brand and Ideals Question

That Redfin would disavow responsibility for a poor consumer experience through Redfin is, to say the least, a sea change.  As Glenn says quite passionately:

We will always, always fight for the consumer: exposing information about agent performance the world has never seen, offering the best value we can, paying our agents based on customer satisfaction, negotiating with Realtor associations to publish more data.

This is an emotional issue for us. We are less interested in proving TechFlash wrong, or even in convincing you that Redfin will succeed or fail — which is still an open question — than we are in establishing what this company stands for: making the real estate industry better for the consumer. Maybe nobody else cares that this company actually stands for something. But we do. We always will.

Does that include accepting legal liablity for the actions of your ‘partner agents’?  If it does, then in what way are those ‘partner agents’ different from your own employees — except that they’re not really subject to discipline/training/enforcement by you?

If it does not, if Redfin’s program stops short of accepting legal liability for the misconduct or negligence by partner agents, then that is a fundamental change in the Redfin brand.  And I daresay it represents a change of the Redfin ideals in a subtle, yet profound, way.  Sure, Redfin can still work to make the real estate industry better for the consumer.  But it won’t do it directly, by training its agents, by implementing its policies and procedures, and by serving the consumer.

That might be fine; might even be great.  Maybe Redfin overcomes some of the acrimony built up over the years this way.

But it is a fundamental change.  He who pays you is your customer.

The End of the Beginning

For the industry, I think Redfin’s move represents the end of the first wave of Real Estate 2.0.  The implication appears to be that new companies cannot implement new business models for real estate.  Trulia and Zillow are not real estate companies; they are media companies in the real estate space.  They make money from advertising.

Homegain, HouseValues, Estately and so on are also pseudo-media companies, but with a pay-for-performance type of ad model.

Redfin was the pioneer of a new model, centered around a fantastic website, direct consumer engagement, and a novel refund concept.  Their obsession with transparency, truly excellent user experience online, and “freakish depth” was the precursor to what the brokerage of the future might look like.

That chapter, I think, now comes to a close.  The new real estate companies have found that they cannot make money directly from consumers.  Okay, fine.  What does the next chapter look like?

No one knows of course.  But it does seem to me that the battle lines are getting drawn as follows:

On the one hand, the new entrants must find ways to derive revenues from real estate agents; on the other hand, the existing brokerages must find ways to make consumers happier and provide more value to its agents.  The midgame, then, represents a struggle on the one hand over consumer service/experience coupled to value delivery to agents, and a struggle on the other hand over getting money out of agents.

We are living through interesting times in real estate.

-rsh