Notorious R.O.B.

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

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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

So two events conspired to make my evening interesting.

First, there was a brief Twitter exchange between Marc Davison, he of the Kilo-class wattage, and Joe Ferrara of Sellsius:

Joe: @1000wattmarc Riddle me this: When looking at a specific home zstimate, what value is knowing the median error rate for a city?

Marc: @jfsellsius Totally. After receiving my CMA last night and going through it, I realize how much value the agent offers in this area.

Joe: @1000WattMarc Certainly no.The error rate is a red herring to lend air of authenticity. It has no real value,even 2 those who understand it.

Marc: @jfsellsius The question I have is — why did it take getting a CMA to realize the value? I know the value of BMW without owning one.

Marc: @jfsellsius What needs to be illustrated here is how much agent value is buried beneath the surface. Points to areas they can improve upon

Second, I read this post by Eric Bryn over at Real Estate Relativity on Antonin Artaud, a long-dead French playwright, and real estate (no, really, I swear):

Similarly, it seems to me, the real estate industry is due for an Artaud-like challenge to existing norms with respect to representation, compensation, and professionalism. The run-up to 2009 was indeed a real spectacle, but the tent has fallen, the elephants have flattened the performance space, and the audience seems to have run away. Indeed, many have written about the current state of affairs.

Now, I know what you’re thinking: “Boy, Rob’s life must really be sad if those things made his evening interesting.”  But let me assure you that my life is not quite as sad as it may seem.  Because those things made me wonder — as I often do as I wait for my entourage of rock stars and Ford models to arrive at my house, so we can go over to George Clooney’s place for a nightcap — about agent value.

How Much Is that Doggie in the Window?

The whole conversation began, I think, when Joe Ferrara asked over Twitter what the difference was between a normal CMA and an “advanced” CMA.  (CMA = Comparative Market Analysis).  A CMA purports to give the consumer a professional opinion on the fair-price of a particular property.

As this Realty Times article says:

This is one of the areas in which the real estate industry really earns its keep – by showing you in black and white what your competition is.

…

It takes a skilled person to be able to use it. For this reason , the CMA will always need to be interpreted by a professional or with complete objectivity by the seller or buyer.

I have no particular opinion on CMA, nor am I qualified to judge whether it takes a skilled person to be able to use it or not.  I do think, however, that much of what is perceived to be an agent’s value is tied up in this ability to look at comps, look at intangibles, interpret the mystic omens, and price property.

The thing about pricing, however, is that it’s nothing more than a guess.  Even the most sophisticated pricing models — that make advanced CMA’s look like blindly throwing darts — utterly failed to predict the financial collapse of 2008.  Turns out, these sophisticated models, built by math geniuses and bona-fide rocket scientists, were really nothing more than guesswork cloaked in arcane language.

When it comes right down to it, what something is worth is precisely equal to what someone will pay for it.  Not in theory, but in legal tender.  You can use historicals, comparables, trend analysis, macroeconomics, risk-adjusted capital asset pricing models, whatever to argue that the price should be X or Y, but the price will be what the buyer and seller end up agreeing on.

As it happens, there is a mechanism that pretty much always works for finding market price: the competitive auction.

The Ebay Effect

For the purposes of theoretical discussion, let’s imagine a world in which all sellers of real estate just put their homes on Ebay.  Oh wait, we don’t need to imagine that much: Real Estate On Ebay.

Here’s one listing in Dayton, OH:

At time of writing, the highest bid on this house was $8,600.

Now, as it happens, the real estate market in the United States is not yet ready to embrace full open, competitive auctions over the Internet.  The number of people willing to spend hundreds of thousands on a website is, well, pretty small.  And I don’t believe Ebay will take over the real estate market.

But let’s imagine that it does.  That every seller and every buyer goes on to Ebay to find, and buy & sell properties.

In that world, what is the value of the agent?

Pricing is pretty much automatic — it’s what some buyer and some seller agree on.  Comparables, historicals, and so forth have very little bearing — except that they might influence a seller to set reserve prices at a point where there are no buyers or get a buyer to bid far over what the seller would have been happy to accept. Point is that pricing is no more a matter of expertise, but of simple agreement.

Value in Transparent Markets

There is no doubt that realtors will have some value in a perfectly transparent market.  As the comments in this old thread shows, realtors actually do quite a bit more than just provide pricing guidance.  They do consulting work, they provide psychological counseling, they handle the paperwork of the transaction, and project manage the whole thing.

However… the emphasis on consulting, on “local expertise”, and the like is interesting.  Because so much of that consulting, local expertise, and the like today is tied up with pricing.  A realtor is a local expert who really knows the local market, and can help you price your house to sell or give you guidance on what you should pay as a buyer.

Much of the “consulting” is tied up with how to present, market, and stage a property so that it fetches the maximum price.  Or conversely, how to look behind the marketing to determine the “true fair price”.

Negotiation is a skill brought up often by working realtors.  Well, that’s a particularly useless skill in an Ebay world.

In an Ebay world, the realtor’s value appears to consist of doing paperwork, providing psychological counseling, and project managing a transaction — and right now, I’m thinking that justifying taking a 6% commission is going to be difficult based on those services.

Implications, Simplifications

What the experiment shows me is that so much of a realtor’s “value” today is tied up with pricing.  Despite all of the data and information in the hands of consumers today, they would still rather have someone else tell them what to charge or what to pay.

And if this ability to price properties lies at the heart of agent value, what implications does that raise for agents and brokers and real estate company marketers around the country?  For one thing, should smiling photos really be on every realtor business card?  For another, what sort of investment should brokerages be making into mo betta pricing models and training to use them accurately?

There are dozens of questions that arise from the thought experiment.  Which was sort of the point.  Which is why the two events — Marc and Joe’s debate, and Eric’s post — made my evening so interesting.

Now I have to run — Brett Michaels and boys are here with the Ford models, and George is waiting.

-rsh

First of all, let me give a shout-out to Hey Amaretto, aka, Diane Guercio, whose blog I just read for the first time.  She’s got an amazing voice for the web: personable, yet relevant, with useful information mixed in with humor and an overall fun voice.  Really, check her out for one example of how realtor blogging should sound.  (She is also now blogrolled here.)  Here’s a taste:

So, okay, I can’t see how they would have signed an Exclusive Buyer’s Agency contract, let alone a MA Mandatory Agency Disclosure form. And handing out my lockbox codes to buyers doesn’t exactly constitute representation. Just thinking about the things that could happen made me really upset. Suppose the buyers had slipped on the ice, or had fallen down the cellar stairs, or SAID they had fallen down the cellar stairs? I am just getting over the headache that had started after I was handed this little nugget of information.

See what I mean?  Useful info, but with a really nice, personable, human-sounding voice.

Her latest post — which I found out via Twitter (which is, in and of itself, some sort of testament to social media) — is also interesting: Business Darwinism, Success, and Laundry.  Her point appears to be that to survive in a Darwinist environment, one needs to become a “Shortcut” — a superior specimen par excellence that becomes the ‘automatic choice’ for any given task.  And to become a “Shortcut”, one needs plenty of elbow grease:

And that is the point, in summary- by working harder and better than others, you become indispensable. Not much of a surprise that I scored well on the online test, given the rigorous training sessions I had been through with the little cherubs. I guess you want to be the best you can be, in business, in your personal relationships, in life. That’s how you create job security, and really, it’s the only way to go, regardless of the rewards. (Emphasis added.)

Now, here’s the thing: I have a passing interest in the application of Darwinist theories to other subject areas.  Indeed, it’s fascinating what happens when you apply evolution to something like computer programming.  There’s a whole institute, called the Santa Fe Institute, that focuses on things like chaos theory and evolution as applied to areas like economics, physics, chemistry, and so forth.

[By no means do I know more than the tiniest of the tiny bit about any of this stuff.  So it is quite likely that I'm going to sound like an idjit in the next few paragraphs, since a little knowledge is a dangerous thing.  Caveat lector. -- ED: And this would be different from your other posts how?]

Evolution and Effort

But at the heart of evolutionary theory is the notion of competition.  Evolution is not, as popular usage of the phrase has come to mean, a peaceful, gradual change from one state to another.  It is a violent conflict, with winners and losers, and the losers in evolutionary struggle almost always die.

The interesting thing to note, from a theory standpoint, is that the winners and losers are not differentiated by a level of effort.  In other words, there is no suggestion (and no evidence) that species which go extinct did not work at survival.  The dodo bird quite likely worked hard at finding food, reproducing, and so on given its environment.  It just couldn’t adapt fast enough, or adjust quickly enough, when its environment changed dramatically with the arrival of humans — and more importantly, their livestock:

However, when humans first arrived on Mauritius, they also brought with them other animals that had not existed on the island before, including dogs, pigs, cats, rats, and Crab-eating Macaques, which plundered the dodo nests, while humans destroyed the forests where the birds made their homes;^[20] currently, the impact these animals – especially the pigs and macaques – had on the dodo population is considered to have been more severe than that of hunting.

Applied to business, then, the lesson frankly is not to work harder but to adapt to changing conditions faster.

If you’re a buggy whip manufacturer, no amount of hard work, no amount of superhuman effort, no amount of being the go-to guy when it comes to horse buggy whips is going to save you from extinction when automobiles replace the horse-drawn carriage.  That is an environmental change, driven by technology: your only choices are to adapt or perish.

Which makes Diane’s observations correct, but only in part.  Working harder and better than others to become indispensable is the key to survival, but only if the hard work and better work is suited to the environment in which they are happening.

Being a mom, frankly, is the wrong analogy here, because no matter how lazy you are, no matter how neglectful you are of your kids, you are still indispensable to them.  Conversely, Diane might be the best mom in the entire world; she could be the “Shortcut”, the go-to mom, for all things momlike.  That does no good for my kids who don’t have Diane as her mom; they’ll have to settle for their own mom (who, incidentally, is pretty kickass too).

Evolution in Real Estate

Which brings us back to real estate, evolution, competition, and Darwinism.  The situation we face today is not simply a “market downturn” — although there is no doubt that the market downturn is part of the environment.  The situation, frankly, is that the environment itself has changed irrevocably, as disruptive technology tends to make happen.

I just don’t see how it pays to work your tail off doing the outdated things that worked prior to the Internet era.  You might become the go-to gal when it comes to making property flyers, but when 80% of consumers are finding homes online, does that hard work matter much?

I know this is obvious to most of the folks who are reading this (after all, this is a blog….)  But the challenge the industry faces as a whole is one of evolutionary adaptation.  Given fundamental changes in the environment, does it make sense to keep doing what one has been doing? At the same time, change for change’s sake isn’t necessarily going to lead to success either.  Just because ‘social media’ is the in-thing today doesn’t mean that it makes sense for you or your company to do.  On the other hand, maybe it does.

All depends on your assessment of the environment, and what efforts will lead to success in your environment.  Once you have some idea, then and only then will all that hard work and better work pay off.

A Modest Suggestion

So allow me to make one modest suggestion for the various real estate companies.  I know the trendy thing to do right now is to hire various positions like “Director of Social Media” and “Chief Blogger” and such.  Those things, in and of themselves, are just fine.

But you really need to have a “Chief Evolutionary Officer” whose job is to continually look at the environment and assess whether the strategies you have in place are the right ones right now.  (And yes, that should be the CEO in most cases.  The acronym is fully intentional.)  We are undergoing significant environmental disruption; now is the time to pay very close attention to the environment to ensure that all that hard work is actually accomplishing something.

-rsh

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

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

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

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

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

Analyzing the Threat

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

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

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

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

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

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

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

Institutional Disadvantage

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

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

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

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

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

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

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

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

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

I Ain’t No Chicken Little McNugget

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

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

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

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

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

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

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

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

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

Productivity and brand — these two thing dictate institutional advantage.

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

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

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

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

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

Renouncing Aybaf

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

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

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

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

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

How will you compete?

-rsh

The Setup

The talented and lovely Kris Berg is but one of the able spokespersons on the vanguard of a movement I have whimsically dubbed the “Kristians”.  This is an important movement, with very important points to make, and even as I disagree with them on points, I take their arguments seriously.

Essentially, the Kristian position appears to be (and please, feel free to correct me) that the future of real estate lies in The Swarm — small independents, high quality agents, and boutique firms, empowered by technology and social media.  The technology will be provided by third party firms, third party consumer websites, and the like.

Big Brokers, in the Kristian view, are anachronistic dinosaurs stuck back in the days, who provide no meaningful support to high-quality agents.  There is a role for Big Brokerage in the Kristian worldview, but it’s limited to some sort of a training factory to churn through the ranks of inexperienced newbies who aren’t serious about the business of real estate.  A nursery, if you will, for realtors who will go independent as soon as they are able.

In contrast, you have those who believe that the future of real estate will be dictated by Big Brokerage (including Big Franchise, such as Remax, Coldwell Banker, and the like) which I have dubbed The Robnecks.

The Robnecks believe that despite the current buzz being generated by social media, “Web 2.0″, and the like, the fundamental realities of business and the industry will reassert themselves and in the not-too-distant future.  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.

The Robneckian theory posits that there are technology solutions available in the market today — such as enterprise CRM — that are enormously expensive to implement and to operate, but provide lasting institutional advantage.  Given that some of these Big Brokerages have billions in sales, and hundreds of millions in revenues, they will not go gentle into that dark night.  They will fight and rage against the dying of the light.

We believe, therefore, that the future of real estate will be charted by those Big Brokerages who have woken up, seen the light, and have begun to streamline their operations, understanding the critical levers of power in the industry.  Marrying their institutional expertise with infrastructure with significant investment into productivity technology will provide these Big Brokerages with a profit advantage over big competitors and a brand advantage over The Swarm, which will lead to their changing the industry.

The Question

With that background, consider that Kris Berg recently posted a very thought-provoking, and important, article on this topic entitled “Innovation in Real Estate: Are we really different or did we just change clothes“.  I urge you to read it in full.

It continues the debate that began here.  And Kris asks important questions and makes important points.  The most salient, I think, is this:

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.

Admittedly, many agents may not want to think that hard, so there will always be a place for the high-overhead brokerage. But as we march forward in our social evolution, the numbers who will need help grasping technology or will need to be spoon-fed a business plan will diminish. As virtual office space becomes more the norm and less the exception, I believe we will be finding more agents concluding that the shiny office supported by company voice mail and e-mail systems and an administrative staff a dozen deep are “wants” and not “needs.” And when that happens, there will be more resistance to paying for something that is not truly necessary in conducting our business.

So we are left with the true value of the brokerage being in the areas of training and “lead generation.” Training is another topic entirely and for another day. As for lead generation, I see it becoming a footrace of sorts among the competing brokerages to generate the most “leads” (consumer contacts and inquiries) to placate and feed the largest number of agents. More agents equal more money. But then, haven’t we come full circle? Aren’t we back to what we are now? And just where did the customer go in the equation?

Again, read the whole thing in full for the proper context.

Kris is surely correct as things stand today.  I want to stress this point.  As the industry is today, Kris Berg is absolutely correct, and the Kristians have the field.

If Big Brokerage of today is essentially a office-park operation that has gleaming office space and dozens of admins who add little value to the transaction, and they just charge rent (aka, “desk fee”) to the agents, then yes, the savvy agent will see that they don’t in fact need anything that the Big Brokerage provides.

Third party vendors do in fact supply the savvy agent with everything she needs to be successful.

The only value of brokerage, then, in the Kristian vision is “training and lead generation”.  And her question is poignant indeed: “And just where did the customer go in the equation?”

The Answer

The Robneckian answer is un-simple.  Furthermore, it is counter-factual, because I am essentially arguing that the future will be different than the recent past, and the present day.  But I believe this.

To start, we must begin with First Premises — assumptions that underlie the answer.  In this case, they are:

• People love money, but people hate losing money even more.
• He who controls the consumer relationship controls the money; he who controls the money controls the future.
• Real Estate is the longest of Long Tails.

From these first premises, what I derive is that Big Brokerage has greater incentive to act than pretenders to the throne.  It’s one thing to want to make $150m a year by becoming a third party technology provider to millions of agents.  It’s another thing altogether to lose $150m a year by sleeping on the job.

Lest we forget, some of the people who own these Big Brokerages are folks who have spent their entire lives building up a company from the ground up.  I met some of these people during my time at Realogy.  They may be fatcats now, but not one forgot the struggles they went through as a young man or woman scratching and fighting, building their company one customer at a time, one agent at a time, facing bankruptcies, having wins, and finally breaking through.  They are one motivated group of folks.

Is it really safe to assume that people like that are content to let their brokerage value plummet while third party tech vendors pick off their top producers?

I wouldn’t bet against those people as a group.  Sure, some will be too tired, some will be too set in their ways, some will simply be content to fade away — but most of those successful broker owners are extremely driven, competitive, smart people with a track record of success over the decades.

Second, once those people come to understand that he who controls the consumer relationship controls the business, and that web technology lets institutions control that consumer relationship (see, e.g., zappos.com)… I believe that they will see what this means for their business.  Going from the currently prevailing 3% profit margin to say a 10% profit margin when you’re doing $2B in sales means you achieve massive institutional advantage.

Finally, because real estate is the longest of long tail industries — due to the fact that each and every house is unique and not movable — even the superest of super agents can only occupy a small part of the long tail.  Yes, they can make a very nice living while there (see, e.g., John McMonigle) but as compared to Big Brokerage, these super-teams or boutique brokerages simply lack market power.

Only someone who can aggregate all these different pieces of the long tail into a significant enough chunk can make real money from real estate.  The only two contenders are Big Brokerage or Technology Providers (such as Zillow).

Can Tech Providers win that war?  Of course they can.  Too much arrogance, too short-term vision, or too little nimbleness on the part of Big Brokerage will naturally lead to the Tech Providers winning.  In large part, this is what has happened to commercial real estate in the United States.

However, the Robnecks hypothesize that it will not happen in residential real estate, because here (unlike in CRE), an institution can own the consumer relationship.

Caveat Lector

The caveat: they cannot do it with technology already available to the agent.  No way, no how.  The cost advantages of someone working from home, using Trulia for listings, Google Apps for software, and the like are too enormous.  Big Brokerage can never be the lowest cost provider.

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

Furthermore, the Big Brokers simply cannot do it when loaded down with overhead that isn’t leading to owning the consumer relationship.  Those 20,000 sq. ft. offices have to go.  $15,000 per year desk costs per agent have to go.  Multi-million dollar print ad budgets have to go.  You cannot compete, even with small independents, burdened with useless overhead.

Big Brokers have to adapt many of the techniques of the smaller, nimbler Kristians, then layer the Big Technology on top of that.

And finally (at least for this post), Big Brokers must understand that their brand is what separates them from The Swarm, and that their brand is in the hands of their worst agent.  Without serious focus on quality control, without serious concern about fulfilling the brand promise by every single person who is associated with Big Brokerage brand, it will be impossible to establish lasting institutional advantage over The Swarm.

Without that advantage, you die.  Just a matter of time.

Enter the Customer

While I concede this is counterfactual, consider… imagine, if you will… what happens to the consumer when a fully awake, fully invested, and fully operational Big Brokerage aims to own the relationship with him.

From the moment the consumer goes on www.BigBroker.com, the company knows something about him based on anonymous IP tracking, user profiling, geo-targeting, and the like.  As he interacts with the site, fully realized with something like the Lifestyle Listings Engine, the company knows more and more about his preferences, his life decisions, his economics, and the like.

From the minute he presses “Submit a Question” button, the system routes his information to the appropriate expert on the topics he is interested in, and the CRM system gives the agent 5 minutes to respond by phone or email before moving the lead on.  End result: consumer is contacted within 15 minutes.

Throughout the entire transactional process, the Big Broker system is tracking every interaction, the customer service department is following the consumer’s twitterstream, sending out satisfaction surveys, and sending links to helpful articles, vendors, and the like depending on the phase of transaction.

After the transaction, full customer satisfaction surveys are conducted, and if problem spots arise, a customer service rep — perhaps even the owner of Big Brokerage himself — is on the phone with him finding out what went wrong and how they could fix it next time.

This is all possible today.  It is roughly the experience I had buying a Honda.  It is absolutely possible in real estate.

Far From the End

This is not the end of the discussion and debate, of course.  If anything, it is merely the start of the Grand Debate that I believe will be sorted out by realities on the ground over the next 2-3 years.

The Kristians have a strong argument.  Because their version of reality is in fact what exists today.  Most brokers do too little for too few for too much money.  Consumers are left as an afterthought.

But that can change.  And quickly. And all of the incentives are lined up on the side of the existing players who have far, far too much to lose.  Once awake, they have the resources to make things happen awfully quick.

I for one am not betting against them.

-rsh

I just heard of this new company that is planning to launch in mid-2009, called Aybaf.  It is a new virtual brokerage model with the following pertinent points:

• A world-class consumer web portal, currently generating north of 2 million unique visitors per month
• Roughly 15,000 web-based leads every month, growing at 10% on average month over month (adjusted for seasonality)
• Full suite of online agent tools, ranging from a baseline free set to premium tools from Aybaf partners that the agent will select on an a-la-carte basis.
  • Free will include: Agent Profile Page, Email Marketing Engine (including weekly CMA reports automatically generated), full-on listings syndication, Agent Website (agent.aybaf.com) with multiple templates featuring the agent’s own listings and a WordPress blog included.
  • Options include: IDX feed, VOW site (with state-specific registration pathways), independent agent site (www.agent.com), Custom design (through Aybaf’s network of web development partners), Search Marketing (Aybaf has tools from AdWords to Omniture, where any agent can go purchase keywords easily), Featured Listings (on a competitive bid basis on geographies), and PR (through network of PR partners).
• Full social media support, included in the above suite of tools, from group blogs on blog.aybaf.com to individual blogs (hosted and managed on Aybaf’s Class-A datacenter) to premium paid services (all at agent’s discretion).
• Enterprise CRM platform, with social media tools.  As I heard it, Aybaf is looking at the Zappos.com model of leveraging social media as a customer retention and relationship tool, and deploying that out to both an internal customer-service call-center as well as member agents.  Every customer is tracked, leads are distributed according to proprietary algorithms, and performance tracked to ensure that leads are going to productive agents who respond quickly.
• Customer surveys after each and every interaction, to ensure that only the best agents remain affiliated with Aybaf, and to let agents know what they did well and where they can improve.  Continual quality improvement is their goal.
• A range of partnerships with service providers, as well as a simple online resource center for agents to order services.  For example, if you need a yardsign, Aybaf offers partnerships with six different yard sign companies at discounts ranging from 5% to 15%, and an online order center to easily expedite ordering yard signs.  Same for any service an agent might need, from direct mail to SEO consultancies.
• Training will be available 24/7 through Aybaf’s automated Agent Resource Center, featuring WebEx, pre-recorded sessions from top names in training, as well as a network of coaches, consultants, and trainers on topics from business planning to social media. They’re incorporating BlackBoard software for enabling online education for all of their agents.
• Full range of professional services through partnerships.  They are signing up real estate lawyers, mortgage companies, title companies, etc. at a rapid clip and integrating them as much as possible into the Agent Resource Center.

There were some other details, but the above are the main points.

The most amazing thing about this is that every agent will be on a 100% split, and because Aybaf is a purely virtual brokerage (except in states where they must have a physical office, in which case it will be the smallest possible “storefront” with a single desk, or even just a PO Box), the “desk fees” are only $19.95 a month.

Aybaf’s business model is premised upon making money upon delivery of actionable leads (they haven’t figured out the precise rate, but thinks it’ll be in the 10-15% of GCI, and only if it leads to an actual closed side for the agent), and taking a piece of any premium services the agent purchases.

What do you think?  Could this work in real estate?

-rsh

UPDATE: You might want to read this, the followup to this post.

There are really very few voices in the RE.net I respect more than Russell Shaw‘s. I mean, this is a guy who not only talks the talk, he actually walks the walk. His insights and ideas are great in and of themselves, but they are that much more credible in my eyes because he’s a tremendously successful practitioner of the craft as well.

So when Russell speaks on something I’ve written, and criticizes it, that criticism is something I take seriously. He writes:

In some of the posts on various blogs and also on Inman there has been discussion of IDX vs. VOW and how perhaps a national MLS is needed and that some fantastic company using really wonderful technology is going to attract loads and loads of business, pay the agents less and sort of take over. I contend that if such a thing were possible it would have already happened. Zip or Redfin would be making a ton of money (instead of endlessly feeding their companies with investor capital that is not likely to ever come back to them). I don’t think it makes any difference to any big company if only IDX or only VOW is used. About the only people who it will ever make a significant difference to are those agents (not “companies”) who primarily work buyers. They use other people’s listings (via IDX or VOW) as bait to attract buyers who aren’t working with any agent yet.

Desk-fee agents are not only not going away, they ARE the future of our industry. Don’t believe it? Look at the actual trends for the past decade. Our industry is shifting from a totally broker-centric model to 100% companies. Right now, in most parts of the country it is the big national 100% companies who dominate (in terms of numbers of agents). Take a closer look at where 100% started (Phoenix) and you see a very different picture: most of the agents are with 100% companies and the “traditional” companies have changed their splits to the point that they may as well be 100% companies. But it is the less well-known 100% companies that have the largest number of agents. Hint: they charge less. A lot less. My prediction is that these companies and teams of agents (with a rainmaker, mentor) are the future of our business. We will have fewer agents and I believe that is a good thing. A very good thing.

My only defense to this powerful line of criticism is that “past performance is no guarantee of future results.” Let’s get into depth a bit.

IDX, VOW, and Bait

I think Russell is surely correct when he says that buyer agents use other people’s listings, whether over IDX or VOW, to attract buyers. But I submit that if you go a level deeper into this “bait” concept, the difference between IDX and VOW are significant, and that the incentives as currently structured point the way towards a very different future.

It is worth noting that very knowledgeable people think I’m nuts. I say, time will tell.

But this whole discussion is being driven at base by the continued shift of consumers to the Internet. That trend is not likely to reverse, as the demographics of the consumer continually changes.

And while Russell is right that buyer agents use other people’s listings as bait, I believe that the trend even for sellers is to look at effective online marketing programs by the listing agent. I mean, could you even walk into a listing presentation today without an integrated online marketing strategy?

So whether you’re talking about bait to attract buyers, or bait to get sellers to list with you, you’re still talking about the Internet and effective online marketing.

Now, throw into this volatile, changing environment these facts:

1. IDX, while tremendously successful, is a pain to implement due to variety of local rules.
2. VOW, while tremendously open, has that “signup” provision that is a major barrier to consumer engagement.
3. Only public facing MLS websites (and possibly Realtor.com) are free of either restriction, under the NAR-DOJ settlement.

What is the likely outcome?

To me, it appears that the future looks something like this:

• Public-facing MLS websites become the primary consumer destination sites, with perhaps Realtor.com (depending on how the NAR-DOJ settlement is interpreted vis-a-vis Realtor.com) being the primary national real estate portal (possibly to each MLS site).
• Brokers (and agents) have enormous marketing advantages if they can convince consumers to signup with them in some way.
• Ergo, brokers (and agents) who have extremely robust, powerful, and consumer-useful CRM systems married to an effective, consumer-friendly, and content-rich online marketing strategies win the battle for consumers. And winning that battle leads to wining the listings battle, as those brokers (and agents) are able to tell the seller, “We have a database of 95,000 homebuyers, married to our awesome website, and an integrated marketing approach.”

Perhaps it won’t happen this way, but I think the logic is valid.

End of Desk Fee Brokerage?

For what it’s worth, I didn’t come up with the title for my Inman interview. I’m not sure if desk-fee brokerage is going the way of the dodo bird. What I do wonder about, however, is what stops a Third Party Platform (such as Trulia or Homegain or whoever is left standing) from getting brokerage licenses, and leveraging their overall lower cost of operations (from economies of scale) and rolling out a national, desk-fee model, but featuring lower fees for all services that desk fee agents currently receive from their brokerages.

Sperry Van Ness has tried to do this in commercial real estate to some success, and that’s a business that isn’t all that friendly to a desk-fee model. Why it wouldn’t work in residential is something I’m waiting to find out.

Furthermore, as I mentioned above, what happened in the past is not a great indication of what is likely to happen in the future. At some point, especially in what appears to be a historic down market, the extremely thin profit margins of these various brokerages are going to catch up to them. Do they maintain the 100% desk fee model that is yielding less than investment into Treasuries? Or do they at some point decide it’s not worth all the hassle and the risk?

The Connection to Brand

What’s even more interesting is that Russell points out the unfortunate truth: real estate brands have lost so much equity, so much brand identity, that most of them don’t stand for anything:

Take what is currently, factually, the really biggest real estate company in the world, Realogy: other than Sotheby’s what brand do they have that matters? Try none for an answer. What meaningful difference does the general public or even the agent public see between Century 21, ERA, Better Homes & Gardens, or Coldwell Banker (just to name a few)? Which one of those is a “good brand”? (yes, yes, I know, Coldwell Banker is supposed to be their “premier brand”)

Is Coldwell Banker a better brokerage firm to the public than Century 21? Do people across the nation think to themselves, “It would be so great if we could buy our next home from a Coldwell Banker agent”? Ever? Does anyone, anywhere, ever think that? How about, ERA? Does anyone say,”I only want to do business with an ERA agent”? If not, what are those “brands” worth? Not much. Why? They don’t stand for anything. To matter, a brand must mean something in the mind of the public and few national real estate firms have ever done that and then managed to hold on to their position.

So, to start off, general agreement on all points. The big brands in real estate have lost most, if not all, of their brand equity.

Brand awareness is not the same thing as brand equity. So for Century 21 to claim that they are #1 in brand awareness, as they recently did, is actually somewhat meaningless unless the brand itself is connected to a real identity.

However, brand awareness is important. It takes years, decades, and really serious money to build up brand awareness in the minds of consumers. To even get people to recognize a particular logo and see it as being familiar takes real effort. And it does provide tangible benefits. In the case of C21, it meant that at least in a survey, consumers responded that they were most likely to choose C21 to buy or sell a house.

Furthermore, if you have a familiar brand, it takes far less effort to turn it around and give it a real identity. It isn’t easy, but it is doable.

What Russell does not take into account, however, in the brand story is how the brand equity was lost. Perhaps the full story will require far more study and research than my little blogpost here, but I submit that the main way that brand equity was lost by Big Brands was through loss of control over the agents.

Best Buy can put out all the TV ads in the world showing smiling, friendly salespeople talking about some sweet holiday story. I set foot into a local Best Buy, deal with one Best Buy salesperson, and all of that branding effort is wiped out if the salesperson is rude, surly, and a moron. It’s happened to me often enough that I no longer shop at Best Buy unless I absolutely must.

Same thing applies to retail. Bloomingdales was once seen as the creme de la creme of American retail — a true luxury with incredible customer service. Yeah… have you set foot in a Bloomingdale’s recently? Do you feel catered to? Special? Luxurious?

All the branding in the world cannot overcome a bad customer touchpoint, and the people who wear the brand is quite possibly the single most important customer touchpoint.

Take a look at the care with which service-driven industries, such as luxury hotels, select, train, and monitor their frontline staff from the check-in clerk, to the over-the-phone reservation people. If I feel that I’ve been treated less than perfectly at a Westin, I’m pretty sure I can get that employee fired. But at a Best Western? I seriously doubt it.

So in the world of real estate, which big brand really enforces brand discipline down through the ranks to the agent level?

For that matter, how many large brokerages — especially the 100% desk fee models — truly enforce brand message and brand discipline?

If the official brand statement is that “our agents are truly knowledgeable experts”, how many brokers fire agents who aren’t?  How many even test agents to see just how expert they are?

And the 100% desk fee models contributed directly to, and was simultaneously symptomatic of, that loss of control.  With a 100% desk fee model, the broker doesn’t care so much about the consumer, or his brand, except insofar as it would help him bring in agents who pay him fees.  The real customer is the agent, not the consumer.

Sort of tough to “control the agent” and “enforce brand discipline” when that’s the case.

The Gorilla Cometh

So when I predict the future coming of the Big Brokerage, it is based on certain fundamental assumptions and observations.

Brokers will not stay in a 3% profit business forever; either the profit has to go up, or they will get out.

We are currently at the tail-end of an agent-centric industry model pioneered by Remax.  The current shift is away from an agent-centric model towards a web-centric model, because the key to the whole industry is Who Holds the Consumer Relationship?

If Third Party Providers win that battle through superior technology, superior marketing, and superior web-based applications, then they will enable the “desk-fee’ing” of the entire real estate brokerage industry.  At that point, the brokerages might as well go out of business, because the agents don’t need you; they need the Third Party Providers far more.  This is the CoStar/Loopnet future of real estate.

What argues against this outcome is the simple fact that most Third Party Providers are losing money in a rough investment environment, and may not survive to see this beautiful future (for them).

If Brokers win that battle through real investment into technologies that enable a web-centric model, then they can and will absolutely reduce the cost of labor.  They have to in order to make back their investment on the one hand, and to raise the profitability of the business on the other.

What argues against this outcome is that most Big Brokerages do not yet seem to understand this, and in the current market, are likely to be very gunshy about investing in anything.

My current stance is that it is easier for the guys with the money — Big Brokerage — to make the investment, gain control over their agents, gain control over their brands, drive brand discipline through the ranks, and emerge far stronger than they ever have been, empowered by technology, than it is for the guys with the technology to find ways to make money.  Hence, I believe the 900-lb gorilla cometh.

But… I could be wrong.  And it could be the 900-lb bear that cometh instead.

(The agent, by the way, is simply not a player in this battle.  They don’t have the money, and don’t have the infrastructure.  They will use whatever tools are provided by whomever, and decide who the winner will be, but they themselves are not in this fight.)

-rsh

I was recently asked by Inman to provide some opinions on a variety of topics, and one of my responses is as follows:

5. What technology trends will change the industry in the future?

Enterprise CRM, married to truly effective, and measurable interactive marketing technology.

In the alternative, third party systems that replicate all or most of the value from a brokerage system may create a whole new paradigm: the Swarm. This is Trulia’s play, in my opinion. I am, however, not certain that these third parties have enough profitability to truly compete with the big brokerages and the power they can bring to the market.

So after I wrote this, I got an email asking what in heaven’s name I was talking about. Swarming? And what’s the connection to Trulia? [Update: My responses have now been posted at Inman News.]

I started to write out an answer, and quickly came to realize that this is one of those things that got stuck in my head years ago, continue to influence me, but that I never really discussed.

So here it is.

BattleSwarm

Swarming is something I borrowed from the U.S. military, where it has been in active discussion (and even quite a bit of implementation) since the 1990′s.

I was first introduced to the concept by an op-ed entitled “Swarming — The Next Face of Battle” by two RAND Corporation strategists, John Arquilla and David Ronfeldt. Their central thesis was that warfare had been revolutionized by advances in information technology and networking, and that threats facing our military in the battlefield were asymmetrical: terrorists, guerilla actions, and so on. (For a fuller background into even the origins of this strategy, you might consider reading this essay that introduced the concepts, but never formalized it into the “BattleSwarm” doctrine.) Arquilla and Ronfeldt:

Swarming is a seemingly amorphous but carefully structured, coordinated way to strike from all directions at a particular point or points, by means of a sustainable “pulsing” of force and/or fire, close-in as well as from stand-off positions. It will work best — perhaps it will only work — if it is designed mainly around the deployment of myriad small, dispersed, networked maneuver units. The aim is to coalesce rapidly and stealthily on a target, attack it, then dissever and redisperse, immediately ready to recombine for a new pulse. Unlike previous military practice, battle management is now mainly about “command and decontrol,” as networked units all over the field of battle (or business, or activism, or terror and crime) coordinate and strike the adversary in fluid, flexible, nonlinear ways.

Right about now, you’re wondering… this is all very fascinating (not really), but what the heck does this have to do with real estate?

Swarming and Commercial Real Estate

Well, a few years ago, I was on a consulting assignment for Coldwell Banker Commercial (which led to my being hired there) on strategies for commercial real estate. Given the nature of CBC at the time (still true to this day) as a national franchise of relatively small, independent, local offices lacking central command and control of larger competitors such as CBRE or Cushman & Wakefield, I thought that the BattleSwarm doctrine might work for CBC as corporate strategy.

Taking down a major corporate real estate assignment is an enormous affair, involving many experts from diverse fields. A firm like CBRE can actually put a whole team into play with various specialists in finance, insurance, land use, taxes, architecture, and so on and so forth to convince a Fortune 500 company to give it the assignment like “Find me 2,500 retail outlets across the United States”.

I thought the only way that CBC could compete is by implementing some sort of a Swarming strategy, where independent offices could smell an opportunity, quickly communicate it along the network, and coalesce rapidly to bring the full range of services that CBRE can offer, but without the CBRE pricetag, in an ad-hoc team created specifically for that assignment and that assignment alone.

As the Sr. Director for Interactive Marketing for CBC, I actually implemented some of the elements of that long-ago strategy, such as an internal social network, long before FaceBook was a phenomenon. I can’t take credit for the idea, though, because it was from brilliant minds in the American military.

Swarming and Trulia

So when I quickly dashed off my response to Inman, I must have subconsciously brought up Swarming. Since the question had to do with what technology trends will change the industry, I saw (and still see) things as a crossroads.

Either the Big Brokerages will master enterprise CRM and marry that to effective, measurable interactive marketing systems, or Third Party Platforms will evolve to provide all of the services that Big Brokerage currently provides.

The latter enables Swarming in residential real estate.

Now, that happens not to be as important as it might be in commercial real estate (because few assignments are big enough to warrant a team of specialists), and elements of Swarming already occurs in residential real estate.

For example, a listing agent who reaches out to a staging specialist she knows, then a painter to repaint the house, a photographer to shoot photos of the house, a home inspector to check out the house, and an attorney to review land use regulations — all of them part of her private network of contacts — is effectively creating an ad-hoc team to service the client.

Nonetheless, if the Third Party Platforms become dominant in the industry, that will enshrine the Swarm as the norm for delivery of services. Consider what services an agent — who is an independent contractor — receives from a broker, for which she pays the broker a share of the commission.

Branding, a nice website, liability insurance, office space, source for yard signs, copy machines, etc.

With advances in technology, I see no reason why a Third Party Platform could not provide every single one of these services to an agent. Even insurance could be delivered as a buying cooperative; if Trulia has 150,000 agents “in its network”, can it not negotiate with insurance carriers for group discounts or group policies or whatever? Of course it can.

Lead generation is already handled by each agent; the existence of a network simply amplifies that. Lead management and routing software already exists. The network as a whole can establish quality standards through things like agent ratings, refusal to work with known bad actors, training offered (for a fee) by network members, etc.

All of this can happen with nary a Big Broker or national franchise in sight. The technology already exists; it’s a matter of integrating it together, and putting in effective processes.

If Third Party Platforms get robust enough, then even the biggest firm can simply be taken down by a Swarm of networked independents attacking it from all angles. With lower overhead made possible by the technology (provided by the Third Party Platforms), an independent can compete with Big Brokerage on every listing assignment on price, with no compromise on quality of service. Indeed, an ad-hoc network of experts could provide a higher level of service to a customer than a Big Brokerage could and at lower cost (4% commissions, instead of 6%, for example).

Meanwhile, Big Brokerage faces enormous pressure on its top line revenues as top-producing agents have every incentive to either (a) leave and join the Swarm, or (b) demand far higher splits and services to stay.

Case Study?

That sounds nice in theory, but is there any evidence to suggest that this will actually happen? There are hints.

In commercial real estate, at this point, I can make a pretty strong argument that CoStar is far more important to a practicing agent than the firm to which he belongs. At the lower end of the market, a pretty strong case can be made that a commercial agent can make a very fine living without affiliation with a national brand, or a local brokerage, but could do very little without Loopnet.

I personally know of multiple examples where a top producer flat out told his broker that if the brokerage does not renew the CoStar contract at exorbitant cost, he will leave, taking millions of dollars in GCI with him. The rest of the services, including the brand name, that the brokerage provided him were worthless in comparison to CoStar.

And those companies, as yet, do not offer the full range of services to its members that a brokerage offers. Once they add robust research, and robust network-driven marketing services… watch out.

The Future is Unknown

Of course, all of this is speculation.  Only the reality of what happens over the next few years will resolve things.  It is likely that the actual future will look quite different from what I’m predicting.

Nonetheless, for students of strategy, the whole Swarming doctrine is an interesting read.  How a network impacts power, force, and maneuverability is not something relevant only to military forces. And I highly recommend checking the theory out… if you’ve got an evening or two free….

-rsh

Then the Gods of the Market tumbled, and their smooth-tongued wizards withdrew
And the hearts of the meanest were humbled and began to believe it was true
That All is not Gold that Glitters, and Two and Two make Four
And the Gods of the Copybook Headings limped up to explain it once more.

- Rudyard Kipling, The Gods of the Copybook Headings

Brian Larson, swiftly becoming one of my must-read bloggers, posts a thoughtful argument that I’m far too cynical. Which is entirely possible.

He posits that my observations about what the recent VOW rules mean for an MLS appear correct:

1) An MLS public website is not subject to the VOW signup requirement.

2) An MLS can create truly ridiculous IDX rules, because IDX was not covered by the NAR-DOJ settlement.

3) An MLS cannot not prohibit brokers/agents from sending listings to Trulia/Zillow/etc. as that would violate Sherman Anti-Trust Act. But the MLS is not required to provide Trulia, Zillow with any data either, unless Trulia signs up as a broker subject to VOW rules.

But, Brian goes on to say, the MLSes are not nearly as evil as I presume them to be, nor are the requirements of VOW such a major deal.  His argument (which you should read in full, by the way) is premised upon three assumptions and recent trends:

First, the “VOW signup requirement” is not all that daunting anymore. So many applications folks use online now require registration. The key is to ensure that the consumer trusts you will not bombard her with crap email after she registers. You cannot use Facebook or MySpace without registering…. In the real estate space, I expect we’ll see more applications that rely on registration, or that at least have an “account” mentality. 1000Watt’s post about Dwellicious suggests that it might be an example.

Second, I think the VOW policy gives many MLSs incentives to make their IDX rules more open. By including more fields and statuses in IDX, the MLSs can make it easier for a broker to deliver information through the more-regulated IDX method, rather than encouraging her to use a VOW, which is harder for the MLS to regulate and monitor. I have MLS clients that have already indicated to me their intentions to take this approach. (In fact, I speculate that restrictive IDX rules will actually make it easier for brokers to get consumers to register for their VOWs. “I can show you X more listings if you register….”)

Third, many MLSs have embarked on “listings syndication,” which makes it easy for their brokers to send listings to places like Zillow and Trulia. We did a whitepaper on syndication this last spring (though it seems hopelessly outdated to me now). MLSs recognize the value they can bring to their brokers with syndication. Some still have “protectivist” tendencies, but I think the trend is moving to more syndication.

On this basis, it does indeed appear that I am merely a huge cynic.  Again, I grant the possibility of that.

However, the Gods of the MLS Headings are not so kind.  Thousands of years of human history have taught us not to overestimate the level of charity and goodwill in your average person, nation, or organization.  It is a rare person, and an even rarer company, that forgoes self-interest in the name of community.

Let me delve deeper into each of Brian’s points.

Signup requirement is not daunting

The problem with this analysis, however, is that it takes an objective stance on something that is entirely relative.  While it may be true that the VOW signup requirement is in and of itself not daunting, the real issue is whether it is easier or more difficult relative to other alternatives.

There is no version of Facebook that does not require signup.  There is, however, a version of the VOW website that does not require signup: the one belonging to the MLS.  So faced with two choices — one, a realtor website where I have to signup and provide my email address, and another, a MLS website where I do not — I am going to select the one that puts fewer requirements on me nearly every time.

Furthermore, a requirement’s ease or difficulty stands in relation to the value delivered.  I don’t find it all that daunting that I have to study, take both a written exam and a roadtest, before I am allowed to drive a car.  The value delivered (driving) is sufficient for the requirement.

Facebook and MySpace, in order to deliver its value (personal space to connect with friends) has to have your personal information.  Plus, the value that it delivers is sufficient for consumers to want to signup.

YouTube, on the other hand, will go out of business if it requires signup before a user can view a video — because a competitor will arise (such as Google Vide0) that will drop that requirement.  The personal information is irrelevant to the value delivered: viewing a video.

In real estate web, having to deliver my personal information to a realtor just to view listing information is a pretty large stumbling block.  I know intuitively as a consumer that you don’t need to know my name or my email just to display photos of a house, or show me how many bedrooms and bathrooms it has.  So I deduce (correctly) that the only reason you want my information is to try and sell me something.

Under these factors, I submit to you that the temptation for the MLS to create a public-facing VOW-powered website freed from the signup requirement — that it must place, by law, on every other participant — is rather huge.

Let us not forget that MLS organizations these days are not exactly rollin’ in the cash.  Many of them are facing fundamental questions from their membership about the value being delivered to them for their annual dues.  There is a growing trend of real estate agents electing not to be part of the MLS, or paying absolutely the minimum for access to listings, and complaining bitterly about the dues being charged because the MLS doesn’t “do anything for me”.  And companies like Trulia are only helping to accelerate that trend.  No wonder that MLSes are heavily investigating public-facing websites then — being able to deliver consumer leads to its membership may be essential to the very survival of the MLS.

The incentive is large; the tempation is huge.

VOW Improves IDX

Brian’s next point, that the VOW rules may lead MLSes to relax their IDX rules so that their members can manage listings via the controllable IDX feed instead of the uncontrollable (by law) VOW feed simply doesn’t take incentives into account.

The MLS has major incentives to tighten IDX rules (as above) to make it a very unattractive option.

All participants have an incentive to display as much information as possible on their own website, in order to drive leads and conversion.

The listing broker might have incentive to try and control how its listings are displayed on competitor sites via IDX, but no broker is a pure listings broker who doesn’t take buyer inquiries via its own site.  So their incentive to want to control listings is canceled out by their incentive to want not to get controlled by others.

The incentive for brokers is to use IDX as bait to get a consumer to signup, so that they can show them the VOW data.  The trouble is, there’s already a website out there that shows consumers the full VOW data without signup: the MLS public website.  Do brokers truly care, if they are receiving rock-solid leads without charge from the MLS site?  The experience of companies like Houston Association of REALTORS suggests that they do not.

I submit that Brian’s clients who have indicated that they plan to relaxing IDX rules will either (a) swiftly scale back those plans, or (b) go out of business when a competing MLS implements the cash-generating cynical strategy I outline.

Trend is Towards Syndication

I agree with Brian that the trend was towards listings syndication.  It benefited the agents and listings brokers (and their clients) so much to be able to market listings to dozens of websites with the push of a button.  The MLS, in effect, was charging its members dues to provide the syndication service.

However, that was prior to these particular incentives setup by these particular rules.

After these VOW rules are fully implemented, I believe the incentives have changed.  Because now, the MLS can absolutely control third party sites like Trulia, whereas they could not do it effectively beforehand.

First, for third party aggregator sites to take VOW feeds, they have to become a participant in the MLS, subject to all of the rules of that MLS.  This rule now has the force of law.

Second, since the VOW settlement doesn’t address IDX at all, the MLS can provide an incredibly obnoxious IDX feed to the third party syndicators, say they are providing syndication (which is true), but at the same time, really build out its public facing VOW-powered website.

Third, the MLS can simply cease providing syndication to its members.  Instead, it will provide cost-free leads direct from the MLS public site.  Which service is the member more likely to value?  The lead, or the chance to get a lead from a third party aggregator?

Idealism vs. Gods of the MLS Headings

I actually like to think I’m an idealistic fellow.  I care about my fellow man.  I care about this industry.  I care about the many wonderful professionals I’ve had the pleasure and privilege to meet.

But at the same time, I can’t ignore the economic incentives now at play thanks to the DOJ-NAR settlement, which gives the VOW rules the force of law.  I can’t ignore the fact that MLSes are losing membership — partly because of the market, but partly because their value to members has been decreasing for the past several years.

Since MLSes are not government entities run without care for covering costs, but are private companies that must generate enough revenue to pay for its costs, I have to think that making money (through membership or other means) by providing greater value has to take priority over every idealistic principle any MLS executive.

Indeed, even if the MLS executives want desperately not to take advantage of these rules, the economic realities may force them to do so.  It’s hard to be idealistic if you’re dead.  Survival is the first moral principle, after all, and that applies both to individuals and to organizations.

I hope that Brian can continue to be an influence in the industry, and that not all of his clients go down my cynical path.  That would make Brian sad.   Which would make me sad.

On the other hand, is it really such a bad thing for the industry, and for consumers, if there were at least a few websites (all of them owned and operated by MLSes) that provided people with the full VOW listings information without requiring signups, jumping through hoops, and the rest of it?

-rsh

I was tempted to jump in after part 1, when Danilo Bogdanovic threw down the gauntlet. But man, am I glad I waited until he was all done with his series on the future of real estate brokerage. You really owe it to yourself to read the whole series: Part 1, Part 2, and Part 3. As it happens, this is a topic that I’ve also written about a little bit.

So… before diving in… let me see if I can do justice to Danilo’s main points of argument.

I believe there are three main takeaways from what Danilo lays out.

1. There are too many crappy agents working in real estate.
2. There are too many old fogies who don’t get technology working in real estate.
3. There are too many hands in the agent’s pocket.

So his solution is something he calls “White Label Brokerage”:

“White Label Brokerage”. It has an agent-centric versus broker-centric focus and a fee structure that does not interfere with an agent’s business focus. It allows agents to brand themselves, the team to brand their team, and the small brokerage office brand their own company name.

It’s not about the big broker and the brokerage firm’s name and ego. It’s about the agents that do all the work and deserve the recognition. After all…without the agents, there would be no brokerage firm.

Agents who are or intend to be the best professionals in the industry will recognize the financial advantages of this new model as well as the freedom and control it will give them. The freedom that the current brokerage model refuses to embrace is the basis of the future “White Label Brokerage” model.

But the full chain of logic goes something like this (in my opinion):

There are too many brokers who have their hands in the agent’s pocket, charging them ridiculous fee after fee without any training and no support. Because of that, these brokers couldn’t care less whether they were hiring good agents or crappy ones. As long as they can charge fees to these warm bodies, they’re happy to keep it going.

Plus, today, the old-timers who are in business with the fat referral networks, with decades of experience, are more than happy to keep doing the same old crap that no longer works with new consumers who are tech-savvy. Brokers are more than happy to keep these old fogies around, because they’re bringing in dollars, but they’re mortgaging the future.

NAR should be maintaining professional standards, but because they have a vested interest in having as many members as possible, they don’t do nearly enough in enforcing standards or raising standards.

The solution, then, is a new brokerage model that places dollars over ego and grants extraordinary freedoms to its producers, while keeping the bad apples out. The broker needs to support the new technologies, the new marketing methods and channels, and stop imposing their stupid brand rules that actually hurt the on-the-ground producer.

I think and hope that does justice to Danilo’s argument.

I love Danilo’s vision. I applaud his daring. I think he’s speaking for a large number of the new generation of real estate agents — the Gen-Xers who are poised to take over the leadership ranks in the coming years.

Unfortunately, I just see things differently. It probably stems from the fact that Danilo is an on-the-ground real estate agent. He has to go out and get listings, find buyers, do the showings, advise and counsel consumers through the process of buying and selling a home. He has that wealth of experience to draw upon. I, on the other hand, come out of the interactive marketing division of a national franchisor, and work for a technology and data provider to the real estate industry. My experience is rather different.

Therefore, let me disagree with the greatest of affection and respect for Danilo, with whom I plan on imbibing a wide variety of adult beverages in the very near future.

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