Notorious R.O.B.

A 1982 Osborne Executive next to a 2007 iPhone

I’m giving a presentation tomorrow at the Nextgen Realtor Group of the Houston Association of REALTORS. I do believe the actual title of my presentation, as in the program itself, is called Welcome to Dystopia. Somehow, it seems, I’ve become the Cassandra of the real estate industry. But in researching for the presentation, I ran across something that I wanted to think about more. And since writing blogposts is one of my primary ways to think about things… here it goes.

Moore’s Law states that the number of transistors one can fit on an integrated circuit board doubles every two years. (Originally, it was doubling every year, then every 18 months, and these days, the accepted ratio seems to be double every two years.) This principle is taken more or less as gospel within the computer hardware industry, and of course, the computer software industry designs its programs with Moore’s Law in mind. You write code that can barely function on today’s machines, and by the time you finish all the QA testing and roll it out, computers have gotten faster and more powerful.

So a ‘shorthand’ expression of Moore’s Law is that computing power doubles every two years.

Okay, you’re thinking… so what? We knew that. Duh!

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If you’re responsible for real estate brokerage operations, you owe it to yourself and to your company to read this post by Glenn Kelman at Redfin.  I have said for a while now that I believe Redfin to be one of few viable models for real estate brokerage of the future, and this post helps confirm that belief.  It’s a long post, and worth reading in full, but here’s the money graf:

But outside of calling one agent after another, the CB CEO has no way of knowing what his agents are doing; most work as contractors, for franchises, recording their deals in spreadsheets and notepads. Redfin on the other hand has a system for scheduling home tours and writing offers, which means we also have a system for storing data about every tour & offer. Months before the numbers are recorded at county courthouses or by federal agencies, we know when bidding wars are back, or when tire-kickers have taken over the market. We can see the whole elephant, and we’re minutely sensitive to when he’s about to roll on top of us or stampede through the jungle. [Emphasis added]

Fact is, far too many real estate brokerages pay lip service to the importance of technology.  Even the ones who do invest are putting money and resources towards marketing technology rather than information technology.  In the long run, I think the companies that survive the Great Recession will be ones who invested in information technology, rather than just another pretty website. Read the rest of this entry »

In Part 1, I explored how large law firms and big brokerages are similar, based on the forthcoming paper by Glenn Reynolds, a law professor and blogging pioneer.  Then in Part 2, we looked at how they’re different in some fundamental ways, particularly compensation models, that makes the size of Big Brokerage appear to be all of the disadvantages with none of the advantages.

In this Part 3, I would like to explore how size could be made relevant again.  There are still areas where size does matter, even in real estate.  And the future of the industry really depends on how big brokerages respond to the rapid changes in the social and economic marketplace.  Up to this point, most have been extremely slow to react, believing that a strategy of evolutionary adaptation makes more sense than a risky revolutionary act.  I no longer believe, if I ever did, that slow evolution will get the job done for the giants in our industry.  The window of opportunity is closing, and quickly at that.  Unless something fairly dramatic is done, and soon, I believe that by 2020, the large brokerage as we know it will be a thing of the past.

So, with that Cassandra moment out of the way, what are the areas where size still matters?  And how might big brokerage respond to make size matter once again?

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In Part 1 of this series, I examined a scholarly paper by one Glenn Reynolds(aka, Instapundit, who is a law professor, the author of Army of Davids, and one of the most important and influential bloggers in the United States today) about the future of big law firms and drew some lessons about how big law firms and big real estate brokerages are similar.

In this part, we focus on how they’re different.  And before you say, “Duh, Rob” (or since you’ve probably already said that, before you say it again), of course lawyers are not realtors, and law firms are not brokerages.  But there are lessons to be drawn from some of the fundamental differences as they go to issues of business models.

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Pocket Hercules (Photo by Sam Greenwood/Getty Images)

Aaaaand I can hear the tee-hee’ing going on in Costa Mesa from here.  While I’m not above making cheap jokes in order to erect a logical argument about brokerage performance, business dysfunction, and customer satisfaction, this post is actually about serious issues in real estate, technology, and marketing.  So stop giggling.

We begin with a question: does the size of a brokerage matter in real estate?

I have argued in the past that the Big Broker holds the key to the future of the real estate industry, and that small independents and boutiques will end up surviving on the good graces of the various titans in their markets.  Of course, that argument was counter-factual at the time I made it (over a year ago now) and I conceded that as the industry was then, big brokerages were boned.  What I argued then, and still believe to some extent, is that the Big Brokerage with the will to change has the resources to do so.  But in the almost year and a full quarter since I wrote that post, I don’t know that I’ve seen too many examples of such visionary brokerages.

Meanwhile, technology continues its remorseless march.

Then comes this paper by one of the pioneers of the blogosphere: Glenn Reynolds, aka, Instapundit, the Beauchamp Brogan Distinguished Professor of Law at the University of Tennessee.  If you’re at all interested in the impact of technology and of the Web (and its offspring, social media) on the real estate industry, I urge you to read it in full.  While it is a scholarly paper published in a law review, it’s written in plain English for the layman, and does not deal with legal issues as much as it does with business and social issues.

The implications are profound, and the questions Reynolds raise are significant.  And insofar as law is the epitome of professional services, and one that many realtors look to as an example of client-driven professional services, changes in the legal business model are something we should pay close attention to.

This will be a multi-part post, as the topic is large enough and complex enough to warrant breaking up into bite-size pieces.  This first part focuses on understanding Reynolds’s argument as it applies to law firms, then extrapolating similarities to real estate brokerages.

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Mike Farmer at Bloodhound has an inspirational and thought-provoking post up on what he calls a “Biz 2.0: Super Real Estate Company” would look like. Read the whole thing; it’s long, but worth the time.

By now, readers of this blog know that I am entirely simpatico to Mike’s call for a new enlightened leadership and work processes in real estate.

There is, however, one fly in the ointment for Mike’s vision that I have pointed out before, and it’s worth doing so again.

For his (and my) vision of the Real Estate Company 2.0 to become real, the industry has to abandon one of its hallowed traditions: the independent agent.

The level of unity, organizational pride, and collaboration that Mike is envisioning simply can’t happen when your entire producing workforce thinks of themselves as independent contractors in business for himself/herself.

The truth is that a company needs leadership, but a committment to the on-the-ground salesforce is critical to retention and productivity. With intranet 2.0, voices across the system should be heard and information used for steady improvement and innvoation. With all the communication tools, any part of the company should be able to access rich information about listings, trends, local changes, clients, closings, vendors, etc. with a click or two. The information being fed from the field should be a steady stream. Training should include the skills necessary for agents to learn the importance of information, how to quickly gather it and input it so that it’s meaningful and useful. The infrastructure for this should user-friendly so that agents aren’t burdened with a clumsy, complex system they won’t use. But, companies should also be contracting with more skilled agents.

The Biz 2.0 tools will allow communication and comarederie [sic] throughout the company and create the highest level of co-operaton possible if leadership believes and everyone is on board. Then perhaps companies who hire anyone breathing will be more selective and realize that quality is way more powerful than quantity in this line of work. I venture to guess that a local company who implements these changes could dominate the market their in in no time at all. The environment would be attractive for connected, productive agents and too difficult for those who aren’t serious about RE. It would be very difficult to form a company like this, but it is possible. Can you imagine what 50-100 agents and high-skilled managers with enlightened leadership could accomplish if they were wired and working together toward a common goal?

This is possible, and desirable, but only if those 50-100 agents are not independent contractors whose ultimate (and sometimes the prima facie) loyalty is to his or her own commission splits.

First of all, the level of investment required in such a system and such a process at the organizational level is quite high. An intranet is no joke to setup, nor is it self-maintaining. It takes enormous investment in time and treasure to get a really useful intranet going. Providing truly useful information technology to every member of the organization is expensive, resource-intensive, and time-consuming. A broker might decide to do all of these things to gain a competitive advantage — because he will gain that — but the money to fund all these have to come from somewhere.

Can such a Brokerage 2.0 become uncompetitive in agent splits and still retain the talent it needs? Because the money has to come from somewhere. Apart from commissions, what else can a brokerage tap to fund these initiatives?

Second, and this is connected, the individual employee’s investment of time and energy into maintaining such a “live” organization is enormous. As Mike himself points out, the flow of information from the field has to be steady and constant. Information technology is utterly useless without information. And someone, somewhere has to gather that information and put it into the system.

You see this in practice, in the real world, in commercial real estate where information flow is absolutely the lifeblood of brokerage. You have to know your local market to a degree that many residential brokerages do not. Knowing the inventory, the actual square footage vs. leasable square footage, the comps, the new projects, etc. etc. is critical to competing in CRE. Guess what the #1 pain point for these companies are? Getting that data in the first place.

Many of them rely on their newer agents to do the gruntwork of going door to door, calling on landlords, etc. to find out which tenants are in which buildings taking up how much space and for how long. Many require their agents to go do these market surveys periodically. Some condition the release of the commission check upon meeting the quota of market data gathered. But almost every single one has enormous difficulty getting its agents — who all think of themselves as independent contractors — to do this work that doesn’t benefit any one of them directly. It’s a variation of the tragedy of the commons.

Third, it’s extremely difficult even in an integrated organization (with only employees) to ensure service quality. Take a look at investment banks and law firms, none of whom employ independent contractors to be frontline representatives. They expend enormous resources in recruiting and training, and these companies are aided by professional schools that train individuals for two to three years learning professional competence, as well as government organizations that require compliance to standards.

I simply can’t imagine how this would work where your producers are all entirely independent contractors over whom you the broker have limited control, by law. As I read the IRS ruling, you actually cannot demand that your agents undergo specific training, or do things in a specific company-mandated way. That would constitute control over “means and methods” and make them into your employees. That in turn has significant implications for taxes, for liability, and other legal issues. If you’re going to undertake those things, then you want to do it with your eyes wide open, and with a very different compensation structure.

I’m sure someone somewhere either has tried the agent-less real estate brokerage, or will try it again soon. I think that may help us figure out whether this is a viable business model for real estate or not, and whether Biz 2.0 will be a driver of that model or the beneficiary of it.

-rsh