Notorious R.O.B.

The average denizen of the RE.net cybercafe — that includes you, since you’re reading this on a blog — knows that the hot topic du jour is syndication. I wrote about it here and here already, but frankly, have been talking about this issue for quite some time. And influential bloggers like Jay Thompson and Kris Berg have weighed in, and Facebook groups are all over this issue.

And I’ve gotten a couple of phone calls, a number of emails, and Facebook messages and such debating my one critical issue with me. I wrote that the issue here isn’t syndication, which is more or less dead in its current form, but IDX. And that one cannot be against syndication but for IDX. Jay Thompson agreed, while Kris Berg (to take but one example) disagreed.

So I’d like to explore this connection more, to clarify why the distinction between syndication and IDX does not, and cannot, hold. And what that then means for the future of the industry, by connecting a couple of dots.

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Joel Burslem over at 1000watt has proclaimed July 9, 2010 as the day that the real estate blog died, and given the thoughtfulness and intelligence of the author, it’s difficult to disagree with his conclusion.  Given how Joel defines “real estate blog”, the conclusions he draws are somewhat difficult to escape:

For every Phoenix Real Estate Guy, there are likely umpteen dozen soulless me-too real estate blogs in any given metro these days. Many are filled with meaningless “market reports,” meandering “community updates” – and most were last updated many moons ago.

These blogs float like drift nets on the web, hoping to snare the clueless web visitor who stumbles in through some long tail Google search.

I, however, don’t necessarily agree with his premise.  In order for something to die, it had to have been alive at some point.  Since I don’t believe that the “real estate blog” as defined above was ever graced with the spark of life, I don’t know that I would mourn its death.

Instead, I would like to recommend some tools that are critical to the aspiring real estate blogger in the hopes that we might change the definition of a ‘real estate blog’ from “soulless me-too” Google-farming wanna-be blogs to an actual blog: a weblog, a series of thoughts.

These are not free tools, unfortunately, but for someone interested in blogging — whether in real estate or hyperlocal or something else — these tools are absolutely essential.

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Agent ratings are back in the conversation, thanks to this scintillating op/ed by Kris Berg (link is for Inman premium subscribers only) who is one of the best writers in real estate today.  I have written about this topic before (here and here) and it continues to fascinate and puzzle me still.

Kris’s point essentially boils down to the fact that providing real estate brokerage service is one fraught with emotion, with unpredictable clients who don’t know what it is that a realtor actually does for them, who cannot make rational evaluations of how good or bad an agent really is.  Quantitative metrics don’t provide accurate ratings, in Kris’s view, because those focus on production rather than service.  Customer surveys are flawed because customers are ignorant on the one hand, and nuts on the other hand, and are too often influenced by how the transaction itself went down rather than how the realtor performed.

All of her points are, I think, valid and true.

Sadly, they are all irrelevant to some extent.

Fact is, agent ratings are already here in places like Yelp and Angie’s List.  Consumers will talk, will evaluate, and will rate realtors (as they do every other service provider) on their FaceBook pages, on blogs, on websites, and with each other in person.  It’s going to happen whatever the merits of such ratings.

The real issue, then, isn’t whether such rating systems are good or bad or inaccurate or legitimate, but who will do the rating and how they will do it.

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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

In the comments of this post, I wrote that THE challenge facing real estate is how brokers move from 3% profit margins to 10% profit margins.  And I just got off a fantastic teleconference featuring the likes of Kris Berg, Marty Frame, Pam O’Connor, and other experts talking about the industry.

Then Kris, Jay Thompson, and I got into a Twitter discussion about broker profitability and the path to it.  The 140-char limit is not conducive to real discussion, so… this post.

Let’s set the stage.

I have heard from various sources who ought to know (e.g., COO of a very large brokerage in the South, president of major franchisor, etc.) that the average profit margin for real estate brokerage is about 3%.  This means that some are over 3%, but a huge portion are actually below 3%.  (Remember, average, not median.)

The average profit margin for corporate America over the last 25 years is 8.3%.

As of today, 30-year Treasuries are paying a 4.5% coupon, and yielding 2.66%.

So by taking ZERO risks with my money and investing it into 30-year Treasuries, I will make 2.66%; by taking all sorts of risks (litigation risk, business risk, etc.) and for taking on the headache of managing a whole bunch of real estate agents, I’m going to make 3%.

There is so little incentive to become a broker if this is the situation.

More facts: The average company dollar for real estate brokerage (based on the REAL Trends Brokerage Performance Report) is 26.8% — meaning that for every dollar of GCI revenue, the broker receives 26 cents.  Then out of that company dollar, the broker has to pay for all the overhead, the office space, the advertising, the websites, so on and so forth.

The Debate

So the question is, how does a broker improve his profitability?  Because if profitability is so low, then he might as well just put his money into Treasuries and earn more.

Kris Berg suggests that the answer is for the broker to stop giving agents all these ridiculous, unused, useless tools and gadgets, and to just get out of the way.  Jay Thompson echoes her thoughts and points out that he’d make more money from a really good agent at 10% split than a crappy newbie at 40% splits.

Okay.  So, the issues are:

1.  Profit ($$) vs. Profitability (%)

Profit is raw dollars; Jay probably does make more $$ from a top agent at 90/10 splits.  However, his company dollar is 10; his maximum profitability from that agent is 10%.  After taking all of the costs of having that agent into account, I suppose Jay could calculate the profit margin of that particular agent.  If it’s 2%, then I have to recommend to Jay that he fire the agent, take those dollars he would have invested in keeping that agent (e.g., overhead, utilities, whatever) and put it into Treasuries paying 2.66%.  He’d actually end up making more money.

2.  Scalability

This is something no one truly knows.  No doubt Jay’s actual profit margins are higher — he’s estimating maybe even 9% or so.  That puts his profitability in line with corporate America, trend-wise, and makes it worthwhile to keep being a broker.

But does this translate to say Crye-Leike?  No one actually knows.

And the impact of margins get outsized as the actual dollar volume increases.  Going from 9% to 7% for a small operation might mean profit decreases from $90K a year to $70K a year.  But if you’re a Big Brokerage, then going from 9% to 7% could mean going from $90M a year to $70M — those $20M dollars could have gone into things like investment in more innovation, a better website, whatever.

Conversely, if you take two large brokerages, and one makes 9% and the other 8.5%, that could still mean a $5M a year advantage for the one making 9% to reinvest into the business.  After a few short years, those millions will start to have an impact on the weaker business — whether that’s through more effective branding, better training, or better consumer website that the extra $5M a year can buy.

3.  Incentives

The key question, I think, is that of incentives.

If a broker is seeking to be a low-cost, low-value provider to the agent, what exactly is the agent’s incentive to pay the broker a larger share of GCI?

And if the answer is None, then the claim absolutely must be that for a broker to increase profitability, it must be done by cutting costs other than labor costs.  In fact, the money saved from eliminating all those ancillary tools and overhead must more than make up for the inevitable decline in company dollar.

Consider.  If today, you’re giving me $10,000 worth of tools and services, and I’m paying you 20% splits… it is entirely irrational for me to agree to keep paying you 20% splits if you drop what you’re giving me to $1,000.  So that $9K you’re saving by dropping your services to me to $1,000 had better be more than the company dollar you’re going to lose when I demand higher splits (let’s say to 95/5).  So 15% of my GCI production for that year has to be less than $9k you’re saving for this to end up improving your profitability.

Is there a scenario where this could work?  Possibly.

I just can’t imagine it.  The incentives are completely out of whack.

The Answer?

Seems to me that at the end of the day, it comes back to an issue of Productivity.  Somehow, I as the broker, have to get more productivity out of my agents without raising my labor costs significantly.

Well, since Productivity is classically defined as “Output per unit of labor” the only two ways to increase productivity is to raise output (i.e, GCI in our case) or lower per unit labor costs (i.e., agent commissions).

Raising output then means somehow, the agents you already have, without any additional assistance, tools, or services, simply have to make more deals happen.  It’s possible, of course, if the market conditions improve, or they just get better at selling homes.  But that strikes me as an exercise in “hope and faith as corporate strategy”.  Just Do It! is rarely an effective business strategy.

Lowering per unit labor costs is similarly fraught with difficulty.  If someone is making 80% of GCI on a split, what exactly is his incentive to make less, if you are giving him nothing more?

So… I come back to this: Technology.

The only proven way to improve output per unit of labor is to invest in technology.  A farmer using a horse-drawn plow can produce more grain if he’s given an International Harvester.  A shoemaker producing two shoes a day using a hammer and scissors can produce two hundred if he’s given an automated modern factory with an assembly line and modern inventory management.

It’s the only known answer we have.

So if a broker wants to improve profitability, seems to me that he has no choice but to invest in technology to make his agents more productive, while either demanding more money (since he’s giving them more) or keeping labor costs constant (since he’s giving them more).

Am I missing something here?

-rsh