Notorious R.O.B.

In my first blog conversation post, I wrote about Millenial family formation. That was fun stuff, and Travis Robertson, my dialogue partner, has posted his response. Go check it out; it’s worth a read, and the discussion is fun. But I thought I’d move onto some of the real meat.

Travis claims in the video (embedded in the first post) that companies — and specifically real estate brokerages — have to change the way they operate in order to recruit the Millenials. I don’t think so; I rather think Millenials have to change the way they operate and view the world in order to be recruited by employers, including brokerages (at least the ones that demand something of their agents).

I’m going to be referring to Travis’s posts and his eBook; and I do encourage you to go check them out.

In this part, let’s address the issue of managing Millenials.

Read the rest of this entry »

Why yes, Don, I would love your office furniture!

I have decided that before 2011 is out, I will buy actual office furniture for my home office. Hitherto, I’ve been working on a folding table from Staples — which actually worked great, as it allowed me to spread out multiple computers, peripherals, papers, and such. I never got around to buying an actual desk. Although, I will confess that I invested in a chair a couple of years ago, which might have been the best $800 I’ve ever spent.

So I start looking around for desks. And quickly ran into something interesting. Read on to follow along these random musings.

Read the rest of this entry »

We can build on this! We can build on this!

In part 1 of this series, I discussed the First Principle of real estate insurgency: Never Fight on Their Turf.  The extension of that principle meant that insurgents have to figure out how to outmaneuver then neutralize the primary advantage of Big Brands: breadth of brand (aka, brand recognition).

So let’s suppose you’re an insurgent and you have managed to outmaneuver and neutralize the Big Brand advantage.  Now what?  Since I’ve been watching some NBA Playoffs the last few days, I’m afraid you’re in for a lot of basketball analogies people.

Read the rest of this entry »

(Part 1, 2, and 3 of the Lessons from Counterinsurgency Series)

Final Thoughts from Gen. Petraeus

Finally, we always must strive to learn and adapt. The situation in Afghanistan has changed significantly in the past several years and it continues to evolve. This makes it incumbent on us to assess the situation continually and to adjust our plans, operations, and tactics as required. We should share good ideas and best practices, but we also should never forget that what works in an area today may not work there tomorrow, and that what works in one area may not work in another.

Honestly, this needs very little elaboration.

The American military is a huge organization.  It is not known for its friendliness to change.  If anything, the military tends to be conservative, holding onto its hallowed traditions.

Nonetheless, in a counterinsurgency, the doctrine is to continually assess the situation, learn, and adjust plans.

No matter how large a Big Brokerage may be, learning to adapt will be a key factor in whether they emerge victorious or fall by the wayside over the next few years.  CEO’s and other senior leaders must not only be prepared for rapid change but insist on organizational nimbleness across the board.  Bureaucratic barriers must be brought down; resistant personnel moved out; cumbersome processes reexamined to see if they are really necessary.

Senior leaders must also question some of their most hallowed, deeply held beliefs about how the industry works.  “Getting back to basics” may be fatal if the lessons from the last war you fought are completely inappropriate for the current counterinsurgency action.  Is having the greatest number of yard signs really the most important competitive advantage?  Really?  Don’t take the answer for granted: investigate it, and you may be surprised.

Finally, in the new business environment, I don’t believe that any answer remains the answer for long.  As Gen. Petraeus points out, what works in one area may not work in another; what works today may not work tomorrow.  Organizations must be remade, reforged, and retrained to deal with the fluid, ever-changing environment they face today.  Why?

Because the insurgents are constantly changing, constantly adapting, and constantly investigating how they can stay one step ahead of you.

-rsh

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

This particular debate centered on the following question:

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

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

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

But the basic structure of this business remains remarkably intact.

There are two possible conclusions to be taken from this:

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

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

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

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

Read the rest of this entry »

If you could go ahead and try to go virtual, that'd be great, okay?

Let us talk about land.  About buildings.  The pure physicality of bricks, wood, steel beams, stairways, elevators, walls and roofs.  You know, real estate.

Normally, the conversation would be all about homes, condos, and the like — the stuff of the daily business of realtors and consumers.  But I have in mind a slightly different take.

Let’s discuss brokerage offices.

This topic has been swirling around the industry for quite some time now, but a few recent events brought it into focus for me.

First, the LeadingRE Conference in Scottsdale.  I got to speak with Matt Dollinger quite a bit while out there, and thanks to Pam O’Connor’s graciousness, I had the opportunity to hear some of the top broker-owners in the country talk about some of their top issues. The cost of leasing office space and how to minimize it was a frequent topic of discussion.

Second, a brief conversation on Twitter with Derek Massey (@derekmassey) about the desirability of virtual setups vs. physical offices.

Third, conversations off and on with people like Joe Ferrara (@jfsellsius), Eric Stegemann (@ericstegemann), and others who are either trying to start or thinking heavily about “virtual brokerages” with no overhead for office space.

Fourth, this report the existence of which just crossed my RSS feed: Beyond Brick and Mortar, Rethinking the Real Estate Office.  I haven’t read it, and at $299 for a copy, I’m not likely to read it anytime soon.  But if you have, or plan to, please let us know what the findings are.

Direct Cost…

The direct cost of brokerage office is actual, measurable, and large.  According to the RealTrends 2007 Brokerage Performance Report (yes, I need to get the 2008 report), all respondents had Rent & Related Occupancy costs that came in at 4.94% of GCI.  This figure, however, is a bit misleading in my opinion, because rent and occupancy costs are paid entirely by the brokerage.

Since average company dollar is 26.7% among respondents, the actual direct cost is about 3.7 times the GCI figure in terms of impact on the bottomline.  For example, a company with $10m in GCI would end up with $2.6m in company dollar.  Occupancy costs, at 4.94% of GCI is $494,000 or 18.5% of company dollar.

Add in the 0.83% of GCI for Supplies (pens, paper, etc.) that having a physical office necessitates, and we’re looking at 21.6% of company dollar going to expenses associated with having physical space.

In contrast, the combined expenses for Communications (e.g., telephone, high-speed internet, etc.) and Technology (e.g., website) for respondents were 5.1% of company dollar.  Even if you assume that going to a virtual brokerage setup would double the cost of Communications and Technology, we’re looking at 10% of company dollar expenses vs. 21%.

A 50% reduction in cost is something anyone is going to look at, especially now.

vs. Indirect Cost

There is, however, another side to the equation.  Actually, two other sides.  That makes no sense at all, so I suppose it’s more like two factors on the other side.

First, agent productivity.

Some of the brokers at the LeadingRE show expressed the view that agents are unquestionably more productive when they are sitting together in a physical office.  Unfortunately, I don’t know that there is any study or data available on the relationship between office and productivity.  Are we talking a 100% improvement or a 1% improvement?

The impact of productivity is far-ranging, however.  Let’s take that hypothetical brokerage from above and extend the analysis.  Based on my bad math, it goes something like this:

To do $10m in GCI, at an assumed rate of 2.5% per side, and a avg. Home Price of $250,000, that brokerage had to do 1,600 transaction sides totalling $400m in volume.

If we further assume that every agent did 20 transactions, that translates to 80 agents.  (Now, I know the reality is 80/20 rule, where 20% of the agents do 80% of the transactions, but for simplicity’s sake, let’s pretend they’re all robots.)

A 10% decrease in agent productivity by going virtual means a loss of $1m in GCI, resulting in a $267K in lost company dollar.  The net savings from shutting down the office then is only $227K.  If the productivity loss is 20%, then Hypo Realty ends up losing $40K from the ‘cost-saving’ move as the $534K loss in company dollar more than offsets the $494K in savings.

Second factor, however, is agent splits.  One of the justifications for a brokerage charging a split is to pay for overhead, such as office space.  Get rid of that, and it seems unlikely that the brokerage can maintain the same splits.

Moving from a 26.7% company dollar scenario to a 5% decrease — 21.7% company dollar — means that even if the productivity loss is only 10%, Hyop Realty is now losing $140K from its ‘cost-saving’ measure: decline of $717K in company dollar vs. saving $494K in rent.

All of a sudden, going all virtual doesn’t seem quite so attractive.

And neither of these factors take into account possible ‘soft’ costs, such as loss of brand value due to not having any storefront space in a highly visible street, or possibly a more difficult time in recruiting, or any of the other hard-to-measure impacts.

So What’s the Answer?

Because the financial ‘model’ above is so quick and dirty, it may be that there’s a balance point, especially given the 80/20 rule of productivity where you provide office space to your most productive 20% and gain the benefits of that, while saving on occupancy costs for the 80% who aren’t producing much anyhow.

Without analyzing a particular company’s financials and its market conditions — e.g., prevailing rents for store-front office space — it’s impossible to say whether Virtual is better or Physical is better.

But I figure folks more knowledgeable than I will step forth and provide further insight.  In particular, I think some sort of metrics of agent productivity would be enormously helpful.  Perhaps the Inman report has that answer.

Looking forward to your thoughts.

-rsh

Unity of Effort

(Part 1, Part 2)

Petraeus on Unity

Another major lesson from counterinsurgency is the importance of coordination and synchronization:

It is also essential that we achieve unity of effort, that we coordinate and synchronize the actions of all ISAF and Afghan forces — and those of our Pakistani partners across the border — and that we do the same with the actions of our embassy and international partners, our Afghan counterparts, local governmental leaders, and international and non-governmental organizations. Working to a common purpose is essential in the conduct of counterinsurgency operations.

For the military, counterinsurgency brings all instruments of power to bear on the conflict, from the guns and bombers to diplomats to financial incentives, civil engineers, teachers and nonprofits, and everything else that could help the mission.

The obvious implication for real estate — and one that Big Brokerage already does very well — is to offer the full range of services either under the same roof or by strategic relationships.

For example, as a consumer, I may go see some properties with a real estate agent, then walk down the hall to a mortgage broker and apply, then have the agent find me the home inspector, the real estate attorney, title insurer, and escrow services.  Without my having to go research each of those and shop around.  So it’s convenient for the consumer.

There are, however, two further implications of the unity of effort doctrine for real estate that go beyond this easy, surface lesson of “full service”.

Read the rest of this entry »

Forward Operating Base Gibraltar, Afghanistan

In part 1 of this series, we discussed Information Operations and the importance of integrity in counterinsurgency strategy.  I took lessons from the U.S. Military, and the author of those doctrines Gen. David Petraeus, and applied them to the real estate industry.  In this installment, I’d like to take a look at another key principle of counterinsurgency and how those lessons apply to Big Real Estate: Importance of Local.

Petraeus On Local

Counterinsurgency is intensely local, and reflects lessons of Fourth Generation Warfare. Digression follows!

First generation warfare is all about formations, line and column, and massed infantry.  It is what Napoleon was a master of, and conquered half of Europe with, until he ran into better-trained British infantrymen.  [Making this digression even more of one, for a really entertaining look into first generation warfare and what that looked like, check out the Richard Sharpe series from the British historical novelist Bernard Cornwell.]

Second generation warfare emphasized massed firepower (aka, “massed artillery” and machine guns ) instead of massed manpower.  The idea was that artillery would bombard the enemy into submission, while the rifleman simply mops up the mess.  World War I was mostly a second-gen affair.

Third generation warfare emphasized speed and maneuverability (“blitzkrieg”) to neutralize the advantage of massed artillery.

All of these approaches concerned themselves with taking on an established, uniformed opposing army.  When the enemy disperses and become guerrilla forces or insurgents, then these strategies are of limited utility.

Fourth generation warfare is precisely this sort of war — insurgents, terrorism, propaganda, information operations, where the line between combatants and civilians is intentionally blurred, etc.

With all that said… here’s Gen. Petraeus:

Securing and serving the people requires that our forces be good neighbors. While it may be less culturally acceptable to live among the people in certain parts of Afghanistan than it was in Iraq, it is necessary to locate Afghan and ISAF forces where they can establish a persistent security presence. You can’t commute to work in the conduct of counterinsurgency operations. Positioning outposts and patrol bases, then, requires careful thought, consultation with local leaders, and the establishment of good local relationships to be effective.

Positioning near those we and our Afghan partners are helping to secure also enables us to understand the neighborhood. A nuanced appreciation of the local situation is essential. (Emphasis added)

Conducting counterinsurgency means getting close to the local situation, having boots on the ground in the local community, providing security to the local area, and truly understanding the local neighborhood.

He may as well have been talking about real estate. Read the rest of this entry »

In all sincerity, the best and the brightest our nation has to offer.

It may be completely inappropriate to compare the life-and-death work of our military in Afghanistan to the buying and selling of real estate ensconced in our safety… but I could not help but read this with interest:

We also must strive to be first with the truth. We need to beat the insurgents and extremists to the headlines and to pre-empt rumors. We can do that by getting accurate information to the chain of command, to our Afghan partners, and to the press as soon as is possible.Integrity is critical to this fight. Thus, when situations are bad, we should freely acknowledge that fact and avoid temptations to spin. Rather, we should describe the setbacks and failures we suffer and then state what we’ve learned from them and how we’ll adjust to reduce the chances of similar events in the future. (Emphasis added)

General David Petraeus

That is from a recent speech that General David Petraeus gave at the Munich Security Conference talking about the very real, very serious problems of fighting Al Qaeda and Taliban in Afghanistan.

But if he were speaking at just about any real estate industry conference, I don’t know that those words would be any different.

How often have we heard condemnations of NAR, and specifically of David Lereah, former Chief Economist for NAR?  There are even whole websites set up to rant at Mr. Lereah.

And according to at least one real estate professional, David Lereah and the whole ‘head-in-sand’ approach to the RE market hurt her directly by undermining the credibility of the profession, forcing her to un-educate then re-educate consumers, and establish her own credibility as a realtor.

What’s more, not one big brokerage or big brand in real estate was sounding the alarm back in 2005 or so, while individual realtors were starting to get real skeptical of home values, and blogs like Patrick.net were in full bubble-warning mode in 2005.

What has that done to the brand image of all Realtors?  What has the failure to freely acknowledge that situations are bad, the failure of so-called ‘real estate experts’ to warn about the housing bubble, the failure of so-called ‘mortgage experts’ to warn about the credit bubble, and the failure of so-called ‘ethical professionals with fiduciary duty to clients’ to properly advise buyers during what was obviously a bubble done to the industry?

Post-bubble, has there been any major statement by NAR or by a major brokerage acknowledging the “setbacks and failures” and stating “what they’ve learned from them and how they’ll adjust to reduce the chances of similar events in the future”?  If so, I missed it. Read the rest of this entry »

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

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

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

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

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

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

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

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

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

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

O.O

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

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

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

-rsh