Notorious R.O.B.

Something to consider from the world of commercial real estate, Brokerages Retool Rainmakers:

With office leasing and investment sales volume reaching new lows across the country, big brokerages are retraining idled dealmakers to become service providers rather than cowboys intent on roping the next mega deal. Brokerages have enormous fixed costs and in this challenging economy they are under pressure to provide tailored client services, such as mortgage workout programs.

And:

Betsy Peck, chief administrative officer for brokerage in the Americas with Chicago-based Jones Lang LaSalle, oversees the company’s training programs. “Understanding the multiple levels of service that can be provided beyond the transaction is clearly something that clients are looking for as they look into outsourcing and expanding their reliance on some of our professionals,” says Peck. “We try to anticipate the next client need. You’re not selling a service unless you’re listening to the client.”

Now, as I’ve pointed out before, on the whole, commercial real estate is to residential real estate as investment banking is to used car sales: totally and completely different industries in many respects.  There are indeed services in the CRE world that does not exist (yet) in residential world, such as portfolio management and capital markets work.

However, as residential real estate practitioners begin to talk more and more about professionalism, about need for local expertise, and how such expertise can be turned into money, I think the worlds are getting closer together.

First point to note is that even CRE firms cannot transform cowboys into consultants.  The personality type demanded of a rainmaking deal originator is so different from the personality type demanded of a consultant that “retooling” one to become the other is futile:

Rather than focus on training individual brokers, Lipsey has identified training that works best in team environments. “Let’s say a broker sold a property two years ago and now the mortgage is greater than fair market value. That broker can go back and say, ‘We’ve got some services for a fee that we can provide you until things get better.’ The broker brings the work in and the work is performed by the junior broker and the technician [researcher/analyst], and the bill gets submitted.”

So the cowboy remains a cowboy: he’s just roping different kinds o’ steer.  Rather than trying to sell properties or lease space, the cowboy-rainmaker is still out there beating the bushes for services deals.  The work itself, however, is to be done by the “junior broker” and the “technician”.  Not much retooling here; more of a change in the offerings menu.

The second point to note is that this can, and probably does, work in residential real estate as well.  Highly relevant is this post by Chris Johnson at Bloodhound Blog, especialy this part:

But I said I am a rake.  I cared about my clients–to a point.  To the point that they didn’t trouble me, expect anything, or need sympathy, I really cared.   I’d return phone calls, and the noisy ones could compel me to make a flyer or whatever.  I looked around and the sheer volume of work that other agents were doing astonished me.  I figured–deliberately–that a higher churn was acceptable if I didn’t have to mess around with e-neighborhoods and stuff like that. The path, then, was to burn through people.

Now: at some point, I’ll post how to use a Rake to be part of a team.  Best use of me would have been to join a mega agent and prospect more.  If that had fed a team somewhere, or if I’d built service people…the love of prospecting is a lethal way to sell.

Is this not the ideal rainmaker personality you would want?  Why burden such a pure cowboy mentality with the need to ‘make a flyer or whatever’?  Just have “technicians” do that, especially since some of them take the same attitude towards making flyers, marketing listings, or staging houses that Chris takes to making phone calls, and unleash both parts to do what each likes to do.

Individuals cannot be ‘retooled’ quite so easily, as if they were a piece of machinery.  There are skills, experiences, and personalities that suit one person to a particular kind of work, while making him unsuited for a different type of work.  But firms, teams, and organizations can and should be retooled constantly to adapt to changing market conditions and changing consumer expectations.

-rsh

Marc Davison’s newest post is, as is normal for him, a wonderful read filled with cool and interesting insights.  Go read it in full.

The key passage, I think, is this:

But over the decades, the love waned. As new competitors grew into the marketplace, these establishments remained still in their own murky waters of services, anchored to old ways and failing to navigate their brands to the new currents of change.

Over time, despite the full array of services they offered, they drifted from the fabric of our culture, replaced by TRESemme, Paul Mitchell, Fantastic Sams, CVS and Starbucks — “interlopers.”

The older institutions suffered at the hands of their own neglect, compounded by their inability to convey the value they offered, the full services they provided and the personal attention they gave. They believed that being moored to an historic tradition is good enough to insure their place in the future. Or perhaps they believed in nothing and let fear of some unknown guide their complacency.

I haven’t researched the how & why of the decline of barber shops in the United States, but much of this does ring true.

At the same time, I find myself differing with Marc on this:

Today’s broker — you might be a barbershop.
You cut hair better than anyone.
You service the customer better than anyone.
And what you deliver is uncommon.

But you’ve created ambiguity around yourselves and these benefits.

…

Believe that as things get tougher, as money gets tighter, people need what you have but will never find it if you and your agents are sharpening your scissors behind closed doors.

Believe that so much has changed in real estate and in the way consumers interact with it that your message, your brand, your entire marketing campaign is likely dangerously antique.

I don’t think the problem is marketing.  I think the problem is the actual services being offered, and the ways those services are being delivered.  Marketing campaign is the least of a real estate broker’s concerns.

[To be fair, I don't think we have real disagreement here.  I think Marc would actually agree with my analysis here, because the steps he recommends under the name of "Davison Realty Group" have less to do with marketing and advertising and much more to do with actual operations.]

On Barber Shops, Old and New

Marc is right that the old barber shop was a part of the American cultural fabric.  It was just something that American men did. However, why did barber shops decline and fall out of the cultural mainstream?  Was it because of a failure of marketing?

This article I found on the Web is actually a pretty nice summary of the history of barber shops.  Key points:

From the 1880′s to the 1940′s, men tended to hang out in unisex, all-male establishments from country clubs to saloons to barbershops.  Going to the barbershop, then, was a weekly — even daily — ritual for men.

During this period, barbershops are not the cheezy plastic-chair and old geezer affair most of us remember or see around the neighborhood.  They were luxurious, classy places:

Marble counters were lined with colorful glass blown tonic bottles. The barber chairs were elaborately carved from oak and walnut, and fitted with fine leather upholstery. Everything from the shaving mugs to the advertising signs were rendered with an artistic flourish. The best shops even had crystal chandeliers hanging from fresco painted ceilings.

The decline of barbershops had quite a bit to do with technological change – sound familiar, brokers?

The first blow to barbershops came in 1904 when Gillette began mass marketing the safety razor. Their advertisements touted the razor as more economical and convenient than visiting the barbershop….  Companies like Sears began selling at-home haircutting kits, and mom began cutting Junior’s and Pop’s hair. Then the Depression hit, and people cut back on discretionary spending like barber shaves.

Then in the 1960’s Beatlemania and the hippie culture seized the country, and hairstyles began to change. Men started to grow their hair longer and shaggier, and their visits to the barber became infrequent or non-existent.

Let’s also note that the 60′s was a period marked by rebellion against everything old and familiar: family, church, government, schools… and yes, that extended to barbershops.

Even when short hair came back into style during the 1980’s, men did not return en masse to the barbershop. Instead, a new type of hairdresser siphoned off the barbers’ former customers: the unisex salon. Places like “SuperCuts” which were neither beauty salons nor barbershops, catered to both men and women.

Part of this change, I believe, has to do with how our society and culture have changed.  Men no longer tend to hang out in unisex environments, only with other men.  In some cases, there have been lawsuits to force those types of changes.  In other cases, it was the cultural norm that changed.

Furthermore, our workplace has changed. Gone are the days of long, leisurely lunches.  Gone are the days when men can work till 3pm, then head to the club, or to the barbershop to fraternize with other men.  We now work in 24/7 cycles, from early in the morning with barely time to grab breakfast, till late at night, commuting ever-longer distances from our jobs.  I know I personally have trouble even getting to some place to get my hair cut regularly; being able to go to a classic, traditional barbershop for a leisurely hour or two of chatting with other guys about the Jets and Yankees, while getting my hair cut seems luxury difficult to imagine.

Just get me in and out, as fast as possible, at as low a cost as possible.  That seems to be the modern mantra of the working male.

The Relative Uselessness of Marketing

If the decline of the barbershop was driven by technological change (e.g., introduction of the safety razor) and by society-wide cultural change (e.g., Age of Aquarius, feminism, etc.) and by fundamental change in lifestyle, then honestly, how much would have a new marketing campaign helped?

I just can’t imagine a barbershop able to market its way out of a decline, when all of those forces are arrayed against it.  When everyone wants to grow their hair out long, and thinks barbershops are part of the ‘authority’ they are supposed to question, positioning the same set of services in a different light makes no difference.

The customer simply does not want the services being offered.

The Product First, Marketing Second

And yet, in recent years, we are beginning to see a resurgence of the old barbershop in dramatically different form, offering a whole new set of services that at least a segment of the customer does want.

Companies like Miles & Lyle and Truman’s are offering an updated barbershop concept that reaches back into the golden age of barbershops on the one hand, while offering services that the barber of the 1930′s wouldn’t have imagined.  For example, Truman’s offers pedicures and “Deep Cleaning Skin Treatments” to its “members”.

And they do it in a luxury surrounding, evocative of the original classy appeal of the barbershop.

These changes are not merely marketing; they are fundamental changes to the service offering itself.  And they are aimed at a particular kind of consumer who doesn’t mind paying a ton of money to be pampered.

Lessons for Real Estate

As I’ve noted above, I think Marc would actually agree here, that what real estate brokers need to do today isn’t simply a new marketing campaign.  His suggestions are operational in nature more than they are promotional.  For example:

I would take a hard look at my backend system. Does it have lead management? Does it have lead routing? Does it offer my agents the ability to run comparative market analyses on the fly? Does it allow me to distribute incoming inquiries to my agents via text messages and supply them with the tools to respond immediately and properly rather than with canned nonsense?

Backend systems are marketing, of course, since everything can be traced to marketing one way or another.  But note that having things like lead management, lead routing, and ability to run CMA’s on the fly are productivity enhancers that enables a brokerage to offer services it could not before.

These types of changes are, in fact, precisely the kind of changes that many of us realestistas have been advocating for some time.  Improving agent quality is a common battlecry; I’ve pointed out that “your brand is in the hands of your worst agent.”  Improving the website to be more consumer-friendly is something every broker and agent should be thinking about.

But note the similarities here.  Real estate brokerage is being challenged by technological changes.  The web is to brokerage what safety razors were to barbershops.  In some cases, there are societal and cultural changes as well.  As hippies did not want to go to Dear Old Dad’s barbershop, the Gen-X and Gen-Y consumers don’t want to call some agent before having researched neighborhoods, houses, prices, and mortgages thoroughly.

If barbershops declined from the 1940′s till today, it was not because of a failure of marketing.  It was because they failed to adapt their core service offering to the new environment.  The same holds true for real estate brokerage.

No amount of brilliant marketing, no amount of TV advertising, no amount of social media, or blogging, or video, or whatever clever marketing scheme can get around the core service offering.

Reinvention

So it is that as barbershops are reinventing themselves as a new kind of social-club for men, perhaps brokerages will need to reinvent themselves as a new kind of real-estate services firm.  Marketing is important, of course — critical, even.  But even as a marketer myself, I do think that the lesson to be drawn from the decline of barbershops is that changes must be dealt with first at a core operations level, and then from a marketing and messaging standpoint.

In the meantime… Marc’s post reminds me that I very badly need a haircut….

-rsh

I recently discovered Brandie Young, a fellow marketer, via her first blogpost on Agent Genius.  That post is interesting in and of itself.  And I’ve added her blog to the blogroll here.

But this comment from a Barry Cunningham on that post is really interesting to the whole Robnecks v. Kristians debate:

You have described my business model EXACTLY. I do all the marketing, I drive SERIOUS traffic via opt-ins and registrations to our various points of entry, and each day I see loads of buyer regs coming in ASKING to be show property. So what do I do? I’m not interested in doing grunt work…I have found 25 HUNGRY almost starving agents and if they are real nice and do EXACTLY what I tell them, I shove them ready , willing and able buyer manna under the door for them to feed upon. Oh yeah…we take in EXCESS of 50%..WAY in excess!

If an agent doesn’t like it..then fine..go away. I run one ad, and have a bevy of agents to choose from.

So… if this works so well with 25 agents… why wouldn’t it work with 250?  With 2,500?  Backed up with actual enterprise technology and professional teams?

Anecdote is not the plural of evidence.  Still… seems to me controlling the customer relationship leads to everything else.

-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’ve been engaged in much discussion of late on the future of real estate, and we’re having a debate right now between those who believe that the future is made up of numerous independent agents (or small agent teams) operating in low-cost, low-service brokerage models and those who believe that the future actually belongs to Big Brokers who come to their senses and start investing in their future.

Let’s call the former camp Kristians, and the latter camp the Robnecks. Fact is that the Kristians are much nicer, better looking, and have invaluable perspective as on-the-ground practitioners of the craft. On the other hand, the Robnecks have the laws of economics on their side….

But this post isn’t about either one of those Grand Debates. This post is… well, I don’t know what it is. Whimsy, probably — which also happens to accurately describe 95% of the posts on this blog.

Basically, I wanted to offer a bunch of free, unsolicited advice to brokers of all sizes, varieties, and business models. Being that this is free and unsolicited, the approximate value of this advice asymptotically approaches zero on a relatively steep curve. But hey, when has ‘value-free advice’ ever stopped me before?

So… rather than grand theory, here are the top three things I would do if I were running a real estate brokerage in 2009:

1. Get a Clear View of My Business
2. Invest in Technology
3. Hire a Real Marketer

Let’s get into it, shall we? Read the rest of this entry »

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

In part 1 of this series, I looked at per-person productivity numbers which simply made no sense. Thankfully, people like Russell Shaw and Jay Thompson stepped in to provide at least an explanation. Simply put, there are too many agents chasing the same number of deals.

So despite large improvements in personal productivity of a realtor thanks to technology, sales per agent had to go down as the denominator (# of agents) increased throughout the industry.

Seems logical to me.

So I looked at recruiting and training figures. Oh, how fun!

Show Me The Money

Again, according to the 2007 REALTrends Brokerage Performance Report, the average and median spends (as a percentage of GCI) look like this:

Recruiting

Average: 0.39%, Median: 0.19%

Training

Average: 0.45%, Median: 0.30%

REALTrends thinks that recruiting costs went up “somewhat” over the past few years, while training costs are back to 2004 levels. Then they make this statement:

With the assumption that training and recruiting are linked together, it follows that where brokerage firms are spending less to recruit or have less success in recruiting due to market conditions, then some proportionate decrease in training will occur. (p. 28 of Report)

If true, then here lies another significant issue for brokerages. In this post on OnBlog, I ran through some assumptions to get at what the GCI involved is, and came up with $12.6m in GCI for the “average” or “median” respondent. Let’s go with that for the purposes of illustration.

That means the average brokerage spent $56,700 on training in 2007 (0.45% of $12.6m). We have no way of knowing how many employees that represents, but the company I picked to generate that GCI number (#250 on the PowerBrokers 500 list) had 255 total agents with two offices. That means this hypothetical brokerage spent $222 in training costs per agent. Keep this number in mind.

According to this study by the American Society for Training and Development:

The average direct expenditure per employee in the consolidated sample of organizations rose to $1,103 per employee in 2007, an increase of 6.0 percent from 2006. The average learning expenditure per employee in both ASTD Benchmarking Forum (BMF) and ASTD BEST Award-winning organizations was higher than the consolidated average. For BMF organizations, average direct expenditure per employee was $1,609 in 2007. The BEST Award winners spent an average of $1,451 per employee on learning and development.

In other words, real estate companies spend one-fifth what other companies spend on training. There’s more.

According to this report by Bersin & Associates, “The average spending per learner is $1,273. The highest spending sector is technology ($2,763) and the lowest is retail ($519).”

Because of the jankiness of my data (all sorts of assumptions going on there), I can’t say for sure that real estate brokerages actually spend less than half ($222) of what McDonald’s or The Gap spends ($519) on training. But I think it’s pretty clear that brokerages are closer to retail than they are to technology in terms of training expenditure per person.

But here’s a way to gut check the numbers. Let’s pick a brokerage at random from the PowerBrokers 500 list. (Shake, shake, shake… roll dice — #173) Okay, #173 has 480 agents doing $580m in transaction volume. If this company were to spend the American corporate average, as per Bersin & Associates, its training budget would be $611,040. Does anyone believe that any real estate brokerage company spent $600K on training in 2007?

Our Assets Walk Out the Door Every Day

Back in the day, when I was thinking of law, a senior partner at a major NYC firm told me, “Our assets walk out the door every day.” Which seems obvious. Can’t really have a law firm if you ain’t got no lawyers.

The same holds true for real estate brokerage. Again, this seems obvious. No agents = no brokerage. The best website in the world, the best marketing, the best office space, the most comfortable chairs — none of these things will mean a thing if the people stop showing up for work.

So what gives?

I know a part of it is that the agents are all 1099 independent contractors who can walk at any time. So a brokerage has very little incentive to train an agent only to see her walk out the door and across the street to a competitor. I believe this is a fundamental weakness of the brokerage model — but there are small companies and teams that overcome that weakness.

Perhaps another part is that the training happens prior to someone being hired, as people have to study for the real estate license exam.  But a licensing exam isn’t the answer.  One, licensing exam tests factual knowledge, not sales technique or customer management.  Two, it is a well-known fact that real estate licenses are notoriously easy to get.  Easier in some states than getting a hairdresser license.  So relying on licensing schemes strikes me as a non-good way of getting ‘trained’ professionals.

Maybe a third is NAR training to get the REALTOR designation.  I haven’t heard anyone talk about how hard the REALTOR designation is to get, so I’m classifying this one as “too easy, too many” type of a deal.

From my perspective, the apparent lack of training (if true) really helps me to understand a bunch of things that I couldn’t understand before. Like, why do so many agents suck so bad? Why are so few of them informed about their own market? Why do so few of them do an adequate job of followup and CRM and marketing? Why is it that so few of them can speak intelligently to intelligent professionals?

I had a lot of trouble squaring the number of poor experiences I’ve had personally over the years with various real estate agents with the smart, professional realtors I’ve met over the years working in the industry.

Well, no longer. The pieces are falling into place.  They are not trained.  They are not trained.  They. Are. Not. Trained.

When it appears that the average fry cook at McDonald’s is better trained than the average real estate agent who is handling the most important purchase of a consumer’s life, the claim that realtors are licensed professionals is a joke.

The apparent lack of training — if real — points to a fundamental problem in the industry.  This isn’t something that can be fixed with a blog.  Or a nifty agent website.  When the basis of the business is on trustworthiness, expertise, and professionalism, spending so little on training is going to yield precisely the expected result: crappy agents.

No wonder that the Per Person Productivity numbers are down across the board.

-rsh

Over at the OnBlog, I posted an item discussing the difference between how much brokerages spend on print advertising vs. their website. That was for the clients (past, present and future) of Onboard Informatics. This blog is where I get to talk speculative BS with friends in the RE.net.

So… let me start out by saying how much I love the REALTrends guys. They are providing an invaluable service to the industry with their research into productivity numbers and metrics. If you don’t subscribe, and you have anything to do with brokerage operations, you probably should. Go. Subscribe. Buy their reports. Tell ‘em the Notorious One sent ya.

I am getting most of my inspiration from the 2007 REALTrends Brokerage Performance Report. (I’m sure this stuff is copyrighted, but I have no desire to hurt REALTrends; I’m considering my usage of their stuff as fair use in order to discuss the issues.)

Ummm…

So the first thing I noticed is from the Executive Summary, where RealTrends noted that Productivity Per Person (PPP) dropped again in 2006, and noted that this drop “continue[d] the downward trend of nearly 10 years”.

Wait a second. Nearly 10 years? Ten?

So we’re talking about 1998 – 2008… during which time period we have had the single biggest real estate bubble in the history of the United States, nay, the world resulting in the financial cataclysm of 2008. I don’t quite understand. This means that the PPP is divorced from the real estate market as such — even during the height of the real estate bubble, the PPP dropped.

Let us keep in mind that this ten year period is when the PC revolution truly hit home: “Productivity grew from 1.33 percent to 2.07 percent between the periods 1975-1993 and 1995-2000, according to Dale Jorgensen of Harvard University, Mun Ho of Resources for the Future, and Kevin Stiroh of the Federal Reserve Bank of New York.” If you’re so inclined, you can read the original report here (PDF).  It’s actually really good.

Anyhow… so it appears that in the midst of the biggest increase in worker productivity in a generation, real estate brokerages suffer a drop in productivity.  What explains this phenomenon?

Could it be that real estate is somehow immune to productivity gains from technology? Having email, computer, smartphones, and all the rest simply do not make buyers want to buy any more houses, or buy them faster, or with less work on the part of the agent?  Did real estate agents decide that with all the productivity gains they were making thanks to technology, they weren’t going to work any harder, but spend more time on the golf course?

Again, the market conditions of the past couple of years can’t explain this. This drop in productivity was happening throughout the biggest boom in real estate in memory. So what explains the PPP numbers?

WTF?

If those numbers make you scratch your head, this one will blow your mind.  Again, according to the REALTrends Report, “Profitability slid to 4.3% [in 2006] from 7.4% [2005] and 7.8% [2004] for the previous two years respectively.”

Now.

From the exact same executive summary, we learn that

(a) employment costs dropped 0.4% of GCI from 2005 to 2006;

(b) advertising expenses dropped 0.55% of GCI from 2005 to 2006; and

(c) occupancy costs (i.e., office rent) rose 0.3% of GCI from 2005 to 2006.

These three things taken together make up 75% of all costs of operation in 2006.

So in summary we have a whopping 41.8% drop in profitability for all brokerages in spite of their cutting employment costs and advertising costs, because office rent went up by 0.3% of GCI?

It seemingly makes no sense, until you consider that apparently, at least the Top 100 Brokers (that is, the Top 100 of the REAL Trends 500 list) actually added agents and offices between 2005 and 2006.

In 2005, there were a total of 210,154 agents working for the Top 100; in 2006, that number was 212,431.  The number of offices went from 4,034 to 4,077.  Meanwhile, PPP (Per Person Productivity) went from 9.5 to 8.1 — a drop of 14.8% — and total # of closed units went from 1.99 million to 1.73 million (a drop of 13%).

Incidentally, the 2005 numbers were worse than 2004 numbers.  PPP went from 10.0 to 9.5; total closed units went from 2.08 million to 1.99 million.  But agent numbers went from 208,000 to 210,000 and office numbers went from 3,998 to 4,034.

So let me get this straight.  Brokers were adding costs while their productivity and revenues were falling… not as an aberration, but as part of a trend?  And people were trying to become real estate agents in the midst of what was clearly a bubble bursting?  And other people were hiring them?

o.0

Maybe the three-to-one spend on print advertising over website is not the biggest problem that brokerages have.  And maybe our industry needs fewer Web 2.0 consultants and more straight-up business consultants that understand arcana like “cash flow” and “ROE”.

-rsh

I’ve referenced David Ogilvy, the founder of Ogilvy & Mather, a number of times.  His book, Confessions of an Advertising Man, is one of the wittiest and yet most influential books I have read.  I recently ran across a webpage of “Ogilvyisms” — sayings and quotes from David Ogilvy — that I found absolutely fascinating.  So much of what he writes about the advertising business can and should apply directly to real estate.  Here are my selections:

Don’t bunt. Aim out of the ball park. Aim for the company of immortals.

A lot of today’s campaigns are based on optimum positioning but are totally ineffective – because they are dull, or badly constructed, or ineptly written. If nobody reads your advertisement or looks at your commercial, it doesn’t do you much good to have the right positioning.

Most readers look at the photograph first. If you put it in the middle of the page, the reader will start by looking in the middle. Then her eye must go up to read the headline; this doesn’t work, because people have a habit of scanning downwards. However, suppose a few readers do read the headline after seeing the photograph below it. After that, you require them to jump down past the photograph which they have already seen. Not bloody likely.

No sale, no commission. No commission, no eat. That made an impression on me.

We exist to build the business of our clients. The recommendations we make to them should be the recommendations we would make if we owned their companies, without regard to our own short-term interest,” he said. “This earns their respect, which is the greatest asset we can have.

You wouldn’t tell lies to your own wife. Don’t tell them to mine.

We prefer the discipline of knowledge to the anarchy of ignorance. We pursue knowledge the way a pig pursues truffles.

Great hospitals do two things. They look after patients, and they teach young doctors. We look after clients, and we teach young advertising people.

If we hire people who are smaller than we are, we will become a company of dwarfs. If we hire people who are larger than we are, we’ll become a company of giants.

The top man has one principle responsibility – to provide an atmosphere in which creative mavericks can do useful work.

Set exorbitant standards, and give your people hell when they don’t live up to them. There is nothing so demoralizing as a boss who tolerates second rate work.

I can’t stand callow amateurs who aren’t sufficiently interested in the craft of advertising to assume the posture of students.

Training should not be confined to trainees. It should be a continuous process, and should include the entire professional staff of the agency. The more our people learn, the more useful they can be to our clients.

We like people who are honest. Honest in argument, honest with clients, honest with suppliers, honest with the company — and above all, honest with consumers.

Advertising is a business of words, but advertising agencies are infested with men and women who cannot write. They are as helpless as deaf mutes on the stage of the Metropolitan Opera.

It is the inescapable duty of management to fire incompetent people.

The best ideas come as jokes. Make your thinking as funny as possible.

The more informative your advertising, the more persuasive it will be.

Advertising is a business of words, but advertising agencies are infested with men and women who cannot write. They cannot write advertisements, and they cannot write plans. They are helpless as deaf mutes on the stage of the Metropolitan Opera.

The more prospects you talk to, the more sales you expose yourself to, the more orders you will get. But never mistake quantity of calls for quality of sales-manship.

Always hold your sales meetings in rooms too small for the audience, even if it means holding them in the WC. ‘Standing room only’ creates an atmosphere of success, as in theatres and restaurants, while a half-empty auditorium smells of failure.

I don’t know about you, but these words are like Mentos thrown into the Diet Coke of my brain.

-rsh