Notorious R.O.B.

Thinking about the dawn of a new day

I had promised in Part 2 of this series that I would tackle the so-called “K-Dub” model in this part.  Well, I’ve decided against it.  Looking at the numbers, it seems to me that from a model perspective, there’s nothing particularly novel about the K-Dub (based on Keller Williams) model.  Its appeal and power lie elsewhere — power of recruiting, passive income streams, etc. — but on paper, K-Dub is clearly inferior to an optimized Traditional model and to the employee-based TerraFirma model.  In the real world, of course, Keller Williams is the fastest growing real estate company in America for a reason.

Instead, I think it might be time to get into a meatier, opinion-based discussion about what the future might look like, based on the models thus far.  So first, for those of you inclined to mess around with spreadsheets and such, I’m attaching the actual Excel spreadsheet I’ve been using for my analysis: Brokerage Models 2.0 (.xlsx workbook file).

Also, before we dive in, please take a moment to go read this post by Nicolai Kolding, the guy who sort of started this all with his prescient post on the status quo.  Some of the comments to that post are just excellent, and this post of mine can be thought of as an extended comment to his post.

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Math is FUN-damental!

One of the more insightful posts on the industry came earlier this week from one of the more insightful people in the industry: Nicolai Kolding, COO of Better Homes & Gardens Real Estate, and former head of M&A for Realogy. This is a man who knows what he’s talking about.

He gave a presentation (PDF) at Inman Connect in San Francisco that I unfortunately missed due to meetings and such but I think his blogpost covers most of his basic points:

- The current business model for real estate brokerage is unsustainable.

- There are four financial factors that drive revenues:

1. The number of homes sold (with each sale having two “sides”),
2. The average price of the sales,
3. The brokerage’s take after the agents’ commission splits (”percent retained”),
4. The amount (in percentage) received per transaction (”average broker commission rate” or ABCR).

- Three of these four factors have been going in the wrong direction over the past decade or so. The deterioration was covered by rising home prices during the Bubble, but sides, percent retained, and ABCR have all been headed down.

- Even if home prices recover, without changing these fundamental dynamics, the current brokerage model is unsustainable.

- The sustainable model of the future will, in Nicolai’s view, do four things:

1. Maintain (or increase) ABCR by constantly updating and improving the value proposition to consumers;
2. Increase average agent productivity;
3. Increase percent retained through brokerage-generated business;
4. Generate a far higher output per square foot of office space.

Nicolai recommends a bunch of action items in his presentation.  For example, he talks about reducing office space to 50 sq.ft. per agent, restructuring commission plans and compensation plans, consolidating certain functions such as accounting and marketing, and eliminating technology/office items such as printing, copying, extra landlines, etc.

As it happens, I think Nicolai is right on target in many many respects.  In the comments to his blogpost, there are some heavy duty thinkers weighing in on how to fix the status quo and structure a business model for brokerage that makes sense going forward.

One of the things I wanted to do — and I’ve asked Nicolai for some help on this, which he was kind enough to supply as he could — was to contextualize the discussion by looking at the numbers involved.  A lot of the talk about business models feels to me like a bunch of hot air unless we can start looking at numbers, even if manufactured/fake, just to have some basis for discussion.

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