So I’ve had a few days to recover from a wonderful, crazy, hectic, monumental week. I’m referring, of course, to the HearItDirect event that Sue Adler and I hosted in Charleston, SC last week. Quite a bit has been tweeted about the event, quite a few people have written on it, called us, emailed us, and so on, so I’ll limit this to just some of my top thoughts on what I saw/heard/experienced.
In Part 1 of this series, I put forth the notion that a real estate company built on the law firm model — rainmaking partners + salaried associates + support staff — could work. The main requirement is that there is some sort of a competitive advantage that arises from the structure of the partnership such that individual rainmakers would want to pool their resources.
But how does such a competitive advantage arise? In this and succeeding parts, I hope to explore some ideas on how it might be possible.
The similarity between legal practice and the post-Internet real estate brokerage is remarkable. In both cases, you have service providers who provide what is essentially a commodity service in all but the extremes, and yet are of varying qualities as professionals.
The typical lawyer does not do only the extremely complex, novel questions of law that end up before the Supreme Court. The average attorney does run of the mill contracts, wills, real estate transactions, incorporations, and typical lawsuits — the so-called “slip and fall” cases, or breach of contract cases, or some such. There isn’t much to that practice — the law is more or less settled in most of the situations, and all that the attorney is doing is to represent his client in the most favorable light possible. Yet, there is no question that some lawyers are simply better than others. They are more knowledgeable about the law; they are better writers, better researchers, and better negotiators. Some speak better than others, and are more effective in litigation. Still others are just smarter, and can help their clients more than another attorney can.
Similarly, in the post-Internet real estate brokerage, where simply matching buyer to property is no longer seen as particularly valuable, real estate brokerage is a fairly commodity service (except at the extremes). Brokers help sellers list a house, market it using various techniques, price the house in order to move it, coordinate various activities with third parties (lawyers, inspectors, government, etc.), and promote the listing in various ways. For buyers, brokers do inventory searches, work with third parties, negotiate on their behalf, advise them on various subjects, and educate them about the real estate process, about the local market, and so on. Again, there are clearly brokers who are more talented than others, smarter, more informed, better educated, and so forth.
In both cases, the consumer is confronted with a conundrum: How do you select a professional for something of which you yourself have very limited knowledge, but the importance of which is extremely high? Pick the wrong lawyer, and you could end up going to jail. Pick the wrong realtor, and you could end up stuck for years in a house built on top of a toxic waste dump.
In both cases, consumers often end up going with either (a) brand names, (b) recommendations, or (c) gut feelings.
For all three — branding, recommendations, and emotional connection — there are enormous advantages to institutionalization for a service provider. In Part 1, I listed five things a real estate firm (“The Firm” hereafter) must do:
- Institutional CRM: The Killer App
- Systemic Brokerage: Learning from Bill Belichick
- Redefine the Profession: Shifting the Grounds of Competition
- Specialization for Domination
- Outsource Everything But Profit Centers
Three of the five are directly related to institutionalization: Customer Relationship Management, Systemic Brokerage, and Specialization. In this part, let us cover CRM: The Killer App.
[CAVEAT: Before we begin, I feel it is imperative to stress once again that in real estate — as in law, or any professional service — the commoditization of the service and therefore the institutional advantage fades. Meaning, if you absolutely MUST have the best criminal defense attorney for your death-penalty trial, you really won’t care whether he’s with Big Law Firm or a solo practitioner. If your company is involved in some ridiculously complicated international tax case, you are going to seek out the absolute best specialist — institution be damned. Same with real estate. If you’re trying to list a $50 million condo, there just aren’t that many people who can service your needs — finding buyers for a $50m house is in and of itself a valuable service. Traditional “transactional” brokerage based entirely on personal relationships may be the best solution when you’re in an extreme situation.
These posts are not intended to address the exceptional cases. They are, rather, intended to discuss the vast majority of non-exceptional brokerage.] Continue reading
It must be zeitgeist, a change in the real estate weltanschauung. I wrote a long post back in March of 2008 having a conversation with Mike Farmer on his original Biz 2.0 post on the Bloodhound Blog. He then responded with some additional thoughts. I had a 1500 word draft that wasn’t even halfway finished, then life got really busy.
Fast forward to Inman Connect SF. I’m having lunch with Joseph Ferrara of Sellsius fame, who is also an attorney, and I say to him, “You know, Joe, I’ve been thinking alot about brokerage business models — why couldn’t it replicate how law firms work?” Joe and I talk about this for a pleasant half hour or so. I end up talking to people about the idea of the “Bill Belichick Brokerage” (more on that later). Then I get back home and I see these two great posts by Sean Purcell on Bloodhound Blog on this very topic: Disbrokeration and Super-Teams.
There’s something in the air.
In any case, Sean’s posts are worth reading in full. Disbrokeration strikes me as a decent review of what’s wrong with the brokerage industry today — some of those weaknesses are being revealed by the impact of technology. In Super-Teams, Sean lays out his vision:
Our Goal Model Defined
Yes, greed must be accounted for if we are to design a blueprint for the industry as a whole. Even more importantly, we must acknowledge the premier ingredient in creating real estate success: lead generation. The broker is no longer germane. The ability to create leads is THE most important factor and defines the primary actors in the model that will take us forward. But we are looking for more. If we wish to create a model for the future, let’s charge it with an even higher level of responsibility. Let’s create a model that also rids the industry of loafers and under performing “shoe salesmen“. Let’s create a model that sustains its growth by success rather than law. Let’s create a model that generates its own need and reward for education. Let’s create a model that allows any to enter, but demands dedication and professionalism for success. Let’s create a model without help from rigged tax laws and a “loose” interpretation of independent contractors. Finally, and most important to universal portability, let’s create a model that is achievable now and with our current skill sets. The Basic Real Estate Team model fails right from the beginning. It takes into account almost none of our needs and few of our desires. What about Super Teams?
They look like this: one or possibly two agents are the Team Leaders; they are the Rain Makers (RMs). Beyond the RMs there may be nothing more than a part time administrator; or there may be multiple buyers’ agents, listing agents, lead coordinators, customer service managers, marketing directors and so on. What makes them unique is the fact that they all work on the RMs’ team and directly for the RMs. They may bring in some business of their own (and the splits on that business may be higher) but the primary responsibility of those that work on the Super Team is to benefit the RMs. The entire team exists to enrich the RMs; to help them in their mayoral marketing – to help them become mayor for life. Super Teams do allow for change. If someone on the team decides they can be an RM too, they are free to start their own team (and well trained for it too). But for a great many, the idea of enjoying the profession of real estate without all the messy marketing and concerns over a commission lifestyle makes the Super Team a cozy home.
This model certainly accounts for the greed aspect and literally defines the importance of lead generation. It also quite adequately rids us of loafers and water cooler whiners (RM’s would have short patience for someone not pulling their weight). After that though, this model begins to fall off.
My initial thought was, “Didn’t I write something that is directly on point to this already?” My second thought was, “Oh yeah, but I never published it, did I?”
So here it is, the 1,500-word essay that is swiftly heading towards like 3,000 words. Read more at your peril. You have been warned. Continue reading
Mike Farmer at Bloodhound has an inspirational and thought-provoking post up on what he calls a “Biz 2.0: Super Real Estate Company” would look like. Read the whole thing; it’s long, but worth the time.
By now, readers of this blog know that I am entirely simpatico to Mike’s call for a new enlightened leadership and work processes in real estate.
There is, however, one fly in the ointment for Mike’s vision that I have pointed out before, and it’s worth doing so again.
For his (and my) vision of the Real Estate Company 2.0 to become real, the industry has to abandon one of its hallowed traditions: the independent agent.
The level of unity, organizational pride, and collaboration that Mike is envisioning simply can’t happen when your entire producing workforce thinks of themselves as independent contractors in business for himself/herself.
The truth is that a company needs leadership, but a committment to the on-the-ground salesforce is critical to retention and productivity. With intranet 2.0, voices across the system should be heard and information used for steady improvement and innvoation. With all the communication tools, any part of the company should be able to access rich information about listings, trends, local changes, clients, closings, vendors, etc. with a click or two. The information being fed from the field should be a steady stream. Training should include the skills necessary for agents to learn the importance of information, how to quickly gather it and input it so that it’s meaningful and useful. The infrastructure for this should user-friendly so that agents aren’t burdened with a clumsy, complex system they won’t use. But, companies should also be contracting with more skilled agents.
The Biz 2.0 tools will allow communication and comarederie [sic] throughout the company and create the highest level of co-operaton possible if leadership believes and everyone is on board. Then perhaps companies who hire anyone breathing will be more selective and realize that quality is way more powerful than quantity in this line of work. I venture to guess that a local company who implements these changes could dominate the market their in in no time at all. The environment would be attractive for connected, productive agents and too difficult for those who aren’t serious about RE. It would be very difficult to form a company like this, but it is possible. Can you imagine what 50-100 agents and high-skilled managers with enlightened leadership could accomplish if they were wired and working together toward a common goal?
This is possible, and desirable, but only if those 50-100 agents are not independent contractors whose ultimate (and sometimes the prima facie) loyalty is to his or her own commission splits.
First of all, the level of investment required in such a system and such a process at the organizational level is quite high. An intranet is no joke to setup, nor is it self-maintaining. It takes enormous investment in time and treasure to get a really useful intranet going. Providing truly useful information technology to every member of the organization is expensive, resource-intensive, and time-consuming. A broker might decide to do all of these things to gain a competitive advantage — because he will gain that — but the money to fund all these have to come from somewhere.
Can such a Brokerage 2.0 become uncompetitive in agent splits and still retain the talent it needs? Because the money has to come from somewhere. Apart from commissions, what else can a brokerage tap to fund these initiatives?
Second, and this is connected, the individual employee’s investment of time and energy into maintaining such a “live” organization is enormous. As Mike himself points out, the flow of information from the field has to be steady and constant. Information technology is utterly useless without information. And someone, somewhere has to gather that information and put it into the system.
You see this in practice, in the real world, in commercial real estate where information flow is absolutely the lifeblood of brokerage. You have to know your local market to a degree that many residential brokerages do not. Knowing the inventory, the actual square footage vs. leasable square footage, the comps, the new projects, etc. etc. is critical to competing in CRE. Guess what the #1 pain point for these companies are? Getting that data in the first place.
Many of them rely on their newer agents to do the gruntwork of going door to door, calling on landlords, etc. to find out which tenants are in which buildings taking up how much space and for how long. Many require their agents to go do these market surveys periodically. Some condition the release of the commission check upon meeting the quota of market data gathered. But almost every single one has enormous difficulty getting its agents — who all think of themselves as independent contractors — to do this work that doesn’t benefit any one of them directly. It’s a variation of the tragedy of the commons.
Third, it’s extremely difficult even in an integrated organization (with only employees) to ensure service quality. Take a look at investment banks and law firms, none of whom employ independent contractors to be frontline representatives. They expend enormous resources in recruiting and training, and these companies are aided by professional schools that train individuals for two to three years learning professional competence, as well as government organizations that require compliance to standards.
I simply can’t imagine how this would work where your producers are all entirely independent contractors over whom you the broker have limited control, by law. As I read the IRS ruling, you actually cannot demand that your agents undergo specific training, or do things in a specific company-mandated way. That would constitute control over “means and methods” and make them into your employees. That in turn has significant implications for taxes, for liability, and other legal issues. If you’re going to undertake those things, then you want to do it with your eyes wide open, and with a very different compensation structure.
I’m sure someone somewhere either has tried the agent-less real estate brokerage, or will try it again soon. I think that may help us figure out whether this is a viable business model for real estate or not, and whether Biz 2.0 will be a driver of that model or the beneficiary of it.