For centuries, the notion of turning lead into gold has captured the imagination of countless Alchemists, all of whom were doomed to failure.
The real estate industry’s economic model has been for decades akin to conjuring concoctions that claim to convert the weight of our tarnished enterprise models into shining bars of profitability.
We have not always understood the true alchemy of our industry and the relationship between the decline of profitability with the introduction and application of new technologies to our industry.
Each of the two great historical shifts (economic eras) in our industry have occurred with the rise of new technology, the independence of agents and the empowerment of the consumer. Consider the following diagram and then listen to the accompanying presentation.
The shift from the Broker-Centric era to the Agent-Centric era was created largely as a result of the introduction of a technology known as the Personal Computer (PC) to the daily work habits of agents, empowering them to globalize their reach. From that point on, Broker-Owners were not able to fully contain the spillage of property information into the streets of their marketplace.
The loss of the MLS Book coupled with PC access to MLS data created a decline in the control of property information (always a key contributor to loss of profit) and the empowerment of the consumer who no longer had to enter a real estate office in order to see the Holy Grail.
Nor have we fully appreciated how technology has always defined each of the three economic eras of our history and most importantly how each increase in technology within the industry reduces profitability.
In 1994, along came the Information Super Highway and property data began to find its way to the Internet, where a hungry consumer was waiting. The Internet created a bridge from MLS sources to consumers who were also empowered with PCs. This was the beginning of a shift from the agent-centric model to the current new real estate economy where the consumer is now the central character.
“Pb” (lead) can become “Au” (gold). The alchemetrics (not sure that is a word but I’ll run with it) are simply undeniable. Technology creates the shift and transition from one real estate economic era to the next. With each transition three things always occur:
- Technology always defines the shift, the model and the wealth in our economic models
- Owner profitability declines as control over property information control diminishes
- Information control is distributed over time to an increasing number of people thus, democratizing real estate
What does all of this mean? Simply, and yet rather profoundly, this means that ours is a history made up of transitions created primarily by the introduction of new technologies and a fundamental shift in economic control from us to consumers. It also means that the principle of alchemy is real.
Our lead-based model (forget lead-based paint for a moment!) is in the process of being turned into gold. However, in the alchemic (not sure that is a word either but I’ll run with it as well) process, we will not necessarily become the benefactors of the creation of new wealth being created by the introduction of new consumer-centric technologies. We could be but we are not, it appears, equipped to transition with the consumer into The New Real Estate Economy.
Watch the presentation and please, comment.
Many have come and most have gone.
Road kill has always been a part of the mix; the strong eat the weak and the weak find refuge in other endeavors.
The real estate industry has always been a town occupied by heralded gun slingers whose reputations have become the stuff of legends. Sometimes these are brands, other times they are movements, fads or personalities that come and go with the wind.
We have always been a tad reckless; that’s why we are a business model willing to predicate its economic viability on the unpredictable and unenforceable productivity of independent contractors. Let’s admit it, the business cultures we have created have typically been less than IBMish.
Nonetheless, we have moved from era-to-era, cycle-to-cycle and shifted from mode-to-mode, surviving the financial droughts of summer and living through the long, frigid economic nights of our many winters. We are an industry that could legitimately lay claim to squeezing blood from turnips.
We have historically endured and outlasted our most caustic critics who have mocked us at every turn and likened us to dishonest snake-oil salesmen.
Yes, we’ve been brought back from the dead a number of times. We are a cat with nine lives and most of them have been used up.
Are we now reaching the termination point? Are we, Tenus Terminatio Cuspis?
An Industry on Life Support
e-Partner believes we are an industry on life support. Our traditional business models are being depleted of their potency because they only work effectively within controlled economic environments backed by cycles where predictability is a guarantee.
Broker/Owners are reaching a desperation point as they face the decision to remain on life support or, turn off the apparatus that sustains them. In essence, they are losing the will to sustain the battle.
We have built our business models on the sands of predictable turnarounds that always came if we just waited long enough. Our economic foundation was never “rock solid” (a phrase once used by my former franchisor) but rather, a roll-of-the-dice at a table where we knew the odds would eventually turn against us.
The money is running out and the sand in the hour glass is reaching its last few grains. The water line that once flowed with abundance has slowed from its gush of 2002-2006 to droplets we must now try to ration.
Our rank and file is wearied and worried about sustainability. We are nervous and fearful about what might be waiting for us around the next corner. With few exceptions, there doesn’t seem to be a coherent national call-to-arms to address our crisis.
This is no way to run a business or an industry.
While We have Faint Pulse
During a recent two-hour protracted conversation with a Broker/Owner, I realized the deep hunger that exists within our industry for one-on-one support. In fact, I was told in no uncertain terms that the personal conversation itself had more meaning than the business concepts being exchanged. I’m feeling more like a therapist than a business consultant.
This and many other conversations like it indicate that we have a faint pulse but that we may be losing some patients very soon if we do not shore up the ranks by means of a national support network for Broker/Owners.
Our productivity numbers indicate that we are on the cusp, facing what could become a pandemic situation. Many Broker/Owners are reaching the termination point.
The 64,000 dollar question begging to be asked is, “Is our industry as a whole reaching a collective termination point?” How much more trauma can we endure?
e-Partner has not seen nor have we heard of any national industry initiative dedicated to addressing the survivability of ourselves.
While we may have a pulse today, tomorrow is coming. While many are hunkered down waiting hoping for some sort of market rebound, the demands and characteristics of a new real estate economy are passing us by.
I am ready to predict that there will be no return to what we once knew and that new operating and economic rules are being devised and implemented that will forever change our relationship with the consumer and thus, our viability.
There will always be time as long as we have a pulse. Like any weakened or wounded entity, the longer we wait to implement decisive corrective action the more difficult becomes the chance of survival. And if we squander our resources on internal battles that do not equip us for the next generation of our industry we will surely succumb.
We can survive but not without a herculean effort to save ourselves. Then, after survival comes the art of rehabilitation and full sustainability. The industry as we know it today is in need not of a stint but of a radical transplant in order to produce the type of organization that is in possession and control of the requisite tools and willful capacity to perform in a new global real estate economy with new rules and new regimens.
There is a set of irreducible minimums that e-Partner sees as industry priorities and this set of principled changes must be considered before we can arrive at protracted sustainability.
- Redirect key NAR Resources to industry redevelopment and Broker/Owner support.
- Redefine the meaning of real estate “market” in contemporary terms.
- Redistribute property information via transparent MLS economic packages.
- Retool local Realtor Association models and services for tomorrow’s reality.
These four principled changes serve as the nucleus for rehabilitation and sustainability of our industry. Let’s address each of these briefly.
Redirection of Key NAR Resources. NAR holds sway over much of the industry. Our money flows from the grassroots members upward to NAR and is used to promote the priorities of our industry.
Promotion is an integral component of the function of NAR. But more must be done to create the conversations that will lead to transformation of the industry. This requires a consideration of the redistribution of our capital assets. The motivations behind how NAR prioritizes the allocation of our resources is just as important as where these economic resources are directed.
NAR does a great job defending and promoting the industry. But it does a less than stellar job tending to the needs of Broker/Owners and the demands placed upon them by the massive economic and technology changes taking place within the rank and file. We are not collectively managing the economic and operating changes at a pace commensurate with the consumer nor the profit margins required for survival.
In order to insure survival and sustainability, the industry needs to take a serious and candid look at the economic priorities implemented by NAR and ask the question, “Is this what we should be doing with our money?”
Redirecting key economic resources toward targeted initiatives designed to re-define the economic model, our relationship with the consumer and how we transact business for profitability should be emergency priorities.
Redefining our Market. Second on the list of priority principles is the notion of market definition. All businesses must be predicated upon an accurate definition of their market in order to produce sustained economic success.
I believe that our previous definition of market as a zip code, city name or a set of buildings positioned therein, is now defunct because the customer has changed the definition for us.
Until we understand what the real estate market is we cannot expect to move to a new platform where profitability exists and where the industry can flourish.
Although transactions take place in a fixed geographic location, I do not believe location is the market and furthermore, I believe the market is much more distant, unpredictable and illusive than in previous economic eras.
The market is Jell-O, not dirt. It is water, without concrete. Yet our institutional structures and operating models are still captive to bricks, mortar and steel.
The chemical and behavioral composition of the “new real estate market” is a highly refined set of consumer characteristics finding their origin in the freedom and power granted by technology and the Internet to self-access information and it is therefore in a constant state of uncontrollable flux. Indeed, the new real estate market never gels. Our industry must then be as liquid as possible in order to play effectively.
Learning the components of market definition will lead us to new models. Until we reach an understanding of what constitutes our market and how we fit into this new paradigm, profit will continue to erode and sustainability will continue to place us in peril.
What is a real estate market? Is it my city? Is it my customers in my database? Is it my hot list of prospects? Is it consumers pledge loyal to my brand?
No, it is none of these anymore. It is a complex set of consumer bents, biases and behaviors that are shifting the center of control away from lead generation, massive corporate models and universal branding to stealth and fluid exchanges that result in trust and conclude with transaction. The Trust = Transaction formula, although not new, is, however, comprised of new dynamics that create it and it is precisely these dynamics that we need to capture and shape into models that create what I have been referring to as “new real estate model math.”
Brand loyalty, process control, property information containment, website contact forms, registration requirements and the host of Web 1.0 schemes are dead or dying, being replaced by freedom platforms that move the consumer to the center position and us into orbit around a unique set of moving and ever changing requirements.
This is the new market.
Redistribution of Packaged Property Information. Once the new real estate market has been defined we can then create new property information models that can become economic products and marketable services to the consumer.
It’s not the house, it’s the information. It’s not the brand anymore, it’s the information. It’s not the broker, agent or NAR, it’s the information. Any semblance of control techniques, tactics and models will be loathed.
Grouped informational products designed by the consumer, then defined and deployed by us can provide the new profit stream for the industry.
As a whole, we as an industry have spent inordinate time, money and effort sweating over the loss of our precious MLS data that we have failed to understand the economic power that exists in packaging this information as a product for consumer distribution.
It is not just property information the consumer wants packaged up, made accessible and delivered via the portals of cyberspace. In the real estate and relocation process, there exist a myriad of ancillary information data sets that are marketable, including health care, community lifestyles and much more.
Old MLS control models are largely defunct, too expensive and more importantly, they are inoperable as economic tools. They are increasingly failing to perform for Broker/Owners.
Retooling Realtor Association Models. This leads me to my final dribble.
Heretofore, our local Associations (formerly “Boards”) served a valuable function in supporting local real estate businesses in a non-technical, disconnected world where real estate transactions were virtually all initiated on site and in a building owned and/or operated by a Broker/Owner. (See the post “The Four Bs target=”_blank”” at Realonomics.net).
The localized value proposition for Associations has changed. The importance of the traditional functions of Associations is diminished from its pre-Internet apex in the early 1990s where Associations were controlled by local Brokers, printed MLS books and hosted MLS meetings where agents shared wants and needs. A total control model.
Yet, despite the transition away from the centralized control wielded by the Brokers, Boards, Books and Buildings (the “The Four Bs target=”_blank” ”) geographic model, we have been largely unwilling to break our addiction the now false and unsustainable notion of property information control through Associations.
Can and do Associations have value? Yes, no and maybe. Yes they can and many do, if they are functioning and providing the types of services necessary to the new real estate economy.
No, Associations are not valuable if they are simply self-serving paternalistic job banks at the expense of Broker/Owners and local agents.
Maybe Associations can bring new value to the industry if they equip themselves to provide the types of cutting-edge business services related to the creation and sustainability of Broker/Owner profit.
Translation: If an Association can justify its existence (and they should be required to do so at regular intervals) and its functional costs to Members when measured against productivity standards and market conditions, then maybe they can deliver value.
Retooling Realtor Association models is a tall order because of historic entrenchment and a perception of need that is probably misplaced.
Almost all functions currently executed by Associations could be centralized and even made more effective through consolidation of services, marketing and training. Small is good, agility it the first of the Ten Commandments of the New Real Estate Economy. Generally, the refinement and redirection of general and administrative costs is good for business and profit.
In my own geographic area in northern Arizona there are Associations in Flagstaff, Sedona and Prescott, just to name one small geographic area. Remarkably, the distance between these locations is less than an hour.
Each of these Associations has its own Executive Officer, staff, facilities, operating costs and Board of Directors. What are we protecting?
The reality of the situation is that agents in central and northern Arizona are now servicing all three markets because that is what the consumer wants them to do AND that is what they must do in the prevailing market to produce income.
However, despite the needs and wants of the consumer and the dictates of market realities these Associations are an impediment to change and Broker/Owner profit because their membership structures are prohibitive rather than inclusive. Some legal minds even view these structural impediments as economic and therefore potentially subject to anti-trust law.
Associations were largely constructed upon the old definition of the real estate market being purely a localized function driven by sign calls, newspaper ads and up-desk lead generation.
Why have we not adapted our administrative model so that it matches consumer reality and Broker/Owner needs in a market defined by bits and bytes? The layers of bureaucracy inherent in the Association structures and their relationship to NAR would make a career bureaucrat blush.
Simply said, our administrative models are labor intensive, bloated and we are spending too much money on infrastructure and organizational maintenance at the expense of profitability.
We are spending approximately the same amount of money per transaction per Association as we were in 2002-07, money that could be used to redevelop the industry. Why?
In conclusion I can only ask, “Tenus terminatio cuspis?”
And, it is especially difficult for owners to direct the re-invention or re-direction of their companies when the industry is engaged in what appears to be “perfect storm” conditions.
Experience tells me that owners want and need help in analyzing their businesses and this is where e-Partner can help. Our business development services include the following and more:
- Market Analysys, Definition and Deployment;
- Social Media Development for Maximum Branding
- Confidential Merger & Acquisition Services
- 360 Degree Technology and Internet Audit
- Franchise Analysis, Negotiation & Leveraging
- Recruiting Development and Implementation
- Profit Assessment and Company Disposition
e-Partner was created by an owner, for owners. This means that our services do not include “theory 101″ but rather, focus on the immediate priorities required by owners to move their ship through uncharted waters.
CALL US TOLL FREE AT 1-877-380-1000.
Owners are engaged in the delicate balancing act; walking on the razor’s edge, barefoot.
Slicing into Profit
The razor upon which owners must balance themselves is now slicing so deeply into revenues that profitability is now proving more and more illusive. Today’s Broker/Owners are confronted with an economy that is not rebounding fast enough to enable them to survive.
e-Partner has long held that Broker/Owners are the financial backbone of the real estate industry and that their survival should be one of the top priorities of our industry through 2010.
Our Bleeding Feet
The razor’s edge takes no prisoners and yields no concessions to owners who are struggling to meet their ever increasing general operating expenses. Trapped by the same economic factors faced by other businesses, owners are looking for ways to decrease fixed and personally guaranteed obligations.
e-Partner talks to owners from every brand and those who are independent and the story is generally the same. There are simply too few closing and too much bricks-and-mortar operating expenses. “There is just not enough transaction commission to meet the monthly demands we have,” one broker/owner told us.
Agility, created and sustained, is the first of the Ten Commandments of the New Real Estate Economy.
Although we are not quick on our feet, the razor’s edge is sensitizing us to perils of standing still for too long in one place. Our bloated organization body weight presses down on the sharp stainless steel edge and this slices away large chunks of capital required to sustain retail models.
New principle: the razor’s edge is now an owner’s continuing reality and he/she/all of us will learn to walk on this edge nimbly and quickly or, we will be cut to pieces.
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The emergence of the new real estate economy has been fueled by the agent-centric cultures created by brokerage firms during the past two decades. In the past the "Broker" provided all of the fundamental tools necessary for an independent contractor to operate his/her business in the local market. The power of the broker/owner enabled a favorable economic relationship that would ensure profitability.
Four events changed this economic model, turning it on its proverbial ear. What was not so predictable was the replacement of the Broker as the controller of the real estate transaction with the modern, tech-savvy, home-officing agent.
The first trend was a real estate information distribution shift and it entailed the move away from the distribution of property information via a printed model (the MLS book) toward the automation of the Multiple Listing Service (MLS) through server-based technology.
This event launched a new era in real estate, one where the Broker would no longer be able to control what real estate property information. The new server-based technology loosened the Broker’s grip on the central controlling factor that empowered them, property information control.
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Since 1994, the real estate brokerage industry in the United States has seen and sustained its longest and most lucrative boom. During this same decade the industry has seen more significant changes than in all of its combined history. The boom and the changes have created opportunity but also, stress associated with the demands placed on company’s to keep pace.
Brokerage models such as RE/Max and Realty Executives realized that brokers were no longer in control of the real estate transaction and they introduced an economic model that recognized the agent-centric nature of the business.
This new model relieved brokers from providing all of the services associated with traditional office affiliation. They stripped away the fluff, cut the fat, reduced the relationship between the broker and agent to its lowest common denominator and essentially empowered thousands of agents to simply take charge.
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Let’s talk about the money. The real estate brokerage premise has one great overriding premise: the generation and retention of gross commission income. This should come as no surprise to any red-blooded capitalist entrepreneur because income generation and profit retention is the basis for any viable business enterprise.
During the 1994-2004 time period, the commission proforma for the real estate industry took it on the chin. The following illustrates what occured during this decade of transformation:
|Transaction Commission per Closing||-||Decreased 20-40%|
|Commission Paid to Agents per Closing||-||Increased 25-50%|
|Annual Brokerage Office Operating Costs||-||Increased 15-20%|
|Technology Operating and Training Costs||-||Increased 150%|
|Transaction Skimming by New Middle Entities||-||Increased by 1000%|
Throughout the 60’s, 70’s and 80’s the modern real estate franchise machine emerged creating a new service and marketing partner for traditional brokerage companies throughout the United States.
Century 21, ERA, Coldwell Banker, Realty World and in the late 80’s and early 90’s Prudential entered the crowded field fueled by their acquisition of Merrill Lynch’s brokerage houses.
The early franchisors flourished as they attracted brokerage firms to their franchise promises associated with brand recognition, marketing tools, advertisement, national relocation, referrals, training and business support services. In exchange for their franchise services they were paid handsomely, usually extracting a fee of 6-8% fee from all gross brokerage receipts.
Inherent within the franchisor’s model is the concept of territorialism, the promise or illusion of exclusive access market presence, tools, economies of scale and owner support that come from association with a large national entity.
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The consumer, joystick in hand, now drives the economic train. Armed with access to property information, multiple ancillary support services, online mortage and title services, the consumer has more power over the transaction than the broker and agent combined.
Today’s consumer will have a 70-80% chance of conducting research via the Internet prior to selecting a brand, company or agent.
e-Partner believes that the consumer’s appetite for information is insatiable and that brand, broker and agent are now secondary to real estate transaction.
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The brokerage industry is trying to re-invent itself while maintaining and resurrecting old business models that continue to suck out capital, energy and the ability to move into the third wave.
There have been three distinct waves in the evolution of the real estate brokerage industry.
The first wave was traditional brokerage enhanced by franchise development. This is the model that lacks the versatility and agility to adapt quickly to market demands and is sometimes steeped so deeply in the operating traditions of the past that any thought of re-invention is out of the question.
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