Archive for December, 2008

Predicting the Future of Residential Real Estate Brokerage

Tuesday, December 16th, 2008

100%

Okay, so they’re not really all "100%".  Re/Max is now a maximum of a 95% split.  Further, most of the 100% companies have various other more traditional splits (IE: 70 – 30) for those who can’t pay the standard monthly bill.  But the overall trend for the industry is that most "mega agents" wind up at a 100% company and many of the major marque agents wind up eventually even leaving Re/Max to start their own company.  Re/Max was, at one time, the most agent-centric company in the business.  That has changed a bit.  Now at their national conventions the only "approved" business coach is Brian Buffini.  The others, who used to be quite visible ( Mike Ferry, Howard Brinton, to name a few) at those conventions are no longer welcome.  Only Buffini.  I am just guessing that someone named Brian Buffini pays a specific amount of what he can collect from Re/Max agents to Re/Max International.  That one is just a guess, but there was no guess work involved when Re/Max sued First American last April.  First American backed out of the deal and stopped payments.  The lawsuit from Re/Max prompted a probe from the Colorado Real Estate Department looking into the possibility of a HUD kickback violation

Actually, I don’t think they did actually violate the law.  But I have to say I loved their defense:  we were basically just selling a mailing list.  We have a lot of agents, let’s pimp them out.  This is from the company that revolutionized the residential brokerage business.  Not very revolutionary, is it?

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The 100% concept was started by a very remarkable man named Dale Rector.  He was a true visionary and he was the founder of Realty Executives.  He made Realty Executives into a very successful company that for many years was the top selling company in all of Arizona.  Prior to Re/Max, Dave Liniger worked for Dale Rector here in Phoenix and had been sent by Dale up to Denver to start a Realty Executives office there.  Instead, Dave started Re/Max.  A few years later he took it national.  He successfully accomplished what Realty Executives never did: massive expansion on a global level.  The real estate world would never be the same.  Agents who could produce did not have to "give the broker half".  They would pay the broker to be there (a desk fee) and pay their own expenses and keep all of what they earned.  Dale Rector’s original dream had become a reality for agents all across the nation and eventually, most of the world.  But it was Dave Liniger who made that dream a reality.

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Anytime anyone discovers or develops anything that could be a meaningful advantage in business it does not take long until someone else comes along with a knock off version, usually for less money.  Real estate brokerage offices are no exception.  By the mid 70’s, when Re/Max was just getting going and Realty Executives was going strong a different kind of company started sprouting up all around the Phoenix area.  Realty Executives / Re/Max knock offs.  There were dozens and dozens of them.  Some were very well run, others were very poorly managed and went out of business.  The company I have been with for 31 years, John Hall & Associates was one of those "original knock offs".  Less offered and less service to the agent but at a much lower price.  In the early 80’s came the knock off – knock offs.  West USA, was started by Clay Fouts.  Clay started at John Hall about the same time I did, in 1978.  He liked the idea of what John had done and saw that he could provide similar services for less.  Clay’s original value proposition was simply having a lower price per month for agents than John Hall.  When he started West USA he got several hundred of his original agents from John Hall.  He took some from Realty Executives too.  Eventually came the knock off of the knock off of the knock offs.  Companies that would charge the agents $25 – $50 a month to hang their license and take a few hundred dollars out of each closing.  These companies went on to pass West USA (West USA was the largest company in Arizona with about 2,000 agents) and there is now a company with well over 3,000 agents: HomeSmart.  This business model is scalable and can be started just about anywhere.

If HomeSmart doesn’t eventually open an office in your city don’t worry.  Someone like them or someone lifting their business model will eventually do just that.  How can a brokerage firm make any money at $25 – $50 a month?  Use your calculator to multiply that times, say 3,000.  Add in the fact that they are not providing office space, a desk, phones, etc. and you can start to get the picture.  Maybe they only have 200 – 300 agents they are collecting $200 a closing from and they are still quite profitable.

The competitive pressure these companies have put on "traditional brokers" with regard to commission splits has changed the landscape for all real estate companies here.  For example – a little known fact – the two largest national 100% companies, Re/Max and Keller Williams charge agents considerably less in the Phoenix area than they charge elsewhere.  For example a Re/Max agent here could pay around $600 a month without office space.  That same set up in the San Francisco area would be about $1,600 a month.  Watch that price drop once the knock off knock off knock offs are well known to the agents there.

The customers of the big brokers are not buyers and sellers.  Buyers and sellers are the customers of the agents.  The customer of the big broker is the agent.  The brokers are in the agent acquisition and retention business.  If successful, their expertise typically is limited and is solely in getting and keeping agents and avoiding lawsuits.  They seldom even know much about the little detail of getting and keeping buyers and sellers – as they never did it very much.  The skills required to be a successful agent and the skills required to be a successful broker are not the same skill set.  There are a select few who have both skill sets but that is quite rare from what I’ve seen.

There are specific communities and areas where a company is so good at getting business that they can hire all the agents they want and dictate the commission splits.  However, this is not the pattern in most areas.  The pattern is typically that the company doing the most business has the most top producing agents.  If those top producing agents left to go somewhere else their business would go right with them.  So what is a brokerage company not making enough money to do?  There are just a few choices: 1. cut back expenses, 2. close, 3. find a way to drive in business or 4. find a way to get more agents.

As almost all of the companies are completely inept at driving in business they are forced to choose options 1, 2 or 4.  Option 4 is achieved by having a company agents would really like to affiliate with – so to survive they have to be really really great or really really inexpensive.  The later is typically much easier to achieve.

Will Real Estate Ever Have a 900 Pound Gorilla?

Friday, December 12th, 2008

Big Ape Realty

Some fantastic viewpoints lately about the future of the residential real estate business.  A few see our business becoming more "agent-centric".  Others see it becoming almost exclusively "broker-centric": the big broker brands will dominate by being consumer-centric. 

Really?  What big brand?  Is there even ONE big brand that has a name (a brand?) that means anything to anybody?  The only national "big brands" that the agent public or the general public even thinks of as representing much of anything is either a discount company or a "100% company".  What one company is the most well known, most well thought of (by agents and the public)?  That would be Re/Max, a 100%, agent centric company.  What other company is going to pass them by?  If anyone can and ever does, it will be Keller Williams, an even more agent centric 100%company.  In a buyer’s market, there is no discount real estate company that is ever going to dominate any city or area, let alone, the country.

Take what is currently, factually, the really biggest real estate company in the world, Realogy: other than Sotheby’s what brand do they have that matters?  Try none for an answer.  What meaningful difference does the general public or even the agent public see between Century 21, ERA, Better Homes & Gardens, or Coldwell Banker (just to name a few)?  Which one of those is a "good brand"?  (yes, yes, I know, Coldwell Banker is supposed to be their "premier brand")

Is Coldwell Banker a better brokerage firm to the public than Century 21?  Do people across the nation think to themselves, "It would be so great if we could buy our next home from a Coldwell Banker agent"?  Ever?  Does anyone, anywhere, ever think that?  How about, ERA?  Does anyone say,"I only want to do business with an ERA agent"?  If not, what are those "brands" worth?  Not much.  Why?  They don’t stand for anything.  To matter, a brand must mean something in the mind of the public and few national real estate firms have ever done that and then managed to hold on to their position.  Century 21 did it years ago, they were the number 1 company in the world.  Re/Max passed them and started claiming number 1 in their ads too.  They even went to court to get C21 to stop making the "We’re number 1" claim.  Re/Max won.  They kept their position by attracting more and more agents with their name (which does mean something to the agent public and the general public).  In terms of brands (which is what it would take for a company to "own" a market – have a brand that was perceived as desirable by the public) Re/Max probably has the "best brand" in the United States.  I don’t know of any cities or states where they "own the market".  Why not?  Being "Number 1" isn’t enough.  The buyers and sellers will still choose to do business with that incompetent relative who just entered the business.  Over the years, those agents (they’re in, now they are out) – on the average – will sell three houses before they leave the business.  That is three sales I didn’t get.  You didn’t either and it isn’t going to matter much what scripts you use.  Their "brand" of I-know-you must be senior to someone being number 1.  Or any other number.

What is the difference between ERA and Better Homes and Gardens?  Other then the logos and phone numbers, is there any meaningful difference that anyone would ever really care about?  By the way, this is the very same problem that General Motors achieved for themselves with their brands (why yes, as a matter of fact, they have also run their big company into the ground and are currently broke).  What is the real difference between a Buick, a Chevy, an Oldsmobile and a Cadillac?  Not much, it seems.  You can buy cheap Cadillacs, an expensive Chevy, an Olds that costs more than a Cadillac.  All mixed up.  All standing for nothing.  The only brand General Motors has where they name actually means anything is Corvette.  Corvette actually stands for something and is a "valuable brand".  The others, not so much.  You can also see this nonsense at work from the executives at Volvo: Volvo = safe.  So, brand-wise it is beyond stupid for them to have a convertible or a "sports model" Volvo.  Currently, Volvo is trying to change Volvo = safe to Volvo = life.  It is a stupid strategy and will fail.  If they continue in that direction they will crap on their brands the way General Motors has crapped on theirs.

If we shift the discussion to a local one vs. a national one it can change completely.  Are there companies that dominate their local markets?  Or a segment of that market?  Absolutely.  But it is accomplished by representing something.  Something that is wanted and needed currently by that public in that area.  The same thing is true for an individual agent.

In some of the posts on various blogs and also on Inman there has been discussion of IDX vs. VOW and how perhaps a national MLS is needed and that some fantastic company using really wonderful technology is going to attract loads and loads of business, pay the agents less and sort of take over.  I contend that if such a thing were possible it would have already happened.  Zip or Redfin would be making a ton of money (instead of endlessly feeding their companies with investor capital that is not likely to ever come back to them).  I don’t think it makes any difference to any big company if only IDX or only VOW is used.  About the only people who it will ever make a significant difference to are those agents (not "companies") who primarily work buyers.  They use other people’s listings (via IDX or VOW) as bait to attract buyers who aren’t working with any agent yet.

Desk-fee agents are not only not going away, they ARE the future of our industry.  Don’t believe it?  Look at the actual trends for the past decade.  Our industry is shifting from a totally broker-centric model to 100% companies.  Right now, in most parts of the country it is the big national 100% companies who dominate (in terms of numbers of agents).  Take a closer look at where 100% started (Phoenix) and you see a very different picture: most of the agents are with 100% companies and the "traditional" companies have changed their splits to the point that they may as well be 100% companies.  But it is the less well-known 100% companies that have the largest number of agents.  Hint: they charge less.  A lot less.  My prediction is that these companies and teams of agents (with a rainmaker, mentor) are the future of our business.  We will have fewer agents and I believe that is a good thing.  A very good thing.

Thanks to Michael Wurzer for his post which got me to write this one!  And to Al Ries for helping me to actually learn what branding really is.

Shift Happens. Read This Book.

Tuesday, December 2nd, 2008

Shift Front Cover

This is the book I am telling all of my friends in the real estate business to get and read.  It is so well researched that those of you who like statistics will be impressed just with some of the stats.  Those who may have hit a rough patch and found their business in a bit of a skid will find it to be just what the doctor ordered.  Those who are already doing just fine will find a very put together write up of what they are already doing.  I haven’t found anyone doing really well who didn’t find something in this book that they could use.  Now.

You can find it at just about any book store.  Here is a link where you can peek inside and buy it online.  You can see some nice excerpts from it here.  And, if you like, watch a ten minute video on YouTube from Gary’s tour.  The book covers the specific twelve tactics that are needed for survival and success.

The better off and more informed you are the more you will discover things you already "sort of knew".  For example, look over this simple illustration showing seasonal sales cycles in any normal year (a small seasonal shift).  It is part of a page in the book.

Seasonal Sales Cycles

The footnote reads, "Based on a study of over a million closed transactions over a five-year period."  To me, this kind of data is priceless.  I would have no way of ever compiling it on my own and no one else (at least no one I know who is sharing with agents) has it to hand to me.

Another one – this one is the Seasonal Income Cycle.  I wish I had known this sort of thing my first 10 years in the business (the ones where I wasn’t keeping track of my own stats to ever be able to see this sort of thing for myself).  The text above the chart is from a page in the book.

Seasonal Income Cycle

Notice how only about a third of all the months are in the "average" range.  What would you do differently if you knew that about 2/3 of the time the income you were physically receiving was not your average?  It was way above or way below.  Would it change anything for you?

One last one.  The book has simple wisdom like this in great abundance.  This is another one that (at least in my opinion) every agent should have a subjective reality on.

The Three Types of Markets

Do well.  Buy "Shift".  Read it.  Get others to read it.