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New Model for Real Estate? Let’s Try an Older Idea.

January 29, 2008

Pat Kitano at Transparent Real Estate has an interesting post speculating on what the future of the real estate industry might look like, by taking a look-see at the finance world.

If one subscribes to the idea that a real estate transaction is basically matching capital with opportunity, and that the transactional process has become more transparent due to internet data, then it’s logical to see that any intermediary based transaction is also fair game.

Investment banking and venture capital is a relationship based business that matches investor bases, often institutional investors, with opportunities – stocks, bonds, M&A, start ups, etc. Like any other lucrative business model, maintaining the mystique of “high finance” and managing deals behind the scenes keeps power contained within the select few who live on Park Avenue or in Woodside.

Read the whole thing.

I think Kitano is on to something, but at the same time, his analysis doesn’t work for me. He essentially ignores what may be the most important element, either in real estate or in high finance: people.

For example, he believes that finance — whether venture capital or investment banking — is just a matter of matching capital with opportunity. Stripped to its bare essentials, that would make sense. Except that you could also say that automobiles are about getting from point A to point B. Or that sex is about combining genetic materials for the propagation of the species.

While true, in a reductive sense, once you inject people into the equation, the story changes dramatically.

Entrepreneurs don’t select VC’s simply because they offer the best term sheet., the site that Kitano mentions, is not a NASDAQ for startups matching bid-ask prices for investment — the message boards are filled with human-on-human interaction stories. Investment banking may be matching capital to need at its core, but as Jonathan Knee of The Accidental Investment Banker posits in his book, there is an enormous human element to that business as well.

Knee, a former managing director at Goldman Sachs and Morgan Stanley, talks on and on at length about how the investment banking community has lost its way, how it has abandoned the traditions of client service in search of the next kill. He seems to believe that at the heart of investment banking is being a trusted advisor to the CEO’s and CFO’s — men and women who are powerful, but lonely because of their power. Surrounded by asskissers and yes-men, these executives need someone who understands their business and isn’t afraid to tell them what they need to hear, a business confidante or sorts.

Knee left the big Wall Street banks and joined a boutique firm that specializes in the kind of handholding services that he believes clients need.

That stands in stark contrast to the future that Kitano is describing:

Now that the jig is up, investment banks need to prove another business model for 2008+, but like many of the transactional industries disintermediated by the internet – travel, real estate – the new reality will be lower fee structures distributed among more players who can provide services that were once the sole province of investment banks. For example, Kessler posits that new players will be consolidated financial powerhouses with the capital strength to provide a continuum of financial services – think Goldman Sachs merged with Citigroup.

Kitano and Kessler both seem to think that the future of investment banking will be some sort of a financial Super Wal-Mart. Presumably, for real estate, that means the future will be some sort of a real estate One-Stop-Shopping combining brokerage, buyer agency, mortgage, appraisal, title, legal, moving, home maintenance, and Home Depot to boot.

I don’t think so.

If anything, I foresee a future that splits sharply, just as retail has done. On the one hand, you’ll have the low-cost Wal-Mart types that competes on the basis of one-stop convenience combined with pricing power. Frankly, the various FSBO type companies coming up are shaping up to be these. Low-service, low-prices, low-interaction. That’s one model, and lies at the heart of Kitano’s new model for real estate.

Thing is, I just don’t believe these will be the dominant model for real estate, anymore than I believe the Super Goldman Citibank Dean Witter will be the dominant model for investment banking.

Investment banking — the buying and selling of companies, and the locating of massive amounts of capital — isn’t exactly picking up the groceries. It’s one of the most difficult, traumatic, and life-changing events in a company’s lifecycle. If you’re the CEO, do you really want to go with the lowest bidder on something like that? That’s like selecting your brain surgeon on the basis of price only. I believe investment bankers get chosen on the basis of trust. I believe the successful investment bankers of the future will go smaller and more focused, instead of bigger and more diversified.
Similarly, buying and selling a home isn’t picking out the latest CD or pair of shoes. It’s one of the most important, financially significant, and traumatic experiences a family goes through. The disconnect today isn’t that capital-finding-opportunity has been disintermediated by the Internet. The disconnect today is that the person the family turns to for advice and counsel doesn’t care. The real estate agent looks at the family as just another deal. Too many of them pretend to give a crap, but really, all they’re thinking about is the commission check. Buyers and sellers are just wallets with legs to far too many Realtors.
And that insincerity shines through in everything these brokers do.

That is what is wrong with VC’s, with investment bankers, and with Realtors: they are supposed to be selected on the basis of trust, but they do things to make sure that they are not trustworthy. Conflict of interest is so rampant in all three industries that lawyers are getting verrrrry interested in them. Mercenary behavior is the norm, not the exception.

No wonder the customers are looking to disintermediate, and boil things down to capital-matching-need. If you’ve got to deal with mercenary scumbags who only see you as a pile of cash, wouldn’t you want to minimize what you have to pay these hyenas? I would.

But here’s the bright side: If you actually found someone who is trustworthy, who is professional, who is an expert, and who actually gives a crap about you, would you really mind paying them whatever the cost for the most important financial transaction of your life? I don’t think so.

If an investment banker can really earn the client’s trust, disavow the mercenary behavior, would the client — who is buying a $10 billion competitor — really haggle over a few million here or there? I just don’t believe they will. I think those clients will gladly sign the check over knowing that they didn’t get conned, didn’t get snowjobbed, and got someone’s honest, objective, professional, best-effort assistance.

The same goes for real estate. 6% of the sale is a rather large sum of money. I would pay it without hesitation if I really felt that the agent representing me did so with no conflict, with forthright honesty, and with genuine caring about me and my family. If she really worked for me, to advance my interests, did the homework and the research, and knew the market, and knew her stuff, and got me what I think is the best price possible for my house… I’d sign that check without hesitation. I hesitate only because I don’t believe she did any of those things.

Why doesn’t the real estate industry try a much older idea: actual, fiduciary client service. Realtors talk the talk, but then try their damnedest to get ‘both sides of the deal’. Come on now!

Maybe the business model of real estate is just broken. Maybe the buyer agents need to be completely separated from sell-side brokers. Maybe both need to be paid a salary to encourage professionalism instead of mercenary hunt-and-kill mindset. Maybe the regulations surrounding Realtors need to be toughened up a bunch, and the equivalent of the Bar Exam in law needs to be instituted.

But whatever the solution, I’m convinced that at the heart of any major transaction — whether investment banking or buying a home — is the human being.

Get more human. That seems like the ‘new’ model for real estate to me.


2 Comments leave one →
  1. January 29, 2008 1:06 pm

    Great analysis Rob! The higher the price tag, the more important the human element. I completely agree with you that the value of investment bankers, VCs and real estate professionals boils down to the individual value proposition and that is why there are so few at the top of their game in these fields.

    The mercenary elements associated with the high ticket transactional professions are real and often hidden, and I posit that the new transparency taking place in these fields will provide more exposure.

    My article may have been misleading in the sense that I point out how Kessler predicts the emergence of well capitalized super financial institutions. But that’s not the end all… I actually believe there will be a lot of room for the new boutique players who specialize in fields of business that the Financial Walmarts either don’t have sufficient expertise to practice, or are just too small a deal. I see the same trend in real estate as brokers and agents begin to evolve into market specialists – by geography, by demographic, by domain knowledge – which is what the consumer wants.

  2. January 29, 2008 6:30 pm

    Thanks for the clarification, Pat.

    I’m in full agreement that we will see the emergence of what you’ve termed ‘market specialists’ but I prefer to call “real estate professionals”.

    The one thing I believe the industry has to come to terms with is the fact that it is entirely too easy to be a real estate agent, or even a broker. Compare it with something like law, accounting, or even personal financial planning, and it’s obvious that real estate simply doesn’t have any standards of professionalism.

    1.3 million Realtors is probably 1 million too many. If the real estate industry as a whole is going to survive, I believe it has to evolve by kicking out those who are unprofessional, who have little notion of ethics, and who are simply not smart enough to advise intelligent consumers on the biggest purchase of their lives. Why a doctor or a lawyer or an investment banker should trust the word of some part-time agent who just submits listings to MLS’es is entirely beyond me.

    Reform, or Die. That’s my view of the industry at the moment.


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