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Imagining the Future of Real Estate: The Firm As Model

July 30, 2008
Georg Wilhelm Friedrich Hegel

Georg Wilhelm Friedrich Hegel

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?

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. 🙂

The good news for Sean and others thinking big thoughts of transformation is that there is a model that is precisely like his “Super-Team” concept: law firms.

Intro to Law Firms

Law firms are mostly limited partnerships (for the most part, although a few are Professional Corporations) with liability to each partner limited to the extent of his stake in the enterprise. Most are governed by a smaller subset of the partners, something like an Executive Committee. And the head of the firm is usually the guy who chairs the Committee. But those are the partners. They are equity owners.

The vast majority of lawyers at larger firms are Associates, aka, salaried employees, aka, wage slaves — sometimes called “peons” or “hey you!”. They are paid a salary, and sometimes a bonus based on performance, like any corporate drone. Their time is billed out at a rate far higher than what the firm pays them. Almost all Associates bitch and whine about how badly they are treated, but few of them want to leave and start their own practice because they know they couldn’t get the clients on their own.

The custom has developed over decades that there are “steps” to being an associate. These are the stereotypes, and they are (apparently) based on reality.

The junior associate (1-2 years of experience) knows absolutely zilch and are worth about as much as a pile of dogpoop in a bag as a lawyer, but the firm keeps paying them enormous salaries in the hopes that they will one day be worth a damn. The mid-level associate (3-6 years experience) are the workhorses — they don’t know enough to lead their own teams, and have to be supervised, but at least they know how to wipe their own noses, legally speaking. The senior associates (7-10 years of experience) are like midlevel managers, the heart-and-soul of any organization. They are the right hand to the partner in charge of the case/client. They do almost all of the work, all of the strategy, and manage the lower level associates and paralegals to get things done.

Somewhere in your 8th through 10th year, the senior associate is supposed to be considered for partnership. All kinds of calculations, machinations, and politics goes on. At the end of the day, the associate is either invited to partnership or essentially told to leave. Although firms like to say that they consider all factors, it seems to me that there is one very clear requirement for partnership: a book of business. If you are not a producing partner, able to bring in enough business to feed others, then you’re a drag on the revenues of everyone else. So your partners have little reason to keep you around. Or invite you into the club in the first place.

Once you are a partner, you gain all of the rights and privileges of partnership. You no longer get paid a salary; instead, you take a draw against profits. And at the end of the year, the partners split the common profit pie through a series of bloodthirsty meetings. 🙂

As you can imagine, if the senior associates are doing almost all of the work, then what exactly do the highly-paid partners do day in and day out? They go out and sell. They bring in business. They do the networking, the schmoozing, the meetings, the golf outings, whatever it takes to bring in business. Once in a while, they practice a little law too.

In addition to the lawyers, of course, your typical law firm also has a large number of support staff — administrative assistants, paralegals, IT people, HR, librarian, etc. etc. All support is shared by the whole firm, and paid out of the firm’s revenues.

The Real Estate Firm

I think real estate brokerage can work this way too.

Basically, a number of producing agents/brokers would join up in partnership. All of the revenues would go to the common pot — shares of partnership might vary from one partner to the next, depending on the equity contributed, etc. And you might adjust those shares annually based on business brought in, etc., but that’s step one. Pool all of the money, then share it more-or-less equally under some rule that is agreeable to everyone.

Everyone else is an employee. They get a salary, they get benefits, and if business is good, and they’re good, then they get a bonus. If they’re not, then they get fired. The firm is legally responsible for their actions in the course of work (respondeat superior) but in return, the firm clearly directs the how, when, what, and where of the employee’s activities. And the firm takes 100% of the revenues, with no splits, no commissions, and so on.

Junior agents in particular are valuable to the firm only insofar as revenues generated > money spent on that agent. What could a junior agent do to prove such value?

  1. They can do the actual work, freeing up the partners to go out and bring in business.
  2. They can bring in business.

It is a waste of the firm’s time to have a senior partner spend time showing houses; that’s for his associate, who may in fact be better at doing that. He might spend that time either calling on more potential sellers, or speaking at local Chamber of Commerce events, or writing blogs proving how much of an expert he is in investment real estate in the Modesto, CA market.

In addition, the junior agent wants to spend a bunch of time learning to bring in business consistently. Getting three or four $300K deals a year isn’t even going to cover her desk costs in a Firm model. She wants to do this because only by having her revenues outstrip the costs of having her around is she ever going to make partner, and get the opportunity to share in the profits of the firm.

Conversely, if she wants to leave and start her own practice, she’s going to have to figure out how she’s going to bring in enough revenues to have the support she’s used to: assistants, listings coordinators, staging managers, transaction specialists, designers, etc.

What Is Required:

In order for this system to work, the firm has to take on enormous overhead. Payroll, office space, technology, marketing, etc. etc. are all coming out of the firm’s pocket.

That means revenues have to match the expenditure: the partners, in particular, have to make more money by partnering than by going it alone. After all, these are the guys and dolls who bring in the revenue — if they feel that they can do better going it alone, they will.

In real estate, there are only two ways I can see this happening.

First, the Firm has such a competitive advantage that it crushes all non-Firm brokerages in its market area. Where would such a competitive advantage come from? The Firm would have to be so much better at marketing properties that sellers would have to think of a reason not to list with the Firm. It would have to be so much better at finding exactly the right home for buyers, negotiating well on their behalf, and be so good at transaction management that buyers are willing to pay a premium to be represented by the Firm. The level of customer service has to be so high, because the Firm has people who specialize in it, and spend enormous time catering to past, present and future clients’ needs, such that it is able to create loyal customers who return time and time again, even through the Seven Year Cycle. Its rainmakers would have to be talented at getting the business, and be freed up to be able to do just that.

Second, the Firm has ancillary lines of revenue that is unavailable to non-Firm brokerages. For example, its senior brokers end up with such market presence, such acknowledged expertise, that they are able to simply bill for their advice — as top attorneys do. Or they can end up with such detailed data in their market that they are able to leverage that knowledge in working with developers, or with the commercial real estate market, or data companies.

The unitary Firm, with the higher level of support that it is able to create for its rainmakers, must be able to dominate the competition.

So… that’s fine and good, but… how? How?

Film At 11

I’m already at 2,100 words or so, and trying to explain my ideas of How such a Firm could be created is going to take many, many more pixels. That will have to be a next part. However, here are the basic concepts — those smarter than I am could figure it out just from these:

  • Institutional CRM: The Killer App
  • Redefine the Profession: Shifting the Grounds of Competition
  • Systemic Brokerage: Learning from Bill Belichick
  • Outsource Everything But Profit Centers
  • Specialization for Domination

And before anyone else points it out, no, I am not a real estate broker — never have been, likely never will be. Maybe all this is just hitting more of that ye olde pipe. But then again, all this is free, so it just might be worth what you’re paying for it. 🙂

-rsh

UPDATE: Part 2 of this series on CRM is now up.

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