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Tackling the Future of Real Estate Brokerage

December 3, 2008
I can see the future!  And boy, is it weird.

I can see the future! And boy, is it weird.

I was tempted to jump in after part 1, when Danilo Bogdanovic threw down the gauntlet. But man, am I glad I waited until he was all done with his series on the future of real estate brokerage. You really owe it to yourself to read the whole series: Part 1, Part 2, and Part 3. As it happens, this is a topic that I’ve also written about a little bit.

So… before diving in… let me see if I can do justice to Danilo’s main points of argument.

I believe there are three main takeaways from what Danilo lays out.

  1. There are too many crappy agents working in real estate.
  2. There are too many old fogies who don’t get technology working in real estate.
  3. There are too many hands in the agent’s pocket.

So his solution is something he calls “White Label Brokerage”:

“White Label Brokerage”. It has an agent-centric versus broker-centric focus and a fee structure that does not interfere with an agent’s business focus. It allows agents to brand themselves, the team to brand their team, and the small brokerage office brand their own company name.

It’s not about the big broker and the brokerage firm’s name and ego. It’s about the agents that do all the work and deserve the recognition. After all…without the agents, there would be no brokerage firm.

Agents who are or intend to be the best professionals in the industry will recognize the financial advantages of this new model as well as the freedom and control it will give them. The freedom that the current brokerage model refuses to embrace is the basis of the future “White Label Brokerage” model.

But the full chain of logic goes something like this (in my opinion):

There are too many brokers who have their hands in the agent’s pocket, charging them ridiculous fee after fee without any training and no support. Because of that, these brokers couldn’t care less whether they were hiring good agents or crappy ones. As long as they can charge fees to these warm bodies, they’re happy to keep it going.

Plus, today, the old-timers who are in business with the fat referral networks, with decades of experience, are more than happy to keep doing the same old crap that no longer works with new consumers who are tech-savvy. Brokers are more than happy to keep these old fogies around, because they’re bringing in dollars, but they’re mortgaging the future.

NAR should be maintaining professional standards, but because they have a vested interest in having as many members as possible, they don’t do nearly enough in enforcing standards or raising standards.

The solution, then, is a new brokerage model that places dollars over ego and grants extraordinary freedoms to its producers, while keeping the bad apples out. The broker needs to support the new technologies, the new marketing methods and channels, and stop imposing their stupid brand rules that actually hurt the on-the-ground producer.

I think and hope that does justice to Danilo’s argument.

I love Danilo’s vision. I applaud his daring. I think he’s speaking for a large number of the new generation of real estate agents — the Gen-Xers who are poised to take over the leadership ranks in the coming years.

Unfortunately, I just see things differently. It probably stems from the fact that Danilo is an on-the-ground real estate agent. He has to go out and get listings, find buyers, do the showings, advise and counsel consumers through the process of buying and selling a home. He has that wealth of experience to draw upon. I, on the other hand, come out of the interactive marketing division of a national franchisor, and work for a technology and data provider to the real estate industry. My experience is rather different.

Therefore, let me disagree with the greatest of affection and respect for Danilo, with whom I plan on imbibing a wide variety of adult beverages in the very near future. 🙂

The Real Future (?)

So let me set forth at the outset my vision for the future of real estate brokerage. It is still a work in progress, and is quite likely wrong in lots of ways, but it differs sharply from Danilo’s vision in key respects.

  • I believe that the brokerage of the future will be large enterprises that are consumer-centric, with most of the power shifting back to the broker and away from the agent.
  • I believe that the smaller brokerages will become boutique shops, who are allowed to exist because they fill a market niche that the big players do not care to address.
  • I believe that agent splits are on the way down, and that the number of real estate agents will be reduced fairly dramatically. At the same time, the top producers will find that they are able to build real wealth by ownership stakes in the enterprise, becoming partners in all respects, resulting in either same or increased income.
  • Contra Danilo, I believe that the freedoms that real estate agents and teams currently enjoy are headed to the ash heap of history as the big brands reassert themselves.
  • And technology will make all of this possible.

By the Power of Greyskull!

"By the Power of Greyskull!"

Power, And Its Uses

As I’ve explored here and here, the essential challenge to the industry (and its existential problem) is the relationship between capital and labor.

The current model — dating from the ’70’s as the post-Remax revolution — is extremely agent-centric. Danilo believes that the big brokers just get in the way of the productive agents with all of their silly ego-driven demands. As a marketer, I can attest to exactly the opposite. The kinds of shenanigans that productive agents and teams are allowed to get away with are simply unheard of in any other industry. Coldwell Banker, for example, spends tens of millions of dollars every year in branding. Yet, productive agents are allowed to de-emphasize that brand all the time and brand themselves, with their own agent websites (which do not meet brand guidelines), with their own business cards (which do not meet brand guidelines), and so on.

Brokers as well try to control the agents who ostensibly work for them, but if you’re a big enough producer, you know that you hold the ultimate power. Simply threaten to jump ship to a competitor, taking your book of business with you, and the broker will fold like Gus Hansen holding deuce-seven off-suit.

Because Danilo is actually right about the real value generated: the agents do all the work, and deserve all the recognition.

Thing is, this situation is not a healthy one for the industry.

Analyzed on the basis of labor vs. capital, the real estate brokerage industry is almost entirely labor-driven with very little capital investment. I had an email exchange with Nicolai Kolding, COO of Better Homes & Gardens, who has spent ten years doing real estate M&A and has been involved with north of 350 transactions, about the impact of capital assets on brokerage valuations. His answer was basically that there is no value: “Very often there’s only 3 categories of assets valued – fixed assets, pendings & listings, and goodwill. Often the depreciated value of the assets is next to nothing.” Could it be that brokers invest millions every year into capital assets, but get them valued at next to nothing? Or could it be that brokers simply do NOT invest in capital assets (including things like their website) which results in zero value for assets? I say it is the latter.

What this capital/labor structure creates is an industry made up of thousands of small mom & pops, rather than one made up of a few sophisticated enterprises able to bring the power of technology to the consumer. The end result is that real estate looks more like dry cleaning than it does financial services.

In turn, this fragmentation leads to opportunities for the new generation of real-estate technology firms, such as Trulia and Zillow, who leverage capital investment in technology that the mom & pop’s simply cannot make, and the Big Brokerages did not make.

What the industry needs — and what I believe the industry will get, over time — is a concentration of power into the hands of the few, at the expense of the many. That concentration of power has its uses.

First, it enables the level of investment required to deliver what consumers want. Move, Inc.’s recent 10-Q shows that it spent $6.8m on Q3 of 2008 on product and website development; in the first three quarters of 2008, Move spent $20.5m on product and website development. I have to wonder how many brokers can actually invest that kind of money into technology. Not many, to be sure.

Whether you believe that Move’s investment is bearing fruit or not, you have to at least acknowledge that innovative solutions to consumer problems is more likely when you invest $20m a year than when you invest $20K a year. There is a reason why top companies spend money on R&D, after all.

Second, in my analysis, the trouble with real estate brands is not that they are too overpowering, but that they are too weak. Danilo, again: “It’s not about the big broker and the brokerage firm’s name and ego.” He’s partially right. It isn’t about the big brokerage firm’s ego. It IS, however, about the promise that the big brokerage firm’s name holds. That’s the essence of a brand: a promise of quality.

The trouble with real estate brands is that over the years, due to shoddy business practices (most of which Danilo points out), the brand equity is all but worn out. Coldwell Banker has a hundred years of tradition, but you wouldn’t know it interacting with your average CB agent. What does Keller Williams actually stand for? What is the brand identity of Century 21?

Note that the new players, such as Trulia, Zillow, Homegain, and others, do not have a massive brand identity confusion that the established players have. They are integrated companies presenting a single brand promise to the world. None of the real estate agents represent Trulia. Only Trulia employees represent Trulia. One interesting result, in my opinion, is that the newer entrants have a stronger brand identity than established players like Remax, even though their brand awareness is lower. Trulia stands for “user friendly search”; Zillow stands for “online home valuations”; meanwhile, Century21 stands for… um… gold jackets?

Third, investing in technology (capital) leads to de facto control of the customer relationship. I wrote about this a while back and see no reason to alter my opinion. I have bought dozens of items from Ebay over the years, from a wide variety of sellers. I couldn’t tell you a single thing about a single seller. But I know that I got the items from Ebay. Ebay is the primary holder of my customer relationship, not any of the actual sellers. Similarly, when consumers are finding homes they buy through, then ultimately get serviced by Sarah Jones, a real estate agent with ABC Brokerage, affiliated with Brand XYZ… chances are that seven years later (the average time between consumer real estate transactions), they won’t remember Sarah Jones, won’t remember ABC Brokerage, and won’t even be aware of Brand XYZ. But they will remember they found their home through Henceforth, I will call this the Home Depot Effect.

Conversely, when a consumer is brought in by Sarah the Agent through her own sphere of influence, then the consumer may remember neither ABC Brokerage nor Brand XYZ, but he will remember Sarah the Agent. This is what underlies the entire sphere of influence doctrine, and is what propels real estate social media marketing.

But in this too, one can see echoes of the capital vs. labor dynamic. The companies investing millions into technology assets are betting that they can reach a point where the Home Depot Effect takes over and starts to benefit them. Hence, Zillow spends millions in website development and marketing to try and become the consumer destination for real estate. Once that happens, then the Home Depot Effect comes into play, and realtors become mere order-fulfillment services. The customer relationship lies with Zillow. Conversely, the web-savvy real estate agents are furious blogging, twittering, Facebooking ,and social networking in order to establish an online sphere of influence in their local markets. They are spending what they can on their websites, constantly looking for tools to help their online presence, but in reality, they are substituting their hard work (blogging ain’t easy, folks) for investment into capital.

Power to the People?

An objection to this analysis, of course, is that I am flat out wrong. That very well may be the case; I’ve been wrong before, and will be again.

The primary vision here is that the power of Web 2.0, social media, and open source combine to reduce the power of large organizations. Witness the power of the blogosphere in bringing down the likes of CBS News and the New York Times. The Obama campaign leveraged social media in ways never seen before to put power into the hands of its hundreds of thousands of supporters.

So, the theory goes, all of the tools made available to the real estate agent — such as Google, WordPress, YouTube, Facebook, Twitter, and so forth — will reduce the power of any large brokerage, or any one company like Trulia. The power will devolve down to the local level.

Here’s why I believe this is simply a mistaken view. Somewhat lost in the utopian vision of Web 2.0 is the fact that Web 2.0 mostly benefits a few very large players: Google (87.95B market cap), Yahoo ($15.9B), Facebook ($15B+?), Microsoft ($176.75B), and so on. Sure, these companies mostly provide the plumbing of the new Internet era, so they’re ‘behind the scenes’ if you will. But they’re the ones making all the money, and as a result, they’re the ones able to make all of the investments into technology required to keep Web 2.0 going.

The agent who is unaffiliated with any brand, is using a $9.95/mo hosting provider, a $15/month templated website (with free WordPress), free API’s and widgets from Zillow and Trulia to provide home values or community information, and pays the local MLS some fee for listings believes that he is truly empowered. But that agent isn’t investing millions into developing the next generation of property search, or the next innovation in mapping. Someone else is doing that. And if that someone goes away, the agent is simply out of luck. More importantly, if that someone decides to start charging fees, the agent is basically faced with having to pay those fees, or else.

This is especially the case when the Home Depot Effect kicks in, and consumers start to associate one of a few brands with a particular industry — as they do today in home improvement or hardware.

So in my view, the contest isn’t between Big Companies vs. The Little Guy, but between Big Brokerages and Big Technology. One or the other will emerge with the power, at the expense of the other.  The Little Guy isn’t really part of that conversation, because they have not the money to invest in capital assets (i.e., technology).

The real estate bubble hid (and softened) much of the consequences of the entrance of capital-intensive technology firms into the real estate industry, since everyone from small to large brokers were making money hand over fist, and there was plenty of money to go around to everybody. With the current market, the industry now stands at a crossroads.

Olegba, take me to the crossroads!

Olegba, take me to the crossroads!

The Crossroads and Likely Aftermath

Concentration of power is inevitable. If Big Technology gains the power, then it will be able to displace existing real estate brands as the holder of the primary consumer relationship, and leverage the Home Depot Effect. If Big Brokerage gains the power, then it will be able to displace the technology providers as the provider of capital assets, and leverage the Home Depot Effect itself.

For what it’s worth, I believe the winner of this contest will be Big Brokerage — but only if the management of Big Brokerages understand the critical tasks at hand for them, and the major challenges facing them, in what is going to be an incredibly difficult economic environment.  If they do not, then they will disappear as the “Real Estate 2.0” companies come to the forefront.

The key is investment in technology.  In what is very difficult times, Big Brokerages must redouble their investment in technology.  If they continue to let third party providers provide key technology tools to their agents, if they continue to get beaten by Big Technology companies in innovation, then they can’t possibly win out.  The advantage of Big Brokerage is that they are actually making a lot of money.  A lot more than most of the real estate technology companies, in reality.  For example, John L. Scott, the 8th largest brokerage in the country, according to RISMedia’s 20th Annual Power Broker Report
& Survey, did $14.6B in volume in 2007.  Making assumptions (2% GCI per side, 26.7% company dollar), that means their gross revenues (after commission splits) came to $77.9M.  I’ll bet that was more than every single real estate technology company, and this is only the 8th largest in the country.

I believe Big Brokerage still has the revenues, and still has the financial strength to make the investments necessary into technology.  And once they do… they are in a better position to concentrate power into their hands.  After all, they are already the incumbents.  Question is whether they have the will.

By investing in technology (capital), the Big Brokerages will become the holder of the customer relationship. Currently, the agent is the holder of the relationship — which explains why the threat of a top producer moving to a competitor is so frightening to brokers.

In contrast, if a great loan officer threatens to leave Citibank, the CEO of Citi isn’t losing any sleep, nor is he necessarily countering with more pay and benefits. It’s more like, “Cya, and don’t let the door hit you on the way out.” The reason is that the customer’s relationship is not with a specific loan officer, but with Citibank. To get to this point, Citibank spends hundreds of millions every year on its technology, on its marketing, and on its brand.

If an employee gets to a point where losing him or her would significantly hurt the business, then financial services companies offer incentives (including partial ownership via partnership interests or stock options or whatever) to align their mutual interests. I see that in the future for some of the absolute top producers, which should soften the blow of losing so much power for them.

Concentration of power in turn enables the big firms to re-establish control over their brands, and reinforce the brand promise. That necessarily means that the agents and teams will lose power, in the same way that a local McDonald’s franchise has very little leeway when it comes to the golden arches brand.

Once big firms gain the power, and get ruthless about enforcing brand discipline, they simply cannot afford to have crappy agents ruining the brand experience. Macy’s spends millions upon millions of dollars trying to make me believe it will be pleasant to shop there; a single interaction with a Macy’s employee ruins the brand completely (for me) to a point where I simply refuse to shop there. This is what happens today far too often in real estate.

A firm that has a vested interest in maintaining its brand identity, and its brand equity, will absolutely fire those agents. It will spend more on training new agents. It will ruthlessly enforce quality control, customer service standards, and get rid of those who don’t measure up. Think of how Nordstrom’s does business. Voila, quality control!

So contra Danilo again, I think giving more power to the individual agent or team will result in exactly the opposite of what he wants: higher quality agents serving the consumer. I think the industry will see higher quality agents, and fewer of them, but as the result of concentration of power into big brokerage firms who take their brand really seriously.

The Real Beneficiary

The irony here is that it is technology that makes this transfer of power possible. Until the advent of the Web, and its ability to form direct business relationships with consumers, brokerages couldn’t possibly hold the relationship. Hence, the elevation of the agent. With technology, and with size, the broker can fundamentally change that relationship.

For all of the emphasis on the part of small and independent agents and brokers, the Web 2.0 movement and the social media movement and the tech-centric focus ultimately end up making possible the transfer of power from the agent back to Big Brokerage.  (Or, to Big Technology.)  Of course, some of the people who are now at the vanguard of the Real Estate 2.0 movement will end up running those Big Brokerages… but that’s another thing altogether.

But who is the real beneficiary of this future?  Big Brokerage?  Big Technology?  The agent?

The answer, imho, is the consumer.

Big Brokerage can establish its dominance if and only if its investments into technology produce something that the public, the consumers of real estate, find useful, valuable, time-saving, and/or money-saving.  Simply investing in TV ads ain’t gonna get it done.  Just dumping money into the website isn’t going to do it.  They need to produce something that benefits consumers; otherwise, consumers will just ignore whatever gets produced.

Greater reliance on capital assets, with less reliance on labor, likely means that the overall cost of providing real estate services drops — which benefits the consumer, as those savings will be passed on.

Greater emphasis on re-establishing and maintaining brand identity means higher quality of sevice, as bad agents are removed, and good ones promoted — which benefits the consumer.

The real beneficiary, then, is the real estate consumer.

In the grand scheme of things… that ain’t a bad thing now, is it?


9 Comments leave one →
  1. December 4, 2008 10:39 am

    R- I do believe you have just turned my belief system on its head. While I do not think you are right, I am uncertain enough about what our industry is going to look like in five to ten years (or next Tuesday, for that matter) that I will concede you could be. Off to take a Tylenol, find my Big Thinking Hat, and ponder.

  2. December 4, 2008 10:39 am

    Very interesting and well thought out projection.

    Coming from the marketing side of things as well, it’s interesting to see the differing perceptions between an agent and marketer…now if you could only get a major real estate CEO to chime in, we might be able to see the whole picture.

    Thanks for writing this, it certainly is giving me a lot to think about.

  3. December 5, 2008 1:13 pm

    Very interesting post. Although I did have to take a break to celebrate my 39th and 40th birthday’s before I finished.

    They key point that I found was your examination of the RE 2.0 companies vs. the big outfits like Century 21, who you know I represent. I believe the big boys are here to stay. The online brokerage models may gain some momentum by offering discount services, but I don’t believe that a significant percentage of consumers – of any age – are going to be comfortable transacting what for many is the largest single financial transaction of a lifetime via an online interface. I know I want to be able to reach out and touch my real estate agent, to share my thoughts in person about their performance.

    Well before I get too long-winded, that’s my .02.

    Keep up the thought leadership R.O.B., but please offer a cliff notes section. I only have 30 minutes for lunch.

    Sender – Channel – Message – Receiver

    From the front lines,

    Matt Gentile

  4. Joe Kazzoun permalink
    December 10, 2008 1:41 pm

    I don’t think there will be one ‘winner’ – there will be room for big brokers, franchises, boutiques, teams, etc.

    I agree with many of your points and some of your basic reasoning, but my conclusions are different. For example, I think that teams will continue to be a big part of the picture. Here is why:

    1. Many are able to leverage technology better than big organizations. They can obtain it and deploy it faster because they are smaller and because ASP/browser based technology is so accessible(and inexpensive for them to deploy).
    2. Real Estate is a personal service, just like a Dr, an attorney, a financial planner, etc. People will continue to choose agents based on personal referrals and other factors, not just by brand. Very, very few people call up a broker or franchise some due to their brand. The brand adds to their comfort, but is almost never the driver. I can watch 100 C21 or CB ads, but as soon as I step outside my house and see four yard signs in my neighborhood for an agent (independent or otherwise) and ask my neighbors if they like her (and they do), guess who I’m going to list with?

    More later…



  5. December 11, 2008 9:59 am

    @Joe –

    Hey, thanks for the comment Joe. Great to have your insights here.

    I should clarify that I don’t completely disagree with your conclusion, in the sense that… IF the Big Brokerages don’t step up, then the only real alternative is for Big Technology to do so.

    Your point #1 about teams/small groups being the future because they can leverage technology better is true. But it also relies upon those ASP/browser based technology being available in the first place. That can happen only because someone invested millions of dollars in creating it.

    My take right now is that Big Brokerage is best positioned, and best incentivized, to make that investment and to create the next generation of technology tools. But they might not do so. Real Estate Technology — still a very nascent industry, with few players who are making big dollars — might mature and eventually take over that technology provider role.

    If it does, then that spells the end for Big Brokerage as we know it, IMHO, in the same way that technology spelled the end (more or less) for Big Travel.

    As for #2… I think that deserves far more explication and exploration than available in a comment. 🙂 But generally, I wholly agree. Technology, however, will have dramatically different impacts.


  6. December 30, 2008 12:43 pm

    The one issue with all these models is they tend to try and lump every real-estate consumer into one big pile. When actually, what we do have, are many splinters of vertical markets.

    The first thing I tell a new broker is “you may start out doing everything in sight. But as time goes by, you will find yourself working more with a certain subset, say retirees.” No one brand, and no one technology is a one size fits all.

    Therefore, what we are more likely to see are two things:
    1) Real-Estate as a service
    2) Real-Estate vertical communities

    Let’s look at “Real-Estate as a Service” first. More and more do it yourself consumers will want the REAL Home Depot option. That of getting the tools and materials I need from Home Depot so I can do it myself. This means, I may want to pick up a “Listing Service”, a “Staging Service”, a “Negotiate On My Behalf” service, and so on. Firm’s agents will offer these services for fees. The number and type of service is endless. Use your imagination.

    The second is “Vertical Communities”. We already have some of this today. Just look at Commercial vs. Residential. Then drill down a little more and you have potential verticals like “First Time Buyers”, “Luxury Buyers”, and “Retirees”. Drilling down even further, you might have “Half-Backs” as a vertical community. Half-Backs are retirees who sold their homes up North, moved to Florida, and now want to move half way back to say North Carolina. Think about the needs of this one segment, Half-Backs. If someone were to create an online community where this group could congregate to share stories, talk about their problems selling their home in Florida and get advice or info from other community members. Then have their Floridian property (listed in a local MLS) be shared on websites of markets for potential buyers (in this case, we know buyers of Floridian properties are in England, Germany, and Australia).

    So the tools and technologies will be verticalized by the regional stakeholders in those vertical markets. But no one company or technology will prevail. It will be MANY vertical companies with customized Google Social type technologies who will prevail and be the real winners.

  7. December 30, 2008 1:03 pm

    @Barrett –

    Very interesting observations, Barret — thank you.

    Really quick, since I don’t have a ton of time right now, your observation about “Vertical Communities” brings to mind the whole Long Tail scenario. It also brings to mind specialized practices in areas like law and finance. So while the topic deserves far more detailed discussion, it seems to me that the key then will be figuring out (a) the verticals that are remunerative enough in and of themselves to sustain a business, and (b) pricing models differentiated upon the specialization.

    (a) goes to the Long Tail problem where producers in the Long Tail make no money; only the aggregators do. (b) goes to the problem of incentives: if brain surgeons got paid the same as general practitioners, why would anyone want to take on the additional schooling, training, and residency requirements of becoming a brain surgeon?

    More later.



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