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Onward Kristian Soldiers!

January 16, 2009
Onward to Victory!

Onward to Victory!

The Setup

The talented and lovely Kris Berg is but one of the able spokespersons on the vanguard of a movement I have whimsically dubbed the “Kristians”.  This is an important movement, with very important points to make, and even as I disagree with them on points, I take their arguments seriously.

Essentially, the Kristian position appears to be (and please, feel free to correct me) that the future of real estate lies in The Swarm — small independents, high quality agents, and boutique firms, empowered by technology and social media.  The technology will be provided by third party firms, third party consumer websites, and the like.

Big Brokers, in the Kristian view, are anachronistic dinosaurs stuck back in the days, who provide no meaningful support to high-quality agents.  There is a role for Big Brokerage in the Kristian worldview, but it’s limited to some sort of a training factory to churn through the ranks of inexperienced newbies who aren’t serious about the business of real estate.  A nursery, if you will, for realtors who will go independent as soon as they are able.

In contrast, you have those who believe that the future of real estate will be dictated by Big Brokerage (including Big Franchise, such as Remax, Coldwell Banker, and the like) which I have dubbed The Robnecks.

The Robnecks believe that despite the current buzz being generated by social media, “Web 2.0”, and the like, the fundamental realities of business and the industry will reassert themselves and in the not-too-distant future.  Robnecks hold that Big Brokers are not dinosaurs doomed to extinction as much as they are sleeping giants.  Some will never wake up, and end up being devoured by the Swarm; but those who do wake up have established business models, established brand, established infrastructure, and most importantly, have the resources to invest in to technology.

The Robneckian theory posits that there are technology solutions available in the market today — such as enterprise CRM — that are enormously expensive to implement and to operate, but provide lasting institutional advantage.  Given that some of these Big Brokerages have billions in sales, and hundreds of millions in revenues, they will not go gentle into that dark night.  They will fight and rage against the dying of the light.

We believe, therefore, that the future of real estate will be charted by those Big Brokerages who have woken up, seen the light, and have begun to streamline their operations, understanding the critical levers of power in the industry.  Marrying their institutional expertise with infrastructure with significant investment into productivity technology will provide these Big Brokerages with a profit advantage over big competitors and a brand advantage over The Swarm, which will lead to their changing the industry.

The Question

The Talented Ms. Berg

The Talented Ms. Berg

With that background, consider that Kris Berg recently posted a very thought-provoking, and important, article on this topic entitled “Innovation in Real Estate: Are we really different or did we just change clothes“.  I urge you to read it in full.

It continues the debate that began here.  And Kris asks important questions and makes important points.  The most salient, I think, is this:

It seems like only yesterday that I needed a company brand for credibility. I needed the resources of a big company, both the fixtures and the systems, because there was an economy of scale which I couldn’t touch on my own. Today, I can work from anywhere. I don’t need the desk and computer bank and copiers; I have my own. I don’t need the listing feeds; I can place my listings any place my broker might, and in doing so all roads lead back to me. I don’t need the brand; I long ago branded myself. Group print advertising rates which used to be a huge benefit of associating with the 1000 pound gorilla are now an antiquated concept.

Admittedly, many agents may not want to think that hard, so there will always be a place for the high-overhead brokerage. But as we march forward in our social evolution, the numbers who will need help grasping technology or will need to be spoon-fed a business plan will diminish. As virtual office space becomes more the norm and less the exception, I believe we will be finding more agents concluding that the shiny office supported by company voice mail and e-mail systems and an administrative staff a dozen deep are “wants” and not “needs.” And when that happens, there will be more resistance to paying for something that is not truly necessary in conducting our business.

So we are left with the true value of the brokerage being in the areas of training and “lead generation.” Training is another topic entirely and for another day. As for lead generation, I see it becoming a footrace of sorts among the competing brokerages to generate the most “leads” (consumer contacts and inquiries) to placate and feed the largest number of agents. More agents equal more money. But then, haven’t we come full circle? Aren’t we back to what we are now? And just where did the customer go in the equation?

Again, read the whole thing in full for the proper context.

Kris is surely correct as things stand today.  I want to stress this point.  As the industry is today, Kris Berg is absolutely correct, and the Kristians have the field.

If Big Brokerage of today is essentially a office-park operation that has gleaming office space and dozens of admins who add little value to the transaction, and they just charge rent (aka, “desk fee”) to the agents, then yes, the savvy agent will see that they don’t in fact need anything that the Big Brokerage provides.

Third party vendors do in fact supply the savvy agent with everything she needs to be successful.

The only value of brokerage, then, in the Kristian vision is “training and lead generation”.  And her question is poignant indeed: “And just where did the customer go in the equation?”

The Answer

The Robneckian answer is un-simple.  Furthermore, it is counter-factual, because I am essentially arguing that the future will be different than the recent past, and the present day.  But I believe this.

To start, we must begin with First Premises — assumptions that underlie the answer.  In this case, they are:

  • People love money, but people hate losing money even more.
  • He who controls the consumer relationship controls the money; he who controls the money controls the future.
  • Real Estate is the longest of Long Tails.

From these first premises, what I derive is that Big Brokerage has greater incentive to act than pretenders to the throne.  It’s one thing to want to make $150m a year by becoming a third party technology provider to millions of agents.  It’s another thing altogether to lose $150m a year by sleeping on the job.

Lest we forget, some of the people who own these Big Brokerages are folks who have spent their entire lives building up a company from the ground up.  I met some of these people during my time at Realogy.  They may be fatcats now, but not one forgot the struggles they went through as a young man or woman scratching and fighting, building their company one customer at a time, one agent at a time, facing bankruptcies, having wins, and finally breaking through.  They are one motivated group of folks.

Is it really safe to assume that people like that are content to let their brokerage value plummet while third party tech vendors pick off their top producers?

I wouldn’t bet against those people as a group.  Sure, some will be too tired, some will be too set in their ways, some will simply be content to fade away — but most of those successful broker owners are extremely driven, competitive, smart people with a track record of success over the decades.

Second, once those people come to understand that he who controls the consumer relationship controls the business, and that web technology lets institutions control that consumer relationship (see, e.g., zappos.com)… I believe that they will see what this means for their business.  Going from the currently prevailing 3% profit margin to say a 10% profit margin when you’re doing $2B in sales means you achieve massive institutional advantage.

Finally, because real estate is the longest of long tail industries — due to the fact that each and every house is unique and not movable — even the superest of super agents can only occupy a small part of the long tail.  Yes, they can make a very nice living while there (see, e.g., John McMonigle) but as compared to Big Brokerage, these super-teams or boutique brokerages simply lack market power.

Only someone who can aggregate all these different pieces of the long tail into a significant enough chunk can make real money from real estate.  The only two contenders are Big Brokerage or Technology Providers (such as Zillow).

Can Tech Providers win that war?  Of course they can.  Too much arrogance, too short-term vision, or too little nimbleness on the part of Big Brokerage will naturally lead to the Tech Providers winning.  In large part, this is what has happened to commercial real estate in the United States.

However, the Robnecks hypothesize that it will not happen in residential real estate, because here (unlike in CRE), an institution can own the consumer relationship.

Caveat Lector

The caveat: they cannot do it with technology already available to the agent.  No way, no how.  The cost advantages of someone working from home, using Trulia for listings, Google Apps for software, and the like are too enormous.  Big Brokerage can never be the lowest cost provider.

Rather, they have to do it with technology that is yet unavailable to the masses.  Two examples: enterprise CRM, and dynamic content management coupled to anonymous user profiling.  Imagine those deployed cross the NRT.  And that’s just pure technology.  Imagine competing with a Big Broker that has an actual, professional marketing and customer relationship team (again, see Zappos.com) empowered with enterprise software.

Furthermore, the Big Brokers simply cannot do it when loaded down with overhead that isn’t leading to owning the consumer relationship.  Those 20,000 sq. ft. offices have to go.  $15,000 per year desk costs per agent have to go.  Multi-million dollar print ad budgets have to go.  You cannot compete, even with small independents, burdened with useless overhead.

Big Brokers have to adapt many of the techniques of the smaller, nimbler Kristians, then layer the Big Technology on top of that.

And finally (at least for this post), Big Brokers must understand that their brand is what separates them from The Swarm, and that their brand is in the hands of their worst agent.  Without serious focus on quality control, without serious concern about fulfilling the brand promise by every single person who is associated with Big Brokerage brand, it will be impossible to establish lasting institutional advantage over The Swarm.

Without that advantage, you die.  Just a matter of time.

Enter the Customer

While I concede this is counterfactual, consider… imagine, if you will… what happens to the consumer when a fully awake, fully invested, and fully operational Big Brokerage aims to own the relationship with him.

From the moment the consumer goes on http://www.BigBroker.com, the company knows something about him based on anonymous IP tracking, user profiling, geo-targeting, and the like.  As he interacts with the site, fully realized with something like the Lifestyle Listings Engine, the company knows more and more about his preferences, his life decisions, his economics, and the like.

From the minute he presses “Submit a Question” button, the system routes his information to the appropriate expert on the topics he is interested in, and the CRM system gives the agent 5 minutes to respond by phone or email before moving the lead on.  End result: consumer is contacted within 15 minutes.

Throughout the entire transactional process, the Big Broker system is tracking every interaction, the customer service department is following the consumer’s twitterstream, sending out satisfaction surveys, and sending links to helpful articles, vendors, and the like depending on the phase of transaction.

After the transaction, full customer satisfaction surveys are conducted, and if problem spots arise, a customer service rep — perhaps even the owner of Big Brokerage himself — is on the phone with him finding out what went wrong and how they could fix it next time.

This is all possible today.  It is roughly the experience I had buying a Honda.  It is absolutely possible in real estate.

Far From the End

This is not the end of the discussion and debate, of course.  If anything, it is merely the start of the Grand Debate that I believe will be sorted out by realities on the ground over the next 2-3 years.

The Kristians have a strong argument.  Because their version of reality is in fact what exists today.  Most brokers do too little for too few for too much money.  Consumers are left as an afterthought.

But that can change.  And quickly. And all of the incentives are lined up on the side of the existing players who have far, far too much to lose.  Once awake, they have the resources to make things happen awfully quick.

I for one am not betting against them.

-rsh

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13 Comments leave one →
  1. January 21, 2009 11:41 am

    I think I’m the one who needs the therapy. I spend way too much time being sucked into these conversations 🙂

    Your blog is so addictive, Rob. I’ve never followed a blog like I do yours.

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