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The New Real Estate Model – Part 1: Disbrokeration

Ch-Ch-Ch-Changes
The Real Estate industry is going through some pretty rapid changes lately. We have everything from Apple’s iPhone to Zillow’s Zestimates. There is a lot of conflict too. Your local Board of Realtors is most likely still trying to throw a fence around listing information, while a wired world questions the nature and even purpose of a real estate agent. The RE.net is creating opportunities and shifting the nature of the game. The world is 2.0 and it communicates differently. A 2.0 world markets differently and rewards differently too. Throw in the most destructive credit crunch since the Great Depression and you have a recipe for… WHAT? Only one sure answer: change. But the question is this: change into what? What does the future of the real estate industry look like? Will there be agents? Will there be brokers? Will there be a real estate industry? This is the first of a three-part series that will attempt to answer some of these questions.

Back in March I wrote a post on Disbrokeration and the coming changes in the real estate industry. I suggested that Brokers, more than agents, were going to see their positions and their livelihood challenged. I still believe that to be true. In part two of this series I will run through the first evolution I saw for our industry: The Super Team. Not an uncommon idea, the Super Team already exists and the refinement of it is discussed in many areas. Mike Farmer has written about it in great fashion. I will discuss why it may work for some, but in general it simply does not solve enough problems. Worse yet, it adds new ones. In the final installment, part three, I suggest a new model for the real estate industry. A model that is easily copied, well developed and most suited to solving the issues in our industry. But first, we must understand why the current model will not last.

Disbrokeration: The End of the Current Model
The existing Broker model is actually a pretty old one, found in almost any industry that is focused around the act or process of sales. From large Wall Street securities firms to small water purifier companies going door to door, we see the same basic structure: a principal surrounded by representatives. It goes back to the earliest days of retail. One person has an idea, a store, or a product/service that they wish to sell: a shoe store for example. They can only see so many prospects at one time or in one day so to increase overall sales, the principal brings others on-board. For a reduction in profits per pair of shoes sold, the principal hopes to see a lot more shoes sold. In this sense a store clerk, a stock broker and a real estate agent all serve the same purpose: help sell something that belongs to someone else in return for a piece of the profits in wages or commission. (Important Note: to sell something that belongs to someone else in real estate has nothing to do with who owns a piece of property. Agents are selling a listing or purchasing service that belongs to the broker. The broker is the store owner and the agents are the clerks. They help the broker sell more shoes by assisting clients in finding the proper style and fit.)

This made good sense for a long time and even worked as an incentive within the industry: work hard as an agent and eventually, if you have the desire and the money and the wherewithal, you will create or purchase your own real estate shop.  You are then the Broker and you hire agents to represent you in dealing with clients who wish to buy or sell a home.  In many ways it was a grand retirement plan.  New agents counted on the Broker for everything from an office to phones; from training to accounting and from organization to guidance.  In return the broker kept a hefty portion of the commission.  It was rare for an agent to even reach 50% as it was the Broker who had taken all the risk, fronted all the bills and established him or herself as successful enough to own a brokerage in the first place.

Over time, the real estate industry expanded and grew, as any living organism will. Under the pressure of this growth, weaknesses are exposed and even exploited. The industry grew a very strong lobby and laws began to benefit the principals even more. Licensing standards were put in place, protection and confidence of the consumer being the objective. But the bar to entry was set so low as to be beyond meaningless. Some have argued it merely gives consumers a false sense of confidence. Tax laws were changed to minimize the cost of bringing a new agent on board. This may have made more sense at a time when there were substantial costs involved in hiring on a new agent, but times change. The internet has given agents unfettered access to buyers, sellers and available inventory.  The fluid nature of the business dictates that agents brand themselves now, making the need for a big name obsolete.  Pricing structures and commission splits have driven training out of the picture at most of the brokerages.  Few agents receive anything for free and those that do are likely “loss leaders”: top producing agents there not to make the brokerage money (quite the contrary), but rather serve as a beacon for recruitment and a marketing tool for the rest of the agents.  Most Brokers now engage the business philosophy of the lowest common denominator (also known as “putting butts in seats”). Thanks to the tax laws, the brokerage looks to profit on the one or two deals a new agent might stumble across from family and friends before the revolving door swings another agent through.  I am not judging this.  As long as everyone knows up front what they are getting it is a legitimate model of business… just not a very good one.

The Problem Defined
With the changes in tax laws and the power shift brought about by the internet, we have ended up with a very different kind of shoe store. The owner now hires as many clerks as possible (which is made easier by the low standards to entry) and puts them on the floor right away (which is not a liability due to the beneficial tax laws). The clerks want the lion’s share of the profits so the owner forsakes any type of training or mentoring. Why take the time and expense to move someone from apprentice to journeyman to master when the expectation is two to three sales of shoes to family and friends, followed by a quick exit and the next batch of shoe salesmen coming through? Of course, if the store is physically large enough or the brokerage has enough desks, the principal can just keep hiring without letting others go – why risk losing an extra sale they may trip over? In the end one finds three distinct levels within the store: those that have found true success through self-education, luck or experience from a previous job, those that are in the midst of their revolving door spin and finally, in those larger firms, those who “used to make a lot of good sales” (their family/friend stage) and are now filling seats, known simply as “water cooler whiners”.

The result is a number of detrimental outcomes:

  • the knowledge and training possessed by the average agent is lower
  • the collective wisdom of the industry is necessarily reduced
  • professional standards are lowered, as is professionalism itself
  • inclusion of the “water cooler whiners” in statistical studies lowers the perception of aptitude and success within the industry

The current brokerage system has devolved from a shoe store in which the principal hired on new representatives, trained them to know shoes as well as he did and increased profits by sharing profits and increasing revenue; to a shoe store that is overcrowded with underperforming reps. A store where the principal’s primary focus is making sure the lights come on, the plants are watered and there are enough desks to accommodate available butts

Next time: Super Teams: A Solution for the Few

Related posts:
  • The New Real Estate Model – Part 3.1: The Solution
  • The New Real Estate Model – Part 2: Super Teams
  • The Odysseus Medal competition — Voting for the People’s Choice Award is open

  • 27 comments

    27 Comments so far

    1. Landflip July 28th, 2008 12:00 pm

      For any business to succeed, I feel that it is very important to provide your employees with the proper training. I think that we are getting a “new” generation of workers and people are not willing to work as hard as they once did. It’s going to be very interesting to see what happens over the next 30 years.

    2. genuine chirs johnson July 28th, 2008 1:03 pm

      I truly hope people are paying attention to this situation; the “water cooler whinrs” are the lions share of our industry.

    3. Mike Farmer July 28th, 2008 1:06 pm

      Good, a critique from someone who actually does the work. Lately, I’ve heard too many outsiders who’ve never done the work telling us what to do. This I will listen to with interest.

    4. Sean Purcell July 28th, 2008 1:47 pm

      Landflip,

      Not sure if people don’t work as hard or if they just don’t get the direction they need. There was a time when your path was pretty well laid out for you – no matter your career choice. Certainly real estate was more structured. I would venture to say that most people left to their own devices, don’t devise anything.

    5. Sean Purcell July 28th, 2008 1:51 pm

      Genuine,

      the “water cooler whinrs” are the lions share of our industry

      and will continue to be if there is no reason to drop them. We seem to find ourselves in an industry where inefficiency is not penalized.

    6. Sean Purcell July 28th, 2008 1:53 pm

      Mike,

      I am looking forward to your comments and critiques. You have been exploring this topic for some time now. Don’t be shy!

    7. Greg Swann July 28th, 2008 2:04 pm

      This is great stuff, Sean. I can’t wait to see where this is headed.

    8. Michael Cook July 28th, 2008 3:20 pm

      This is one of the easiest to follow outlines I have seen on the industry. Great start. I cant wait to hear how you can make this system better.

    9. Sean Purcell July 28th, 2008 3:41 pm

      Greg & Michael,

      Looking forward to your input, comments and critique of where our industry is headed.

    10. Don Reedy July 28th, 2008 4:04 pm

      Sean,

      How about some contrarian thinking, to illuminate the topic of disbrokerization?

      Let’s all work toward complete “Brokerization.” In this kind of world, only knowledge based, “shoe savvy”, motivated entrepreneurs would be licensed to practice.

      At least the shoe store owners and their clients knew that the clerks were, well, just clerks. Our industry now has hidden the fact that most of the agents are, well, just clerks. We could go a long way forward by just going backward. Let’s empower the client by putting up a meaningful credential that indicates that real estate practitioner “A” or “B” is or is not qualified.

      There may be a shortage of doctors, and perhaps too many lawyers, but we’ve got a pretty good idea, both those inside and outside of those professions, what they know and don’t know. Do you think anyone knows what the gal that just moved into the cubicle across the room knows? As they say in “Wayne’s World”…..NOT!!!

    11. Sean Purcell July 28th, 2008 4:33 pm

      Don,

      Let’s all work toward complete “Brokerization.” In this kind of world, only knowledge based, “shoe savvy”, motivated entrepreneurs would be licensed to practice

      My thesis is not about licensing so much as what the natural mechanisms of the market are going to do to the real estate industry and to Brokers in particular. The term Broker here is not meant to reflect the respective licensing but rather the intermediate nature of the position.

      Since you have brought it up though, let me say that I rarely see licensing do what it sets out to do. As a matter of fact, I think the most meaningful credential of someone’s qualifications is their success. Until you have achieved that success you must work within a system that will best avail you of the opportunity to become a success. This leads us to Part 2 & Part 3 to follow later this week.

      BTW, your example of Doctors and Lawyers, in my opinion, benefits my argument. Getting a medical license in no way tells me you are fit to advise me on my health (over the years I have met more than a few Doctors who did more harm than good). In the same vein, not passing the Bar exam (love the visual of being barred from doing something, no matter my qualifications) does not make me less capable to advise, argue or represent the law. Plenty of men and women out there that – as lawyers – make great shoe salesmen.

    12. Michael Paul July 28th, 2008 8:25 pm

      Before “complete brokerization” can happen, I think there needs to be a trimming of the fat. Perhaps that’s what we’re seeing right now. Looking forward to part 3! 2, not so much, but definitely 3. ;)

    13. Erion Shehaj July 28th, 2008 8:33 pm

      Sean,

      I haven’t felt this sense of anticipation for the next episode since the Sopranos finale.

      Can’t wait to see where this goes…

    14. Sean Purcell July 28th, 2008 8:43 pm

      Michael,

      Trimming of the fat is a VERY apt description. Excess fat serves no useful purpose. Rather than provide long term energy and protection against injury and famine, excess fat slows our metabolism and dulls our reactions. A successful business must be agile, intelligent and lean. I wonder if I should have written this entire treatise using a health analogy? Well done.

    15. Sean Purcell July 28th, 2008 8:50 pm

      Erion,

      Do I get “whacked” at the end of this one too? :)

    16. Cameron Novak July 29th, 2008 12:30 am

      They have been saying the current real estate model cannot last for ……… quite some time now. A long darn time!

      Cameron Novak
      The Homefinding Center
      951-212-7479
      http://activerain.com/cameronnovak

    17. Erion Shehaj July 29th, 2008 4:29 am

      Nah. I think the screen just goes black and a whole new conversation starts about what really happened ;-)

    18. pligg.com July 29th, 2008 8:13 am

      The New Real Estate Model – Part 1: Disbrokeration…

      The Real Estate industry is going through some pretty rapid changes lately. We have everything from Apple’s iPhone to Zillow’s Zestimates. There is a lot of conflict too. Your local Board of Realtors is most likely still trying to throw a fence aro…

    19. [...] In Part 1, I discussed the concept of Disbrokeration; some of its causes and effects. When I originally wrote about Disbrokeration I thought I had a pretty good idea what the next iteration of the industry would be: Super Teams.  This type of development is not new and successful Super Teams abound right now.  For me it seemed the logical next step in a 2.0 world where the Brokers have lost a great deal of their function.  Having said that, I see some flaws with Super Teams.  Especially in their ability to transcend a relatively common problem faced by many self-employed entrepreneurs.  My purpose here is to discover a model that will not just work, but work for the majority.  Let’s look at the pros and cons of the Super Teams and in Part 3 of this three-part series, I will share a model that I think may best serve the future of our industry. [...]

    20. [...] Preamble In Part 1: Disbrokeration, I looked at the problems that exist within the current, brokerage-based real estate model.  The [...]

    21. [...] believe one of the driving factors behind the “shoe salesman” phenomenon that Sean Purcell wrote about — where a broker employs hundreds of agents, many of whom are part-time, many of whom do the [...]

    22. [...] back home and I see these two great posts by Sean Purcell on Bloodhound Blog on this very topic: Disbrokeration and [...]

    23. [...] Preamble In Part 1: Disbrokeration, I looked at the problems that exist within the current, brokerage-based real estate model.  The [...]

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