Rethinking the Business Structure Today for Success in the New World

Written by: Jack Harper

- Dec 2, 2008 2:49:00 PM

It should be clear by now that your world has changed – probably in very significant ways and likely forever. Sure, these changes are not hard to understand, given the worst economic climate in our lifetime. But are we just a victim of the times? No. We are also a victim of our own slowness to change. We will change, but it is a certainty that the industry in general and brokerages specifically will be forever changed in very dramatic ways as a result of these times and the convergence of several factors outside our control, whether we elect to modify our strategy or not.

It is my belief that our business has already evolved and will continue to do so to such a degree that nothing will be the same when we look back three years from now. One school of thought tells us that most brokerages today have not made proactive changes to be in position when the market returns to some form of normalcy. We seem to be too locked into reaction to our immediate problem: survival!

But what will the industry look like when we begin to emerge from this? Will there even be something we might call a normal market? Probably not. How will brokerages who survive today look when we leave this difficult market behind? Will we be able to (or will we even want to) just operate as usual, happily picking up where we left off? I think absolutely not. Brokerages that survive and even thrive in this economic climate will likely do so as a result of some serious evolutionary processes that will position them to grow when the market is ready.

Our changing world

Yes, our world has changed. . . in so many ways and to such a degree that we each probably don’t even have a sense of how dramatic this shift has been and will continue to be. We are not talking about some tweaks to your business plan, shedding overhead and migrating toward a field-based agent population (although that is a requirement). We are speaking about a near-complete restructuring of our base business plan – how we provide service, what services we provide and how we monetize those services.

This is not specific to our industry.   Nearly every segment of business in America today has been forced to go into hyper-evolutionary mode to keep up with the rapid changes our shrinking world has forced on them. Automobiles, finance, investment, retail, service, travel and more have seen their markets dry up and often disappear as a result of many factors:
 

•  Internet data availability and interpretation
•  Off-shore competition (e.g. automobiles, technology, telemarketing)
•  Bad management and poor financial decisions (such as banking, investment, automobiles)
•  New online competition ( e.g. travel agencies)
•  Empowered consumers (a good thing)
•  Economic downturn (said politely)
• And more

Our industry is, however, particularly vulnerable. Since most of our practitioners are entrepreneurs; that is to say they make their living based solely on their success in closing transactions, we are experiencing changes the likes of which we have never seen before. A large percentage of the agent population that came into the industry during the heady times of 1999 through 2006 have watched their income shrink to near zero. As a result, many have taken other jobs – often without letting their broker know about it. This is the growing “phantom agent” population that is becoming the bane of the industry.

Most brokerage models require a steady influx of agents to fuel their growth and a relatively static corps of associates to ensure their continuation. As brokers become wise to the phantom agent problem with an eye on survival, many will start to shrink their populations in an effort to reduce their office footprint to an affordable level. The days of recruit anyone who fogs a mirror are gone. Yes, I am certain that none of you reading this were among the mirror fog employers. But someone was! We can no longer afford to do this. Survivors will be those whose recruiting take on a “you must qualify to work here” attitude. This very change will, however, be the catalyst that will finally force the mass exodus of licensees we have predicted for so long. This mass exodus will likely decimate the ranks of most large and several medium size agencies. It is no longer about quantity. It is all about quality.

Shrinking ranks forces us to be better than anyone else at attracting the market powerhouses, doesn’t it? Anyone who doesn’t have that ability will become vulnerable. If this vulnerability comes close on the heels of a protracted recession, it is highly unlikely that most companies will survive. We will possibly see a mere fraction of the current brokerages left standing when the smoke clears.

 This is compounded by the fact that many in our industry, in our desire to compete successfully in our market areas, give away services for free. Note, however, that the services we give away are usually what might be considered to be “nice to have” but not critical. These services are the ones we have invested many years in promoting as our “unique value.” This includes free CMA’s, free staging, free property searches. . . We have promoted these ancillary services so heavily that we have succeeded in making the consumers think that these are our core competency!

Key Reasons For Change

I feel it is important to review some of the more significant reasons behind what will shake out to be the most notable and evolutionary time in our industry: 

• According to Lawrence Yun, Chief Economist for NAR: “Pending and closed sales both reflect distressed sales of short-sales (those home sales where the mortgage loan cannot be fully repaid) and foreclosures. If it is in the multiple-listing service (MLS) then it is captured. If sales are occurring outside the MLS such as some of the auction sales and bank-owned REOs then it is not captured in our data. Based on a survey of REALTORS® in August regarding their most recent transaction, we estimate that about 40 percent of home sales are distressed sales.” This from his commentary of 10/28/08
  
• The level of distressed sales will grow, adding to the problem.  These sales are controlled by banks, lenders and loan service companies.  Didn’t we just spend the past several years trying to keep them out of real estate? 
   
• Our retained-earning capacity has dropped through the floorboards. This is partly a result of steep declines in sales prices, with outside and inside competition driving commissions downward and an ever-increasing cost of doing business.
   
•  Availability of data and listings has enabled the consumer to take a much more active role in the sale and purchase of real estate. This consumer involvement is a good thing. We all like informed consumers. On the other hand, they give us an almost obligatory need to reduce fees for those who take such an active role. As an example, we are seeing more and more that consumers are no longer shy about asking for rebates, discounts and many are willing to work directly with listing agents so they can get a large portion of the buyer agent commission for themselves. This trend shows little or no sign of retreat.
   
• Third-party participants (aka non-traditional brokerage) have gained strength. Economy notwithstanding, several outside entities have come on the scene in such a way and with enough initial success that we need to open our eyes to the fact that consumers are more than willing to embrace new business models!  Although it is true that these economic times have taken their toll on everyone (including these new-model companies), we have seen enough in the few years they have been in existence to tell us that they are here to stay. This includes models like the home valuation model (Zillow, etc), consumer-participative models (Redfin, etc) and many more. It is very clear, consumers like choice in how they work with us!

Too many of us either practice business with such a strong case of denial or we recoil from the sheer amount of change required that we may never be able to admit that the way we always worked will no longer be acceptable.

 Competition to attract and retain competent and committed agents will be at an all-time high. Fewer licenses are being renewed now. Far fewer will be renewed in the coming years. As our ranks shrink, our need to retain and recruit will be more important than ever before. We will no longer be able to rely on the things that worked for us in the past. Agents and brokers will now be looking for those companies who offer them more and newer ways to make a living. Being open to the consulting model is just one of those methods. Any attempt to hold the line on what we today consider to be full service will tell agents that you are inflexible and unwilling to let them venture into the new business model.

 You must practice transparency! Consumers need to know what they are paying for, what their options are. Agents need to know that it is alright to become consumer-centered. Our business model will never go back to the one that served us for the past one hundred years. You either adapt or see the same shrinking market experienced by so many other industries who tried to ignore these changes away. Denial will not work.

Dramatically lower income streams, consumer evolution, intentionally shrinking ranks, lowered sales prices, lowered commissions. . . all converging at the same time. Guess what comes next? I think we will see a desperate attempt to maintain status quo by going about it the wrong way. We will push for and pray for legislative support to pull our bacon from the fryer. But, sorry to say, it will not work. We see a prime example in the recent raft of states who enacted some form of minimum service laws designed to keep the ‘MLS-only bunch’ busy trying to figure a way around them. And, I suspect, they will. Consumers are calling the shots!

Who do these laws benefit? Are they there to protect the hapless consumer who wanders aimlessly into a bad deal with these companies? Or, as I believe, are they really a vain attempt to legislate protection of the traditional real estate business model? I feel strongly, that if you need to enact laws to protect the income of a business that has not changed in one hundred years, you are protecting the wrong side. Does anyone see the similarity to the proposed automotive industry bailout?   Fairness and value should be the true protection. Offer a fair service at a fair price and you will not need to protect it via legislation or government rescue dollars.

Whatever your belief, you might want to look at the probability that consumers have more of a right to be protected than real estate professionals do. It will not be long before we get back to that level of thinking. Consumers do not need protection from the big bad MLS-only bunch. They need education! They need to know what their choices are and how to select them to their advantage.

A world full of informed consumers making informed decisions to enter into mutually-beneficial business relationships is where we need to be heading. If we invest our time, money and energy in restructuring our own business to allow for consumer-directed offerings that make consumer-based informed choice possible, we will be doing the right thing. If not, they will surely get it somewhere else.

Copyright 2008 Jack Harper, All Rights Reserved