Biz 2.0 Real Estate: What About the Consumer?

With the 6% model a few have made a lot. I say "Good for them" -- they did well and succeeded. To be honest, I've made a good living in real estate. But competition is competition and change is change. Things are changing, and the real estate superstar might have had his day. Don't get me wrong, I admire stars and success. I also admire reaction to changing markets.

What do consumers want and what will they be demanding? They want good service at a low cost. Imagine a line on the left as "service" and a line on the right as "cost". Then imagine the line on the left lower than the line on the right. The line of the left rises as the line on the right falls until they meet -- this is where the New Biz wants to be -- where service and cost meet -- the lowest cost good service that's possible.

I've come to believe we can't do with the RE superstar 6% model. It will take salaried employees made strong through leadership and teamwork where the combination of cost and service makes it a no brainer for the consumer to use the service, much more appealing than FSBO. RE companies will have to do it on volume made possible through a strong system of teamwork where the team is much more powerful and less expensive than the Superstar.

We need a service business model. Consumers, especially retiring baby boomers and oncoming Gen Xers will want more than the Superstar can deliver because it's less about sales acumen than it is about service quality and comprehensiveness, information management, ease of searching, valid results, and so forth. Oh, it will work to sell homes, just in a softer way through teamwork and technology. The key will be to find the meeting lines of service and cost and the best use of technology to achieve it. This to me is the great challenge in the RE evolution. 

I'm almost positive the New Biz will need to be employee-based -- it's the only way to manage the new change and to get service costs down. The 100 agent office where 20 are succeeding the rest drink coffee will change to a team effort where the unproductive will be doing something just not real estate work on the weekends.

That's not to say that the Superstar idea is kapoot, it merely means, in my estimation, that super teams will develope made up of super agents and super leadership. the team concept has been weak in many instances because it hasn't been managed well and has mainly been friends grouping together within the 6% model with no idea how to make the teamwork effective. For the most part, that is -- I know of successful teams, but I think the New Biz 2.0 can capitalize on the concept much more efficiently and powerfully and at a lower cost to the consumer.

I think the consumer mindset is going that way too. They want gaurantees of quailty, and it will be easier to creat the great quality company than it will be to search for needles in a haystack. Plus, the consumers no longer trust the agent, Superstar or not. Perhaps they'll trust the team if the cost is right.

OK, enough for awhile I have to go do super work.

Biz 2.0 Real Estate: Building a Great Company

Let's see, I hire someone to whom I'll be paying a salary. What do I expect.

1. I expect results.

2. I expect compliance with policies and procedures

3. I expect adherence to job description

4. I expect loyalty to the company

5. I expect honesty

Why would an employee agent (EA) not be motivated to achieve results? I've done my due diligence before hiring and I've found the prospective EA to be results oriented, moderately successful in RE, honest, internet/computer savvy, a good salesperson, intelligent, personable, amenable to teamwork, available full time.

Why would this person, with intensive training and given the tools to succeed, not be a top producing agent on salary with the potential to meet bonus requirement and make $120,000 a year?

The person understands from our employment agreement that results are a priority, that unless the person produces what is expected they'll be let go from the company. They also understand that if they produce X amount and meet all standards of teamwork, they will remain with the company and grow with the company and that after every successful year the bonuses will increase.

The person understands what is expected of her and she knows the rewards of achieving what's expected. Why would this person not be successful and add value to the company?

One thing a salaried model would do is exclude the part timers and the dabblers. Not that there is anything wrong with part time and dabbling, but it just wouldn't work with the salary model. The salary model will work only with agents who adopt the employee mindset, which would be difficult for many experienced agents -- although it would be a welcomed relief for many other agents, especially now in this slow market. One possible reaction is that agents would respond positively toward salary and being under the guidance of leadership.

Once agents realize they have to produce in order to overcome their salary and to receive a bonus that would put them in the higher income bracket, I have a feeling they would do what is necessary to make the company successful.

Leadership should enhance the work experience so that working at Company Y is a joy. Yes, I said JOY, something rare people receive in great working conditions where they find respect, interest, freedom, honesty, rational expectations and opportunity -- all jabbered about in pitches but seldom delivered as a way of actually doing business. It can be done.

The funny part is that everyone reading this will say - Yes, I could do this, but others can't or won't. It can be done.

Talented people working together toward a common goal can create amazing things, and if it's done right it doesn't have to rape individualism and uniqueness -- as a matter of fact uniqueness should be fostered in a great company. Again, leadership is vital.

In the real world of numbers it will take much crunching and evidence for companies to embrace a salary model. If I had a large company I'd begin testing to see what happens, even if it's virtual testing. I'd get together my top players, bring in a consultant, bring in business connections outside RE and have an idea session with what-ifs and mock scenarios, recording all the different objections and good ideas and raised questions.

My gut feeling is the first company to do it in earnest will be wildly successful. There will be agents beating the doors down to become a part of it. If I'm correct, it will foster competition, but by the time the competition reacts the first will be ahead of the game. The scary part is the initial investment, but with the right operation it wouldn't take long to reap the rewards.

If I'm correct in my assessment and there is a demand to be a part of the new company, this alone would be enough motivation for the hired employees to produce and work together. I've already described some of the structure built on a biz 2.0 model, and if this is applied correctly, the amount of leads coming in should create another strong reason for EAs to work hard toward success -- they will see results, they will see value, they will see security. I think they'll be loyal.

Plus, if leadership is positive, the new way of doing business itself will be attractive, special, something different and honest and forward looking. If this type of environment can be created it generates results. Fire in the belly is powerful and hard to stop, but the challenge is to keep the fire burning. That's what we always fall back to, because it's a reality -- in-fighting starts, management becomes somewhat aloof and dishonest, politics infest the workplace, petty jealousies begin worming their way into relationships, cynicism sets in and the entrophy begins.

This doesn't HAVE to be, but it happens, and the company becomes another failed experiment and skeptics smugly say -- "I told you so." It doesn't have to happen,and most likely won't if leadership is experienced and knows the signs to look for and to combat. If leadership says -- "I can do this, but others can't, so I need to be straw boss", then it won't work, but if experienced leadership says -- "I can do this and others can to, and I'm going to help them achieve it", then it will probably work. Understanding a little psychology and group dynamics would be helpful -- not to manipulate the employees, but to understand how to prevent the downward slope.

I'm only part-cynic, so I won't say money is the bottom-line, rather I'll say money is important, but so is the work experience -- if people trust and are happy, that's worth a lot. You can have both.

More later. What about the consmer?

Real Estate Biz 2.0: The Problems With Compensation

No matter how you look at compensation in real estate it's befuddling. The 6% commission model has been criticized because it seems exorbitant when you're talking about a $900,000 home or a 2 million dollar home. Some of the arguments in defense of the model have been that it takes longer to sell a 2 million home, it requires more expensive marketing and liability is greater in case of law suits. These arguments haven't washed. Some companies have lowered their commission but if you lower the commission too much you can't attract other agents to show the listings, because the commission split is lower.

What we have now may be based on a 6% model, but as we all know, it's negotiated many ways in all the daily transactions across the country. Some discount companis have offered a flat rate -- I've seen $2449.00, $4995.00, but then many have fine print that excludes the cost of another agent bringing a buyer. These flat rate models haven't caught on for whatever reason -- local resistance from competing, traditional agents or failure to show a profit.

Then there's the whole commission split thing, where many think that the buyer agent ought to be paid by the buyer and the listing agent by the seller. This would loosen up the 6% model somewhat. You most likely would have sellers negotiating from 3% downward, and the buyer and buyer agent would be negotiating the price for service on the buyer end. In this model, if the listing agent brought the buyer, the double side would be less, around 3%, and the sellers would save money. However, what would most likely happen is that the buyer's would negotiate for the buyer agent to be paid from the proceeds of the sale, 1% or 2%, maybe 3%, or what might happen is that buyers don't want to involve compensation in the negotiations and begin rationalizing that they don't need a buyer agent, therefore increasing dual agency. Savvy buyers with the wherewithal would pay the buyer agent directly if the agent is good enough and proves the value. This might open up interesting compensation scenarios on the buyer's side. I hate to say it, but the whole attraction of buyer agency now is the concept that it's "free". Direct payment from the buyer will kill buyer agency.

If all that needs to be done is paperwork, representation and management of the closing, a fee like, say, $1000.00 might be worked out. If the buyer agent is starting at the beginning and working with the buyer throughout the process, the compensation would most likely be higher, but the question is will buyers pay directly for representation.

I'm not sure we could ever have this situation, buyer paying buyer agent and seller paying listing agent, without some law being passed forcing it to happen, but I don't think lawmakers would do this, because they would see the probability of dual agency becoming the norm and buyers losing the leverage to get "free" representation. It would also be seen as gumming up the negotiations as buyers attempt to get the seller to pay their side. I don't believe buyers would pay buyer agents directly on a large enough scale to make it worthwhile for any agent to become an exclusive buyer agent, just as the seller wouldn't price his house without taking the marketing costs into account. Part of that marketing cost is to pay the buyer agent who's been working with a buyer to bring a buyer to buy the seller's home. So, while splitting the compensation pay might seem like a good thing to do for integrity's sake and it would break up the negotiation to both sides and the consumer would benefit, it doesn't seem likely to happen, because lawmakers would see it as an unnecessary complication that would increase dual agency.

Then there's the employee/salary model I just wrote about. This is risky and brings productivity into question . Will salaried agents be motivated to produce as much if they have a guaranteed salary, and will internally motivated agents produce far more income then the salary they are paid. The representation problem would be somewhat resolved with a salary model, because companies would be offering buyer agent services, and the agents would be getting a salary, but if it's through the same company that has listings, the same question arises about objectivity and true representation.

If you could answer the productivity problem, I think the buyer agent problem would find an easier solution -- companies would have to allow agents to truly represent buyers and they would have to strive for integrity in the process. However, the productivity problem remains the big stumbling block. I suppose it comes down to whether a company thinks they can not find enough internally motivated people to do the job or they think they can. If they think they can't then the 6% model will be around for a long time to come, until the government steps in or the market totally rejects it. If companies begin to believe they can make it work, then the innovation begins to create the best system -- most likey a combination of base salary, bonuses, perks, working environment, tools provided for success, leads, training, coaching and instilled pride from talented leaders.

I'm an idealist, so I think it can work but I fear many cynics and realists will disagree. I next want to write about how I think a company can make a salaried model work, just for the sake of thinking about it as a possibility.

Is The Federal Reserve a Failure?

I received an email stating the readers that come here might find this article interesting.

I've had my reservations (no pun intended) about the Fed for years, ever since I read Milton Friedman's (I think it was Friedman) work about the Fed's complicity in government manipulation of money suppy in the 30s which could have caused the Great Depression.

Biz 2.0 Real Estate -- Model # 1

I appreciate Rob carrying this further. So, for micro-modeling's sake, let's say we forsake the independent contractor route and devise an employee model with salary and bonuses based on results.

Let's also assume the better angels of humanity are at work and that it's possible to cherry-pick the best, the brightest and the ones who fit a team approach without losing the individual fire of innovation and ambition to excel. 

Part of the problem with devising a new model is that we're trapped in old mental models that assume the worst in human nature -- I'm guilty of this, and it causes me to place limits on certain ideas, because they not "practical", or they don't take "human nature" into account. I've seen the worst and the best of human nature and I believe the best is possible.

One possible scenario is salaried, RE licensed employees divided into areas that make sense locally. Ten employees are a team chosen for the mixture of skills, compatibility, and knowledge of their area. Each team has a team leader who co-ordinates, mediates and coaches. Some areas might have higher priced homes and fewer sales, other areas might have more sales at lower prices, but say it's possible to select teams for areas that are fairly equal all the way around. Perhaps in the higher priced and fewer sales areas the team would be less than 10, but let's assume all this can be worked out equitably.

The listings in each area are the team's listings. Every member of the team knows all about the listings and, through intranet 2.0, information is continuously passed along among the team. The team leader co-ordinates all the activity to make sure sellers aren't confused by so many different people being involved, and the leader has explained fully to the seller the team concept so that the seller understands the power of the approach - the seller gets a whole team to work on selling the listing. There would be many creative ways to use the strengths of individual members: some are good at blogging, some are good at sales,some are good at buyer agency, some are good at staging, on and on.

To cut down on layers of management, the team leaders are highly skilled, capable of being cross-trianed to deal with finances, management, technology, marketing, etc. -- and they are well compensated. However, the strength is in the teams and the "leader" is trained to understand the value of human capital and the concept of interactive participation.

There are no company offices -- all communication is done online or face-to-face meetings at designated places. The only physical "place" would be where the the intranet structure is set up. I don't know about the viability of hosted intranet but let's assume the company has worked out the best, least expensive way to do this -- that the infrastructure has been built. Everyone on the team is somewhat tech/savvy and continous education is given to improve these skills.

This type model, if viable, could be viral, spreading to other areas in a wider and wider circle. The power of all this effort applied to the internet should create a steady stream of online leads by excellent placement and connections with RE listing sites. The employee compensation model could be a base salary of $60,000 and the possibility of bonuses adding another $60,000. The actual numbers might vary, they would only have to be appealing to the employees who opt for safety rather than the commission route. RE agents who can make $300,000 - $500,000 a year would not be interested but many good agents would be interested, just to relieve the pressure of uncertainty so they can concentrate on being the best without financial anxiety.

This would be a big risk for the company. And this is where the worst of human nature prevents being able to take a step outside the commission box. Will people work less if they know they are assured of $60,000? I'm sure companies have tried this and found it wanting, but did they fully implement it with strict hiring criteria? Did they really search for the best and market the approach to attract quailified, mature, internally motivated employees? Did they have a good enough bonus system to encourage better performance? Did they have excellent team leaders? I don't know.

What would a company have to offer the consumer to attract enough business to pay the overhead and make a good profit? Service and price. I suggest for the sake of this micro-model a 4% model with a cap. Let's say the cap is $10,000, so sellers would pay 4% until the cap is reached, which is a $225,000 priced home, and every price above $225,000 would be capped at $10,000. I'm just throwing this out as a place to start thinking. the numbers would need to be crunched with local knowledge of the market and what share of the market is a reasonable projection. I ran some numbers and projected a financial scenario for Savannah based on capturing 25% of the market and it came out profitable for high functioning employees and the company. Can 50-100 agents working together in a model like this with lower costs and lower service prices for consumers capture 30% of the market. Maybe.

Would some agents slack leaving the other agents to take it up? Can a system be created with mature, talented people that works in fairness for all? Ah, the old human nature thang.

More thoughts later. This brings up 2235 questions.