The Future of Residential Real Estate Brokerage

I am looking to join with other reform minded Realtors, to collaborate on building a brokerage model that makes sense for both Realtors and sellers (it is the listing side of the equation that I think is largely out of touch with realities of internet enabled buyers, which render most of the things we used to do inefficient at best).

What follows is my own vision for reform. If it resonates with the reader, contact me!

[My footnotes were eliminated when I cut and pasted this, so I notated them as n1 to n14, corresponding with Note 1 to Note 14 in the endnotes.]

The Connection Realty vision is to continuously improve and scale its demonstrably better mousetrap (providing better results at lower cost for sellers, with greater income for solid, service oriented Realtors who struggle to make a living in the current model).

In brief, I believe that the better mousetrap consists primarily of combining:

1. Entrepreneurial division of labor to maximize creativity & efficiency

2. Reduced overhead to minimize costs (virtual office)

3. Precision pricing to minimize market time & maximize sold price

The result of properly combining just the latter two items has already allowed me to deliver superior results, at significantly less than traditional cost – going “virtual office”, dispensing with ineffective print media, and adding a far more scientific dimension to market analysis and precision pricing.

To illustrate the value of adding entrepreneurial division of labor to the equation, consider that in 2005, before my heart and the economy both went bad, I made $105K in commissions charging 1% on the listing side, or 3.5% total, and spent perhaps 25K on direct marketing and 15K on operational expenses, for a net of 65K. Meanwhile, the median full time Fox Valley Realtor in 2005 probably made 45K gross, charging 5-6%. [n1]

While I am exceptionally good at both pricing and negotiating (they go hand in hand), there are any number of agents making around 45K who are far better than me at both the prospecting and the administrative sides of the equation (though it is unlikely that they would be exceptional at more than one of those roles). What could a team of 3 do?

The synergy of combining three 45K agents starts with letting the sales agent sell the superior results, but not dilute their efforts by having to deliver those results. It remains to discover the profit maximizing price that we can charge for a “no fluff, better results” story, but let’s assume that charging 4% is optimal (making up for the lower commission in the extra volume from being price differentiated). Our 45K sales agent might have put up 16 listings to get 8 closes, but when focused exclusively on sales, and with a superior story to tell (on both price and results), getting a single appointment a day set would seem to be quite feasible. That would be 250 appointments over 50 weeks, of which 200 might realistically be expected to list (I currently convert better than 80%).

200 listings a year is a comfortable number for a quality implementation team to handle. [n2] In a typical implementation team, the listing agent might focus on pricing, market analysis and negotiating, and the co-listing agent might take care of all administrative and transactional tasks. Let’s conservatively assume a conversion percentage of 60% (a little better than the median conversion percentage for the top 30 agents in the Fox Valley since 2005). [n3] That means that the team would close 120 listings, generating $450,000 of commission revenue from listings (1.5% x 120 x 250K). 120 closed listings should also translate to around 60 buyer transactions – by distributing leads to buyer agents at 40%, we add another $150,000 to the coffers (0.6 x 60 x 2.5% x 250,000). [n4]

How to split up the $600,000 of revenue between the corporate owners and the 3 listing team members is a “problem” that we can surely solve to the general satisfaction of all. [n5]

To this point, the analysis has done nothing creative at the corporate level to improve on the existing model. While we might all agree in the theoretical analysis above, and in the assertion that the potential talent is already out there, if we can only find it, combine it and develop it … but therein lies the rub!

Without reforming the broker management model (more precisely, the corporate side of the equation), it is highly unlikely that we would be able to recruit and develop the talent, much less keep it. Once the entrepreneurial team model is proven, teams would have a huge incentive to simply form their own little company and keep the profits, unless the corporate side offers sufficient and sustainable value to justify the cost.

We can apply the same division-of-labor principles to improving the value proposition offered to agents by the company. Broker managers are asked to wear many hats (recruiting, training, administering), with duties quite analogous to the personal producing agent. By bringing in partners with complementary skills that cover the gamut, a far better product can be developed for agents. If we can extrapolate out to Fortune 500 status (where the overhead of paying a senior management team can be covered), the ultimate real estate company would have at least the following separate roles (plus CEO):

1. Chief Operating Officer (streamlining administrative functions)

2. HR director in charge of recruiting

3. HR director in charge of training (2 and 3 are NOT the same talent set)

4. HR director in charge of compensation management and compliance

5. Chief technology officer

6. Chief marketing officer (print and television media)

7. Chief marketing officer (social media and online advertising)

8. Chief financial officer

9. Econometric officer (to develop and improve a proprietary pricing model)

Every broker/owner charged with developing an office has to wear all of the hats above (or ignore an area that is important for sustaining competitive advantage).

So how can a company entice quality teams to stick around? I have several thoughts on the topic, and suspect that every agent in Chicagoland does as well! [n6]

Consider centralized marketing. There are huge economies of scale that kick in when you can purchase media across Chicagoland, or bid for search terms like “Illinois Real estate”. Local boutiques don’t have the option of tapping into CATV, global search terms, etc., in a cost effective way. Doing large scale marketing at the corporate level is one of many things that can provide a sustainable value proposition to the teams. [n7]

Such marketing, along with the mere fact of attaining market share, also helps with building brand, which constitutes a significant value to agents. [n8]

Division-of-labor structures invite questions about the benefits of having employees vs. independent contractors. Long before this embryonic idea transforms into a Fortune 500 company, there would be sufficient profit generated at the corporate level to institute a superior compensation structure (modest base pay with substantial bonus) that would allow us to tap into the enormous talent pool of people who refuse to live in the uncertain world of commission-only. It is frankly a lot more profitable (as long as you recruit and train well) to remove the excessive risk inherent in 1099 status. Income stability, coupled with the ability to offer health benefits would be a huge differentiating attraction for many agents. This is particularly applicable to the implementation teams, while sales agents should perhaps be offered a choice.

The final and perhaps most important value to agents is the benefit of being part of a genuine learning organization. Let’s begin by taking a deeper look at the power of unleashing creativity from a division of labor model. Effectively procuring new clients is the supreme mission of the sales agent, and he or she will likely be able to direct many times the intellectual firepower at that task when all other “distractions” are removed. We all know the enormous difference in production between an average salesperson and a great salesperson (far greater difference than we would predict solely from the time spent by each on the task), and we also know (at least in principle) the relationship between focus and excellence.

Now let’s add co-creative collaboration BETWEEN teams to the equation. This is possible if we construct a model that creates a level of territoriality (for sales agents or implementers) that will encourage the sharing of best practices between teams. Consider that in the Fox Valley, each of the primary 4 zip codes (60134, 60174, 60175, and 60510) could be adequately covered by a single implementation team, even at 30% market share. For that reason, I would argue that it makes little sense to have overlapping implementation teams within a single zip. The largest zip (60134) had 340 closed residential listings in the latest 12 months (as of 9/14/2010). Yet I’ve suggested (and feel strongly) that a dedicated, quality implementation team of two can handle 120 closed listings a year without sacrificing quality. [n9]

Imagine having 30% market share (with 4 teams serving 4 zips) and look at the quality that results from territorial implementation. Better pricing (incorporating market conditions, knowledge of the area and of specific subdivisions, etc) is a crucial value proposition that can differentiate a company. At the same volume of production, having one “pricing agent” develop specialized knowledge of one zip is surely better than 4 agents overlapping in 4 zips, with a fourth the experience in any one of those zips. Being the #1 team in a zip is also more marketable.

While sales doesn’t gain the same benefit (e.g., geographical pricing expertise) from territoriality (the basic “better results” story is the same), it makes little sense to have two different agents knock on the same door or mail a marketing piece to the same address. [n10] Finding ways to minimize tripping over one another (some form of territoriality) seems key to substantially increasing sales and marketing efficiency.

But back to co-creative collaboration as it applies to the sales agents -- if we can institute some territorial division of labor in the sales/marketing function, we also eliminate much of the resistance that the sales agents across the organization might have in sharing best practices. [n11] Now the learning isn’t just from the concentrated attention and greater sales experience that result from taking implementation out of the equation for sales agents. Their greater understanding of what works and what doesn’t (from a multitude of approaches tested) can be leveraged across the organization, with best practices filtering to the top, and being continually revisited and improved upon in an infinite positive feedback loop that benefits all.

As everyone who knows me well can attest, what ignites my personal passion more than anything else isn’t higher conversion rates, enhanced earnings for agents, or the corporate profits that can derive from organizational efficiency and superior results. It is solving problems, and very specifically, social and environmental problems that are so complex that no one person can solve them. Co-creative collaboration is so much more than a buzz word -- economic and political structures which unduly emphasize competition over cooperation often have very negative side effects. [n12] The human cost of the huge failure rate of Realtors in this industry, structured largely as a pure win-lose proposition, is a case in point.

Given the 16-fold “theoretical inefficiency” in the current model (50-50 splits, 50% conversion rates, and a $0.75 effective cost in sales effort or marketing to procure $1.00 of revenue), there is undoubtedly ample opportunity for greatly improving the existing model. Given the magnitude of the industry and the importance of housing to our social well-being, it is also a relevant and fascinating canvass on which to express creativity and to help prove the power and synergy of co-creative collaboration, which proof has ramifications for larger issues facing the planet. [n13]

Unfortunately, all of these musings amount to a conversation with myself. Co-creativity requires co-creators, so my current efforts are directed to the search for others who want to join this conversation; who can help me see past my own tunnel vision; who can assume a mission critical role; and who can help me rewrite this script to incorporate their better understanding of any number of pieces of the puzzle. [n14]

Norlyn Dimmitt, FSA

Broker/Owner, www.Connection-Realty.com

Cell: 630-362-4663

Note 1. In 2005, 8 closed listings and 4 buyers would have put a Realtor in the top 20% of all Fox Valley Realtors, but if only 40% of Realtors were truly full time, this would be the median full time Realtor. At an average price of 250K, 2.5% would generate $75,000, and at a 60-40 split, 45,000 of commission.

Note 2. Hundreds of implementation teams for superstar agents do this across the country every year, with at least five of them in the Fox Valley.

Note 3. Anything less than 60% conversion and the “superior results” claim becomes problematic

Note 4. I do not at all mean to treat buyers in a purely instrumental way. I don’t see the same inefficiency on that side of the equation as I do on the listing side, and consequently, I’m not looking to reform buyer agency. The practical result of this is that I’m probably going to be constrained by business realities to compensate buyer agents in accordance with prevailing market forces. Zip Realty has already shown that buyer agents will line up to pay 55% for a steady stream of leads, so the point of lowering that to 40% would be to attract higher quality buyer agents (higher pay allows higher selectivity). As for the question of the listing team taking care of buyers, the point of division-of-labor economics is to focus on doing one thing exceptionally well rather than 17 things with mediocrity.

Note 5. Let’s leave aside for now the question of whether it takes one, two or five of our formerly-45K sales agents to exhaust the capacity of one implementation team. The optimal mix may well be some combination of direct marketing, social media, centralized solicitation of expired listings, and sales agents. Marketing efficiency is the variable to be optimized, though to avoid counterproductive friction, it might be necessary to provide sales agents a substantial opportunity for an equity stake in marketing operations.

Note 6. The last role is my only area of proven superior expertise -- being able to show that we are better at pricing and market analysis, developing and using proprietary technology that goes way beyond CMAs is ultimately huge, as it creates a barrier to entry as well as providing a component of the quality that teams deliver. Another company can copy our model and compete on almost every other front, so staying one step ahead on the single most important informational aspect of a listing is important for retaining talent and for holding competitors at bay.

Note 7. Zip Realty’s capacity to bid nationwide on search terms, or employ search engine optimizing on a large scale, is the primary value proposition for the many buyer agents who line up to pay 55% for the leads.

Note 8. Currently, Baird & Warner, Coldwell Banker and Re/Max dominate the Fox Valley, and that very domination gives them great value to the agents who continue to rely on references to their company’s success (despite the mediocre performance of many of the agents invoking the brand!).

Note 9. Initially, it makes little sense to have more than one implementation team in the entire tri-cities (and surrounding communities) – the entire Re/Max Excels office did 240 closed listings in the 4 zips in the past year!

Note 10. With almost all 92 Re/Max agents in the Tri-Cities having some incentive to pitch “we are the #1 office” story to the next FSBO in the Tri-Cities, it is no wonder that sales is so hard for the #10 or #20 producer at Re/Max. Brand loses its value at the individual producer level to whatever extent that agents from the same company are soliciting the same sellers (with essentially the same story).

Note 11. Equity incentives to encourage sharing constitute an entirely different chapter that has to be co-created!

Note 12. Note the ineffective governance that emerges from our polarized two party system, or the mass unemployment that results from unbridled “free market” globalization.

Note 13. While pursuing a PhD in Economics at UIC, I spent several years investigating the potential of deliberative democracy (a form of co-creative collaboration) to improve governance and to find solutions to some of the most intractable problems of social justice and sustainable economics.

Note 14. As a glaring example, the cornerstone of most successful agents’ business is referrals from past clients, which is not even mentioned above, since my focus has been entirely on the challenge of generating new business. Referrals remain a huge part of the overall compensation structure, and “ownership” of clients is a problem that has to be negotiated between team members (and the office).