The New Economy Real Estate Model - A Soft Sell Concept

As far back as the 1970's Sears envisioned a kiosk in their stores where a customer could buy stock and even real estate. It was a bold look at the future from one of the world's largest retailers. All they had to do was to get the consumer to come to their stores to do business. This was quite a challenge thrown down to both Wall Street and Main Street USA. Most of us probably never heard or remember this strategy, and it never got off the ground. People just did not equate Sears with stock or real estate; they were a department store.

In fairness to Sears, the technologies and conveniences did not exist to enable the plan. Sears may have also thought themselves too big to fail. That theme does seem to be a constant.

Hmm, it appears that history does indeed repeat itself, and perhaps at shorter and shorter intervals. It may be ironic that by speeding up processes and the rate at which things can change, the lessons of history are lost at a quicker rate. Did that make sense? If it did, you may be thinking a bit like me - you've been cautioned.

In the 1980's the successful real estate agent became more independent and needed fewer and fewer services from the brokerage firm. As they claimed a higher and higher portion of the brokerage fee, margins for the real estate brokerage began to shrink. Some phenomenally high interest rates had a similar impact on the mortgage banking industry. Unless buyers had no choice, they did not take on these inflated mortgages. The mortgage industry literally shrunk along with their profit margins. We all know that real estate cycles; it goes up and it goes down. The curve is rarely smooth, and is punctuated by sharp turns in one direction or another. Most features of the real estate industry react quickly to the conditions in the market that affect it. Now we have the background for the next attempt to create a commodities market from the real estate process.

In 1974, the Real Estate Settlement and Procedures Act (RESPA), as amended, was passed. It opened the door for consolidations within the industry. To foster competition, companies were regulated to prevent abuses in the industry and to keep prices to the consumer lower. It was almost ironic that the very act that was passed to prevent abuses, in a way opened the door. I don't know that it has empirically been demonstrated that RESPA actually lowered costs or prevented abuses. With HUD as a watchdog, there was little real enforcement, and although fines were levied, industry practices ultimately were left to the states to manage. It took decades to sort it out, and Wall Street only a few months to make it yesterday's issue.

The point for mentioning RESPA was that it allowed what was called "controlled business entities," a term later changed to "affiliated business entities." The home builder and the real estate brokerage could now have a captive mortgage and title business. The theory was that this would somehow create efficiencies and economies lowering the cost and improve service to the consumer. It didn't. With all of this vertical integration, each one of the independently managed businesses was caught in the same financial wringer.

What was not taken into consideration was the pro-cyclical nature of the model. When one business was down so were the others. The upside was champagne and roses, but the downside left little room for beer and carnations. There were other oversights as well. Not understanding the risk models for businesses outside of their core competencies was seldom given the focus it deserved. Few also embraced managing the business with the same zeal they had for their core model.

The result was that many of these affiliated arrangements have failed, and the industry model for how transactions are managed remains much the same as it has since the post WWII era. Certainly technology has improved systems, but not nearly to the extent that it could. The competitive natures of the individual sectors of the real estate business keep the technologies proprietary and therefore parochial. A 21st Century model for the industry will come from somewhere outside of the core real estate industry. Next came a far a more organized and systematic attempt to create a commodity market in the real estate arena.

The boldest strategy to commoditize the residential real estate market came from a company called National Realty Trust (NRT). NRT has gone through a number of name changes. In the mid to late 1990s NRT was known as Cendant (CD). The CEO of Cendant, Henry Silverman was a Wall Street visionary who understood commodities. He was big in the rental car business (Avis) and in hospitality with a string of motel franchises. Mr. Silverman viewed the real estate as a commodity that could be franchised and methodically went about acquiring national real estate marks such as Coldwell Banker (Residential), Century 21, ERA and Sotheby's. Subsequently they also acquired established regional real estate companies. They were and remain the largest single group of real estate companies in the industry.

Cendant experienced an accounting scandal in the last decade and lost its impetus. It never quite recovered from the scandal, and the company divided its assets into four groups. The real estate companies were sold to the Apollo Management Group. Apollo has been beset by the soft real estate market and a suit filed by Carl Icahn over a debt exchange plan. With the continuing financial and legal problems, they stumble along with business as usual. They are not in a position to lead the real estate industry into the 21st Century. This strategy involved getting in upstream in the transaction by "owning" the gatekeeper function. It required enormous amounts of capital, and technology was evolving to provide a far more efficient less capital intensive platform to emerge. The Internet makes anyone with the vision and the concept to be a potential player.

Allow me to introduce Soft Sell Solutions LLC, a creative concept for the 21st Century model for real estate. Forged with decades of experience and inside industry knowledge, the concept is supportable by existing technology, demonstrated consumer practice and buy in. The vision and passion to deliver a seamlessly integrated system stands ready to tie the disparate process together.

The third article in this series Who Controls the Real Estate Process sets the stage for a 21st Century approach.