13 June 2008

As Good As It Gets?

Dear brokerage owners and managers:

I know times are awfully tough right now and, believe me, I’m not trying to kick you while you’re down. But I have a nagging question I need to ask: have you considered the possibility that you may never make more money than you are today? I’m not even thinking about what you made, say, in 2004 or 2005. I’m talking about never earning more than you are right at this very moment. Think about that possibility for a minute. What if this is as good as it gets?

No, I don’t think the housing market is doomed. Quite the opposite; I’m bullish long-term. Home values and transaction sides will increase again. In some places, this is already underway. In many others, the turnaround appears near, even if the pace could be only moderate. Despite this, I still believe few brokers will see any real gains because too many are betting the ranch, so to speak, that these two drivers alone will whisk them back to profitability. Too few are thinking realistically about that most critical of revenue drivers: their percentage take per transaction (also known as broker commission rate or BCR).

Consumer demands and business models that are listening and responding to those demands have been chomping away at BCR for years. It seems very possible that any gains from price and sides will only accelerate the erosion of these rates. I just don’t see the day when BCR pressure will let up.

If you agree, then you know that we cannot fight this battle without a serious change in the value proposition (and, to be able to afford that, in the cost structure). I believe we need to erase much of what we have known about how business was done in the past. We all need to listen carefully to what our consumers are looking for.

As a broker, you need to accept the fact that many of your consumers will come into your office with more, and sometimes better, information than you are presenting them with. Trying to outdo the information (or, worse yet, dismissing what doesn’t come from you) is not where your energy is best focused. Concentrate instead on enabling your people so that they can do what data can never touch: deliver exceptional service.

Providing the kind of service to get today’s consumers to pay the rates of yesterday will come at a cost. The only way to afford this will be to eliminate the clutter of yesterday’s model that is weighing you down. Where do we start? For my next post, I want to propose some ideas for floor plans for tomorrow’s real estate office that I believe go hand-in-hand with the new, consumer-focused model. And I’d love to hear from some of you about how you envision the modern real estate office.

BCR pressure will never let up. That’s the bad news. The silver lining is that there will never be a better time to rebuild the model. If you do that, then maybe 2008 won’t be as good as it gets.

6 thoughts on “As Good As It Gets?

  1. Nicolai,

    Right again! There is no better time to take a step back (or forward) and redesign how today’s real estate business operates. Too many brokers design their business around what the agents think they need to be in business, private office, access to the latest in technology and business machines, administrative staff, under the assumption that now is the time to attract agents so that when the market “turns” they will be out front. But really, what if you rescaled your office to be out front NOW? What if you took todays numbers and figured out how you could earn a PROFIT under todays conditions, and did it delivering what the consumer wants? How many times have we heard an agent say “I can’t remember the last time I brought a customer to the office.” I think tomorrow’s (or perhaps todays) real estate office is not down the street but in the customer’s mind. This morning you are going to get a Starbuck’s, read your RSS feeds, text some friends to see what is going on and set about finding a home. Where are you going to meet the Realtor? At the office? Will he/she be wearing a suit? I bet not. I bet you will meet at that Starbuck’s and talk over coffee and hop in the car and take a look around. And the broker with the big office, and the huge newspaper ad will be watching you drive around with your new friend from his perch on the billboard just off main street.

  2. Thank you, Mark. As far as I see it, every broker should look at their lease agreements now. Each lease expiration (or early out) is a chance to redefine themselves. Redeploy all the money that’s being eaten by the lease and pour it into the new business model. The only one who will long for yesterday will be the landlord.

  3. Nicolai,

    I will be very interested in viewing your next post to see how you envision the real estate office of the “future” … with the “future” being as close as tomorrow in our industry, this is very relevant to recreating how consumers interact with our brokers and agents.

    As I have been telling many of my managing brokers in our branch offices, the cash flow crunch being felt in so many real estate offices today is not so much a result of diminished production as it is a result of the business model that has been used for decades. Even with a slower real estate market, the country is on pace for one of the top 10 years for sales … so the question is, “why are so many companies struggling?” Well, over the past ten years there has been a number of factors that have squeezed the BCR resulting in a much lower revenue stream to the brokerage. Some of the major contributers to this have been the dramatic escalation of commercial lease rates, a shift toward triple net commercial leases, significant costs to incorporate technologies, a rise in the reliance of third party referral sources of business and fees paid to them (Cartus, Lending Tree, etc.), a sharp increase in the share of commissions paid to agents, and a significant reduction in the percentage consumers are willing to pay for services. All of these result in the brokerage being forced to pay higher expenses with less income … a broken business model that is destined for an innovative approach that challenges conventional wisdom.

    I truly believe the overhead costs for a company can be significantly controlled by creating “service centers” that are tailored to create a dynamic consumer experience while also giving agents all the tools necessary to perform their roles with ease and proficiency. In my mind, these would be small well-appointed facilities of 1000-1200 square feet which allows a broker to better control many of the burdensome fixed expenses relating to occupancy. These would have a casually elegant (not overly stuffy) lobby, a few nicely furnished conference rooms, a private office for a managing broker, and a work area for files/copies/phone use. Agents would become virtual extensions with an efficient WAN (wide area network) that would allow constant communication with the managing broker … a concept that would allow the brokerage to better manage the flow of information and record-keeping. I could go on about this concept – but I don’t want to give away too many secrets before I see your floor plan concepts!

    You are certainly on the right track (in my opinion of course to focus on the consumer experience — when this is properly created, the ability to improve the BCR always follows!

  4. Thanks, Bob. I’ve got at least two “visions” of floorplans that I’m working on (I’m playing with a drafting program lest I post a hand-written sketch – and I’m no artist!). One is modeled off of coffee shops and the other off of car sales floors. But both get to much of what you suggest. If we can move from the “classic” 3,000 square foot “cube farm” model to a 1,500 square foot (or less) dynamic space then we’ll tackle our biggest fixed expense WHILE responding to what I believe the consumer wants in a home-buying experience.

    I’ll try to get my next post up soon. I keep hearing rumors of a big brand launch, though…

  5. Bob/Nicolai,

    The “service center” model is the exact concept brokers need for controlling overhead as well as creating an environment agile enough to constantly evolve with consumer needs. KINKO’s is a model I used when I went through this exercise in 2001 of creating an office of the future. We downsized a 5500 SF office to 2700 by giving back part of the space to the landlord at renewal. (This was slightly larger than I wanted, but we were limited by the building’s configuration. Starting with a blank open space is ideal. 1500 SF bay in a retail center, for example, should be plenty.)

    The finished product included a comfortable lobby, 16 workstations (2×4 cubes) for 40 – 50 agents, 5 desktop PC stations, mgr office, conf. rm, kitchen w/conf table, 2 bathrooms, sign/phone rm, staff area, file storage. Electronic file storage would save a tremendous amount of office space. A smart yard-sign design would also save space.

    Even in today’s difficult environment, this office is profitable 12 months of the year.

  6. Thank you Darrin. You managed to get quite a bit into 2700 square feet – I’m impressed, and I’d love to see it one day. To test one of my ideas I spent part of this weekend quietly pacing out the floor of a local BMW dealership. The sales staff couldn’t understand why I was more interested in the space configuration than in a wonderful new X5.

    I’ll take your comment on the signs to some people to challenge them to think of new designs. Even with electronic file storage, there’s still a need in most offices for storage of some kind and a lot of today’s signs take up tons of space.

    I know there are many brokers out there who have gone out and changed to a “new” floorplan. Some, like you, saw this years ago. It’s clear to me the market is ready for this.

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