Matthew Ferrara, Philosopher

The Next Generation of Real Estate Innovation

Too many REALTORS are in “lock-down” mode during the housing recession. But approximately 4.5 million homes will switch hands this year. Innovative brokers should be making a killing.

If everyone can make money on the way up, can nobody can make money on the way down? The reason is ┬ásimple: Neither “planned” to make money all along.

At NAR’s convention two weeks ago, we heard the same “challenges” from brokers and agents that we heard in 2005. And 2000. And 1995. And 1990. While the market has changed multiple times over those twenty years, it seems the troubles facing REALTORS – paradoxically – haven’t.

Set aside the “technology” issue for a moment. The industry loves to make technology the “challenge” scapegoat and focus its attention on shiny, blinking things. Certainly two decades of technology introduction into a historically “homespun” industry (pardon the pun) was tough. It was expensive and it required the mastery of a variety of new skills.

But so what? That happened to every industry during the same period. That’s what happens when industries industrialize.

Many industries parlayed those changes into modern models that drove profits and drove down costs to . Yet in the real estate industry, what didn’t happen was the introduction of new systems of operations to maximize the new tools. When textiles went from hand-spun to machine-woven, factories were invented. The process was redesigned and labor redeployed. Generalists learned to use new tools, and became specialists. The text book classic division of labor occurred, and production soared. Likewise, prices to fell.

None of which happened in the last two decades in real estate.

Today, ostensibly, the technology equation has been solved. Every possible – or potentially helpful – area of the real estate production cycle has been computerized. Advertising costs can be reduced online; customer leads can be handled faster by email; paperwork can be eliminated by tablets. Less than $200 buys a video camera capable of producing television commercials. YouTube will distribute them globally for free.

With such , shouldn’t real estate brokers be in a better operational place today than a decade ago – notwithstanding the housing recession? They should have been ready to beat the recession – to make money despite a decline in commodity prices they base commissions upon – after such a lead-time of innovation.

Yet much of the innovation has turned out to be lipstick on a pig.

Three kinds of proof bear witness. First, brokers still complain about spending too much money on advertising, while spending most of their time desperately recruiting agents and avoiding termination of unproductive ones. Sounds just like the problems of 1990. Second, agents have made the 12-month listing agreement the “norm” in their market, keeping alive the malpractice of overpricing which kills margins. Holding inventory for a year would kill Infiniti, Dell or Wal-Mart. No wonder it’s killing REALTORS, who earned less than $35,000 on average last year.

But the best proof that innovation hasn’t prepared us for the recession remains the average cost to consumers for brokerage services.

What other industry could spend 20 years innovating without cutting costs by at least half? In the 1960s flight across the country were hundreds of dollars (thousands in today’s terms). You can book Boston to San Francisco for $200 today. Nobody would claim airlines are the model of efficiency, technology or innovation, either. Yet they have driven down costs to consumers.

The average computer in 2000 was double what we pay today. Same for cell phones, and long distance service. You get the point. New technology along didn’t do it alone. It was operational innovation – the organization and deployment of capital and labor – that kept profits alive while lowering costs.

Some might argue that real estate is “labor intensive” and therefore more price inelastic. Even if that’s true, it can’t account for the mis-allocation of labor. Nearly half of all agents in the industry did zero transactions last year. Yet their existence incurred costs (licensing, office space, advertising, training, coffee) that were passed along to someone.

Real estate, as an industry, continues to subsidize operational inefficiencies. Agents offer co-broke fees to other agents who find a buyer, even though they promised the seller that “their” marketing was supposed to be excellent enough to find that same buyer. We position labor in the office – even if it’s just for a telephone – when we should otherwise cut office square footage by 75%, considering the power of mobile technology.

Even  companies who tried to lower costs did so only by offering less services. Is that our only concept of innovation in the real estate industry?

It’s time for the real estate industry to discover what the meaning of the recession is. Once we stop blaming the banks, consumers or even the government we will see an opportunity space. If there ever was a time to solve perennial problems – like recruiting and firing – it’s during a recession. If there was ever a period in which closing offices was more acceptable, it at a time when consumers are plenty happy to watch virtual tours and video chat on their smartphones.

If there was ever going to be a period in which a company made a break for the “blue ocean” space of doing real estate differently, it’s now.

While most of the industry is “locked down” or “going back to basics” there’s an opportunity for someone to make a break for it. To change the model, not just reshape the pyramid or scramble the rubics-cube. But it must start at the one place nobody has been willing to address for two decades: The end-cost to consumers. If 25-75% of sellers’ equity and buyers’ savings has been destroyed during the recession, if wages have stagnated and inflation has stealthily risen, the of real estate brokers must find ways to offer valuable but efficient products and services within a much different price structure.

The first companies who do that will break away from the pack. They will capture much more than market share. The real prize is to use innovation capture the minds of consumers who will make up that marketplace in the future.

And trust me, it’s going to take more than Twitter to do it.

P.S. For some ideas how this just might happen….. watch this blog over the coming weeks.

  • Another great post… Brokers feel that the consumer should pay for their inabilities and mistakes… Why do we see more sellers turning to FSBO options… it is not that all of them are difficult to deal with, many can not pay the real estate commissions. And the reason most fail is the inability to price effectively. When we as an industry have been taught since the 70’s how to protect our commission by every coach and manager, and it will take a huge overhaul of the mindset of our real estate leaders… I spend a lot of time and money to market a sellers property, and the next agent may charge more an offer less services, however, I am not the fool, as in the long run, great marketing systems will generate future profits, not the get quick rich now commission structure, that all the brokers are trying to protect to benefit them!

    Bob McTague
    Coldwell Banker Prime Properties

  • Matthew,

    I look forward to reading “some ideas how this just might happen”! You are right on; we as Brokers still spend far too much time “recruiting” and avoiding “de-hiring”. Compounding this conundrum, is the endless “Competitive Business Model” offering “higher splits” to agents that made less than $35,000!

    As stubborn as I am in pushing my agents to embrace change and seize the opportunities that only present themselves during the most challenging of times, I must admit I am frustrated by an abundance of apathy. It is refreshing to know that we are not alone and that “change” truly begins at the leadership level.

    Keep on truckin,

    Jim Flanagan, GRI, e-PRO
    Coldwell Banker Flanagan Realty

  • The irony is that too often when I’m chatting “shop” with agents, I find that too many are in such a mental state of lack. When I presented my services and explained how more efficient, productive and how many more homes they could sell, I was met with, but………I can’t afford it. Let’s see, you can sell more homes, help more people, work less and do a better job, and it’s not worth the investment into your business?

    You’re right, things do need to changed, and to quote Gandhi, “Be the change you wish to see in the world”.

    I’m looking forward to seeing a change, a revolution and I’m sure that consumers are as well.

  • Sam Ruta

    I agree with you. Your comments made me think of the Yellow Tail Wine Story. The innovation, elimination, and condensing of certain services so that a consumer gets the story in a simplistic fashion make a lot of sense. Why don’t we have the guts to follow suit? We always seem to operate in an atmosphere of fear and frozen attitudes of coming change. Something has to give. What frustrates the heck out of me is when I see such conduits like Face Books used for inane comments such as “Eating yummy home made vegetable soup” I want to scream.

  • Vhenry

    It’s about time. I wish there were more people who thought this way. I am so tired of hearing the same ‘ole things’ over and over. Our consumers are running off and leaving us. They are no longer going to accommodate our rules and regs just to buy or sell something.

  • Sharon Coleman

    I too will be excited and am looking forward to the changes you forsee that need to be made. For years as a broker- owner and full time agent have grappled with what is the best structure/commission scale to offer to be fair to all parties. On top of that you have consumers who consume our time only to come to the conclusion to buy nothing or stay put. This is what we do for our clients, sometimes you have to help them figure out if it is the best time for them to buy or sell. I have always figured that’s why we get paid the way we do-it all comes out in the wash-averages out between the people who go forward and those that don’t. Would the person who needs our advising pay us a fee or hourly wage for this service, hard to tell. Many times I advise people and they buy then and some do it later. All of us who do this job, know that sometimes we work and make a magnificent wage and sometimes we would be better off cooking hamburgers. I would welcome a better/fairer/up-to-date system for real estate services and a future we all, agents,brokers and consumers could embrace. I love your thougths and insights, can’t wait to see what you have to say.