Matthew Ferrara, Philosopher
 

Who’s Buried in Real Estate’s Tomb?

We’re mad at it. We blame it for our troubles. We’re afraid it will eliminate us. But recession offers answers for real estate to createsuccess, if we’re willing to listen and adapt. Otherwise we might just find out who’s buried in Grant’s tomb.

Recessions force us to change. When times are good, we get lazy. Why ruin a good thing? But economies and industries aren’t static. People, capital and most of all – customers desires – change every day. Peter Drucker noted that our very success today eliminates the conditions that allowed us to become successful. Recessions remind us that today’s strategies cannot be based upon yesterday’s markets.

Recessions are report cards. They check our assumptions and grade our practices. Who creates recessions? We do. When the outcome of something we always did profitably become different – a recession – we’re being told to discover and learn how things have changed, and that we may not have been keeping up with them.

As Groucho Marx once said, “It’s not so much that hard times are coming; the change observed is that soft times are going.”

The past two years haven’t been easy for the real estate industry. Falling prices and longer sales cycle have driven profits to historically low levels. Expenses, while drastically reduced, remain higher than at any time in twenty years, with new costs like technology, marketing, training and regulatory compliance. Our customers are struggling, too: unemployment, credit availability and overall uncertainty have changed the conditions in which both customers and brokers could be mutually successfully buying and selling homes in the past.

Which brings us back to Groucho: Just three years ago real estate brokers were creating historically high profits. Cheap and plentiful credit, rising prices and customers frenzy-purchasing supported the way we did things. While we hoped the good times would last forever, the music eventually stopped. When the economy moved on, the real estate industry was still practicing its old ways. But even with a few technology and social media band-aids, we can’t get back to the good-old days. The recession is tell us that we’ll have to do something different to create different outcomes for the future.

The recession’s lessons are that a healthy, vibrant real estate industry won’t be possible on the soft practices of the past, even if everyone gets a Twitter account and dumps classified ads. Cautious customers chasing scarce credit require entirely new practices to create new growth. That’s both the judgement of the recession, and the opportunity it presents to us.

Yes, there are opportunities in recessions. And the formula for success is right there, below the surface message (declining profits) of the recession. Smart brokers and agents can read this formula, but must be willing to accept the conclusions of the message. If we want to create the real estate industry, we must be willing to listen to what the recession is telling us to do. A few of the elements are clearly visible today.

  1. Performance requires performers. In the past, marginal agents – those who did only a few deals a year – were tolerable because each few deals they did still yielded such a good margin that it was worth it. Today’s margins are razor thin and will remain so for some time. The hard costs (technology, training, industry memberships, marketing dollar) of keeping minimal performers has become too high. The independent contractor model has been revealed as a financial myth: there are costs to every agent in the office, if only just in coffee. The recession’s lesson is the future requires every producer to be a substantial producers. And the recession offers us a solution: high unemployment provides choices to replace marginal performers with quality talent.
  2. Reorganize the model. The industrial revolution was the product of a recession. When cottage industry could no longer produce the quantity, quality and low-cost goods people desired, Henry Ford changed the production model. Today’s recession teaches the same lesson. The cottage-model of “each person does it all” is unsustainable. Less than 10% of today’s agents can be the perfect prospector, seller, negotiator, closer, relationship manager, etc., anyway. The division of labor in real estate has remained mostly undivided – and that must change. The recession’s solution: modern technology permits specialized workers to create high performing teams. and Y future agents are being taught this in school and in online video games. They are ready to use technology to maximize their individual talent to participate in a collaborative outcome. It’s just a modern Ford assembly model, just faster. Brokers must reorganize operational conditions to maximize how future recruits are being trained to work, not ask them to use unfamiliar (historic) models.
  3. matters. The recession challenges our concept of managing a real estate office.  If we make the two changes already mentioned, current management models are incapable of releasing the productive energies of high performing teams integrated through technology and a new division of labor. Managers who are recruiting cannot be guiding performance teams. Same if nobody shows up at the office for meetings when they could be held online. Managing future multi-generational workforces of highly-independent Boomer agents and newly recruited specialized Gen X/Y workers is new management territory. The recession offers potential solutions (Zappos comes to mind, but there are others). Yet a core lesson from the recession is that management will matter even more in the future generation of real estate brokerage.
  4. Use technology differently. Some recession lessons come from successes despite the downturn. Many thriving organizations – some not even for-profit – teach us to think of doing something different with technology. The past/existing model of technology as an “advertising” tool – for listings, services, tax credits – is challenged by unmoving recession customers. So declaring via technology may be shifting to another approach: listening. The value of social media or instant messaging or even YouTube might be not what we can say through them to our customers, but what we can learn about our customers from them. Recessions remind us that the best companies listen and learn from customers, not incessantly promote to them. The solution might be to check our pre-recessionary egos at the door, and use technology to ask customers what they want, so we can re-tool to deliver it.

Unlocking the opportunities of the recession won’t be easy. We’ll first have to accept the market’s judgement that it’s not as happy with how we do things today as it was in the past. Of course, we do this ourselves with products and services we purchase: who would be happy with a computer from 1980 or paying 21-cents a minute for long-distance calls? The computer and telecom industries changed as a result of their recessions. As hard as it was for them to hear that customers who had bought their services “a certain way” for years suddenly wanted something different, their success nowadays comes from industry leaders who shook up their production processes, created new operational models, focused management on outcomes and used technology in whole new ways. They learned some valuable lessons from their recession. The real estate industry can learn some too from its own recession. The good news is that, if we listen to the recession, we might be able to create future thriving industries – like the computer and telecom industries did – in our future as well.

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  • OK, this is the day where I’m going to have selfishly plug for my company, but before I do I have to say that I totally agree that only those who adapt will survive. For years the model of agents was they did it all, yet no other business that I’m aware of exists this way. Many agents didn’t and won’t survive because they treated their real estate as a job, not a business. Leads were handed to them, referrals came easy and closings even easier. There was no incentive or reason to create systems, delegate or even prepare a business or marketing plan. Now those who had real estate “jobs” are out in the cold, unaware how to run what should be a real estate business.

    So here’s where the selfish plug comes in, my company Transaction Management Consultants has been helping smart agents all across the Country for the last 5 years to successfully build and run their real estate businesses. We’re an excellent resource for those that realize they can’t nor should they try to do all the work themselves. We’ve found that most of our clients have done well in this recession and many are actually seeing their sales improve. Key is that they are focusing on marketing, lead generation and converting those leads. They are reworking their marketing plans and spending time working on their business, not in it. We’re taking care of things like MLS entry, flyer preparation, website updates and coordinating their deals from contract to close.

    Succeeding in anything no doubt takes work, sometimes more than others. Also being flexible and embracing change, not resisting it. I for one think change is good, I’m sure glad I don’t have the original cell phone “brick” I started with 20 years ago, nor the huge bill that came with it. Remember when 20 cents a minute was a good cell rate on top of he $30 a month bill?

    I believe that agents must decide if they want to run a business or have a job and take action accordingly. As Will Rogers says, “Even if you’re on the right track, you’ll get run over if you just sit there.”

  • OK, this is the day where I’m going to have selfishly plug for my company, but before I do I have to say that I totally agree that only those who adapt will survive. For years the model of agents was they did it all, yet no other business that I’m aware of exists this way. Many agents didn’t and won’t survive because they treated their real estate as a job, not a business. Leads were handed to them, referrals came easy and closings even easier. There was no incentive or reason to create systems, delegate or even prepare a business or marketing plan. Now those who had real estate “jobs” are out in the cold, unaware how to run what should be a real estate business.

    So here’s where the selfish plug comes in, my company Transaction Management Consultants has been helping smart agents all across the Country for the last 5 years to successfully build and run their real estate businesses. We’re an excellent resource for those that realize they can’t nor should they try to do all the work themselves. We’ve found that most of our clients have done well in this recession and many are actually seeing their sales improve. Key is that they are focusing on marketing, lead generation and converting those leads. They are reworking their marketing plans and spending time working on their business, not in it. We’re taking care of things like MLS entry, flyer preparation, website updates and coordinating their deals from contract to close.

    Succeeding in anything no doubt takes work, sometimes more than others. Also being flexible and embracing change, not resisting it. I for one think change is good, I’m sure glad I don’t have the original cell phone “brick” I started with 20 years ago, nor the huge bill that came with it. Remember when 20 cents a minute was a good cell rate on top of he $30 a month bill?

    I believe that agents must decide if they want to run a business or have a job and take action accordingly. As Will Rogers says, “Even if you’re on the right track, you’ll get run over if you just sit there.”

  • Matthew Ferrara

    Michelle – thanks for your comments – you’re right that very few other industries operate the way real estate does. The division of labor isn’t just an ‘optional’ idea in the modern economy; it’s a critical one. To make beautiful music, the symphony requires each person to do their PART; if one person tried to do it all, it would be a mess. Hence, the industry’s troubles stem from dis-ORGANIZATION, not recession.

    Sounds like an interesting service business you offer – taking care of the “busy” work so the agents can focus on the “busi-ness”. Continued success to you!

  • Matthew Ferrara

    Michelle – thanks for your comments – you’re right that very few other industries operate the way real estate does. The division of labor isn’t just an ‘optional’ idea in the modern economy; it’s a critical one. To make beautiful music, the symphony requires each person to do their PART; if one person tried to do it all, it would be a mess. Hence, the industry’s troubles stem from dis-ORGANIZATION, not recession.

    Sounds like an interesting service business you offer – taking care of the “busy” work so the agents can focus on the “busi-ness”. Continued success to you!

  • Great post Mathew. I agree that recession is a report card but what about the economies in which recession is not that severe? I know that the real estate market is cyclic but there are economies like Lebanon and Egypt which did not have to go through tough recession period. Does it mean that people in such countries do not get to know about the real estate deeply?

  • Great post Mathew. I agree that recession is a report card but what about the economies in which recession is not that severe? I know that the real estate market is cyclic but there are economies like Lebanon and Egypt which did not have to go through tough recession period. Does it mean that people in such countries do not get to know about the real estate deeply?

  • Matthew,

    Thanks for the encouraging post. I like that you actually understand that recessions are caused by people, but I will argue your point that expenses remain high. When you think about all of the old expenses: fax machines, printers, file storage, and bench ads, versus the amount of web-based applications available today, I would argue that expenses are down. Technology now allows you to connect with thousands, if not millions of people, with nary a postcard or drop of ink used. Smart agents leverage technology to their advantage and cut their operation costs tremendously. Technology also helps weed out the weak, “this is just a job” agents from the truly exceptional agents. And, with most home buyers starting their home searches online, classified ads and billboards won’t matter.

    But overall, I think you’re right. This recession will help us in the long run by making us focus on what really matters. One of my favorite stories ends by asking this simple question: how do you know that what happens to you isn’t good?

    Again, thanks for posting.

  • Matthew,

    Thanks for the encouraging post. I like that you actually understand that recessions are caused by people, but I will argue your point that expenses remain high. When you think about all of the old expenses: fax machines, printers, file storage, and bench ads, versus the amount of web-based applications available today, I would argue that expenses are down. Technology now allows you to connect with thousands, if not millions of people, with nary a postcard or drop of ink used. Smart agents leverage technology to their advantage and cut their operation costs tremendously. Technology also helps weed out the weak, “this is just a job” agents from the truly exceptional agents. And, with most home buyers starting their home searches online, classified ads and billboards won’t matter.

    But overall, I think you’re right. This recession will help us in the long run by making us focus on what really matters. One of my favorite stories ends by asking this simple question: how do you know that what happens to you isn’t good?

    Again, thanks for posting.

  • Recessions force us to change. When times are good, we get lazy. Why ruin a good thing?As a Realtor my goal is to learn every day, and to use the knowledge to change. If you wait for the industry to change and then follow it you will miss it. I like this article it’s on point but it can scare some.

  • Recessions force us to change. When times are good, we get lazy. Why ruin a good thing?As a Realtor my goal is to learn every day, and to use the knowledge to change. If you wait for the industry to change and then follow it you will miss it. I like this article it’s on point but it can scare some.