Like many other aspects of this recession, the spring real estate market is creating some surprises for the industry. On the one hand, buyers are starting to move off the sidelines, enticed by low mortgage rates and rising home affordability. This nice surprise offers real estate agents an opportunity to move some inventory and create cash flow after a seriously difficult winter market. And while the recent increase in activity is welcome weather, some not-so-nice surprises are springing up with the season.
While inventory is starting to move, the average price of homes in America has fallen dramatically, from the mid-200’s two years ago to around $196,000 today. Buyers, of course, appreciate this change, but commission-based sales professionals are getting quite a surprise, even as their business picks up. Brokers are realizing that the economics of the business have changed – which is what recessions do to industries, after all. All of the boom-period methods of selling real estate will be unsustainable in the lower revenue projections of the future. Like an unexpected frost that freezes spring blossoms, real estate brokers are feeling quite a chill in the spring market.
Dealing with these new economic realities is serious business. The first impulse is to simply cut costs, by closing low producing branches and de-cruiting non-producing agents. Across-the-board slashes to marketing budgets are frequent casualties. Unfortunately, the time for those solutions was about one year ago. Getting around to them now will prove too late for many brokers. In fact, cutting costs won’t even be enough. We’re not talking about surviving a “down turn” but preparing for a “new norm” in revenue projections. The market isn’t coming “back” to hyper-priced homes any time soon (if ever). Even the tax rebates and low mortgage rates won’t last: historical pattern of spikes in mortgage rates almost always follow every new government-induced low. So how will real estate professionals survive in the next new market, with less revenue to paper-over impractical practices?
Innovation. Only by thoroughly innovating on the real estate sales process will real estate professionals make it to potential harvests in the Fall. Innovation doesn’t mean getting a Blackberry or eliminating expensive postcard mailings. That’s adaptation, or substitution, of one expense for another. Innovation means radically rethinking the practice of real estate to maximize profits in a falling revenue environment. It’s not a small change, like replacing music cassettes with compact disks, but totally rethinking the process. That’s how we got the iPod which eliminated music media altogether. Can something similar be done in real estate?
Of course, but it won’t be easy. True innovation focuses on outcomes. Most real estate has focused on process for the past four decades. Creating profits from smaller revenue streams won’t come from reorganization – from more offices to fewer, or from fewer agents to more. It’s not about more or less: it’s about better. And like new flowers in the spring, the seeds of true real estate innovation have already been planted. Here are three to consider nurturing today:
Teamwork. With less profit per individual commission, having more agents might seem like a good way to increase revenue. Unfortunately, increasing manual labor almost never creates a better margin. Efficiency, not volume, is the critical innovation avenue for future brokers. Fewer agents supported by highly-skilled technical experts already create more revenue per unit than the average cluster of redundancy-prone individuals in any office. We call them teams today, but in the future, they’ll be called companies. Such division of labor has helped every other industry apply the right people to the right activities. It’s the model for using fewer people to create higher profits in low-margin businesses. It’s time for today’s team exception model to become the organizational norm.
Relationship Management. Real estate is an industry built by Baby Boomers, for Baby Boomers. That’s why most practitioners think “database marketing” where they print/mail/blast things out to groups of indiscriminate prospects. This so-called “farming” is aptly named, because it closely parallels agrarian production thinking, where seeding-yields-harvests was farming-yields-listings model. Unfortunately, we’ve long left the farmer’s era. The information age consumer dominates the real estate marketplace today. Gen X and Y combined are larger than the Boomers, will have more money to spend over the next decade, and aren’t likely to be “farmed” by things arriving in their mailbox or inbox. We’re already seeing the saplings of innovation in the next generation of prospecting tools: social networking is relationship marketing, not database drip campaigning. It creates a persistent presence in the lives of people likely to do local business with us. Again, the margin potential is high, since 64% of listing appointments come from people who worked with us previously or were inexpensively referred to us by someone we know. A social networking relationship prospecting approach can entirely replaces current database marketing models, along with the expensive pay-per-click, search portal, impressions and direct mailing tools.
Integration. Connecting the two parts of innovation – teamwork and relationship management – requires a highly integrated infrastructure. Companies must create economies of scale and efficiency. They can only do this if everyone is on the same page – and cell phone, network, laptop, software, email, etc. Real estate is incredibly inefficient: Too much information must be re-typed, translated, reformatted and rebroadcast. If the health care industry thinks in triplicate, real estate data management is more like sextuplicate. Unnecessary duplication of effort and costs must end by establishing standards of performance for technology, data and people-practices. Creativity will actually flourish, once supported by consistent and reliable systems. It is the chaos of uncoordinated systems that costs the industry too much margin today. Most of all, consumers will demand integration because it provides them with consistency of outcomes and expectations. Quality control and operational excellence can no longer be left to whims and luck. Companies of the future will eke out every penny of profit by aggressively eliminating waste, whether in data systems or manual labor, by mandating standardized technology for all contributors (vendors and agents) in their business.
While it’s good news that the warmer weather is creating new business opportunities for our industry, the chaos we’re already experiencing is a sure sign that the recovery has not yet arrived. For the business of brokerage to move beyond the recession, chaos can no longer be the norm. Spring can mean the “return” of your perennial problems; or it can be an opportunity to plant an entirely new harvest.
It’s not just a play on words to say that your Fall may depend upon whichever you choose.