Pricing Analysis is Greek to Me

I think most of us can agree that real estate agent, as a profession, lacks ”street cred”.  The reputation for our industry is not high and I say this despite the reputable people I meet here and elsewhere.  Two ways to effect a change in that perception are: raise the bar of competition and adopt a better model.  Sometimes we can do both.

In a recent post called It Takes More than Comps to Beat the Competition, I introduced a pricing model based on how assets are valued in the securities industry.  As a former stock broker and options trader, I can tell you that the methods employed in the real estate world for valuing assets and advising clients are rudimentary.  A more thorough understanding of what a property is worth and a framework for better understanding what that knowledge suggests would not only help us to do our job better, but it would separate those that use the tools from those that do not.  Adopting a better model de facto raises the bar of competition.

A Quick Primer
From a securities standpoint, price is rarely the sole motivation behind a buy or sell.  We are usually trading volatility or time or both.  An asset’s value then, is affected by these two items.  This is evident in real estate too.  Good agents take these factors into account when they do comps, but we are generally lacking the common language and function for applying them.  By adopting a better model, we gain these tools.

Volatility
Let’s use options as an example: an options contract is valued in relation to the underlying stock.  This valuation is called its delta.  On a scale of 1-100, a delta of 100 means the options contract might as well be stock.  It is traded, hedged and valued as if it were the underlying stock.  A delta of 20, on the other hand, means the options contract is very unlikely to approach the value of its underlying stock.  It has only a 20 percent chance of holding value.  I would therefore trade, hedge and value it quite differently.  Now a delta of 50 suggests the potential for the contract to eventually carry the full value of the underlying stock at 50/50.  Here’s the important thing to remember: as volatility increases, deltas move toward 50.  What does that mean?  It means that the more volatile the market, the less sure I am what the outcome will be.  At a very high volatility, virtually all possibilities move away from the extremes of “sure thing” and “long shot” to become 50/50.

As the real estate market started to scream upward, property values skyrocketed and equity became more and more of a “sure thing” (in trading lingo we were “in the money”).  Yet in reality the delta of these homes was dropping.  The steeper and more frenzied the rate of appreciation, the less sure we could be of our homes true value in the future.  By the end of the run-up, deltas had to be approaching 50.  As chinks in the credit and lending armor began to appear, deltas would have dropped below 50!  The only way to capture this equity was to close out the position: i.e. sell your home.  The real estate market is liquid, but not that liquid.  If you had not planned on selling your home (and at any given time the majority of people do not), there should have been little confidence in the paper equity that had built up.

Time

The time frame our clients are looking at obviously affects the valuation of a home.  From a buyer’s perspective, the longer they plan on staying in a home the less concerned we become with temporary price fluctuations in the market and the more concerned we become with proper financing.  Real estate, for the most part, is a cyclical, appreciating investment.  Time works in our favor to “heal all wounds”.  The cost of money, however, is not so forgiving.  Time compounds our debt-based mistakes in the same way that compounding interest corrects them.

From a seller’s perspective, their short term and long term goals affect their decision making as to whether to sell and the length of time they can afford to be on the market impacts their pricing.

Bring it All Together
In preparation for meeting a client, begin by assessing and understanding all four values of a property: the BREAK-UP VALUE, the INTRINSIC VALUE, the FUNDAMENTAL VALUE and the UTILITARIAN VALUE (go back to the post referenced above for more on these concepts).  Once a snapshot of pricing has been provided (and that’s all it really is, whether using a more comprehensive four-value view or basic “comps”) there is one more step: provide an analysis for the prices – put them in a framework.  What is the volatility of the current market and what is the time expectation of your clients?

When volatility is high in an appreciating market, home values are increasing but the delta is dropping.  Obviously it is a great time to sell.  But it is your understanding of how low delta is getting that dictates how aggressive your pricing should be.  If volatility is high in a depreciating market, values are dropping but at some point deltas begin to rise indicating a good time to buy.  How fast delta is rising dictates how aggressive to be on your offers.  Low volatility leads to balance and a high degree of confidence in the outcome of buying or selling.  Combine this with your clients’ time expectations.  The further out in time we go, the lower the overall volatility.  An assets true delta becomes clearer and therefore the decisions easier.

Once you have done the four valuations and assessed the two factors, your buying clients will make informed, rational decisions (even while missing out on some of the run-ups) that should leave them little chance of a foreclosure.  Your selling clients will know when prices are out of line and how aggressive they should be in their marketing and price reductions.  You will even create arbitrage opportunities: is the volatility in one area greater or less than than the volatility in another?  This is an obvious benefit to your investor clients but it goes a long way to helping home buyers make a rational decision too.  If you are creative enough, it should impact your listing side marketing too.  Think about it…

Whether your client is interested in buying or selling is secondary.  The purpose of that meeting… that job interview, is to get hired.  When all is said and done, sitting down with such a thorough analysis gives you an edge in advising your clients.  Not every client will understand all that you present, but you might be surprised.  Dumbing down real estate makes us look foolish.  Many of your clients are having these exact conversations already with their financial planner, stock broker, HR rep or even the neighbor next door.  More importantly, they are hiring you because you understand it.  That is called job security.

Providing thorough expertise on what home prices are, why they are moving and how your client should react will not change the market value of a property – but it will most assuredly change your value.

(This post was originally published here.)

Filed under: BUYERS, INVESTORS, MARKETING, REALTORS, SELLERS , Arbitrage, MARKETING, Property Value, Real Estate Future, Volatility

It Takes More Than Comps to Beat the Competition

As real estate agents we are always looking for ways to help our clients make sound decisions.  If we find a way of doing so that also differentiates us from the market – all the better.  In the next two posts I am going to share a new way to value property that not only gives clients a vastly superior ability to make home-buying decisions, but should decrease defaults and foreclosures substantially too.  Do you think that will make me a better agent?  More valuable?  Here’s one more way to differentiate yourself in the marketplace of real estate agents.  (Warning: this post and the next involves some arcane securities concepts and new ideas that will require even more of your time and effort.  If this does not interest you, stop reading now.  Pick up a newspaper.  Enjoy the classifieds.  Maybe polish up the old resume…)

CMAs
In a recent article by Greg Swann discussing the woes of the real estate market, he mentioned homes selling for less than they would cost to build.  He referred to homes priced “below their fundamental value.”  Over the past six months or so I have been discussing with Brian Brady different ways to value a property.  Having both come out of the securities field (I was once a securities broker and “enjoyed” some pretty exciting… read: stressful… years as an options trader on the exchange floor), the discussion revolved around how property would be valued if it were a security investment.  First, Comparative Market Analysis or CMAs would be used only as a qualifier or a secondary validation.  They are circularly self-serving and relationally compromised.  Instead of “comps”, let’s wow our clients, protect them and increase our value as agents at the same time.

A New Way to Value
Remember I warned you that this would involve extra work.  That is because there should be four values to any property and they should all be calculated before we advise our clients.  Here are the four values in ascending order:

1. BREAK-UP VALUE - this is the value of the land itself along with any profits to be made selling pieces of the home before tearing it down, minus the cost of tearing it down.  In Illinois for example, there are companies that advertise a home about to go under a radical rehab.  Buyers come to the home and everything is auctioned off: staircases, doors, windows, cabinets, etc.  After such an auction you combine the money in your hand, the value in your land and subtract the expected cost of your demo contractor to arrive at the break-up value.
2. INTRINSIC VALUE - this is the value of the land plus the actual cost to build a model match home using today’s material and labor costs.  Don’t forget the fees, permits and so on or the cost of not being able to use the home (loss-of-use cost).  Total those costs and you know what a property is worth intrinsically.
3. FUNDAMENTAL VALUE - this is the value of a home based on the neighborhood rents vs the cost of owning.  Often expressed as a property’s cap rate (although that is more common in commercial real estate).  This is how non-owner occupant investors would evaluate a property.  “Does it pencil out” is another way of asking the property’s fundamental value.
4. UTILITARIAN VALUE - this is the Fundamental Value plus the non-definable value that accrues to a person owning their own home.  Brian Brady jokingly refers to this as the “purple wall” value: the added premium a person is willing to pay for the freedom to paint a wall purple if that is their desire.  While not easily defined, it is often easy to quantify.  Look at any area where “fixers” are being sold.  You will find a price discrepancy between investors who wish to make repairs and still earn a profit (either monthly or as a flip) and someone who actually wants the home for their own.  When you are bidding on homes to rehab and/or flip, your price is based on #3 (Fundamental Value) and you will never outbid someone looking to make it their own home because they will pay the utilitarian value.

Methodology
While giving your client four values per property involves extra work, it is not as difficult as it appears.  The first two values can be based on square footage estimates, which you can update from time to time with some of your local contractor clients.  (Don’t have contractor clients?  Great opportunity…)  The Fundamental Value requires you to get tapped into the investment side of your neighborhood or farm.  Again, if you are not doing this already it is an opportunity to expand your business while making your business unique.  The final value is based on a standard comp value, but should be tracked in relation to the other values.  This kind of analysis will tell you and your clients when prices are out of line and once again, differentiate you by your expertise.  Imagine including a four-value analysis in your counter to an offer!

Conclusion
If you, as an agent, were to make all four valuations on a property your client was interested in buying or selling you would most assuredly stand out from the CMA carrying crowd.  More importantly, your buying clients will make informed, rational decisions (even while missing out on some of the run-ups) that should leave them little chance of a foreclosure.  Your selling clients will know when prices are out of line and how aggressive they should be in their marketing and price reductions.  Best of all, you will have yet another way to stand out, add value and provide superior results for your clients.

There is one other aspect that can be added to your property valuation tool box.  It is even more securities based, but will give you the ability to analyze the values you develop and provide your clients with a sound decision-making framework.  I will share it in the next post.

(This post was originally published here.)

Filed under: BUYERS, INVESTORS, MARKETING, REALTORS, SELLERS , Break-up Value, Fundamental Value, Intrinsic Value, MARKETING, Utilitarian Value

The New Real Estate Model – Part 3.2: The Firm

A Real Estate Firm based on the legal model could have many looks, as do actual law firms.  But for a starting point I am going to lay out an achievable structure that will accommodate the greatest majority of agents.  The firm would consist of three distinct levels as well as an administrative staff.

1. In the top level are the named agents: let’s say Ms. Patrick, Mr. Dunne and Mr. Purcell. These are the founders of the firm and generally speaking they are all three tremendous rain makers. They have a large and active client base from which they receive a tremendous amount of referral business.  It is also quite likely that one or more of them has a strong presence in a niche area.  They are not only the face of the firm, but it is their style and personality that colors the firm’s corporate vision.
2. Under the named agents are the partner agents.  It is within this level that we see so much of the communal benefit that Mike Farmer has written about.  Similar to the named agents, partner agents bring in a lot of transactions.  They also may have areas (geographic, industrial, network, etc.) of specialty.  These agents have reached a level reminiscent of tenure.  They share ownership of the firm as well as decision making duties and have a say in its direction.
3. The associate level is where the greatest number of agents are found.  From fresh beginners to agents with years of experience.  The associate level is also the workhorse of the firm.  Associate agents are not only working hard to take care of clients assigned by the partners, but are at the same time trying to impress the partners with business they generate themselves.  The presumed goal of an associate agent is to be made partner.
4. Finally, there is an administrative staff which grows as the firm’s growth dictates.  It could be as simple as one administrator or as complex as a multiple level staff covering everything from answering the phones to creating the marketing to processing the transactions and more.  Staffing might be the one place where someone looking for part time work while deciding whether to make a career change into real estate could get some exposure.

Responsibilities and Remunerations

The Associate
The most significant accumulation and degree of change versus the outdated brokerage model can be seen at the associate level.  First and foremost, associates are employees and as such receive a salary.  There is no more winking at the independent contractor rule by the IRS and no more tax advantaged hiring practices.  Responsibility, accountability and liability for associates as employees rests with the firm.  The hiring process will by necessity be focused and purposeful.  Associates will have the luxury of choosing between competing firms with various personalities, numbers of employees, areas of focus and methods of billing clients.  Of course, top firms will be sought after by many and the competition may be great.  This competitive edge will improve the firms as well as the associates and serve the clients who benefit from that honing process.  No doubt there will be some associates who do not wish to participate in such a competitive market and there will be firms that cater to them as well.  Firms that practice real estate from a different perspective.  Such boutiques, as well as the career path of solo practitioner, allows for anyone to make the choice and enter the field of professional real estate agent.  How long they stay will be up to them.

The associate life at a large real estate firm is a tough one.  They are expected to put in 60 or more hours per week.  There may be training sessions or mentoring programs (as the individual firms decide), marketing duties and clients assigned by the partners.  They may be asked to assist partners or other associates with specific transactions.  On top of that the associate is working hard to generate their own client base as this is one of the primary talents evaluated when an associate is up for partner.  An agent at the associate level receives a great deal of on the job training and a wide variety of experiences.  They receive a salary and possibly benefits.  The firm is liable for their development and their actions; the associate is accountable to the firm.  In the parlance of law firms their job is measured in billable hours.  I suggest that real estate firms abandon the practice of billable hours and keep the focus on value added goals.  I can imagine some variations though: minimum required monthly marketing hours, home viewing hours and so forth.  The firm may use this as time management training and even require the associate to document their days the way a lawyer must.  The difference: the agent is not documenting in order to grow the clients’ billable hours but rather to assure they are doing the proper activities while on company time.

When all is said and done, not all associates will make partner.  In fact at some firms the percentage that make partner may be quite small.  Those that do not move up may be asked to stay on as associates with some type of defined pay structure or they may be asked to leave or they may resign and test their ability at another firm or out on their own.

The Partner
Partners are part owners.  Real estate firms may be set up as corporations, LLCs, LLPs or sole proprietorships.  The partners receive a percentage of the profits as owners and this has significant repercussions.  Again, the wink at independent contractor status is eliminated.  More importantly, the desire to create a firm with profits and the desire to be part of a firm with profits lead to better firms doing better business for their clients.  Generating enough profits to share means the firm is creating satisfied clients and doing so in an efficient, price conscious way.  Pricing will probably be based to a large degree on the firm’s reputation for results.  That reputation is created and nurtured by the partners.  The partners will most likely meet at regular intervals to make decisions on all matters firm related.  This relieves any one or two people from carrying all the weight or spending too much time on running the firm instead of generating business.  If you will remember, this is one of the main set-backs to the Super Team model.

Partners may be general or they may have areas of interest and specialty.  A small firm may take care of all manners of real estate or they may specialize in just a few areas or niches.  On the other hand, a larger real estate firm might have have specific divisions that handle residential, commercial or investment.  There could be divisions based on type of marketing (online, door to door, network, etc.) or they may have divisions broken into geographical areas.  It would depend on the nature and proficiency of the partners as well as the size and vision of the firm.  Partners would continue to generate business as rain makers and have the added benefit of associates to help them handle the leads.  As previously mentioned, partners would receive a percentage of the firm’s profits.  On top of this they may receive a salary, a percentage of the transactions they themselves bring to the firm or both.  Their share of profits may be a fixed percentage or based on the percentage of business they generated.  It might also be influenced by the responsibilities they take on over and above real estate transactions such as training associates or creating marketing strategies.  It might be any combination; the possibilities are almost limitless.

The Named Partner
The named partners will generally be the creators of the firm.  Being named a partner may also be a reward to an existing partner agent or a carrot used to entice a top producing partner from another firm.  The named partners, besides the cache, may receive a higher salary or percentage of profits.  Named partners, as such, also serve as the “face” of the firm.  They are the corporate personality as well as the impetus behind the vision for the firm.  This uniqueness based on the named partners (and to a lesser degree on the partners in general) serves to further differentiate firms from one another; providing clients as well as employees more choices and a greater fit for their individual needs.  A model such as this fosters diversity in the name of the marketplace rather than requiring it by inefficient mandate of law.  Perhaps of greatest benefit to the general public: named partners have a personally vested interest in the level of professionalism and the reputation of the firm.

The Others
Beside the three main levels of the firm there is most likely a support staff.  Given our current licensing laws much of the staff would probably need to be licensed themselves.  Some, if not most, staffing needs can be outsourced so as not to drain so much of the partners time.

There is one other position a larger firm may fill: that of managing partner.  This person is designated as the partner that handles much of the staffing and administration aspects of the firm.  They are not brought on due to their rain making ability so much as their organizational skills.  This would create even more opportunity for the named partners and all the partners in general to focus on business.  I am not a fan of our current licensing laws, but one requirement of our model is that it be achievable quickly.  As current law requires a brokers’ license, that need would also fit nicely in the arena of the managing partner.

In the final section on Wednesday, I will talk about one possible path for implementing our new model. (Editor’s Note: I have not gotten back to create the final section yet… but I will)

Filed under: DISBROKERATION or "The New Model"

The New Real Estate Model – Part 3.1: The Solution

This final post (Part 3) grew rather lengthy.  Considering the fact this has already stretched into a three-part series, I chose to extend the series to five rather than attempt a conclusion of  somnolent proportions.  If brevity is the soul of wit, creating a new model for real estate is witless.  So grab a cup of coffee or your favorite bagel and settle in.  Fairly warned be thee, says I…

The Preamble
In Part 1: Disbrokeration, I looked at the problems that exist within the current, brokerage-based real estate model.  The shift to a 2.0 world is making the traditional position of broker obsolete.  The tax advantaged laws that helped create this model now create a drain on the industry and the level of professionalism is widely perceived to be at an all time low.  This is a topic of some concern, as the most popular response to the current state of affairs is more legislation, more licensing and more efforts to validate capability through pernicious membership rather than actual results.  As Big Al said: “We cannot solve our problems with the same thinking we used when we created them.”

In Part 2: Super Teams, I looked at a natural progression that is already occurring in our industry: Real Estate Teams.  I took that notion further and looked at how a Super Team might be constructed.  There was also a link to some great writing on the concept by Mike Farmer.  There are some problems with the Super Teams though.  They do not go far enough in dealing with issues of independent contractor status, education, professionalism and image.  Their success depends upon either a self-less communal work effort or a strong, unique figurehead to hold all the pieces together.  The former is not realistic across an entire industry and the latter is too uncommon.

The Outline
It is time to outline a new model for the real estate industry.  I believe the following to be a reasonable list of minimum expectations:

• The new model should account for the natural desire in many people to achieve.  It might even embrace the concept that a great many people enter the sales profession because of the unlimited income potential.
• The model should recognize and reward agents who generate leads.  No matter how well a firm may treat their clients, in order to survive as a firm they must first have clients.  Our new model must center around these rain makers or RMs.
• While imparting no barrier for entry into the industry, the model should not indulge what I call the water cooler whiners either.  It should not accommodate, never mind encourage, part-timers as the current system does.  Serious professions deserving of respect are not, by and large, part-time.
• As a byproduct of its very design, the new model should encourage education, training, dedication and professionalism.
• In the interest of self-preservation, the new model should not rely on industry advantaged tax laws, specious employment relationships and Rotarian Socialism for its existence.  The idea of a churning work force must be the antithesis of our new model.
• Finally, and most important to universal portability, let’s create a model utilizing our existing skill set.  By which I mean it should be achievable relatively quickly; perhaps even a paradigm from another industry that already enjoys success and simply needs to be lifted, tweaked and laid in place.

The Solution
Working the list backwards, is there an existing industry made up of skilled professionals acting independently within the framework of a large firm?  Is there a model that possesses the benefits Mike Farmer talked about in his Team concept while adhering to our outline above?  And if so, is the model successful and easily copied?  The answer to all three questions is yes: the law firm.

Law firms provide a model that the real estate industry should adapt and copy.  Within that model are quite a few options, as not all law firms are organized the same way.  But that is a good thing.  If I were to add one thing to the outline of requirements listed above, it would be this: our model should allow for agents to work with as much free choice as possible.  They should be able to work completely alone if they choose, or within small boutiques or as part of a large firm.  I am not advocating a mandate, but rather suggesting a model to improve the industry as a whole, all the while based on a structure that can be widely accepted.  Now it is true that lawyers as individuals have been the butt of jokes going back at least five hundred years, but law firms themselves often command a great deal of respect.  So let’s take a closer look at the benefits.

The Benefits
By using the legal profession model as our model, we import some added benefits beyond ease of imitation and number of options.  The structure, which I will lay out more specifically in the next post, by its very nature creates a need for professionalism.  The reputation, and by extension success, of the firm is based on how it treats its clients.  Professional behavior, knowledgeable agents and ethics that are beyond reproach become paramount.

Within the firm there can be areas of specialty, the firm itself may specialize or the firm might be a “general practitioner”.   Whichever the case, the sum is greater than the whole of its parts and the best aspects of the Super Team are borne out minus the pitfalls of our current brokerage system.  The personalities of the firms differ and this creates diversity for agents and clients.  Accountability is clarified… and this may be one of the most important long term benefits of them all.  Dual agency is an embarrassment to our industry.  Can you imagine the same lawyer representing the plaintiff and the defendant!  A law firm very, very rarely represents opposing sides in the same case, even if different individual lawyers are doing the work.

Adopting the law firm model adds a competitive edge in client relations as well as hiring and that hones the skills of the entire industry.  It abandons the independent contractor model and requires no tax loopholes for its success.  Because salary comes into play now instead of pure commission, this model also creates some stability in an industry notorious for its roller coaster nature.

In the next section, posting later today, I will discuss how such a firm may be organized and clarify the specific positions which will lend support to the benefits I have outlined above.  This will be followed by the final section (I promise) where we look at some ideas on how to implement this plan.

Filed under: DISBROKERATION or "The New Model"

Are You Making Music?

I recently attended a birthday party with my two beautiful boys (yes they are the most beautiful boys in the world and no, I am not biased).  The birthday guest of honor received a great many gifts and it was lots of fun.  Save for one interesting observation… an odd note that just might reflect a growing problem many agents face in real estate.  But I am ahead of myself.

In particular, the boys all gathered around a video game (I think it is called Guitar Hero) that comes with drums and a guitar.  You put the DVD in and the TV provides music and a video while the boys watch a visual cue telling them when to strum a chord or bang a drum.  Anyway, they all jumped in and so did I.  (Little kid at heart still…)

Now here is the interesting part.  I did well at that game. I did well because of my athleticism.  I still have very good eye-hand coordination and I pick things up pretty quickly.  In hindsight, maybe that is not so interesting.  But let me add this: I am completely tone deaf and possess no rhythm whatsoever.  My ex-wife used to laugh at me when I clapped my hands or tapped my foot along to some song.  Apparently I was never on the beat.  I tried to tell her I was keeping with the “back beat”… but she wasn’t buying.  In any case, I was the source for a good deal of amusement.  Now imagine: a guy with no beat excelling at a game involving music.

(Stay with me because I am going to tie this all together in a moment.)  A day or two later, I catch an episode of Gene Simmons’ Family Jewels on cable.  If you have not seen this you are missing out on insights from one of the greatest marketers of our time.  In this particular episode Gene’s son, along with some friends, challenge Gene to this very same video game… and kick his rock & roll butt.  Gene decides this is not right.  So he calls his buddies Tommy Thayer and Eric Singer (yes, those are the actual members of the band KISS) and together they challenge the kids again.  The kids even agree to use a KISS song on the DVD.

Guess what?  That’s right – the kids beat Gene Simmons and his KISS band mates in a game based on a song made famous by KISS!  How is this possible?  They lost a game playing computerized instruments to their own music.  You see the problem now, right?  The computer game is about music, but does not capture the essence of music itself.  I can learn to bang on a drum because I have great eye-hand coordination.  The kids can learn to beat the game through sheer repetition.  But not a one of us is making music.

You see, you can be someone who masters online networking, social media marketing, blogging and whatever other computerized instrument you might find out there.  Or, you can be Jeff Brown: the Mozart of investment advice.  You can be Brian Brady: the Elvis Presley of marketing.  You can be Russell Shaw: the Rolling Stones of listings.  Just remember this: in the end, to be an actual musician, you have got to get in front of people and you have got to play music.  I think it was Beethoven who said: “You have got to sit down at the piano and skin some cats.”

Filed under: LIFE THAT POPs, REALTORS , Success

The New Real Estate Model – Part 2: Super Teams

In Part 1, I discussed the concept of Disbrokeration; some of its causes and effects. When I originally wrote about Disbrokeration I thought I had a pretty good idea what the next iteration of the industry would be: Super Teams.  This type of development is not new and successful Super Teams abound right now.  For me it seemed the logical next step in a 2.0 world where the Brokers have lost a great deal of their function.  Having said that, I see some flaws with Super Teams.  Especially in their ability to transcend a relatively common problem faced by many self-employed entrepreneurs.  My purpose here is to discover a model that will not just work, but work for the majority.  Let’s look at the pros and cons of the Super Teams and in Part 3 of this three-part series, I will share a model that I think may best serve the future of our industry.

Basic Real Estate Teams
Agents may have more than one reason to create a team in real estate. Some may do so for geographical reasons, some may do so to create multiple streams of income.  It can even be done simply for social reasons.  But the primary reason to create a team is economies of scale.  Simply put, a well managed team can be more efficient through intelligent design and effective division of labor.

Gary Keller, in arguably the best book ever written for real estate success: The Millionaire Real Estate Agent, discusses the team concept as a matter of course.  It is simply a requirement for reaching the millionaire level.  This is due to the economy of scale mentioned earlier.  Mr. Keller’s point is that one person alone cannot see enough clients, list enough homes and work with enough buyers to achieve a million dollars in income.  One simply cannot carry the work load necessary for such a goal.

Others have written on the benefits in creating teams.  Mike Farmer looked at it from the perspective of geographical and technological symbiosis rather than a purely profit driven necessity.  I think I do Mr. Farmer no disservice when I summarize his thoughts as: the sum is greater than the whole of its parts.  While I agree with the conclusion of Mr. Farmer’s thesis, I do not agree with its premise.  Bringing together various people to create a team for the betterment of everyone involved is lofty to be sure, but not realistic on a grand scale.  Communal enhancement is not the biological impetus upon which most of us base our actions.  There are a great many examples of people coming together to work as one group for a higher ideal, but there are even more examples of those same groups coming apart under the strain of a more basic drive: greed.

Greed
The point is, ladies and gentleman, that greed — for lack of a better word — is good.
Greed is right.
Greed works.
Greed clarifies, cuts through, and captures the essence of the evolutionary spirit.
Greed, in all of its forms — greed for life, for money, for love, knowledge — has marked the upward surge of mankind.
Gordon Geckko in the movie Wall Street

Our Goal Model Defined
Yes, greed must be accounted for if we are to design a blueprint for the industry as a whole.  Even more importantly, we must acknowledge the premier ingredient in creating real estate success: lead generation.  The broker is no longer germane.  The ability to create leads is THE most important factor and defines the primary actors in the model that will take us forward.  But we are looking for more.  If we wish to create a model for the future, let’s charge it with an even higher level of responsibility.  Let’s create a model that also rids the industry of loafers and under performing “shoe salesmen“.  Let’s create a model that sustains its growth by success rather than law.  Let’s create a model that generates its own need and reward for education.  Let’s create a model that allows any to enter, but demands dedication and professionalism for success.  Let’s create a model without help from rigged tax laws and a “loose” interpretation of independent contractors.  Finally, and most important to universal portability, let’s create a model that is achievable now and with our current skill sets.  The Basic Real Estate Team model fails right from the beginning.  It takes into account almost none of our needs and few of our desires.  What about Super Teams?

Super Teams
They look like this: one or possibly two agents are the Team Leaders; they are the Rain Makers (RMs).  Beyond the RMs there may be nothing more than a part time administrator; or there may be multiple buyers’ agents, listing agents, lead coordinators, customer service managers, marketing directors and so on.  What makes them unique is the fact that they all work on the RMs’ team and directly for the RMs.  They may bring in some business of their own (and the splits on that business may be higher) but the primary responsibility of those that work on the Super Team is to benefit the RMs.  The entire team exists to enrich the RMs; to help them in their mayoral marketing – to help them become mayor for life.  Super Teams do allow for change.  If someone on the team decides they can be an RM too, they are free to start their own team (and well trained for it too).  But for a great many, the idea of enjoying the profession of real estate without all the messy marketing and concerns over a commission lifestyle makes the Super Team a cozy home.

This model certainly accounts for the greed aspect and literally defines the importance of lead generation.  It also quite adequately rids us of loafers and water cooler whiners (RM’s would have short patience for someone not pulling their weight).  After that though, this model begins to fall off.

The Problems
It rewards education, but only to the degree that the education benefits the RMs.  The Super Team model also suffers from our current “loose” interpretation of what an independent contractor is and continues to muddy the waters of accountability.  The Super Team is also easily susceptible to internecine battles and requires a tremendous figure head as RM to hold it together.  Which leads us to a problem usually overlooked until it is too late.  Often referred to as The Peter Principle, it is what can happen when someone moves from their position of success to a position of managing that at which they were successful.  Being an RM is a highly skilled and deservedly well paid achievement.  But reaching that lofty height in no way ensures you will be successful running a team.  The skill set is different.  In Mr. Keller’s book he suggests that you hire an administrator who will eventually oversee the employees, do the hiring and firing and basically run the business. This makes sense in a small, one man operation that is expanding.  But a well paid assistant is hardly the solution to running a large firm.

At its most basic level: a Rainmaker needs help in handling all of the leads they generate.  Yet by taking on the required help they must divert their time and some portion of their rainmaking to management.  This is, in the end, still a self-employed entrepreneur… but with a growing staff.   Either the model falls under its own weight or the RM morphs into something unintended and unproductive.  In either case success leads to more hours and less enjoyment for the Team Leaders that began as Rainmakers.  This is an unlikely proposition on which to create a new business philosophy and its success is most probably not exportable beyond a select group of people.

A Fix?
One possible solution for the Super Team model is to refer all of the leads out to other agents.  Maintain no overhead and no employees other than a coordinator to track the leads.  I submit, however, that the referral fees currently paid are not large enough to justify the work and expense.  On top of which, at this point you are a Rainmaker who is coming dangerously close to being simply a lead wholesaler.  Our goal was to create a model of success within the real estate industry going forward.

So, our problem continues.  The idea of a broker becomes archaic.  As information becomes more readily available there is a natural progression: middlemen (brokers) go from providers to gatekeepers to restrictors (chokepoints as Greg Swann calls them) and eventually they just become unnecessary.  Yet the sole entrepreneur atop a Super Team still suffers from many of the existing problems and struggles under the weight of their own success.  We need a new model.

Next time: An Old Tool for a New Problem

Filed under: DISBROKERATION or "The New Model"