Brokerage Models, REALonomics, Technology in RE
# 8 – Why Buy What’s Free?
January 19, 2007 by REALonomics · Leave a Comment
The Ten Commandments of the New Real Estate Economy form a blueprint for thinking about the economic models associated with contemporary real estate brokerage firms. The eighth commandment is:
Thou Shalt not Attempt to Purchase Markets
Many owners have been led to believe that we can buy market presence and therefore, inherit the dominance that comes with such presence. This has resulted from the merger and acquisition mania that has permeated the industry. Is this good REALonomics?
In a business where the potential ROI is marginal at best, and where integrated technology is rampant, the idea of money purchases of new market positions is absurd…actually, insane.
Admittedly, there are a handful of large entities whose enormous size and business diversity allow them to loss-lead such acquisitions.
Coming out of Hibernation
Some owners are coming out of hibernation and asking hard questions about the “free markets†in front of them waiting to be penetrated. After all, they ask, “why would I purchase something that is free?†REALonomics agrees.
The chief job of a territorialist (franchisors and owners whose business models are predicated on geographically defined markets) is to continue to perpetuate the myth that they actually have control of the local real estate markets. Through NAR’s machinations and local MLS control schemes, there is a pseudo assumption of market control.
Frying a Different Kind of Fish
Today we have an entirely different fish being fried. Through Internet-based platforms, companies can position an owner for penetration of the free markets all around them and thereby empower them to extract new capital resources. In effect, the technology becomes a part of the owner’s brand…collectively the owner and his/her technology apparatus make the brand…get big by being small all over (GBBBSAO).
The lack of agility and the lack of a true coherent technology commitment on the part of owners who are trapped in old industrial real estate models may prevent them from being able to re-design themselves fast enough to compete for the markets around them and perhaps for the ones where they currently operate.
New Competitors: The Non-Mergerists
We have new competitors who are NOT engaging in M&As? They are the Non-Brokers and to some extent the Neo-Brokers among us, who are already on the march within the markets, reinventing the way in which they do business.
Most of these entities are not utilizing the M&A strategy but rather, they are going it alone using less capital resources to accomplish greater financial results.
There is an emerging freedom market mentality that has adopted the position that there is no need to purchase markets when their penetration is so easily facilitated by implementation of Internet marketing strategies at a fraction of the capital risk associated with M&As.
When we dissect an M&A we find that it is indeed a very risky method to use in building a real estate company. An M&A involves capital risk, conflict resulting from cultural nuances (cultural can tear down faster than anyone or any amount of money can build up), management style assimilation, leadership and power issues.
Market penetration involves almost none of the risks inherent in M&A methodologies. Buying markets by means of company acquisition does not assure success by any means and there are some examples of rusty catastrophic failures dotting the real estate landscape.
A Simplified Economic Choice
Growth minded owners will eventually face the choice of whether to acquire markets or penetrate them with hard-hitting technologies that allow them to brand themselves in multiple markets quickly and recruit cyber-agents who work these markets from home or other low-overhead locations.
Eventually, in the business of real estate company development, someone makes a mistake that can be exploited by his/her competitors. One of the biggest mistakes that any owner can make in this day and age, where the tools for growth are so plentiful and affordable, is to engage in an attempt to buy a market position. Yes, acquisitions can accelerate the process of growth, but at what cost?
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