Brokerage Models, REALonomics

Jack’s Beanstalk, the Asset Fairy Tale

This, the fourth installment of the Ten Commandments of the New Real Estate Economy, addresses the asset fairy tale plaguing our business models. For a moment, let’s set aside Jack and the Beanstalk thinking and ask ourselves, what is a real estate company’s core asset?”

Let’s go back a few decades to the beginning of the Second Economic Wave (circa mid 1970s until 1994) of the real estate industry; it is here that we begin to see the struggle for asset definition coming clearly into focus. The Second Economic Wave is the era of the agent-centricity; wherein the agent-dominated business models began to emerge and with them the redefinition of “brokerage asset.”

In the First Economic Wave, the core asset was easily defined as the listing agreement. The teeth in the model was the property information vault, controlled by local brokers via the Multiple Listing Services (MLS) they owned.

At the beginning of the Second Economic Wave, broker/owners controlled ALL property information. The broker/owners wielded their power through the local Multiple Listing Services they owned and controlled. At the end of this era, the property information was beginning to leak from the bottle, spilling into the streets of the information super highway. This single event would ultimately prove to redefine the industry’s asset, forevermore.

The Agent Asset Theory

In both the Broker-Centric Era and the Agent-Centric Era, the more agents you had the better off you were going to be because you had more bodies working in limited vertical markets where the consumer could not access property information without being in the presence of an agent with a book (yes, MLS books!) and the agent couldn’t get the book without the broker’s permission.

This created the notion of the “agent asset” as the fundamental nucleus of brokerage business models. It was the physical bodies (agents) gathering listings and delivering property information to consumers, one-on-one, that produced the myth of the agent asset…it was nothing more than a fairy tale on par with Jack and the Beanstalk.

REALonomics rejects the agent asset fairy tale. No one we know in the accounting world recognizes independent contractors as brokerage business assets.

Our dreadful fixation on the mistaken belief that agents are assets is only superseded by our dogmatic devotion and passion for overhead expressed in office buildings. Who among us can deny that our traditional formula for brokerage asset creation has been:

BUILDINGS + AGENTS + LOCAL MLS CONTROL = ASSET

Owners still cling to this asset belief system and as they do they find themselves overwhelmed by the sheer pressure of just keeping up with the job of attempting to create a limted vertical assets utilizing bodies, while the New Real Estate Economy races past them.

Chopping Down the Beanstalk

Fairy tales are supposed to be silly stories where imagery is exaggerated in order to capture one’s imagination and drive home truth. Grown ups are not supposed to believe in fairy tales yet, in the world of real estate brokerage business modeling, we seem to cling to myth of the agent asset, even when current reality beckons us to chop down the beanstalk.

It is only when we soberly apply REALonomics to the brokerage business model that we come to the conclusion that technology and the Internet, driven and shapped by the consumer’s demand for the Democratization of Real Estate that we realize what has always been true…THE MARKETS ARE THE ASSET.

As real estate company owners enter 2007, they must do so with no illusions dancing about in their heads, especially agent asset fairy tales. Instead, we ought to adopt models that are congruent with market asset development formulas, such as:

HORIZONTAL MARKET PENETRATION + HIGH TECH MANAGEMENT = ASSET

A few weeks ago, I read my 5 year-old daughter a fairy tale. Her eyes were sparkling with each twist in the story. It wasn’t within me to tell her that the story was just make believe; after all she is just a child. I couldn’t help but notice at the end of the book were these famous fairy tale words:

“The End”

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