realonomics

Part Two - The Interview

This is the second installment of a three part series focusing on the thoughts and business models of Donald Teel, the Founder of e-Partner, his view of the real estate industry and the issues facing broker/owners in what he calls “The Third Economic Wave, the Consumer-Centric Era.”

The following interview is a compilation of a pre-existing interview from 2002 with updates that address today’s contemporary real estate industry issues.

Q - What prompted you to dream up the e-Partner Program?

A - Actually, it was something that evolved as a result of my partner and me seeing how business was being transacted in our own real estate company and being willing to confess that we couldn’t continue to do business as usual. Two things created a need for change. The first was the way I saw buyers using the Internet to shop and admitting to myself that they couldn’t care less about what Company and what agent answered their questions and delivered real estate information to them…I know many don’t believe this, still.

The second factor was a very simple economic reality. Over several years from 1996-99 I came to firmly believe that traditional residential real estate operating models were going to enter an era where their viability would be seriously challenged. Fortunately, the decade long market run-up bailed out the industry and delayed the inevitable. But now, here we are again, back to the future!

These two issues led me to rethink and retool what I was already working on, the idea of fluid regional real estate models that could cut across the traditional inhibitions inherent in our business models and truly deliver a consumer-centric, transparent model. And in my attempts to produce such a model, I was met at almost every turn with industry resistance…no conspiracy, mind you, just cultural and operational resistance to a new economic reality.

Q - What is the economic reality you talk about with respect to a real estate company?

A - Certainly, it is something as academic as simply paying the bills month-after-month but more importantly, it was the final acknowledgement that things have to change in the manner in which real estate brokerage firms make money. For example, if you are a franchised broker, first-out money goes to the franchisor and this is typically, 2-8 percent of the gross, money that used to be the broker/owner’s profit. So, what does that money get me, what is its ROI? For example, if I pay six percent of $10,000,000 ($600,000 or, $50,000 per month) to a franchisor, what’s my performance guarantee and how does my business produce a profit on the $600k investment? I have actually asked owners, “what’s your ROI on the franchise fee, have you ever quantified your franchise investment?” Most of the time, an owner doesn’t know how to quantify the capital investments he/she makes every month. This is the type of analysis owners should be thinking about. Lest I appear to be picking on franchisors, I am not, this is but one example of the financial commitments an owner makes. We can talk about office space, relocation strategies, marketing and closing costs as well because they all represent financial commitments…overhead.

e-Partner is an economic model, premised upon the fact that owners don’t have to work in the manner they have been working…in fact, we can’t work in the manner we have worked if we want to build effective businesses with meaningful ROI. Profitability, sustainability and ROI is the economic reality facing owners…this has to become our core reality.

Technology, primarily Internet technology, enables us to create new revenue models, but we have to believe some very basic things. And, if we don’t believe them, we are going to be extremely frustrated as owners or, I should say, caretakers of agent-centric models which, if operated under the old economic principles of real estate, will eventually break down.

Most people think the letter “e” in e-Partner refers to “electronic” but it doesn’t, it refers to “economic.” Broker/Owners ought to be in the business of creating “economic partnerships” with multiple markets, agents, consumers and a host of other tangible relationships that produce meaningful, well-managed ROI.

Q - Why do you insist on talking about the e-Partner beliefs and what are these beliefs?

A - I’m convinced that until we actually believe something we won’t act, change or adopt new ways of thinking and what usually creates a new set of business beliefs is sadly, economic pressure that threatens viability. If most owners are like me, we simply keep going, executing the requirements of our operations, devoting little time to the challenge of re-thinking what we believe, not only about the future of the Companies we own but also about the future of the real estate industry. Owners are dragging a fire hose around with them, putting out brush fires that are escalating into towering infernos. There is little support for the creation of new economic models that can make the science and art of brokerage ownership more satisfying.

We have four beliefs and these are irreducible minimums if one is going to implement competitive change. Here are the required owner beliefs or admissions that empower us to change:

1. The Economics: We are operating our companies from a position of economic weakness by having too much overhead, too many agents and not enough technology. We are still a very old-fashioned industry.
2. The Model: We run business models that are incompatible with the new real estate economy which is going to become almost entirely information aggregation that owners and agents will not necessarily be able to control. We should believe in fluid business models and replace our rigid, retail models with agile economic business models.
3. The Markets: We function in fluid markets, not the old static, limited markets where we defined ourselves in terms of a city or zip codes known as a an “Effective Market Area” or “Effective Service Area” or “Market Service Area” terms coined by franchisors to support their economic model and their cash flow requirements.
4. The Consumer: We are being forced into a tight corner by what I have called “non-brokers” and “neo-brokers” who are dedicated to a transparent real estate economic model that partners with consumers. Many owners think we are still operating in the Broker-Centric Era of the real estate industry…nothing could be further from the truth.

If we believe, and I mean “BELIEVE” in all caps, these four simple truths we can begin to implement dynamic new models that produce revenue and growth within larger consumer-centric markets.

Q - So, what does e-Partner do for Broker/Owners that can help them transition to the new real estate economy?

A - Several things. First, it gives them a way to think and manage change without blowing up their companies chasing the latest fads. It enables them begin to view their old static, highly limited market, usually a town or city, as an open market where they can compete through the strategic use of very simple and cost effective technology models that will attract agents, identify growth opportunities and minimize capital risk. Minimization of capital risk is the big one.

In addition, e-Partner provides an owner with a platform with minimal overhead and a proven model for recruiting, acquisitions, mergers and ancillary revenue streams in totally free markets, inhibited only by an owner’s vision and discipline. It can mean things like providing services to agents who are NOT in your company…there’s a thought…and creating new sustainable financial operating systems within their companies and with agents in multiple markets.

Q - What is it that gives e-Partner its power?

A - In a word, and second to understanding where the industry is going, technology. But we aren’t a software program and we don’t build websites for people. As I said, we are an economic business model for real estate companies with a belief system that utilizes technology and the Internet as one delivery component of the program. I fully subscribe to Paul Zane Pilzer’s premise in his book Unlimited Wealth, that technology always creates wealth and new economies. We have been playing around with the Internet since about 1994…that’s 13 years…and we still get stuck on websites and “lead gen” rather than business modeling in a consumer-centric era. Our websites look like our companies and they shouldn’t, they should look like the consumer. There is a big difference between having a website and executing a business model that utilizes the Internet.

The real power is discovered when we truly recognize that e-Partner is only doing what the market is already doing and saying to us as owners. I discovered…actually, I should say, consumers told me that Northern Arizona was an entire regional real estate market made up of cities. The consumer educated me as a logical result of seeing how they preferred to relocate, shop for real estate, communicate and most importantly, how they prefer to relate to real estate companies and agents during the pre, mid and post transaction mode.

Then, I subsequently discovered that the State of Arizona (what we call a “geo state”) was a macro-market. The sad thing is, most Brokers are not playing in the whole market because they lack the time, capital and expertise to play at that level, they are too busy running their offices and companies. e-Partner won’t save a company, but it will help an owner play in multiple, horizontal markets by providing a platform. Then owners need to look at the way they manage transactions from the agent front end to the closing back end. We are awash in paper and it is killing us economically because we engage a transaction and manage it with a manual labor force…and, that’s just one issue…add to it wasted advertisement dollars that don’t create consumer awareness, commission structures that wipe out an owner’s ability to generate new growth, etc.

Q - You mentioned some of the current problems with traditional brokerage. Are you talking about 100% commission firms or just traditional split commission companies?

A - Good question. The answer is both? In fact, many 100% firms aren’t making it financially either. To make ends meet, it takes three to perhaps ten agents in a 100% firm for every one in a traditional company. The 100% firms have discovered that the panacea isn’t found in simply giving away all the revenue. As a result, what have some of the 100% companies been doing? But those are not the real core issues…the real issue is HOW we structure relationships with independent contractors and the high cost of traditional retention…translation, throw money at them. We are the only recognized industry the IRS allows to receive both 1099s and W-2, why aren’t owners exploiting this in their market areas?

Last month I spoke to an owner of a Re/Max firm. They have no 100% agents because they can’t make money giving away all of the money…smart owner! Many so-called “100%” models have been adopting split commission menus. My point is we are all caught. It isn’t about commission splits, owners lost that battle a long time ago. e-Partner is about the creation of new revenue models with franchisors, agents, the markets, transaction systems, etc. I look at the whole business and ask, “how do we make this work, economically?” That is, how does this make money, how much money, what’s the acceptable ROI and how do I get there, what’s the cost of delivery and does it even work at all? We need to roast some sacred cows. I know this is scary to a lot of owners, but we have to do it to make the transition to the New Real Estate Economy.

Q - What are the big threats to owners today that need to be examined?

A - Oh, my! First, we are our own threat because we are no longer running the industry it is running us. Secondly, we have the “non-brokers” who have no inherent interest in the historical industry…they are coming on big-time with the introduction of new consumer-centric experiments and we are many times the rats when we should be running the labs. Another is the sheer cost of doing business that owners take on, many times without an economic plan or proven model for success…we “wing-it” a lot of the time. From there it’s our market models, agent compensation programs…these are the quick-list items.

We need to look at models purely from a revenue performance, asset development perspective. Our models should bring NEW money in the door, not simply re-shuffle the limited capital available within the company. Brokers are trying to do more for their companies with less capital and taking a financial bath while doing so.

Q - What is this “New Real Estate Economy” you keep talking about?

A - It’s two things, really. At the forefront I am referring to the speed at which technology and the Internet is changing the way we do business and the opportunities this creates for us, if we seize the moment.

Secondly, it’s about the consumer-centric nature of everything in the global and national economy. It’s the democratization of real estate and I’m not certain we totally appreciate this phenomenon and the ways that it can make us incredibly effective and profitable! The consumer is going to continue to make demands on us, the question for owners is whether we can step up and devote the time, energy and vision to recreating our relationship with the consumer, one person at a time because that is where it is going.

The long and short of it is simply that e-Partner seeks to address the issues that are destroying the owner’s side of the business. e-Partner is not about having a company website, it’s about the blueprint we use that needs to be etched, not in stone but rather in water so that we can direct its fluidity toward the Niagara Falls of profitability.

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