February 2009

New Improved Real Estate Model Math

REALonomics coined the phrase “new real estate model math” to convey the long overdue and much needed critical economic analysis of how our real estate brokerage business models work and how they produce revenue.

REALonomics is expanding the scope of its analysis in 2008, applying the idea of “new real estate model math” to brokerage, agents, mortgage and title services. The tip of our pencil will need to be sharper and the use of the eraser more vigorous. The fact is, each participating entity related to the real estate industry is going to do a lot of writing and a lot of erasing throughout 2008.

New economic principles are coming into play that redefines the model math equations for profitability. There are less predictable variants in the market place that we have never fully recognized as part of the new model math for profitability.

CAUTION: Don’t use ink! If you do, you will need a 50-gallon drum of white-out.

ERASE THIS: A market is clearly defined. It’s a city, zip code or delineated geographic area defined by brokerage firms, mortgage providers, title companies and franchisors as “effective market area,” “effective service area” or “market service area.”

WRITE THIS: Markets are macro, cyber and fluid environments where consumers seek information, conversations and property information about multiple locales. Markets are needs not lines. They function by personality not by perimeters. Lines are largely irrelevant.

ERASE THIS: Technology and the Internet provide real estate industry service and product providers with websites where static information about offerings is posted and where consumers are asked to provide personal information in order to proceed to the status of “lead” and become valuable as a potential customer.

WRITE THIS: Technology and the Internet create business environments for information exchange services relevant to the consumer’s core set of needs. From these environments relationships are developed by allowing interaction, posting, questioning, suggesting and empowering individuals with information they can use in their quest for solutions to real estate dilemmas.

ERASE THIS: Operating models are in-house labor pools maintained by real estate service providers in order to create a closing apparatus, execute adequate paper trails and meet legal and regulatory requirements associated with unit transactions.

WRITE THIS: Operating models are service enhanced value propositions, driven by high speed Internet technology tools, accessible by all parties (principal and beneficiary) that create constant interaction between principals and chosen service providers before, during and after the real estate investment decision has been made. The relationship transaction data is forever accessible by the consumer from any Internet access point with all property related value assessments available to everyone.

ERASE THIS: Execution is defined by “closed” loops where finishing is a line designating transaction consummation.

WRITE THIS: Execution is the ability to protract the line that defines the relationship between provider and consumer as a fluid forward moving economic flow, where the consumer may select multiple services for the duration of the relationship and thus create protracted ROI for the provider.

ERASE THIS: Profit is based upon the industrial transaction model known as the “closing” or “recordation” of a particular single real estate service component such as real property, mortgage lending or title services. The end is the justification of the means.

WRITE THIS: Profit is illusory and ever evolving, being created from multiple and truly valuable service and product models beneficial to the consumer. Changing the profit model is never shaded but fully transparent to the consumer. Information is always extended with precise accuracy and without perceived or actual duplicity. The profit model is protracted and filled with constant change, flux and adaptation. The provider is the servant of the consumer, bringing expansive propositions to the table which meet immediate, intermediate and long terms needs.

ERASE THIS: Leadership sets standards internally and business components execute the performance standards measured by factors related to financial objectives (the traditional CEO model). Leadership operates an organization that moves in lock-step to the flow charted demands of accounting and dividend reports.

WRITE THIS: Leadership is primarily the art and science of understanding consumer needs in a rapidly evolving information-based models and leading transparent environments in the production of packaged services and products in these environments. Performance is measured largely by ideas that create and sustain relationships and therefore produce profit opportunities and actual revenue while retaining and extending the consumer conversations to the next profit cycle. Accounting is empirical, as it should be, but CEO leadership is measured by the true value of extending consumer loyalty, therefore, redefining the role.

Can the real estate industry thrive in a business climate where the name of the game is sustained transparency in an open market model with the consumer front-and-center?

This will be the New Real Estate Model Math for 2008 and beyond.

Red Flags Signal Final Flattening

REALonomics is seeing red. Our extensive and ongoing analysis of the real estate industry’s business models has produced red flags that signal the final flattening of the real estate industry. In this case red will ultimately prove good.

The flattening of the industry’s topographical map is leveling the playing field between consumers in the democratization of real estate.

We have many red flags flapping in the howling, bone chilling economic wind. Our common sense is being numbed as we attempt to hike through the arctic blast, unable to see what is in front of us, unable to return to our point of origin, unable to read a compass long since frosted over and unable to find warmth in the sub-zero atmosphere of rapid economic change.

The Red Flag of Information

There are three great inventions that have changed the world. Guttenberg’s press, television and the personal computer (PC). Each of these accelerated the dissemination of information, contributing to a breakdown in traditional institutional control models.

The general speed and specific quantities of information available to anyone and everyone has finally redefined the real estate industry, its markets and the means by which it delivers its services. Information packaging is our economic challenge and the assemblage, packaging and delivery of collated information will become our “economic widget” in the New Real Estate Economy. It’s no longer just about a real estate, mortgage or title office.

Massive dumping of unassembled information into the consumer causeways necessitates and will provide opportunity for the new models. Unbridled info-dumping creates consumer insecurity and retards the decision-making process, producing lethargic markets. Hesitation redefines the revenue capture rate in an already sick market.

We have no traditional place to hide and the info terabytes being swallowed by the masses like so much candy only cause them to demand more from us, flattening our craggy economic models in favor of a smooth, friction-free relationship with those serve. This is good.

The Red Flag of Brand Mash-Up

The powerful historical brokerage, mortgage and title brands we heretofore have relied upon may not be the new delivery channels in a flattened environment. REALonomics believes we will see what we are now terming “brand mash-up” or, the crushing of the potatoes which will change our brand predispositions and assumptions from baked to mashed.

Still, with few exceptions, the industry brands are of our own making and we have said many times that consumers are fickle about pledging allegiance to brands that lack true measurable economic and service distinctions. The reckless pledge of loyalty to a single inside the box brand is a violation of our “Tenth Commandment of the New Real Estate Economy.”

Since the brands are already mashed in the mind of the consumer (as they see little distinction) we will be led to a new form of economic amalgamation where traditional brand matters less and packaged services matter more.

The Red Flag of Market Supremacy

We are learning the hard way about market madness. The notion that we can indefinitely create, sustain and bend markets to our liking is insane. Markets are living, breathing, five-sensed phenomenon that impacts an industry’s ability to control economic outcomes, try as it may. The market is king…long live the king!

But the market is also Frankenstein, a monster we engineer in a dark, damp laboratory that eventually rises from its table to escape into a world where it wreaks its havoc. Here we are in 2008 wondering how to re-capture and strap our market monster to the surgical table.

What we have previously defined as “market” is the worn and extreme notion of local Territorialism (note the “ism”) as the primary component of an economic model.

The new reality is your market is mine and all markets impact all markets because the economic forces influencing them are becoming more universal. We’ve known this for many decades to a lesser degree. Now, with the information deluge, the distinction between Dallas and Denver, Cleveland and Carlsbad is being blurred.

The market is macro, not micro. Our industry models are finally coming to grips with how small the market really is and the fact that what one niche does can impact others.

Reinvention and the transformation of any industry is a very daunting assignment, even when there us compliance on the part of the transformee. Our industry is still kicking, bucking, lashing out and resisting the inevitable. We are mud wrestling with Grizzly bears, unnecessarily.

Thomas L. Friedman wrote about global flattening in his book The World is Flat. Like the world, the distinctions of its smaller components are being leveled. The real estate, mortgage and title industries are being flattened by the forces of property democratization, Internet technologies and an ever demanding hyper-savvy consumer who just doesn’t care about the same things we care about and who is no longer impressed with the images that continue to impress all of us.

Like all business, the one thing that will finally grab us by the throat and command our attention will be our inability to simply operate with any degree of predictable profit. The red flags signal the final flattening of the terrain, enabling us to implement more effective business models with our new business partner, the consumer.

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