realonomics

In a previous post (Nori’s Leaky World) we spoke about the real estate industry being built, in part, on a control model.

Throughout our history we have deployed control-based business models. Like the real game of Monopoly® our industry has created its own market game board governed by a set of rules we wrote and occasionally edited to extend our control. An owner’s business model was based largely on mechanisms designed to control information, markets, brands and for a long time we even tried to control the real estate agents who were part of companies.

Most importantly, we have historically attempted to control the consumer.

Control and Dominance

Large segments of the real estate industry and its core service providers still engage in Realonopoly, a game about market control and dominance. In the game of Realonopoly we carve out spots within defined markets…we then seek to control our position, until, as we have all experienced in the game of Monopoly®, we can no longer pay the rent; a position in which too many owners find themselves today.

Within real estate, mortgage and title companies, creating one’s board is the first initial step; everything flows from there. Position on the board can mean power and power typically equates to a kind of control measured by muscle flexing. Control has historically been everything in the real estate industry.

The ultimate control was consumer control.

Losing control creates a depression and a void…a crack where others can slip in. Yet, it is the contention of REALonomics that each era in the historical timeline of the real estate industry unravels when control is challenged and the challenge typically stems from a change in informational technology…the means by which people gain access to real property data.

Collaboration and Community Forcing Change

Business models typically change when the old models are confronted by new technologies and people empowered by concepts of innovation. Most of the change in business modeling is induced by innovation driving primarily by advances in technology. These advances in real estate technology create a “democratizing” of information, which then empowers others to innovate, challenge the control status of the prevailing models.

This is precisely what has taken place in the real estate industry. REALonomics has presented this as the Democratization of Real Estate, a time where the industry loses its grip on the game of Realonopoly and finally is forced to abandon its position in favor of a new board game. Think of this concept as three distinct eras as follows and notice how transitions occur when new technology is introduced…then, notice how control is relinquished as information is decentralized and ultimately democratized.

Examine the following illustration, extracted from our archives. It demonstrates the evolution of the real estate industry’s business models.

Control works well in business model climates where informational access and free exchange are blunted, where collaboration is limited to the controllers and where the rules only change when the controllers are finally confronted by free thinking people who are initially labeled as rebellious fringe lunatics.

We have now entered an economic era with a new personality being formed by collaboration and communities, rather than control and corporate bureaucracies. Each consumer who is empowered with Internet access is empowered to shape our business models and help us write the rules that will govern The New Real Estate Economy.

There is a new board game emerging that will redefine how we will play the real estate game tomorrow, next month, next year and for quite some time in the future. It’s now a game without many rules, one of collaboration and community, of open, free-flowing dialogue where one person is just as powerful as a group. How do our current models stack up to his new reality.

The question we ask is “Does anyone still want to play the old game, Realonopoly, a game in which we predict there will be no winners?”

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Do you remember this woman? She is the one who filed a lawsuit against a RE/Max agent named Michael Little who she and her husband accused of selling them a $1.2 million home they say was worth substantially less.

See our previous posts entitled Ummel’s Talk, You Decide and Ummels VS Re/Max.

Marty Ummel appeared on national television news programs such as the Today show claiming that she and her husband, Vernon, were deceived by Little in the process of making their purchase.

A jury of twelve (10 women, 2 men) were not convinced and delivered a unanimous decision after a quick two hour deliberation declaring that Little did not breach his duties and was not negligent in his actions on behalf of the Ummels.

Wendi Brick, jury forewoman, explained the verdict by saying, “We felt that yes, he had acted on their behalf, and we felt he met his fiduciary duties as defined…In any kind of purchase, especially one that big – and most of us have had our own situations we’d been through – the bottom line really stops with you. Whose final responsibility is it to sign a contract? It’s yours…”

Little described his feelings by saying, “I feel incredibly relieved and vindicated…it has been more than two years of quite problematic times for me, and I’m happy to get it behind me.”

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As firmly as IBM ruled mainframe computing and Microsoft the personal computer age for many years, so currently Google today rules the Internet. Originally nicknamed “BackRub” in 1998 by Stanford University buddies, Serge Brin and Larry Page, Google has not only become one of the most admired companies of the modern day but has found itself into our every day language, with the verb “google” being added to the Oxford dictionary in 2006. 

The stock price rocketed after its initial public offering price of $85 dollars in August of 2004 to over $720 in November 2007. At that time only Exxon Mobil Corp., General Electric Co., Microsoft Corp. and AT&T Inc. had a higher market capitalization among U.S. companies. Today at around $470, nearly 40% from its high, Google still commands a market capitalization of over $110 billion and continues to battle with giants such as News Corp. and Microsoft. 

Google, with its network composed of hundreds of thousands of servers, Google’s system never ages. When its individual pieces die, engineers just pluck them out and replace them with new, faster boxes. This means the “Google cloud” regenerates as it grows, almost like a living organism. 

At the same time Google at some accounts has become the gatekeeper of all information. Google also advises us that “real estate” is the most searched category on the Web - with the 2000-05 housing boom and the subsequent sub-prime and foreclosure catastrophe, this is maybe not that all surprising. But let’s look beyond that for a second.  

With some 141 million individually identified pieces of property in the U.S., real estate is at the very center of the American way of life – whether living, working, sport or entertainment. As Google conducts more real estate searches it aggregates more real estate information. Potentially with each new property search, each new listing added to its “deep search” database, each virtual street tour completed, each foreclosure filed, and so on Google gains more knowledge of the real estate industry. 

It actually is becoming increasingly harder to wrap your mind around just what exactly Google is – and more importantly what it may become.   

Could Google become the best advertising vehicle of all time to find and to market a house for sale?  

And if it does, could that reduce the need for various traditional real estate brokerage services?  

And if yes, to what extent and in what way, could Google influence the fundamental re-engineering of one of the oldest sales professions? 

What are your thoughts?

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This is a follow-up to our post “Ummel VS ReMax” on January 25, 2008. REALonomics analyzed this interview, not to determine the accuracy of the claim but rather, to get inside Ms. Ummel’s head and ascertain the mentality behind the suit from a consumer’s standpoint. Admittedly, getting inside someone’s cranium is an illusive art form, but in this case we are simply looking for attitude, motive, emotional state and other factors that may serve as a consumer’s motive for such an action.

We are trailblazers…we want to change the industry. We feel we were misled…we do feel angry…we hired our agent because he was a real estate professional, he was expected to do the due diligence…and they (agents) have a code of ethics where they must put the buyer’s first…I think he just wanted to go ahead with the sale and make his commission…he was not concerned about our best interests. We feel that the appraisal was manipulated…we feel that the agent had something to do with that…

Source: Today on MSNBC.msn.com

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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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