realonomics

Bill Gates will stand in the halls of business history as the person who transformed not only technology but entire segments of the business world with an operating platform called “Windows” that dominates the globe with an approximate 90% market share.

Upon his retirement from Microsoft, REALonomics is honoring Bill Gates and his contributions to business and of course, who could question his influence on the real estate industry? Here’s a video from 1992 with some of Bill’s predictions.

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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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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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The stakes are getting higher and higher and higher. What we have called The Democratization of Real Estate is going to create the demand for amalgomation. This will change the ante for those at the high stakes poker table known as real estate company ownership and ultimately the cost of continuance for Broker/Owners. The industry is an aquarium with limited resources. The ecosystem cannot sustain the sheer numbers required for everyone’s survival.

Several years ago, REALonomics noticed the brand collage on the face of the Home Services website. Titan-like groupings of large entities are going to have to emerge in order to meet the high stakes cost of operating in the Consumer-Centric Era, our Third Economic Wave.

Put in basic terms: the big are going to get bigger. Large fish, as usual are going to gobble-up the small plankton in real estate’s vast ocean but they will do so without having to merge or acquire. Plankton is any drifting organism that inhabits corners of the watery markets of this industry; including core services such as title and mortgage.

Want to sell your real estate company? Forget it. Don’t sell, no one’s buying…or, I should say, “no one in his/her right mind is buying real estate companies.” Instead Broker/Owners should group, combine, forge, align or otherwise re-map how they collectivize. Never have Broker/Owners been in a weaker position. The owner’s asset value plummeted in late 2005, the end of the last “Power Cycle.”

REALonomics views real estate markets in seven year cycles we call “Power Cycles”. The next Power Cycle will peak in about 2012. Each Power Cycle contains a set of operating “circumstances” made up primarily of

1. Emergence & adoption of new technologies and operating methodologies;
2. Diminishing inventories and price adjustment shifts;
3. Consumer demand (pent-up) with investor opportunity;
4. Favorable finance conditions where ROI is suitable and predictable

Big Fish Swimming in Multi-Branded Schools

The biggest brands of tomorrow will be multi-branded coalitions. This is the logical result of an industry whose customer is decidedly unfaithful to brands and in order to re-margin the industry requires multiple brands owned by a single entity operating in open markets. The Home Services model.

Those of us who actually own or have owned real estate companies clearly understand that brand value in the market place peaks quickly and then rapidly plummets. The fabric of daily market activity has almost nothing to do with brand and everything to do with the management of a company, its service culture and the quality of its sales force (a.k.a. “agents”).

The brand opens the consumer door, slightly and never permanently. After the door has been opened it’s about the owner, his/her culture and management and the professionalism, skill, knowledge and ethics of the sales force.

Big fish know this, that’s why they multi-brand in single markets. Franchisors know this, but pretend not to in order to control markets. Small fish know this, intuitively, but cannot execute multi-brand constructs due to resource deficiencies…it’s the money, as always.

Big fish redefine the ecosystem within the aquarium. This is smart and necessary for economic survival. Big bucks realty is the principle of Darwin’s natural selection and the survival of the “most fit” among us as we swim our way through the murky waters of the aquarium.

The Power Cycle Analysis - Shifting into High Gear

Our Power Cycle phenomenon is real. The industry is wrestling with coherent technologies that will change its modus operandi. We are currently in a consumer trough where our clientele have diminished in number and where they continue to reject most of our style and service models, craving for more transparency and less hype. Inventories are at all time highs, price points have muted absorption. Investors have retreated and the mortgage markets are in a lock-down mode. These factors are nearly always the conditions of a Power Cycle in decline.

On average, it takes 18-36 months for the cycle to re-ignite and this can only occur when all of the ingredients are present to create the Power Cycle ascension. The Power Cycle is typically sparked by the introduction of new technology AND industry innovation.

The first Power Cycle in this graph was the adoption of the Internet as the primary means for marketing real property to consumers. The next Power Cycle will most likely be fueled by the renovation of the current MLS system with all of its anti-consumer controls in favor of open market transparent models. There are many factors not included in the Power Cycle graph in order to simplify its presentation.

The industry is developing into what REALonomics believes will be a “Big Bucks” model where some participants in the crowded aquarium will be absorbed. This includes entities in the franchise, technology, Internet, brokerage, mortgage and title industry.

It will take more money to operate in the new ecosystem. Margins will be thinner and correct modeling will become paramount to survival. Most importantly, however, is the fact that sustained ROI and long term asset development will come from new found money sources, not necessarily the old traditional money.

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REALonomics has written and blogged extensively about the New Model Math equations for the real estate industry. These NEW math models are being formulated amidst the sea of change in which we are immersed. The nucleus energizing the atomic structure of the New Model Math has shifted from the Broker-Centric and Agent-Centric industry control models to a Consumer-Centric operating formula for profitability.

It’s our belief that we have entered a Third Economic Wave or Era of the industry, a New Real Estate Economy governed largely by a set of Ten Commandments. The Democratization of Real Estate in underway but we are still in the early stages of its unfolding.

Defiant segments of the industry remain entrenched in mountain caves refusing to acknowledge the war is over. The rules are changing and we for the most part are not writing the new rules. It’s a hyperactive, deficit disorder model, where blinking is rewarded with set back and sleeping results in being replaced.

What are the ingredients for the New Model Math? How does the new formula produce adequate and sustained ROI for those who are the players within the industry? Who are the controllers of the new Hyper ROI?

The New Model Math Ingredients: Blend them Gently

We believe there are four primary ingredients to the New Model Math of the Consumer-Centric, technology and Internet-driven era; these are (1) communication and relationship building with consumers, (2) property information management models, (3) market definitions and (4) franchisor contracts for defining how broker/owners will be allowed to play in the future real estate game. This is the ROI quad, a set of super-integrated components that define the new profitability game.

The Communication and Relationship Factor. How the industry develops and sustains its relationship with the consumer will become paramount. The manner in which consumer dialogue is entertained is being redefined by the consumer. We will increasingly face what I call “consent communication” or, “permission-based” dialogues that have no edge to them. It will seem at first to be fickle…like bottling vapor or nailing jello to trees. The industry typically embraced control models such as agency, where we attempt to tie-up the client with “you can only talk to me” formulas.

The Property Information Factor. Property information is public…but is it, really? No, it is not, and its time to acknowledge that having archives at the country office hardly makes them public to the consumer. Our model is just wrong, flat out incompatible with transparent, consumer-centric demands. We have engaged in a kind of real estate market Jerry Mandering that seeks to define association perimeters not for the sake of simplicity for our consumer clients but for our own sake and for the survival of a Fred Flintstone model.

The Market Definition Factor. How we define market areas is now iterated by technology and the Internet, not by zip codes and city names. There simply are no territories or safe havens that can define our business models and protect us from economic predators. Narrowly defined market models such as Effective Service Areas, Market Service Areas and other zip-coded notions of territorialism may cripple the revenue potential of real estate brokerage companies seeking to compete in the New Real Estate Economy.

How an owner defines or outlines his/her market is one of the most critical components in business planning and it’s importance cannot be understated. MacDonalds, WalMart, GMC, Nike and all other highly competitive businesses begin with a refined market definition, consumer profile and product/service delivery analysis.

The Franchise and Branding Factor. Real estate franchises, together with their accompanying brands, are undergoing serious discussions within their respective war rooms. They have discovered that the real estate industry’s brokers and its hoards of agents generally resist intrusion and change. It’s shaping up as a battle for control.

In effect, many of the franchise names are developing and implementing open market models, while ignoring broker/owners who own and operate their businesses in restrictive real estate zones that are defined, measured and controlled by the franchise document terms and conditions. Broker/owners are well aware of the growth restrictions imposed upon them by franchisors. It’s a type of market monopolization designed to box-in broker/owners. While franchisors go macro with their model, they continue to market micro agreements to broker/owners whose profitability and sustained ROI is increasingly eroded through local market real estate models.

The amalgamation of brands under a single franchise owner is a key step that allows a franchisor to play where the consumer plays, in the macro markets. Franchisors know, although seldom admit, that consumers are not brand loyal. The way around this is to simply amass the brands under a single umbrella to the advantage of the franchisor and often to the economic disadvantage of Broker/Owners.

Have Broker/Owners abdicated industry control to franchisors? Are Broker/Owners going to become pawns in the giant real estate profitability chess game? Who will draw the battle plans that determine the sequence of moves that play-out within local markets? This is indeed food for thought and in the end someone proclaims “check mate.”

The Brokerage Business Expression Factor. What we look like in ten years will be different than what we have constructed in the past. The market edifices (aka bricks-n-mortar) cannot withstand the financial cost and therefore, extinction must follow. How our brokerage businesses are expressed locally will be less controlling and elite with respect to the consumer and more, “please enter our atmosphere and use our resources to conduct your property research; then let us know how we might be of assistance.”

How we define and execute services important to the consumer is where the new ROI will be derived.

True demarcations that differentiate one brokerage model, one title model and one mortgage model from another is the call of the New Real Estate Economy.

Profitability & ROI in the Consumer-Centric Era

REALonomics has challenged linear math models that fail to factor in the ambiguity and fickle aspects of the impact of technology and Internet driven business models wherein and whereby the consumer controls the joystick of profitability for an entire industry.

Profitability is already shifting away from Broker/Owners to the collective communicators and controllers of consumer relationships, property information, markets models and brand consolidation.

The ability of traditional, Broker/Owners to develop New Model Math schemas and implement them from their isolated market positions is an increasingly tall and tough order. Owners who adopt a “take-no-prisoners” approach to their business designs and market model definitions will remain competitive. Unfortunately, unless remodeled and re-chartered NAR and local Association purposes are redefined they may no longer provide the care and comfort previously given to owners. These organizations have traditionally been the draw-bridge into the castle of profitability where the industry found its abode.

Hyper ROI will become the New Model Math of the next economic wave of the real estate industry. Expect more speed, more change and more battles over control of the essential ingredients that make up our business model. The central factor for Broker/Owners will be their ability to corm new aliances and partnerships that enpower them to manage change effectively. The industry is shifting into Hyper ROI mode.

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