Management Principles

Economic Escapism and the Peril of Tight Corners

Escape is actually a business principle or, at least a skill based upon a set of economic fundamentals. The ability of an organization to slip out of economic handcuffs in the nick-of-time is not too far removed from the notion of agility; the latter having to do with fluidity of operation.

Escapism (I don’t even know if that is a word but if it isn’t it should be) ought to be a subset of study for those seeking a degree in Economics. Escapism should be a part of the syllabus with collateral reading required. It should be taught as a business discipline and be a demonstrated skill prior to graduation.

The real estate industry knows a lot about the subject of escapism without knowing much about sound economic business models. After all, the economy has always pulled Broker/Owners out of the tight corners of economic calamity into which they have been painted. Ours is a long history riddled with escapes from one economic threat to another.

Today’s shackles may be worse than the past as we find ourselves fettered with the chains and locks of slivered and temporal profitability, almost non-existent R&D, a disjointed, minimally trained, bloated and uncontrollable labor force, no product, service or brand differentiation and finally, last but not least, a less than stellar reputation with consumers, our primary source of survival.

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The Four “Bs”

Let’s get down to some serious industry transformation discussions regarding the “Four Bs.” The Four Bs are the fundamental building blocks that heretofore drove the real estate industry’s models with respect to consumer relationships and Broker/Owner profitability.

Brokers, Boards, Books and Buildings remain the economic blocks that continue to drive our brokerage profit models. Three of the four are still alive and kicking. What are the Four Bs, how do they function and what, if anything, do they mean to us now? More importantly, how do they meet contemporary consumer expectations?

Broker/Owners are literally the financial backbone of the real estate industry. e-Partner and this blog, REALonomics, support the importance of sustaining the roll Broker/Owners play in perpetuating real estate transactions and indeed propping up the industry at large. It is Broker/Owners who literally guarantee the financial stability of the industry. They are real estate’s preeminent risk-takers.

They are almost always the sole guarantors of market presence and it is they who take most of the personal financial risk for the real estate organizations operating within thousands of communities.

Fact: Broker/Owners are losing their ability to produce and sustain profit for their local brokerage firms. The risks now out weigh the rewards, as many are discovering. TWe are facing the financial collapse of many Broker/Owners.
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The Inman Comment

Once in a while REALonomics will post a comment to great articles found in Inman News. Such was the case this morning, Tuesday, September 23, 2008. The comment created some interesting communication…all good, by the way. But the comment to this post seemed to touch a pent-up industry nerve regarding where our industry is headed and what our industry focus should be as move into the Third Economic Wave in the industry’s development.

There seem to be two camps developing within the real estate industry. The first camp believes the media and negative language is the culprit that is creating a lot of the market decline and lack of buyer confidence. The other camp is the group saying, “We need to look within the industry and raise our standards making them more consumer-centric and us less susceptible to repeating the errors of the past.” REALonomics falls into the later group.

As a result of feedback here is the comment from the Inman article posted here for our readership:

The notion that positive thinking and misplaced hype can move us away from a faulty and failing economic model is more dangerous than the crisis itself because it demonstrates the lack of depth in our thinking. This crisis cannot be repaired by “making people believe the worst is over…” This is the logical result and outcome of poor economic modeling in the mortgage industry that loaned billions to buyers who didn’t qualify and the real estate industry’s fickle pretense that it exercises ultimate fiduciary in its dealings with clients.

Rather than whining, what we should be doing as an industry is recreating ourselves in terms of standards-based brokerage practices, revamping our national and state networks into consumer-centric, transparent operations and utilizing the power of NAR to send a positive signal to consumers that we “get it” and that they are going to see a new side to the professional real estate industry they deserve and one that will refuse to close a transaction where the buyer does not qualify.

A standards-based model should include heavy fines for brokerage firms that (1) hire under qualified agents who lack the academic training and counseling skills we need for consumer protection; (2) refuse to fulfill maximum (not minimum) financial training in economics and real estate investments and fiduciary training courses and finally, (3) much higher costs to enter the industry and stay in it.

A standards-based industry would include national performance reviews and ratings of brokerage firms with financial and recognition incentives for creating and maintain standards of excellence that protect consumers and their investments in real estate.

In addition, we need to look at the role of NAR and how NAR services the industry and consider refocusing its mission and resources on a newly profiled industry that really understands and accepts responsibility for its actions when counseling consumers to invest in real estate.

One thing we believe with certainty, we are never returning to what we once knew. Having said that, what is it we would like to become as an industry after the dust settles?

While the Feds scramble to resolve issues, we should be scrambling as an industry to reinvent ourselves. Such a reinvention involves painful analysis and truth-telling about where we have been and how we have operated. Only then can we begin the process of rebuilding a tattered industry that is increasingly viewed with skepticism by most consumers.

REALonomics.net”

———- END OF COMMENT ———-

Unlocking Franchise Economics: Pt 2

In the post “Unlocking Franchise Economics,” Part 1, we opened the door to asking relevant questions that will help owners analyze the economics of real estate franchising.

In this series of posts REALonomics has one primary objective it would like to accomplish on behalf of owners and that is as follows:

…to help owners unlock the door to franchise economics so that gain an understanding of the substantive value propositions that exist and how a franchise name and associated promises can be quantifed in real dollars that are converted to a profit equation that is greater than it would be if the brokerage firm operated without the franchise.

Franchising is an Add-On Toolkit, with Limitations

At its most fundamental economic level a real estate franchise is a brokerage toolkit. Yes, there are all sorts of issues such as marketing, relocation, referrals, training, conventions, etc. But for now, we are setting those aside. A real estate franchise is an economic toolkit, at least it should be. Franchisors spend a great deal of time butter-balling brands, numbers of offices, growth, name recognition, relocation, referrals, etc., and that is how most franchise sales people will present their proposition to an owner. It’s the owner’s responsibility to translate the presentation into real economic reality and performance and to insist that the franchisor do the same.

As a toolkit, there are some things a franchise can do, there are many things it cannot do and there are more things it does not want to do for a brokerage firm because to do them will harm the franchisor’s bottom line. Let me be clear on this last point. At some point in the franchise relationship, an owner may find the franchisor a competitor for market territory, referrals, relocation and even local business.
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Gekko was Wrong…Greed is Bad

EDITORIAL

A re-post from iVoteAmerica, dated Monday, September 15, 2008.

In the movie Wall Street, Gordon Gekko proclaimed to shareholders, “Greed is good!” Gordon was wrong. Wall Street was wrong. The real estate and mortgage industries were wrong.

Oh, by the way…Alan Greenspan was wrong too when he proclaimed that subprime lending was “innovative” and “beneficial to consumers.”

Sound economics and the art of lending are predicated upon the borrower’s capacity to service the debt, pay it down over time and deliver return to the lender.

The concept of borrowing without capacity is foreign to all western economies and you won’t find it on any campus in America in Economics 101. Neither you nor many of your friends was ever taught the principle “you can have something for nothing.”

No One Whined about the Flow of Money

From about 2000 through 2005 greed was good to Wall Street and to the real estate and to the mortgage industries. No one whined about the money back then.

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