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.

As we enter a new decade on January 1, 2010, we find ourselves headed back into the water tank from which we have always, like Houdini himself, found a way out. We have escaped primarily because economic fundamentals were behind the real estate industry. These fundamentals are no longer the backbone of the industry.

Something is different this time around…many things are different this time around. We now face three situations never before seen or experienced.

The New Chains that Bind Us

The real estate industry encountered a fundamental operational shift when Congress mandated that lending institutions find a way to create loans for those who lacked the personal buying power for home ownership.

The Community Reinvestment Act was enacted in 1977 as Federal Law. Essentially, the law was a social experiment mandated and aimed at eliminating what many believed to be unfair lending practices by banks who that were refusing to execute mortgages with under qualified buyers for purchases in neighborhoods that were fundamentally poorer than those neighborhoods where banks preferred to lend.

Regulated financial institutions were suddenly required to meet the lending requests of traditionally unqualified parties as a part of their federal charter. Non-compliance with the edict and the eventual quotas of regulators could mean the loss of accreditation and various other penalties.

The survivability of Banks became subject to the guidelines set forth in the Community Reinvestment Act and therefore, lending requirements were modified as a pre-requisite to compliance.

Banks found themselves forced to approve mortgages that were less than prudent, at least from a sound economic standpoint.

Nonetheless, politicians reveled in the glory of the Community Reinvestment Act, heralding it as a giant leap forward in economic equality and something that could translate into new votes at reelection time.

This was the “New Chains” which created a false housing boom and investment debacle from which we still have not recovered. The primary guarantors were FANNIE MAE and FREDDIE MAC, now nearly bankrupt and in need of more capital infusion from tax payers.

We have not escaped these new chains that bind us. Our ability to break free is now out of our control as the appetite for government bailouts at tax payer expense increases unabated and now, surprisingly, supported by the National Association of Realtors.

In short, we have relinquished the powerful economic principle of self-reliance and home ownership principles that have guided the industry and home ownership for more than 100 years and this may prove to only paint us into a tight corner from which we cannot escape for many, many years.

Strange and Clever Padlocks

Our Houdini-like escapes are now fewer and more difficult as we abandon the sound “model-math” that created our prior and historical profitability. The sad truth is, we have not created “new model-math” congruent with the troubling times in which we find ourselves.

We continue to find ourselves locked-up with strange and clever padlocks the combinations and keys to which we have no apparent access.

On the one hand we are padlocked to our former selves and do not seem to have the will power to admit our addiction to transactions predicated upon easy money.

On the other hand, we are now plunging headlong into a plethora of new operating models, lending models and technology models, the rules of which are being written by those outside our industry.

Are we being written out of the New Real Estate Economy? Why is it that we cannot become the rule-makers and engage in assertively drafting our own charter for the future? Why do we seem reactionary rather than revolutionary with respect to our future? Why have we become so dependent on the creations and rules of those who know so little about our industry and how it must operate?

The keys to the padlocks of government intervention, property information management, technology and Internet tools, consumer-centric relationship models, mortgage lending rules and the direction of NAR have seemingly been placed in the hands of caretakers motivated by political power and personal greed.

Old Keys that are Now Missing or Ineffectual

The old line bricks-and-mortar retail keys that used to unlock markets for us and deliver economic escape from our heavy laden expenses no longer work as they once did.

Our ineffectual revenue management models in the form of commission and operating structures that once drove the cost-per-transaction formulas that guaranteed ROI will no longer unlock profitability.

The bloated labor force we call “agents” are simply too many and will continue to drain capital from Broker-Owners while only serving the interests of NAR’s bureaucratic control over the industry. The large labor force only favors those who collect the dues.

There are too many of us and unlike other industries that balance profit against labor force, our industry works exactly the opposite. The real estate industry is perhaps the only industry that increases its labor force while in economic decline. NAR’s membership still stands at over 1 million; a near complete contradiction of true economic sanity.

Instead of seeing our costs per transaction decline, it is actually increasing when we take into account the entire national organization operating costs.

While we should be moving north, we continue our trek southward almost blinded by our allegiance to who knows what. Broker-Owners no longer control the MLS and that lack of control will eventually render them irrelevant servants to an agent-centric culture.

Agents are no better off as they see their earning capacity at historic lows per capita and their cost of operating increasing with the delusion of technology and its pseudo advances.

There seems to be no easy Houdini-like escape for the industry unless it (we) are willing to recreate our industry by elevating its entry requirements, diminishing its fattened workforce, increasing its educational requirements and finally, bringing NAR into check as the servant of the industry.

There is no escape from the economic realities of the New Real Estate Economy and what it demands of us. However, for those who have a true sense of where we have been historically, where we are today and where we can ultimately take the real estate industry in the future, this is an exciting time.

Yes, in 2010 and beyond we will continue to face the peril of tight corners into which we have largely painted ourselves. The chains, padlocks and keys that have heretofore allowed us to escape no longer exist in forms we recognize.

For those of us who embrace the sound economic principles that guide any business endeavor and for those who choose to become the authors of the new economic rules rather than the readers of same, to these alone belong the keys that will yet provide an escape that will lead the real estate industry to self-reliance in the consumer-centric era.

Happy New Year to all.

Related posts:

1. Scratch and Sniff: Stacking the Economic Deck in Favor of Us
2. REALonomical: an Economic Mentality
3. The Third Economic Wave

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.

Broker/Owners have increasing lost their grip on the consumer due largely to (1) the widespread availability of property information to agents and consumers; (2) the industry’s empowerment of the vast numbers of agents with cutting-edge tools that tie them directly to consumers and (3) the irrelevance of their control over local Associations, formerly called “Boards of Realtors” and the centralization of power over consumer access to property by NAR.

Broker’s once maintain an iron grip on local property information through NAR’s establishment of Boards of Realtors owned by Broker/Owners. Broker/Owners still have stated authority over local Associations but their is little or nothing for them to control and their role is primarily administrative and therefore without economic benefit.

WATCH THIS PRESENTATION

Each local Board of Realtors (BOR) (now called “Association of Realtors”) once commanded total control over local property information on behalf of the paying members. It was the Broker/Owners that owned and controlled the local property information data, how it was received, formatted and distributed.

Through the BOR, Owners owned (no pun intended) and controlled ALL property information and ALL access to the information, whether by agents or the consumer. Therefore, they were assured of income and barring reckless squandering of funds they were also assured of a perpetuation of their profit and existence.

Through such property information control, Broker/Owners were able to set individual brokerage listing fees, control agent commissions and literally decide who could play and who could not play.

The union of Brokers and Boards coupled with geographic market definitions and control of property information meant that ALL consumers were required to work through one channel of expertise for any real estate investment, that being Broker/Owners.

Local BORs were compelled to comply with local Broker/Owners who were the ligitimate owners of property information within a specified regional area. All of this engineered and mandated by NAR.

WATCH THIS PRESENTATION

It might surprise many of our readers when we tell you that the primary technology used during the era of Broker and Board control was ink and paper.

The Board of Realtors’ MLS Book was the officially designated and exclusive repository for local property information. It was, in fact, the technology used by Brokers and Boards to distribute property information to consumers through the Broker’s agents.

To distribute new property information for use by agents, who were the monitors and purveyors of current property data to consumers, a new MLS book was printed at regular intervals. At the moment of printing, the data was defective, as some properties were sold and other listed for sale prior to print.

Data updates were facilitated through thousands and thousands of local MLS meetings held each week across the nation. At these ritual gatherings agents arrived, books and marking pens in hand, for the local property information “update” wherein properties were declared “sold” by agents and then robotically lined through in the MLS book.

Price adjustments were written into the margins of the MLS book along with other information verbally supplied by agents.

These meetings were quite the scene. Nonetheless, they represented the manner in which property information was collected, distributed, managed and updated for the ultimate end user, the consumer.

Let’s also remind ourselves of the operative phrase of that generation of Broker/Owners, Caveat Emptor, Latin for “Let the buyer beware.” In those days, the buyer was an unsuspecting consumer who was not at all represented in a real estate transaction but instead was told by us, “we only represent sellers but promise to treat all parties to the transaction fairly and honestly.”

WATCH THIS PRESENTATION

This brings us to the fourth “B” and the central pillar of the real estate business model used by Broker/Owners…Buildings.

The Brokers who owned the Boards published the Books that were placed in the hands of agents who were warehoused in Buildings in just about every market in the U.S.

The Buildings were the primary real estate market expression used by Broker/Owners. Bricks and mortar was the economic junction where consumers were provided with the most important and manditory requirement for acquiring relevant property information. Such information was only provides by agents in buildings owned or leased by brokers with books in hand that were printed by the boards.

In those days the components necessary for a real estate transaction to occur came together in a Broker/Owner’s office; these being buyer, seller, broker and property information. in those days we were the true “gate keepers” of the transaction.

Yard signs, newspaper ads, open houses and updesk calls were the path to consumer contact and ultimately a commission. These ingredients were the spider web designed to capture consumer buying leads in the local market.

Consumers had very little control over the process of buying real estate, a process completely controlled by Broker/Owners and their local marketing machines.

Circa 1970. Something began to happen in the late 60s and early 70s. National real estate franchising came into play and began to redefine a Broker/Owner’s market from local to regional and even national.

Franchising brought with it the first real attempt to provide Broker/Owners with a horizontal component to their business model, increasing their potential for referrals and relocation by means of national branding and networking with member of like kind.

During this same time frame, local Boards began to digitize property data and to generate computerized MLS systems that could deliver property data to a Broker’s office electronically. This would later prove to be the beginning of the end of one of the four Bs, the Book.

About 25 years after the first digitized MLS endeavors began . Computerized MLS, personal computers, modems and ultimately the Internet came into play and provided the empowerment of agents and consumers with ubiquitous real estate information.

In 1994, MLS property information became available on the World Wide Web (WWW), known then as the “Information Super Highway.”

Today, the MLS books are gone. Buyer beware is gone.

What still remains, hanging by an economic thread are the remaining three Bs; Brokers, Buildings and Boards (renamed Associations).

The total control of local property information by local Associations is being challenged and seems to be eroding.

Each of the remaining three Bs is now under scrutiny by an increasingly powerful consumer. It looks like the next “B” to fall is the notion of “Buildings” as an ultimate but now unaffordable retail expression of a Broker/Owner’s real estate market presence.

REALonomics, as a student, analyst, crytic and developer of concepts related to the real estate industry’s business models, can’t help but wonder which of the remain two “Bs” is most in jeopardy:

Will it be Broker/Owner or our local Associations of Realtors (Boards) that will be transformed or eliminated?

Your thoughts?

WATCH THIS PRESENTATION

Related posts:

1. The First Economic Wave
2. The Second Economic Wave
3. Home Price Declines Hit New Records: What Can the Industry Do?

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 ———-

Related posts:

1. Home Price Declines Hit New Records: What Can the Industry Do?
2. The Four “Bs”
3. REALONOPOLY – Does Anyone Still Wanna Play this Old Game?

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.

As owners, it is important to enter your franchise considerations with both feet firmly planted on the ground and your eyes wide open when you begin to consider both the limitations and the benefits of the franchise toolkit. Converting the tool kit into a quantifiable economic model is entirely another thing and in the end will prove to be the true test of the value to your brokerage.

When an owner considers franchising his/her brokerage firm, one of the highest considerations is the impact on agents and operating overhead. Make no mistake about it; a franchise decision will change the economic structure of the real estate company before it ever delivers a single penny of economic value. Overhead is going to increase immediately and not all agents and employees will perceive and measure value as an owner might. – Donald Teel, Realonomics

Bottom line: the tools provided by a franchisor should fill voids in the brokerage firm with real solutons that can be measured. The brokerage firm must know with certainty how the tools produce NEW ROI (more on this later) and finally, how the implementation of the franchise enlarges the company’s market position and growth opportunities. It is entirely possible that becoming a franchise may in fact diminish a firm’s market potential.

Understanding Owner & Franchisor’s Motivational Schemas

As with any business arrangement, understanding the motivations of the parties is critical so that each can build a workable blueprint. Franchisor are in it for the money. Since franchisors are in it for the money, so should the owner be! Business is conducted with a profit motive, although some brokerage firms are not necessarily profit driven.

If you franchise, you will spend a lot of time (perhaps years) in continued negotiations with the franchisor over myriad operating issues (we will get to this later, as well). Therefore, coming out of the chute, the owner needs to have a pristine understanding of what drives the franchisor’s model.

The Owner’s Schema. I never met an owner that didn’t love transactions. Typically, when an owner considers incorporating a franchise brand into his/her market model, transaction are a key motivator. The Franchisor knows this and the presentation is designed to convey a perception that once franchised, transaction counts will increase.

In addition, broker/owners want more market opportunities in terms of their ability to provide agents with services that will enhance recruiting. However, recruiting is a somewhat dying art and most metro markets are saturated with brokerage firms and agent, reducing the recruiting message to a simple message, “We pay you more.”

Some owners want and desperately need networking opportunities with other owners where they can exchange information, create idea forums and discover new ideas to improve the efficiency of their company. Franchisors can meet this need and most do a good job at creating opportunities for Broker/Owner exchanges.

Today technology and the Internet play an ever increasing roll in real estate brokerage business operations. This was not so true just 14 scant years ago when the first property listings found their way to the Internet and pagers found their way into the hands of agents.

Many brokerage firms are looking for technology solutions and the implementation and maintenance of these solutions can be incredibly expensive. Franchisors are finally beginning to see how technology can provide them with a lock on brokers. When considering a franchise Broker/Owners should have a complete understanding of what a particular technology solutions will create in terms of not only opportunities, but operating costs, maintanance, training and obsolescence. After all, it won’t be included in most franchises.

The Internet is separate from technology, in our opinion, and there will be a whole set of operating and branding requirements for the owner and his/her agents when it comes to utilizing the Internet. Do not assume that your website will automatically comply with the franchisors requirements…read that fine print. Franchisors are doing a much better job today with their technology and Internet delivery than were even five years ago. Most owners want more Internet traffic. Find out how the franchisor delivers Internet presence AND traffic.

The market is paramount to an owner. Almost every owner I have known in nearly 25 years shared the desire to see their company grow in size and market share. What owners may not realize is that “market” is a very important word to the franchisor and it is here where the greatest potential for conflict between owner and franchisor might arise.

Owners want to capture and control more market area horizontally whereas, many times, the franchise will contained highly defined and rigid definitions of “market area” that the owner may find restrictive. Will entering into the franchise agreement expand or contract the owner’s market opportunities? This is an all important question needing to be answered.

Owners are increasingly discovering that market definition in the franchise relationship can make or break them. Any and all attempts to block an owner’s legitimate rights to horizontal growth should be negotiated out of the franchise agreement. Retrictions and control of horizontal market expansion is a key to the franchisor’s economic model. Franchisors typically exercise control over expansion by denying use of marks, brands and branch offices unless they approve. – Donald Teel, REALonomics

Finally, profit is the end game for owners. Although the franchisor will state its strong support of owner profitability, what will happen to the relationship when losses mount for the owner. What specific economic support does the franchisor provide to failing brokerage firms in terms of fee reductions or set asides?

Franchisors should be required to specifically demonstrate with empirical data how the franchise will pay for itself and how long it will take before the relationship brings profit to the Owner when measured against all related expenses. In the opinion of REALonomics, this should be a warranted performance item, with franchisee recource. If they can’t or won’t do it, show the franchisor the door. After all, profit is the end game of business.

The Franchisor’s Schema. Real estate franchisors measure things with a different stick than do most broker/owners.

The king pin in the franchise economic model will always be the brokerage gross commission income (GCI). It is the primary calculator for the franchise payment stream. Franchisors are interested in GROSS as the number against which their multiplier is applied, whether it be 3, 6 or 8 percent. This is their great motivator. Forget the franchise fee of $15k, $25k, $30k or $50k because this number will pale over the long haul of 5-10 years (typical initial franchise term).

How an owner thinks about and treats the franchise effective fee rate in the accounting process is paramount to quantifying the franchise value. If you think of franchise fees as a cost of sale, that’s one thing. If you treat is as an expense item, that’s another. But if you view it and treat it as a business development and capital expansion cost, that’s entirely another matter.

Definitions do count and calling a franchise cost a “selling cost” may be a giant investment error. After all, what did the franchise have to do with the selling cost of your transactions and if it did contribute, how did it contribute? Can you specifically account for it as a selling cost? An expense? Franchising is a market and development cost. Think of it in terms of research and development.

Franchisors are also motivated by the durability of the brokerage firm when they award a franchise to and owner. This has to do with the history and good will of the company in the local market(s). From this a franchisor can deduce predictability and replication of fee payment.

Referrals and relocation leads are a huge part of any franchisors presentation. But, be careful, because most of the major franchisor are running the relocation and referral businesses under not so evident agreements and as separate profit centers. This is a political and economic playing field that is continually tilted by franchisors. It is not uncommon for one franchisor’s relocation lead to be given to a direct competitor operating in the same market as its franchisee.

Watch out when you weigh relocation and referrals as a part of your decision-making. Our advice, based upon your market location, is to consider whether these should be taken off the table as considerations in the value proposition. You’ll only be able to do that if you ask for and receive the referral and relocation statistics with detail. Do not predicate your decision to franchise your firm on empty promises relocation and referral leads.

An owner should explore franchise training programs, business planning and the host of other fringe benefits as well. These are a part of the toolkit…but will they be used and are they, in fact, cutting edge or shop worn?

Stay tuned for “Unlocking Franchise Economics: Part 3.”

Related posts:

1. Unlocking Franchise Economics: Pt 1
2. NEW Franchise Blender-Extractor Available for 2009 Holidays!
3. REALonomical: an Economic Mentality

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.

Even REALonomics, one the real estate industry’s few cutting-edge, truth-telling blogs has acknowledged in a recent post the roll the real estate and mortgage industries have played in the crash of the housing market. Refreshing honesty amidst a sea of excessive finger-pointing and blame gaming.

With today’s huge 500 point decline in the NYSE, the collapse of Lehman Brothers and the timely absorption of Merrill Lynch by Bank of America we have the first bright light in the housing market collapse.

The First True Glimpse of Light

Today’s calamity was a glimmer of light and good news. Today’s plummet was the true market telling us greed is bad.

Yes, this is a bright light! Finally, the healing can begin along with celebration of the release of the last hot air from a pumped-up pseudo market, held together by slick accounting practices.

If not next year then certainly the year after your home value will begin to increase again.

Politically, this means there is less chance the Federal Government will continue its bailout of collapsing institutions that have made greed their mantra.

Tomorrow may see an uptick in the market as the true, blue-blooded economists and investors who understand the balance between eithical lending and moral borrowing begin to buy into a new market that is finally vomiting the economic bacteria from the depths of its belly.

Let the healing begin!

Related posts:

1. Paulson Pushes Bush Plan to Revamp the U.S. Financial Regulatory System
2. Deal or No Deal – Play America’s Game of Chance
3. The Federalization of our Financial System at your Expense

To be “REALonomical” actually means something. REALonomical enterprises recognize the facts surrounding their business models and how those facts play out in real world situations, producing predictable and sustainable ROI. REALonomical is a brokerage mind set and it has something to do with how we model the financial aspects of a company in light of the Third Economic Wave; The Consumer-Centric Era.

It was Once a Simple World

During the First and Second Economic Waves of the real estate industry the model math was fairly simple and easy to interpret. From this interpretation we developed strange economic terms we called “desk cost” and “per person productivity” (ppp). Such economic models delivered notions of profitability because we could run formulas for operating our “offices” and hypothetically project our margins. Our simple formulas appeared as:

Gross Commission Income (GCI) – Cost of Sale (COS) = Gross Company Dollar (GCD). From the GCD, expenses were paid and profit, if any, was realized.

It was a simple world then. Broker/Owners understood how to create profit. Physical space was a huge part of the formula and for many years “cyber” was something we read about in Batman comic books.

Too much of the real estate industry is still living in the former model while being confronted with the transformative power of the cyber model.

This is Now, Not Then

Today’s Broker/Owner faces declining GCI on a per transaction basis, increased COS, less GCD and much higher fixed operating cost. In addition, Broker/Owners generally speaking, have more competition, higher demand for technology solutions, rapidly changing markets and of course, the consumer and his/her/their insatiable appetite for online information, especially property information.

All of this demands a REALonomical mind set on the part of Broker/Owners. It’s an economic mentality that makes and breaks a contemporary brokerage firm. Becoming REALonomical involves:

1. having the correct playing pieces on the board, i.e., understanding what the real estate market is today, not yesterday;
2. having the contemporary tools to create direct relationships with consumers;
3. pointing the business execution strategy in the right direction;
4. setting the business into motion every day so that it produces daily net, net ROI profit

That’s right; the REALonomical mentality focuses the business on daily profitability. REALonomical isn’t meant to be just a clever word; it’s a business mentality that is a lot like the game of tennis; good players always win one point at a time. It’s the single point focus that makes all the difference. It’s essentially the mental toughness required to stay focused on the economics of the brokerage…EVERY DAY!

In tomorrow’s brokerage madness, the winners are going to be those who become REALonomical today; those who win one day at a time, one set at a time and one match at a time. We aren’t playing games, we are playing points.

Related posts:

1. REALONOPOLY – Does Anyone Still Wanna Play this Old Game?
2. Unlocking Franchise Economics: Pt 2
3. The Second Economic Wave

Some broker/owners would claim that a franchise has made them incredibly successful, while others would say they have failed miserably with respect to leveraging a franchisor’s brand and its prima fascia value propositions.

However, despite the predominance of real estate franchising a large number of real estate brokerages still prefer their independent status and some of these have become their own franchised brands, capitalizing on the economic dividends available to them through leveraging themselves.

Although franchising is a powerful force within the industry, REALonomics believes there is still too little careful analysis and quantification of franchising’s market and economic value on the part of owners.

Quantifying a Franchise Value Remains Elusive

In addition, the ability to create economic performance models for a franchise, judge its market impact on a forward moving basis (trending), fully understand the costs and benefits to owners, agents and most importantly, to understand with as much certainty as possible the way in which consumers view franchises, remains quite elusive.

Franchising is a powerful economic consideration for broker/owners and an initial term can represent as much as fifty percent of the life cycle of a contemporary brokerage firm. For some time, franchisors have been negotiating initial franchise commitment terms that will run more than a decade. Another perspective is to consider the lifespan of an executed franchise agreement in terms of the changes that will occur within the industry during this “initial term” of a franchise agreement.

REALonomics will be posing questions, analysis, insights and extending some limited advice regarding how broker/owners can unlock the door to franchise economics. It’s this door that we believe is the key to identifying the benefits to adoption of a real estate franchise.

In true fashion, we will steer our spotlight of analysis and critique on the not-so-oft understood downsides of franchising. We will highlight and accentuate the benefits as we see them. We will ask the powerful questions that should be asked of franchisors who in turn ask broker/owners to pledge their companies to a particular brand at a cost that can sometimes be astronomical.

Framing the Franchise Analysis Correctly

We will help frame questions broker/owners can use to ask franchisors to quantify their economic delivery, their stated marketing value propositions and to clarify the broker/owner’s recourse for sub-standard performance on the part of a franchisor. We will suggest ways for franchisors to remodel some of their old propositions and presuppositions that cannot and do not create value for owners and how they can and should be delivering transparent, consumer-centric solutions that can differentiate them with owners, the market and consumers.

This will be fun, challenging and perhaps a little ugly at times. At the end of the day we hope REALonomics delivers some value to broker/owners, to its general readership and to franchisors.

We want our readers to be a part of the content, so your posted comments, insights, experiences (good or bad), together with private emails and other communication with us will be welcomed by everyone.

Our objective is to see if we can unlock the door to franchise economics, since the state claim of real estate franchisors is their delivery of an economic enhancement and a stronger overall market asset. Broker/owners need to know how a franchise can and should perform on their behalf and how to make the critical judgments associated with the cost versus benefit relationship.

Some initial questions about franchise value might include the following:

1. What is a franchise worth to an owner, i.e., what should today’s initial and ongoing cost be? How do franchises differ from one another, if at all?
2. What is the preeminent economic value of a real estate franchise to Broker/Owners and to agents? Why have new franchises such as Keller Williams and EXIT Realty been successful in the midst of a very crowded playing field?
3. Do consumers have predisposition toward franchise names or, are consumers neutral when it comes to loyalty?

Broker/owners, franchisors and agents are invited to post comments about their franchise experiences, good, bad or indifferent. If you wish to communicate but do not want to post a comment you can use our traditional Contact Form.

Yikes! What have we started now?

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1. Unlocking Franchise Economics: Pt 2
2. NEW Franchise Blender-Extractor Available for 2009 Holidays!
3. Three Stooges: ‘09 Acid Test #2

We have been inside, outside and throughout the industry for quite some time. Our vantage point has changed, enabling us to see what we heretofore could not. In the world of business development and economic analysis one’s vantage point can bring the kind of insight that frankly, changes one’s faulty fundamental assumptions while confirming sound precept.

REALonomics now realizes, without further equivocation, analysis or debate, that our industry’s real estate genie has been released from its bottle and is fresh out of wishes!

Pushing the Vapor Back into the Leaky Bottle

From here on out, all attempts to capture the vapor, return it to its confines and cork the RE bottle will fail.

The Genie that once belonged to us, obeyed us, served us and made us what we once were is loose and fresh out of wishes.

The bottle is tarnished. Rubbing the bottle produces nothing. Our Genie is loose and now serving multiple masters simultaneously, none of whom, save one, the consumer, has sway over the Genie’s capacity to grant new wishes.

It’s impossible to bottle this kind of vapor; its seepage passes through the tiniest of spaces, spilling into the open atmosphere, moving where it wills to go. Where does the Genie go? It ALWAYS takes the path of least resistance, shunning confines, rejecting control and moving to open expanse where it finds its ultimate economic freedom.

Bottling the vapor no longer creates reliable “RE Economic Tonic” for the industry. The vapor is meant to be breathed, not bottled.

RGB, NGB and NGCs

Retail Generation Brokerage (RGB) used the bottle to control the Genie in vertical markets where the consumer was required to submit to the model in order to invest in real estate. Net Generation Brokerage (NGB) is the post 2000 freedom model where horizontal peer collaboration is replacing hierarchal control models.

The real estate industry is now the most vulnerable mainline industry to peer-to-peer models where the consumer and the Genie meet up for property inventory data exchanges and local community collaboration. The context is different and the conversation is different. Both the Genie (property and community information) and the consumer have reached agreement…FREEDOM Rules, open space ROCKS!

Vertical (retail, local style bricks and mortar) real estate brokerage models are being quickly replaced with a viral model, spread by a Genie on the loose and fresh out of wishes.

Two dangers to the industry and its economic models occur in this environment. First, there is the danger of complacency, of not re-tooling our economic ship so that it can operate fluidly in a viral, horizontal world where profitability is defined by open, collaborative peer models facilitated by the real estate industry.

Secondly, and perhaps more importantly, there are now signs of the emergence of what REALonomics calls “self brokering” whereby and wherein the consumer creates their own economic reality, ignores real estate professionals, only calling on them if they must and when they so desire for services they define for themselves.

The next generation of “consumer-buyers-sellers-clients” that will fuel the recovery and beyond will be Next Generation Consumer (NGCs) whose informational points of reference are alltogether dissimilar to old line retail brokerages.

Great News and More Great News!

Great news! The Genie, once our beckoned servant, existing only to accomplishing our economic wishes, rather than rejecting us, invites us to follow into new the new economic space of opportunity…to collaborate, to join the viral horizontal world of the consumer with new approaches to property information management and peer-to-peer community information services.

More great news! Never before has the industry and its adherents been afforded the opportunity to engage in a kind of real estate information alchemy, where our old lead bottle can be turned to a golden horizontal field of freedom for both us and our partner, the consumer.

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3. The Third Economic Wave

“When I first saw the NASA photo, I knew instantly that is was cocaine embedded and growing in the Martian real estate,” said Marty Turf, Broker/Owner of Turf Realty in Miami, Florida. “NASA said it melted when they scooped it up…oh, come on…the wind blew it away, everyone knows what happens when you try to scoop up snow when the wind is gusting,” he replied, sniffing loudly to clear his sinuses.

NASA’s official response to the photo was, “it’s just ice.” Turf believes it is not ice but a sign of real estate recovery through new, highly innovative marketing approaches…in fact, he has approached the National Association of Realtors (NAR) with a proposal that would allow certain properties to be induced with approved narcotics in order to improve their value.

NAR Considers Several Proposals

Marty believes that real estate cocaine may provide a solution to the real estate market depression hitting Florida and the rest of the country. He is determined to seek approval from local and national authorities, such as NAR to hide (embed) cocaine in the soil of carefully selected distressed properties, thus increasing their street value (the house, you dummy! Not the cocaine!).

NAR gave no immediate or official response. But insiders tell us that NAR is reviewing a proposal from Mr. Turf. A former NAR official, wishing to remain anonymous, remarked, “This is the first glimpse of any new marketing strategy that could help bring the recovery we’re all looking for…I for one would favor seating a task force to look into the concept of marketing property that has been infused with prescription drugs but not cocaine, heroin and other hard drugs…this would allow property owners and their personal physicians some degree of anonymity under the physician/patient confidentiality ethic.”

NAR faces many obstacles as do Broker/Owners who are considering adoption of new, innovative and exciting marketing programs that move away from websites, real estate magazines and blogs. Since the Martian photo hit the Internet, ideas have been pouring into NAR to consider including traces of Prozac, Ambien and other prescription solutions as substitutes for Martian or other cocaine.

“Nothing could be more consumer-centric than this, let’s forget blogging and social media for just a minute or two and look at what people really want,” said Betchu A. Dime, one of the real estate industries preeminent bloggers on her blog www.WhiteXmas.com.

SNORT Speaks

One analysis submitted by the Washington based group known as the Strategic National Organization for Realty Transformation (SNORT) boldly proclaimed, “Property values could be immediately and substantially increased…almost overnight…creating a wave of new mortgages, inspections, title and escrow services and yes…a new round of wealth.”

SNORT’s report also stated, “People who are standing in the way of this initiative proposed by Mr. Turf are standing in the way of a new real estate appreciation cycle that could escalate prices as much as 50 percent in just a matter of days.”

One Tampa homeowner declared, “We have all been funding NASA for years, it’s time we got something for our money…I’m in favor of cocaine marketing solutions!”

A Palm Beach condo developer had his own spin. “This could revolutionize the dying condo market, bring a whole new definition to ‘undivided interest’ and provide association members with new reasons to celebrate!”

SNORT’s Public Relations and Marketing Manager, Line S. Upsomemore, reports that phones were lighting up from cities around the country. “Most people just don’t care what it takes, they just want their property values high and the opportunity to find a buyer,” said Linus.

NAR could not be immediately reached for comment. No response is expected until after the 4th of July holiday weekend.

Related posts:

1. Market Bummer = Owner Ops
2. REALonomics: Polling Market Trends
3. NAR Explains DOJ Settlement

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.

Related posts:

1. Bill Gates: Last Day at the Office
2. Brokaw Chats with Bill Gates
3. Is the Future of Real Estate in Google’s Algorithm?