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Does a Bear Sit in the Woods?

There’s a bear in the woods of the economy and in the real estate sector in particular…he’s tired, angry, confused and very hungry. His insatiable appetite can no longer be assuaged by an industry lacking the fortitude to initiate collective, pragmatic and meaningful change to its business model and its relationship with the consumer.

Who is the bear?

As REALonomics forges this post, we estimate that nearly 40% of all real estate brokerage firm owners are the edge of financial collapse. Agents are leaving the industry for jobs at the malls. One said to me, “hey, I gotta eat.” The bear grunts its disapproval and hot steam shoots from its nostrils.

Who is the bear?

While the mortgage industry scrambles around attempting to locate financial relief, 1.8-2 million homeowners will experience up-ticks in their adjustable rate loans in 2008. The money changers are reaching out to foreign investors for capital due to a weakening dollar, indications of recession, bailouts of some of our most cherished lending institutions. Countrywide was just absorbed by Bank of America in what has to be one of the sweetest deals in decades. The bear rumbles through the woods, pacing and snorting.

Who is the bear?

Title and escrow companies have already started trimming, not the Yule tide tree but rather, their staffs…more layoffs are just around the corner…office consolidations are underway…middle managers are updating their resumes…sub-leases opportunities are growing. The ability to sustain the overhead and retain experienced personnel is waning. The roar of the bear is deafening and its hunger is obvious.

Who is the bear?

The landscape of contemporary and financial relevance is starting to shift under the feet of real estate franchisors whose transaction revenue streams have plummeted to amazingly low levels. It’s likely that franchising may become a negative growth industry in 2008…this will be a first since 1976. Wanna buy a real estate company? Eight of ten may be on the market by mid 2008. Market value, zero. The bear stalks the woods, its movements tracked by the sound of snapping branches.

Who is the bear?

The National Association of Home Builders (NAHB) reports are full of sub-prime finger-pointing and predictions that new home recovery will rebound in 2009. Some Midwest markets report that contractors are simply shutting down, packing up and walking away from unfinished projects and unfinished home construction jobs, leaving owners in a lurch with no trades available to complete their project. The forest belongs to the bear and no segment of the terrain is beyond its reach.

Who is the bear?

Finally, the National Association of Realtors (NAR), with declining membership and revenue, while locked in an ongoing and costly herky-jerky legal dance with the Department of Justice (DOJ), recently announced its plans for change, relevance and transparency as only it can define it…drill-down pseudo Web 2.0 mapping for major markets via www.Realtor.com coupled at the neighborhood level with FSBO MLS listing opportunities through www.HousePad.com. Indeed, strange bedfellows. The bear’s ears are penned to its head, flattened in an instinctive response to a threat…he rises on his hind legs, assuming a posture of potentially fatal engagement.

Does a bear sit in the woods? If so, who is the bear?

New Improved Real Estate Model Math

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Anonymous User Paradox

The title industry has long opted to sell directly to intermediate influencers while ignoring end users. The industry incorrectly assumes it’s product to be information. The misconception was spawned by an inexplicable affinity to remain physically and emotionally distant from consumers. The title industry, in fact, sells only credibility and the absence of consumer-centric title models proves that this nuance is not generally perceived.

The arcane concept known as reverse competition has created tiers of imbalances within markets as well as structural inadequacies within the industry itself. The greatest of these issues: The title industry and the consumer know very little about the other. In markets with expectations of honest and continuous business chatter, the self imposed seclusion of the title industry has fueled a public suspicion of skeletons in the closet. The paradox: a retail industry of the store front variety that has never met its customer.

Brick-n-Mortar Mentality

The contemporary model encouraging title company ownership by real estate companies will soon face economic challenges. Income streams produced by internally processed title orders will lose velocity when confronted with heightened scrutiny by consumers and governmental agencies.

The lucrative profits currently used to finance a “brick and mortar mentality” among corporate executives are also needed to lubricate a false sense of security and high percentage commission splits for real estate agents. As the model’s machinations de-accelerate, effective and appropriate business models will elude the title industry’s grasp due to the anonymity of the consumer.

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