realonomics

Wikinomics is a book by Don Tapscott and Anthony Williams. If you haven’t read it yet, do yourself a favor and get it. It is a good interesting read on how the Web is no longer about idly surfing and passively reading or watching, but how it has evolved into a new dynamic form of community and creative expression, one of sharing, socializing, collaborating and creating communities.

Participation has, according to a Wikinomics, reached a tipping point where new forms of mass collaboration are changing how goods and services and invented, produced, marketed, and distributed on a global basis. Now the perfect storm of technology, demographics and global economics is an unrelenting force for change and innovation.

They pinpoint 2006 has been the year when the programmable Web eclipse the static Web, on every level. For example:

• Flickr beat out webshots
• Wikipedia beat out Britannica
• Blogger beat out CNN
• Epinions beat out Consumer Reports
• Google Maps beat out MapQuest
• MySpace beat out Friendster
• Craigslist beat out Monster

The losers were websites. The winners were communities.

Wikinomics believes that profound changes in the world of technology are giving rise to power new tools based on community and collaboration. We are a new economy – a vast global network of connected people that swap and exchanging ideas, information and an endless list of other services.

And from where I stand I can see it happening to our industry as well. The real estate industry is changing and the thousands of blogs, social networks and the wikis are already laying the foundation for the new world. New business models are already being born, new paths already being charted and new leaders already being groomed.

Real estate over the next decade will change forever and Wikinomics may shed some light as to the path.

Below are a couple of examples of social networking in action:

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The real estate industry has always tried to be a closed environment. The real estate industry has traditionally been a control environment. With few exceptions, our models have typically created an “us” and a “them” or, those who are insiders looking out and those who are outsiders looking in.

We are now facing the prospect that we are them and they are us! The once safe environment of our cozy aquarium is being invaded by “them” in droves. They are asking for all the rights to the environment heretofore granted to the “fish”…us. Or, they are proposing that we leave the tank and join them in a new form of existence.

In traditional business models, secrets are often deemed necessary and access to “insider” (the fish) knowledge is viewed as a threat. Free, open and unrestrained information is usually viewed as a corporate debacle and dangerous to the survival of insiders.

Our Real Estate Environments

The unraveling of any business environment starts at the fringes of the model and moves inward toward the epicenter. That is what is occurring in the real estate industry. The hairline cracks in our closed tank system are becoming open gorges where all that we have held sacred (secret) is spilling into the streets where the distinctions between “us” and “them” are being blurred by the Democratization of Real Estate.

Stefan Swanepoel recently posted the thought provoking question “Is the Future of Real Estate in Google’s Algorithm?” The mere addressing of this interrogative forces the industry to reexamine its operating models in the midst of a consumer-centric era.

REALonomics remains uncertain with respect to the ability of the real estate industry to retool itself for life in a new environment.

Learning to Live Life outside the Tank

My daughter once had a goldfish she affectionately named Nori. Nori lived in a small aquarium on the nightstand next to her bed. Twice each day Nori was fed from an entity outside the aquarium. Nori peered at us, we at Nori. Nori, without fully appreciating her situation, was living a life of total dependency on my daughter.

The analogy hardly needs explanation. We are Nori. Nori is us. My daughter is the consumer. She is one of “them” to Nori.

When it came time to clean Nori’s aquarium, we would all gather around and gently scoop her out with a small net, place her in a temporary environment, clean the aquarium and then return her to the environment to which she had become accustomed. Nori could not live outside the tank…her existence depended upon a certain environment.

Can the real estate industry learn to live outside the tank of traditionalism in a world where the operating rules are decidedly different? Can we live without the aquarium? Can we evolve from dependency on controlled isolation to the open world of life without gills?

Can we learn to live and operate the real estate industry and our local business models outside the tank where we have created and experienced a deceptive pseudo security?

Can we shed self-imposed gills and fins and dependency and control in favor of the freedom of an open sourced environment where tanks are the stuff of folklore and where our lungs can breathe the air of innovation and partnership with “them?”

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My real estate brokerage ownership and management experience involved two companies. I’m one of the fortunate ones, having got out of both with proceeds from the first and a cash sale of the second on April 22, 2005, at the peak of the market. In short, I came out somewhat sane and lived to talk about it.

My ownership experiences created the foundation for REALonomics, new real estate model math. I’m no longer a believer in the traditional brokerage business model. It cannot sustain owners and provide them with the return on the investment they need to justify their risk and certainly in most cases provide them with an exit strategy. More importantly, the model is increasingly being rejected by the consumer, who favors less control and much, much more transparency.

The fickle markets, all-wise consumer, transaction complexities, capital and legal risks and the arcane nature of the industry itself have rendered the notion of a broker-centric business model nearly obsolete. Want the unvarnished truth? Of the dozens of broker/owners I speak to each month, almost none of them believe in their model, not with the passion necessary to an ongoing and profitable business endeavor. My broker/owner friends are just stuck knee deep in the cement of a dead model.

Power brokering is becoming highly irrelevant. My broker/owner colleagues, nearly to the person, shake their heads and mumble, “…not worth it…I’m keeping the doors open so my agents can make money…and even they aren’t making money any more…”

Our Quickening March toward Obsolescence

Has the pace of change created an every quickening march toward functional and more importantly, economic obsolescence? Yes, it has! To a large degree the idea of opening a brokerage, complete with agent office space, desks, computers, copiers, coffee room and the assortment of industry trinkets that have little or nothing to do with providing consumers access to property information and homes, seems frightening and very risky.

Ours is an industry where owners just won’t let go of themselves, even after staring into the mirror of obsolescence, where we see ourselves, tired, lonely, frustrated, isolated and economically challenged.

The Broker-Centric era (the first economic wave) and Agent-Centric era (the second economic wave) business models are in a final march toward obsolescence. In effect, neither owners nor agents can afford to push the model much further into a future where liquid property information will abound, consumers will bask in the democratization of real estate and we will service transactions from wholly new vantage points.

This “march toward obsolescence” is a not an industry death knell. More accurately, it could be described as the introduction of a new “script” that charts the direction for highly innovative blueprints that finally redefine how we interface as an industry with people in the Consumer-Centric Era (the third wave of our economic development).

Exorcising the Resident Demons and Myths

Like Emily Rose, we are possessed by many demons. In order to build a neo design we will need to cast out the old counter-productive forces that have taken up residency within our business models and whose negative influence permeates the industry. We are possessed of many…most must go…some will be allowed to remain, temporarily, due to necessity…others can be tamed and trained, perhaps.

The long held notions, superstitions and fairy tales about real estate brokerage will need to be addressed, as these have long held sway over our creative capacity to reinvent, paralyzing us and placing us in an economic stupor.

We must cast-out the idea of property information control and open a transparent portal for the consumer to enter into new conversations with us about real estate investment, where we are truly qualified, trusted and knowledgeable about their investment strategies.

We must expunge the idea that bricks-and-mortar retail models in fixed and defined metro market service areas can continue to produce adequate ROI. We must drag the demon of overhead, kicking and screaming out into the open market where it can be exposed for what it truly is, the enemy of owners and franchisors.

Our demons are legion…they do not come out easily and when they finally do they leave a mark, a dent, a scar that says, “We once lived here.” Our resident guests impact our economies of scale, our market agility and most importantly, our long term survival.

Etch-a-Sketch®: a Neo Design

In 2008, REALonomics will etch concepts for the creation of a neo design. We will put it on paper (well, in the blog) and make the model ideas accessible to you. We will interview brokers, agents, industry leaders and of course, real people who buy and sell real estate. Novel, eh?

Changing our industry’s design is daunting. We need to take a look at our sprawling geographic markets, such as California, Florida, Phoenix, Las Vegas, Chicago, Atlanta and the rest and ask “what can work here, now and tomorrow?” Our industry should deliberately engage in designing the optimal consumer-centric, consumer-partnered, brokerage services model, replete with features necessary to the era in which we live.

Baseline business modeling begins with unfettered access to property information…sketch it in!

Baseline business modeling includes a renewed commitment to standards of practice that please the consumer and create a new, more comfortable reality…sketch it in!

Baseline business modeling marries cultural realities to the real estate transaction prototype…sketch it in!

Baseline business modeling has something to do with expunging the ego-centric expressions and components from the industry that continually project a self-serving, money-grabbing image…sketch it in!

Baseline business modeling is predicated upon a model for all participants, one with the highest possible qualifications for entry…sketch it in!

Baseline business modelling requires rigorous adherence to qualification standards for owner/operators, agents and core service providers…sketch it in!

Finally, baseline business modeling demands adequate ROI when measured against the risk of capital, creative and intellectual investments of the players and principals…sketch it in!

Our impending obsolescence is merely temporal. Our model is being replaced, part-by-part. Can we, those of us within the industry, shake the demons that possess us and sketch a new, highly productive model that will propel us into the future? REALonomics thinks so…sketch it in!

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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.

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