What Does Resilience in Real Estate Look Like?

One of my favorite people in the industry, Joe Rand, a broker-owner from New York, a corporate lawyer by training, and an amazing singer has penned an article for Inman titled, “Be resilient in the face of disruption: My big takeaway from Inman Connect New York.” It’s worth a read, so go do that.

Given our different backgrounds and experiences, it’s natural that Joe and I see things a bit differently — although not as differently as some might think. He’s very smart, very perceptive, and very forward-thinking.

But his article got me thinking about resilience. What exactly does that look like for companies in real estate? And a related question, is resilience really what the industry needs today?

This is a “big think” piece of sorts, where I think through things out loud with all of you.

Joe Rand, Summarized

I’ll try to do justice to Joe’s perspective on this, although, like I said, you really should go read the whole thing.

He starts off by talking about TiVo, which was a promising startup until the incumbents woke up and adapted:

The lesson? The incumbent industry facing a disruptive challenge adapted. They embraced and ultimately absorbed that challenge.

He believes that this is what’s happening in real estate today, as incumbents are “absorbing some of the disruptive challenges that threaten their dominance.”

He lists Coldwell Banker programs like RealSure and RealVitalize, Howard Hanna’s Money-Back Guarantee and Buy Before You Sell.

And most of all, he talks about how incumbents are adapting to the challenge of iBuyers, “the most existential threat to its [the industry’s] future.” What he sees is how quickly the incumbents are adapting and absorbing the iBuyer threat:

And, from what I saw at Connect, that’s what the traditional industry is doing — integrating iBuying into its value proposition. The same way that automated valuation models were once disruptive but have now become basically commodities available on virtually every portal and broker website, iBuying is becoming just another arrow in the quiver of every well-armed agent in the country.

For example, Realogy has its RealSure program, which gives sellers a cash offer good for 45 days, something to keep in their back pocket while they go on the market with their agent from any of the Realogy-franchised brands.

Keller Williams has launched Keller Offers. Redfin has Redfin Direct. [I assume he means RedfinNow, the iBuyer program, not Redfin Direct, the unrepresented buyer program.]  Three completely different types of industry incumbents, all embracing this disruptive idea to provide it as a service to their agents and, ultimately, the consumer.

Because these incumbents have the advantage of scale, they don’t have the CAC (Customer Acquisition Cost) that companies like Opendoor and Knock have. So they’ll be able to do to iBuyers what cable companies did to TiVo: learn, adapt, then offer the value proposition of the upstart at lower cost and greater convenience.

Joe concludes by saying:

Finally, we’re seeing signs that the industry incumbents are not just going to sit back and let the future happen, they’re going to own a piece of it for themselves.

All good so far, and a powerful argument, as is the norm from Joe Rand.

Before We Continue: iBuyer Is Not Flipping

I really don’t want to nitpick the case that Joe is laying out, but this is critical to understanding the entire issue, so I’ll spend a few minutes on this. It’s also something I’ve been hammering since the beginning of the entire iBuyer movement: iBuyer is not flipping; flipping is not iBuyer.

If one does not understand this critical difference, it’s difficult to have real thoughtful conversations about the subject, about resilience, about adapting to or absorbing the “existential challenge.”

True iBuyer companies — today, there might only be two — pay market value for houses. They make their money on seller fees, and hope to really make money on ancillary businesses of mortgage, title, and escrow. They are fundamentally market making operations in much the same way that a market maker in pork bellies makes a couple of pennies per transaction from the spread, but wants enormous volumes of trades.

Every program that focuses on making money on the purchase-and-sale of the home is a house flipping program, not a market making program. There is a niche for those, and have always been, but those are not real iBuyer programs.

The real relevance of this point is this. Joe writes, “Realogy and Keller Williams don’t have to spend a dollar because hundreds of thousands of real estate agents already on the street will just make iBuying an element of their standard CMA.”

This is true only if the iBuying offer that’s in the CMA is offering a price that is market value according to the CMA. That is, if the CMA suggests that the house is worth $300K, the iBuyer offer will be for $300K (or very, very close to it) not for a 20% discount as an investor/flipper would need.

If those offers are not at market value, the consumer can and will just go to Opendoor and Zillow and get a market value offer and make the agent look like a snake oil salesman by comparison. It will feel like a bait-and-switch, which has a long history in real estate.

Resilience and Fundamental Problems

Having said that, my issue isn’t with the narrative that Joe lays out, despite the note about market makers vs. flippers above. My issue is that I’m not sure resilience actually helps the brokerages and big franchises.

Let’s assume, for the sake of discussion, that the future Joe envisions comes to be. How does that help brokerages and franchises solve their fundamental problems?

In a previous post, I made my case for what I think are the fundamental problems of brokerage today:

I’ve written this elsewhere, but the fundamental problem of brokerage is a simple one: it is the only business in the entire world where more productive a worker is, less profitable that worker is. Productivity is inversely correlated to profitability.

And recruiting does not help with this problem.

I’ll add a second fundamental problem to the mix: brokerages do not control the consumer experience, because they do not control their workforce.

Resilience makes sense if the industry that is trying to be resilient is strong, at its core. Cable set-top boxes was not a dying industry when TiVo came along. Adding those features to set-top boxes, making it more convenient and less expensive, allowed those companies to defend their turf.

With real estate brokerage and franchises, are we so certain that they are fundamentally healthy businesses that merely need to adapt and add iBuyer value propositions to thrive? 3% net profit margins, the average for North American brokerages, are not what I’d call healthy.

Let’s Spin This Forward

For the sake of thinking this through, let’s suppose that Joe’s vision comes true, and that the iBuyer offers are at market value, and everything else that the incumbents are absorbing comes to be. What does that look like?

Agent Smith goes to a homeowner, does the CMA thing with real market maker offers in it. Homeowner chooses to list with Agent Smith instead of selling to Zillow. Agent Smith sells the house and earns a commission of $9,000. He’s already capped for the year.

How much money does the brokerage make from this sale?

The answer is “zero dollars” unless (a) there’s a transaction fee of some kind, or (b) the brokerage can charge some kind of an override/referral fee because Agent Smith used the brokerage’s iBuyer platform.

So let’s say that there will be some kind of an override — 25% to pay for the brokerage’s platform.

Agent Smith owns the Smith Team at Coldwell Banker. He’s a top producer with a huge sphere, a giant farming operation, six staffers, and a dozen buyer agents. He’s doing 1,000 transactions a year. He does all of the lead generation through his own efforts, or buys online leads from Zillow and Redfin and OpCity and so on.

What is the likelihood that Agent Smith will happily fork over 25% of 1,000 transactions because he’s using the Coldwell Banker iBuyer platform versus the likelihood that Agent Smith will either (a) go find a brokerage who won’t charge him an override, or (b) just go direct to the vendor and buy it for his team, or (c) if no brokerage exists that won’t charge him an override, start his own brokerage.

In short, suppose that the incumbents get resilient, adapt, absorb and so on. How does that help their bottomline? How does the brokerage capture more of the economic benefits from all of the increased productivity by its agents? How does resilience help brokerages control the consumer experience better, deliver on their brand promises, and so forth?

Productivity Gains = Productivity Losses

The other part of that equation is that real estate is a zero-sum game. The pie is fixed by macroeconomic factors. The only question is who gets a larger piece of the pie.

If Agent Smith becomes far more productive because of Coldwell Banker’s Platform, that means all of the other agents in his market become far less productive. That’s the nature of real estate.

Sure, the thought for Coldwell Banker is that Agent Smith is going to take market share from RE/MAX agents and Keller Williams agents and so on. But RE/MAX and Keller Williams think the exact same thing.

The ultimate outcome is that a few super top agents become super productive, at which point the economics are entirely in their favor, while all the other agents become less productive — and those are precisely the agents from whom brokerages and franchises capture more of the commission.

So resilience does what for the brokerage, exactly?

Ancillary Businesses

The only compelling and convincing answer I have heard to date in my long years in the business is that these large incumbents — horizontally integrated real estate services companies with ancillary businesses in mortgage, title, escrow, insurance and whatever else — can operate the brokerage as a loss leader to fill the top of the funnel in order to drive business to the profit centers that are ancillary businesses.

Two things about that.

One, how long before the Agent Smiths of the world figure that out and want a piece of that sweet action?

Two, the real disruption is happening in ancillary businesses. I have long said that Opendoor is not actually a real estate play, but a mortgage play. Redfin’s most recent earnings call emphasized its growth of and focus on Redfin Mortgage and Title Forward. Enormous funding is flowing towards companies like Modus and JetClosings and Spruce and OneTitle and States Title and others.

How exactly does resilience help the incumbents in this scenario?

Why I’m Belaboring the Point: Resilience vs. Antifragile

I think Joe is correct that the incumbents in real estate are trying to respond to the challenges of disruption. They are learning, adapting, and absorbing what they can to defend their value propositions. The problem, as I see it, is that they are trying to be resilient instead of antifragile.

Here’s a slide I use in a number of my presentations to illustrate the point:

If you haven’t read the book, it’s worth picking up. But the main point is the above.

Real estate incumbents are trying so hard to be resilient in the face of disruption. They’re trying adapt, absorb, and so on in order to stay the same. Realogy and RE/MAX and Keller Williams and so on all want to defend the status quo as much as possible, to keep the agent at the center of the transaction, maintain the system as it has been since the 1970s.

I don’t get why. By all measures, what the brokerages and franchises are trying to defend isn’t actually worth defending. The economic benefits all flow to the agent, and increasingly to these companies-within-companies that are the agent teams. They control very little, can’t deliver on brand promises to consumers, and have to spend enormous time, energy, and resources catering to the outsized egos of the super top producers. Why?

Why not, instead, embrace the antifragile mindset. Disruption and disorder create crises, and those crises create opportunities to get better instead of staying the same.

What I’m recommending, perhaps, is merely an extension of what Joe Rand would say: don’t just learn, adapt, and absorb in order to stay the same and defend the status quo. Learn, adapt and absorb in order to get better, to improve, to solve fundamental problems of brokerages and franchises that exist today.

Use whatever you’ve learned and take advantage of the need to adapt to address one or both of your fundamental problems somehow. Else, what’s the point?

I think my friend Joe Rand would agree with that. How about you?

-rsh

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Rob Hahn

Rob Hahn

Managing Partner of 7DS Associates, and the grand poobah of this here blog. Once called "a revolutionary in a really nice suit", people often wonder what I do for a living because I have the temerity to not talk about my clients and my work for clients. Suffice to say that I do strategy work for some of the largest organizations and companies in real estate, as well as some of the smallest startups and agent teams, but usually only on projects that interest me with big implications for reforming this wonderful, crazy, lovable yet frustrating real estate industry of ours.

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