I read Rob Hahn’s ideas about brokerage-as-law-firm last week. I thought that much was kind of naive — a reflection of a lack of understanding the legal realities of real estate brokerage — but I didn’t jump in because I thought some of his other ideas were interesting.
Here’s the problem: A law firm is based on 1040 employment. The real estate brokerage safe harbor makes it extremely beneficial for brokers to have nothing but 1099 employees. There is no reason to expect that to change unless the IRS removes the safe harbor — three weeks after hell has frozen over.
The Team model works, but it’s inherently small-time.
Branding could work — but doesn’t — because the independent contractor status of agents dilutes the brand to homeopathic concentrations.
Hard-branding like Bloodhound does can only work with very strict control. Redfin has this — but it also has 1040 employees.
All that notwithstanding, present-day brokers are at risk of being wiped out at any minute by several liability — the designated broker is responsible for every idiot he puts out on the street.
Here’s a solution that makes sense to me:
The ideal case would be to get rid of licensing altogether, to get rid of the broker’s level of licensing or to get rid of the salesperson’s level of licensing and call everyone a broker, but none of that is necessary.
Instead, imagine an IntegratedRealty.com business entity that consists of a franchised brand for fly-you-own-flag brokers or brokerage entities. As the owner of IntegratedRealty.com, I franchise the brand and require certain standards and practices from the franchisees. I maintain offices, so, to all appearances to the public, we’re just like Realty Executives. Except that I am not anyone’s broker, and each individual franchised broker is the head of his or her own Team. They write and own their own contracts, and they’re free to sever their relationship with IntegratedRealty.com per the terms of our contract, with their representation contracts going along with them.
This could be rolled out city-by-city, like Realty Executives, or cross-competitively like RE/Max. Each new instance of IntegratedRealty.com could itself be a franchise, so you could build a national franchise of franchisors, each of whom is committed to sustaining the value of the brand. In 1040 businesses, the formal name for this is: “Middle management.”
Rob’s ideas about high-level CRM could come into play, with referral fees to account for who gets what. The individual brokers get the value of the branding, along with franchise-like advice on successful business models. IntegratedRealty.com gets the kind of whatever-it-takes efforts never seen in 1040 employees. And the owner of IntegratedRealty.com is liable only for his own errors.
This is something that could work in the present context. It’s once better than RE/Max or Realty Executives because it separates the owner of the brand from the legal liability of poor representation.
I’m not looking to shoot anyone down. I’m fascinated by this discussion, have been for months. I want to start thinking about it in hard nuts-and-bolts terms. I am by far the most radical libertarian anyone here will ever meet — and I know this because I know everyone in my neighborhood on the Nolan Chart. But as wonderful as ideals might be, there is no reason to expect the laws oppressing us to change anytime soon. The challenge for the practical libertarian is to build the best incentive-based business models that can be achieved in the present context.
Technorati Tags: disintermediation, real estate, real estate marketing, technology
Sean Purcell says:
The challenge for the practical libertarian is to build the best incentive-based business models that can be achieved in the present context
Compromise in defense of pragmatism is neither pragmatic nor defensible.
August 4, 2008 — 9:34 pm
Greg Swann says:
>> The challenge for the practical libertarian is to build the best incentive-based business models that can be achieved in the present context
> Compromise in defense of pragmatism is neither pragmatic nor defensible.
You lost me. Are you claiming that you are not in a constant state of compromise with the welfare state? Since you are not in prison or deceased, this must be untrue. To take a truly uncompromisingly libertarian stance in modern-day America is to be imprisoned or dead. Every time you lick a stamp, you are kissing the master’s ass. To the extent that you wish to live more than you resent your subjugation, you lick the stamp, but it doesn’t do to pretend you are uncompromised.
Moreover, having resolved to live in chains — a compromise that has confronted every human being to one degree or another — the question then is how might one live? An egoist’s answer is to live the best life possible without becoming part of the engine of oppression. Anyone in regulated finance — securities, mortgages, real estate — is walking a fine line, but, for everyone, it is not possible to live within a welfare state without reaping benefits of the secondary consequences of theft: “free” roads, “free” bandwidth, etc. Even so, what remains of the free-market permits rewards to accrue to creators of better ideas. Hence: “The challenge for the practical libertarian is to build the best incentive-based business models that can be achieved in the present context.” This seems to me to be obvious and non-controversial. We strive for the ideal. Most of us swallow hard and live with the real. We are all of us cowards, but we are not all ignoble cowards.
But: That’s not what I’m talking about. What I am talking about is a way to organize large-scale branding and marketing for businesses that work best at very small scales — this most especially because salaried salespeople do not work with the same zeal as commissioned salespeople.
On the phone from Orlando, I demonstrated to the very pragmatic Brian Brady why the 1789 coup d’etat, by betraying the libertarian principles of the American Revolution, is plausibly responsible for Fabianism, Progressivism, Socialism, Fascism, Communism, Maoism and the almost-comprehensively murderous Kmher Rouge — the proximate cause of hundreds of millions of political murders and the on-going graduated enslavement of every living soul on Earth. All of this could have been avoided if a handful of Mercantilists in the North Atlantic could have settled for the profits of mere liberty. But because they betrayed that ideal, they betrayed everything humanity might have achieved instead in the last 219 years — the wealth, and the accrued leverage of that wealth and the opportunity premium of that leverage. We know what was lost, and this is monstrous, but we cannot count what could have been gained instead, and this is a tragedy too large for the mind to fathom.
Ergo: “Tho’ we are not now that strength which in old days moved earth and heaven, that which we are, we are.” We can only get to where we would be by starting from where we are. Our game was won in 1776 and lost again by 1789. I know how to build a defensible liberty, when humanity dares again to want it. In the mean time, we can build a system of real estate brokerage that more closely mimics the behavior or real businesses, even under the present body of laws. That’s my job for today. Are my efforts misdirected?
August 4, 2008 — 10:51 pm
Brian Brady says:
I think Unchained speaker, Mitch Ribak is trying this:
http://www.ehomesrealtynetwork.com/
August 5, 2008 — 8:31 am
Sean Purcell says:
Greg,
Slow down Big Dog. I am not impugning your commitment to humanity, only your idea that the current state of affairs in real estate is entrenched to the degree that we should limit our vision to solutions within the cell rather than outside the window.
I am not sure your idea solves many of the problems that the industry faces. (For that matter I am not sure if my idea does either. They are all works in progress.) But I want to create a system that avoids the pitfalls of untrained, uneducated agents demeaning the entire profession. Contrary to what you stated I do believe that private enterprise incentive is by far the best way to bring about change (albeit not always the swiftest or the prettiest). Incentive, however, does not always equal commission. The incentive to become one of the partners (the psychological need to belong) is at least as strong as the desire for money… maybe stronger. The added benefit being that it transfer responsibility and accountability to those reaping the reward (in my example that would be the partners).
A top down direction, as in your franchise example where the franchisees must follow the rules as handed down creates too much incentive for gaming the system. When the drive is bottom driven there is more accountability all the way around. I consider this a cornerstone of whatever model our collective efforts create.
August 5, 2008 — 9:00 am
Greg Swann says:
> I think Unchained speaker, Mitch Ribak is trying this:
It reads like another flavor of franchising, which is interesting in itself. What I am talking about is removing branding and marketing from the brokerage level, permitting a vast host of independent brokers to work under the same branding and marketing umbrella without the branding and marketing entity being itself at risk for representation errors committed by the individual brokers or their agents.
I don’t think it’s plausible to expect real estate brokers to give up the benefits of 1099 head-count costs in favor of 1040 head-count costs. In general, 1040 business are better run, in no small part because head-count costs induce rational hiring decisions. But the 1099 safe harbor for brokers is too profitable to forego — both because of the tax advantages to the broker and because 1099 employees work a lot harder. It might be fun to speculate about 1040 brokerages, but they’re going to be thin on the ground — and thin on the bottom-line — as long as the safe harbor persists.
Even so, the training and performance advantages Sean Purcell, Rob Hahn, Mike Farmer and others seek are already provided by the Team level of management. This is pure Hayek, intelligent management winning out even in insane circumstances. The Team provides the highly-motivated middle managers you will never find in a 1040 enterprise.
What Teams lack is the branding and marketing skills of bigger businesses. You can see this in Ribak’s site. His marketing ideas may be top-notch. His graphic ideas are excruciating.
A big brokerage or a franchise can solve the branding and marketing problems, but only at the risk of huge legal exposure. If we separate the two functions — branding and marketing and real estate representation — then Teams can work best where and as they work best, with the branding and marketing being handled by specialists.
This is an idea that could really work. Benefits of common-voice branding and marketing for the brokers, no fear of lawsuits for the marketers.
It’s a commercial real estate play, too: The marketers rent space to the brokers, but also to lenders, title companies, inspectors, etc. No collusion, no RESPA disclosures, no kickbacks, just one-stop-shopping.
August 5, 2008 — 10:28 am
Rob Hahn says:
Greg – thank you for this thought-provoking post.
A few points in rebuttal to some of your specific points.
1. IRS Tax preferences
While I agree that I am normally naive about many things, this was one thing I did not feel I was naive about. I know the tax code treats agents differently, which results in an advantage for the 1099 brokerages. However, my view is also that when that “advantage” ends up screwing your business, it’s time to give it up.
How many brokers have you seen who have more or less an adversarial relationship with their agents? Because I worked for a franchisor, I saw first-hand just how corrosive some of that can get to a sustained business. And there is no conceivable business model that can sustain 90/10 or even 100/0 splits with an agent.
So the solution, IMHO, is to forego the tax advantage for what amounts to a business advantage.
2. Get rid of licensing
As a disciple of Hayek and Friedman myself, I can get 100% behind this. 🙂 For both lawyers and realtors, incidentally.
3. Franchise-of-Franchisors
The main issue I see here is one of absolute dollars and resources, especially in a competitive market with a couple of 800-lb gorillas: Realogy and ReMax.
Even if you allow your franchises to franchise others in a pyramid marketing scheme, the fundamental business is not particularly different from what the existing franchisors offer. And the financial models of a franchise business in real estate always devolves down to the actual revenue producer: The Agent.
Contractually binding franchisees to certain practice standards and the like is fine and good — and all existing franchises do the same. The problem is when the rubber meets the road. When your super-agent who is bringing in $2M in GCI decides to say “screw your brand and your practice standards”, what broker is going to fire that agent? (Apart from someone brand-obsessed like you, perhaps?) And when that brokerage is contributing 6% (your franchise fee) of $75m GCI (his annual revenues) to your franchise system, are you going to get rid of that company or sue his company because his super-agent flipped your brand the bird?
I think I can count in one hand the brokers who would get rid of a producing super-agent before they would get rid of the brand whose flag they are flying.
Independent owners (the franchisees) have no loyalty to your brand apart from the business they think flying your flag brings them. They are not equity partners, after all.
Finally, even if we’re not dealing with a super-agent situation, given the tax rules you brought up, every broker is hugely incentivized to hire as many “shoe salesman” type of newbie agents who suck just to get their 2-3 deals. Doing brand enforcement and quality control on that many part-timers who aren’t getting paid by you is… to put it mildly, difficult. The franchisee’s incentive to adhere to your brand standards of professionalism is exceedingly low compared to the revenues he’s generating from that army of low-skill agents who are carrying YOUR FLAG and thereby making a mockery of your brand promise.
4. Institutional CRM
While I believe that a national franchise like BHG or Coldwell Banker could (and should) deploy a robust CRM system, at the end of the day, I don’t believe the SYSTEM of CRM — the data entry, data management, the analysis, etc. — can be done outside of a 1040 institution.
The incentive to do the dirty work of entering data is very low for local franchise workers.
The incentive for an AGENT to share his/her client data with the BROKER is so low that it’s negative. In fact, she has every incentive NOT to share that info. And as a 1099, she can walk at any time to a broker who isn’t going to demand such things.
I may need to think through some of the points more, and turn it into an interim post before doing Part 3. But this is a wonderful discussion altogether.
-rsh
PS: I so dig that there is this libertarian crew in the RE.net. 🙂
August 5, 2008 — 3:17 pm
Thomas Johnson says:
Sounds like a Re/Max shop with franchise/royalty fees. The owner/operator gets the real estate play, desk fees and rent for the title, mortgage,etc. Re/Max gets the fees for national branding and advertising.
Liniger’s original concept was that Re/Max 100% agents were the experienced cream of the crop-you actually had to show decent production to join. That went out the window with office proliferation and as the real estate play (desk fees) became the profit center for the franchisee. I don’t see how you can inspect your franchisees for purity of heart as you try to grow the business. The 1099 system almost guarantees a proliferation of “body shops”.
August 5, 2008 — 3:50 pm
Bob says:
This is where the Team beats all other models hands downs.
August 5, 2008 — 4:11 pm
Greg Swann says:
> This is where the Team beats all other models hands downs.
I think so, too. If you want a strongly-branded, clearly-communicated added-value proposition, I think you need entrepreneurial management. In real estate, it’s hard to make it work beyond a conference-room full of team members.
August 5, 2008 — 4:21 pm
Sean Purcell says:
The Team model beats all others hands down
is true… as far as it goes. But there are a few small problems (most of which I have already addressed in Part 2 without rebuttal) and one large problem: leadership vacuum. These Teams (and I was an early proponent of them so please understand I am knocking the concept) require a strong central figure or a communal “Kum-bay-ah” feeling. Neither is likely.
So our goal is to define the benefits of the team model and then wrap them in a model that has a more universal appeal. In these comments I see too much emphasis on branding (which is already passe in a 2.0 world) and not enough thought on how we incentivize the players.
Our current industry, based on 1099 agents expecting 80-90% splits with no experience or training, is a broken toy. No matter how nice you wrap it or how well branded the wrapping paper, once you get inside the box you’re still looking at play-doh gone hard.
August 5, 2008 — 4:49 pm
Bob says:
I would love to see you actually support your arguments.
Branding is over rated, but ask Gregg Neumann how to make more money on his team and he has a very simple answer: “Sell more homes”.
August 7, 2008 — 4:44 pm