On Biz 2.0: Super Real Estate Companies

Mike Farmer at Bloodhound has an inspirational and thought-provoking post up on what he calls a “Biz 2.0: Super Real Estate Company” would look like. Read the whole thing; it’s long, but worth the time.

By now, readers of this blog know that I am entirely simpatico to Mike’s call for a new enlightened leadership and work processes in real estate.

There is, however, one fly in the ointment for Mike’s vision that I have pointed out before, and it’s worth doing so again.

For his (and my) vision of the Real Estate Company 2.0 to become real, the industry has to abandon one of its hallowed traditions: the independent agent.

The level of unity, organizational pride, and collaboration that Mike is envisioning simply can’t happen when your entire producing workforce thinks of themselves as independent contractors in business for himself/herself.

The truth is that a company needs leadership, but a committment to the on-the-ground salesforce is critical to retention and productivity. With intranet 2.0, voices across the system should be heard and information used for steady improvement and innvoation. With all the communication tools, any part of the company should be able to access rich information about listings, trends, local changes, clients, closings, vendors, etc. with a click or two. The information being fed from the field should be a steady stream. Training should include the skills necessary for agents to learn the importance of information, how to quickly gather it and input it so that it’s meaningful and useful. The infrastructure for this should user-friendly so that agents aren’t burdened with a clumsy, complex system they won’t use. But, companies should also be contracting with more skilled agents.

The Biz 2.0 tools will allow communication and comarederie [sic] throughout the company and create the highest level of co-operaton possible if leadership believes and everyone is on board. Then perhaps companies who hire anyone breathing will be more selective and realize that quality is way more powerful than quantity in this line of work. I venture to guess that a local company who implements these changes could dominate the market their in in no time at all. The environment would be attractive for connected, productive agents and too difficult for those who aren’t serious about RE. It would be very difficult to form a company like this, but it is possible. Can you imagine what 50-100 agents and high-skilled managers with enlightened leadership could accomplish if they were wired and working together toward a common goal?

This is possible, and desirable, but only if those 50-100 agents are not independent contractors whose ultimate (and sometimes the prima facie) loyalty is to his or her own commission splits.

First of all, the level of investment required in such a system and such a process at the organizational level is quite high. An intranet is no joke to setup, nor is it self-maintaining. It takes enormous investment in time and treasure to get a really useful intranet going. Providing truly useful information technology to every member of the organization is expensive, resource-intensive, and time-consuming. A broker might decide to do all of these things to gain a competitive advantage — because he will gain that — but the money to fund all these have to come from somewhere.

Can such a Brokerage 2.0 become uncompetitive in agent splits and still retain the talent it needs? Because the money has to come from somewhere. Apart from commissions, what else can a brokerage tap to fund these initiatives?

Second, and this is connected, the individual employee’s investment of time and energy into maintaining such a “live” organization is enormous. As Mike himself points out, the flow of information from the field has to be steady and constant. Information technology is utterly useless without information. And someone, somewhere has to gather that information and put it into the system.

You see this in practice, in the real world, in commercial real estate where information flow is absolutely the lifeblood of brokerage. You have to know your local market to a degree that many residential brokerages do not. Knowing the inventory, the actual square footage vs. leasable square footage, the comps, the new projects, etc. etc. is critical to competing in CRE. Guess what the #1 pain point for these companies are? Getting that data in the first place.

Many of them rely on their newer agents to do the gruntwork of going door to door, calling on landlords, etc. to find out which tenants are in which buildings taking up how much space and for how long. Many require their agents to go do these market surveys periodically. Some condition the release of the commission check upon meeting the quota of market data gathered. But almost every single one has enormous difficulty getting its agents — who all think of themselves as independent contractors — to do this work that doesn’t benefit any one of them directly. It’s a variation of the tragedy of the commons.

Third, it’s extremely difficult even in an integrated organization (with only employees) to ensure service quality. Take a look at investment banks and law firms, none of whom employ independent contractors to be frontline representatives. They expend enormous resources in recruiting and training, and these companies are aided by professional schools that train individuals for two to three years learning professional competence, as well as government organizations that require compliance to standards.

I simply can’t imagine how this would work where your producers are all entirely independent contractors over whom you the broker have limited control, by law. As I read the IRS ruling, you actually cannot demand that your agents undergo specific training, or do things in a specific company-mandated way. That would constitute control over “means and methods” and make them into your employees. That in turn has significant implications for taxes, for liability, and other legal issues. If you’re going to undertake those things, then you want to do it with your eyes wide open, and with a very different compensation structure.

I’m sure someone somewhere either has tried the agent-less real estate brokerage, or will try it again soon. I think that may help us figure out whether this is a viable business model for real estate or not, and whether Biz 2.0 will be a driver of that model or the beneficiary of it.

-rsh