“One man cannot practice many arts with success.” – Plato
Let us review the situation. Upon deciding that the law firm (although not lawyers themselves perhaps) is a fine model for real estate, you have banded with other rainmakers and formed an institutional real estate practice. You have gone forth and installed a set of uniform, customer-centric relationship management processes, together with the computerized tools (CRM) to help them along. You have recruited people to be salaried employee associates, and have provided the best technical and marketing support. Through your institutional strengths, you have successfully changed the very ground of competition.
The last strategic step to consider is specialization.
In any reasonably complex industry, specialists are bound to arise. The competitive advantage of specialization is fairly large, as customers often want to make sure that they are getting the best qualified, most expert service provider. You are more likely to win business, and to be able to charge a premium for your services because the supply of specialists is lower than that of the run-of-the-mill generalist. On the other hand, the disadvantage of specialization is that your market is smaller than that of the generalist, and the demand for your services is lower as a result.
[I must point out before continuing that I mean true specialization, where someone actually has knowledge and skills that the average practitioner does not have. Simply saying one is a specialist in XYZ is mere marketing, and consumers usually can see past that pablum.]
Specialization in the Law
In an industry like law, specialization is more or less a requirement. When the field is so wide, it is impossible for a single individual to be truly expert in every aspect of the law. While there are lawyers who are more of a generalist — doing your basic contracts, home closings, commercial litigation, and so on — they know when an issue is above his head. Those issues get referred to an expert, unless the attorney likes taking on malpractice litigation risk.
Indeed, the law firm itself is something of a creature of the necessity of specialization. One man might be a top litigator, but knows relatively little about Trusts & Estates beyond the basics. Not wanting to turn clients away, he will partner up with a T&E lawyer. She in turn may realize that there are many tax issues that come up in setting up complex trusts that are beyond her expertise. Enter a third partner who is a specialist in tax law. And so on.
With the law, clients tend to want specialists when the matter is really important. For the basic house closing, a client might want the least expensive option. But if he’s being charged with a felony, he’s going to want a specialist in criminal defense work. Specialization in law becomes a requirement because for the most part, when consumers go looking for a lawyer, they have a fairly serious and important issue of some sort (at least to them). It might be a humdrum insurance dispute to the attorney, but to the client, it could be the difference between being able to pay for hospitalization or not. Those types of issues tend to focus the mind on getting the best representation possible.
Indeed, specialization in the law leads to stratification within the legal industry. At the top of the heap are firms like Wachtel, Lipton or Cravath whose partners often teach at top law schools, help legislatures draft their laws, litigate the most complicated cases all the way up to the Supreme Court, and charge the most money. Some of their attorneys are seen as being so good that there are stories of clients hiring them just so the other side can’t hire them, in effect paying them to sit on the sidelines. The next tier represents firms that can actually claim expertise and specialization, and often handle some very complex (and expensive) matters, but without the credibility and resume of the top firms. And so on down the line, until you get to the generalist at the bottom of the heap who does the typical legal paperwork necessary for most situations, such as the typical house closing and the typical divorce, etc.
Two effects of specialization, and institutionalization that both enables and is enabled by specialization, are worth noting.
First, specialization provides enormous cross-selling opportunities. A firm may get hired to help a company execute its $400m office lease. Executing that lease, however, may require the firm’s tax counsel to be involved, which then can lead to assignments to help the company with its international tax issues. Or the firm’s litigation partner might take the client out to lunch “just to chat”, of course.
Second, specialization creates diversification. The best example of this is bankruptcy practice. In good times, the bankruptcy lawyers see their work dwindle to a trickle — but their corporate partners are more than picking up the slack. When times get rough, however, the corporate partners are sure glad that they got some top notch bankruptcy lawyers, as their formerly high-flying clients are needing help with Chapter 11 workouts. The associates can be re-tasked as the needs of the firm changes, and the firm is able to sail nonchalantly through the storm.
[Incidentally, one of my favorite quote about law practice comes from a bankruptcy partner at a major NYC firm. I asked him, “What do you do when business dries up because the economy is booming?” His answer: “I watch my investments grow.”]
Specialization in Real Estate
Real Estate is already specialized to some extent. Commercial real estate for example is divided between the high-end work done by firms like CBRE or Cushman & Wakefield, and the run-of-the-mill work done most often by so-called “resumercial” agents. Most residential agents do not get involved in complex commercial transactions, and most commercial agents do not buy and sell homes. Luxury real estate can be a specialist’s realm as well, especially as you head towards the stratosphere of the $10m plus properties.
But for the most part, real estate brokerage itself is undifferentiated commodity work. You list a house, you market the house, you manage the transaction, and you do the closing. You talk to potential buyers, you take them around, you manage the transaction, and you do the closing. I mean, yes, the actual practice is far more complicated, but on average, the real estate transaction is a fairly well-settled proposition in most people’s minds.
My hypothesis is that this state of affairs is not the reason why we don’t have institutionalization; rather it is the result of a lack of institutionalization.
Because in theory, specialization can occur in two ways: subject matter expertise and geographic specialization. (And this is leaving aside the extremely thorny issue of service specialization, i.e., brokerage vs. mortgage vs. home inspections, etc., which is more or less mandated by law, e.g., RESPA.)
Subject Matter Specialization
It is not at all evident to me that the same broker will be as expert on transactions involving a condominium vs. a single family house vs. two-family homes. Yet, the same agent holds herself out as a specialist on all forms of real estate. There may be subtleties involved that may make me want to list my condominium with a broker who specializes only in condo sales. Perhaps they know everything there is to know about common charges, condo association regulations, staging a condo vs. a detached residence, etc. etc. Maybe there are issues that only a condo specialist would know.
Perhaps the same person who is going to show me a house for my family to live in is not the same person I want to be using when evaluating investment properties. There may be intricacies that alter the calculation I need to make that only a true specialist in investment sales would know to point out. There may be tactics only that specialist truly understands, that the average generalist simply does not.
For example, most agents can generate a CMA (Competitive Market Analysis) showing all condo sales and trends for a particular market. A specialist in condos may be able to explain why one condo sold for $150K while another just down the block sold for $175K. She may be able to compare (and analyze!) that market’s condo sale trends to six other surrounding markets, the state average, the national average, and show trends going back ten years. She might know every condo association in the area, their rules, which ones are well-run and others poorly managed. She might know which developers built which condo complexes, and make judgments based on that factor as to which condo unit her client might want to pay extra to buy. She may be able to provide the kind of inside information that only specialists tend to have.
The nice thing about real estate is that even within the “single family homes” subject matter, you can have incredible specialization as to geography. Indeed, I see geographic specialization as the more important specialty in real estate.
My town of Millburn, for example, has a number of distinct neighborhoods: Wyoming, South Mountain, and Hartshorn districts, among others. The three have different feel to them, and there are details that only local residents and insiders would know. For example, Lower Wyoming tends to flood more than Upper Wyoming because it lies at the bottom of a hill. I know this from personal experience. 😐 The town of Millburn tickets you if you park your vehicle on the curb in front of your house overnight — whether there is street cleaning or not. I know this from personal experience as well.
No matter where you live, fact is that each area has its own quirks and features that outsiders simply cannot appreciate. Whether such things relate to zoning, taxes, neat features, festivals, amenities, or anything else, to know each neighborhood, each town, each area requires specialization in that particular geographic area.
In fact, most of the agent bloggers instinctively know this. Talking about their local market (the so-called “hyperlocal” movement exemplified by the likes of Localism.com) is what most agents see as the most effective way of leveraging the Web for marketing. The advantages to search engine optimization are often mentioned, as is the benefit of having consumers view you as the local expert.
In Part 3, we discussed the idea of shifting the basis of competition away from personality but skill and service. This shifting is doable without specialization, of course, by leveraging the power of institutionalization and CRM, but in reality, without specialization you lose so much of the competitive advantage that is possible.
As noted above, two effects of specialization for law firms is the ability to cross-sell services, and to create diversification. The same effects apply to real estate as well.
The pooling of revenue is the key. In traditional brokerage, where each person “eats what he kills”, there is little incentive to specialize too much. Remember that the downside of specialization is that your addressable market is significantly smaller. In residential real estate, where the huge bulk of transactions are in the single family home and condo sales, it makes little sense to specialize to a small segment of the market — without extenuating factors (e.g., high end luxury, etc.). You can go out of business while you’re waiting for the right customer who is looking for a condo specialist to walk through the door. So traditional brokerage tends to encourage generalization in real estate.
With institutionalization, each and every producer can specialize in a particular niche, whether subject matter or geography or both, secure in the knowledge that even if her own specialization is small, the firm as a whole covers the entire market, and does so much more effectively.
One partner specializes in single family homes; another specializes in condos; yet another specializes in multifamily dwellings. Together, the firm has the kinds of specialized knowledge that gives them an advantage over the generalist. Because the revenues are pooled and shared, the partners have an incentive to cross-sell each others’ services, while focusing on their own specialty.
In larger firms, one could in fact imagine things getting even more specialized. A young associate working his way up the Firm might decide to specialize in homes for growing families — the second purchase for people in the late-thirties to mid-forties who have more than one child and have outgrown their starter homes. He goes and learns all there is to know about the housing stock in his particular market, the builders, the zoning, the amenities, the water tables, schools both private and public, the character of the various streets where these homes are located, the soil composition, what-have-you. The partner who brings in a couple looking to upgrade their starter home might want to send them to the young associate, because his knowledge is so wide and so deep that they can’t help but be impressed with the young man, and by extension, his firm.
Institutional specialization also leads to the diversification. Like a law firm that has a bankruptcy specialist, an institutional brokerage can have partners who specialize in down-market transactions such as REO’s and foreclosures, whose deep specialty provides a competitive advantage when things head south. Then when the market turns around, the standard partners who specialize in up-market transactions help bring in the revenues.
The institutional model allows for a level of specialization that can lead to absolute domination. Buying a home is usually the single largest purchase for any family. Selling a home is an incredibly important event in a family’s life. If the choice is between going with a specialist who has forgotten more about that particular topic than you ever knew, or a generalist whose knowledge is limited to MLS listings and pre-packaged market reports, most consumers would choose the specialist.
It may appear in today’s market that the consumer frankly doesn’t give a damn. It seems that they’re constantly looking for the cheapest price, pressuring brokers on commissions, going FSBO, or looking for rebate brokerages. My feeling is that whenever there is pricing pressure, the underlying value is simply not being felt or accepted. “What have you done to deserve 6%?” is a common question and a common complaint by consumers.
It may be that this consumer dissatisfaction with realtors stems from the feeling — and oftentimes, the certainty — that the consumer knows more about a market than the real estate agent with whom he is working. With the new consumer-oriented tools and websites out there today, some consumers do a lot more research, get educated, and come to the broker with sharp questions and sharper objections. Providing value to the educated consumer is difficult work, and one where specialization really helps.
“Look, I can understand your concerns about my prices, but if you’re looking for a bargain broker, my competitor across the street might be able to help you out. Make sure you ask him, though, about Regulation 13.7 of the township code and how that affects the four properties you saw on Trulia. Oh and ask him his opinion on Giuliano & Sons, because they’re the contractors who did the work on 14 Main Street, which should be your first choice given your family situation. If you change your mind, and want me to help you, you have my card.” When a broker can say this, and mean it, she has achieved domination in her market through specialization (and institutionalization that enables it).
And isn’t that the goal?