Rethinking Brokerages After Redfin 3.0, Part 3

Future of Real Estate Brokerage?

Part 1 is here, and Part 2 is here.

Thus far, we have explored why Redfin 3.0 is significant, and the hypothesis that the real estate consumer cannot, will not, or in any event does not form relationships with companies or with brands, but only with another person: the agent. We have looked at the two main consequences of that hypothesis: that if the brokerage brand doesn’t help an agent form and maintain client relationships, it can’t hurt an agent either; and that brokerages should only invest in technology only to the extent that such investment leads to greater recruitment and retention of agents. What matters, at the end of the day, is agent count.

We now turn to how those two conclusions then inform business strategy for brokerages going forward.

The New Strategy: Brokers as Retail

The logical analysis of the two consequences above leads to the following conclusion:

The modern brokerage is best served if it becomes a retailer of products and services to real estate agents, who hold the customer relationship.

That formulation is essentially the KWRI model: agents are “partners”, and the consumer is the agent’s customer.

The ideal scenario, then, is for the brokerage to purchase products and services at X and resell them to the agents at X+Y. In effect, they become distribution channels for the companies who produce the actual products and services used by the agents.

Which brings us to the recent Howard Hanna deal with Zillow and I’ve expressed the opinion that after the Hanna deal, that the next battle line would be between the big brokerages and the small independents:

So that announcement by Howard Hanna, together with Zillow’s quarterly report, delineates the next battle line: the big dogs vs. the little independents. Portals would gladly give up advertising revenues, if they can offset it with subscription revenues (well, at least Zillow will). The big dogs would gladly do strategic partnership deals with the portals if those deals give them an advantage in recruiting and retaining agents — especially the strong listing agents.

My friend Jay Thompson, a highly respected industry voice, picked up the argument and wrote this fantastic post on why he believes the small independents are going to thrive:

So there you have our “strategy for surviving and dominating.” Is it scalable? Could I grow Thompson’s Realty to 500 agents? Maybe, maybe not. Personally I have zero desire to run a 500+ agent brokerage. That’s mostly because I’m selfish. I want to know all my agents. I want to be available for them all the time. I want a “family atmosphere” where our agents cooperate with each other, not compete against each other. I think we’d lose all of that if we grew too large. I am not convinced that size matters…

I say the little independent can go toe-to-toe with the big dogs.

And win.

The comments on the post are almost entirely supportive of Jay’s position. Then again, Hoby Hanna is not commenting on that post. 🙂

What I notice throughout Jay’s post, however, is a pair of narratives that are necessarily in conflict.

On the one hand, Jay’s comments reflect the subconscious thought of Thompson’s Realty as a single company, a brokerage with customers, that employs agents. On the other hand, he maintains that the agent is at the center of it all, and holds the customer relationship, and sees his brokerages as providing services to those agents. Those two ideas cannot co-exist.

Redfin was the example par excellence of the brokerage-as-a-company. Redfin 3.0 introduces doubt as to whether that strategy is viable in real estate due to the human elements. KWRI is the example par excellence of the brokerage-as-a-retailer concept; its continued success suggests that once you get on the path of “only the agent can hold the relationship”, the retailer model may be the optimal strategy.

What Jay has to decide, strategically, is whether Thompson’s Realty is at its heart a company providing services to consumers (i.e, Redfin model), or a retailer providing services to agents (i.e., KW model).

The Retail Model Explored

The basics of retail are well understood. You buy low and sell high. It’s pretty much that simple.

Added on to that simple formula is an array of strategic decisions the retailer has to make. I did a series for Inman back a while in which I looked at brokerages on a Michael Porter competitive analysis basis (start here, but it’s premium content). To summarize, there are basically four ways for companies to compete: Differentiation, Cost, Focus-Differentiation, Focus-Cost. I described Thompson Realty in that article as a Focus-Cost model.

Once you decide on you basic competitive strategy, you still need to deal with issues of sales, marketing, inventory, product mix, cost control, margins, etc. etc.

If one thinks of brokerages as a “retailer” (or if you will, a wholesaler catering primarily to professionals like say a builder supply company), what is immediately striking is that the “products” that are offered lack differentiation, almost without exception. At best, we are talking about fairly marginal differences. It isn’t as if one brokerage offers something totally different and unique from everyone else (with a few major exceptions, of which Redfin is one). Most brokerages offer advice, counseling, leads, administrative support and some systems. One transaction management system is more or less like another transaction management system; some are easier to use, some are faster, some more integrated, etc., but they both allow an agent to manage a transaction for a client.

In the vast majority of cases, brokerages do not develop or build these systems. They buy them from vendors. Few brokerages have a printing press in-house, for example, to produce postcards. Few brokerages have an in-house web design firm, staffed with web developers and engineers. (Once again, exceptions exist, and we’ll get into those later.) Even the “core” functions like training, education, management, coaching, and so on are offered by numerous organizations. A brokerage that doesn’t have its own in-house coaching staff, for example, could easily contract with one of the many real estate coaching companies to provide coaching for its agents.

The flipside of this is that the brokerage’s customer — the Agent — can also purchase these products and services in the open market. You don’t like the agent website the broker is offering? You can go buy one yourself from a wide array of website vendors, from the cheapest templated site to hugely expensive custom development jobs. Oftentimes, you can buy such products from the vendor who does the work for the brokerage itself, if you’re willing to shoulder the cost.

Problem for the brokerage/retailer is trying to balance uncertain revenues with fixed costs. A department store doesn’t know how many shoes it will sell in the next quarter, but the orders for those shoes have to placed months in advance and paid for in advance. Similarly, a brokerage has no idea whether the new technology costing $50,000 is going to generate any additional revenues going into it, but it has to build one in order to attract agents at all due to competitive pressure.

From where I sit today, the issue then, is one of cost control and cost certainty.

Size Matters

When it comes to controlling costs, there is no question that size matters. Macy’s will get a better price on that Polo shirt than the mom-n-pop boutique down the street, simply because it buys thousands of units. WalMart dominates in cost competition because it buys in such huge volume.

Howard Hanna can get terms from Zillow and that Jay Thompson is unlikely to get, simply because it can bring more volume to the table. Brokerages themselves practice this same idea: the agent who is closing 50 deals a year gets a better price (splits) than the one who closes 5 deals a year.

I don’t know the terms of the deal that Howard Hanna struck with the portals, but whatever the benefits of that deal are, it is quite possible that an individual agent or a small brokerage could approach ZTR and negotiate for the same benefits. However, it is quite unlikely that they will get the same price; if the amount is $1M per year, then on 8000 agents of Howard Hanna, they’re paying just over $10 per person per month. Zillow’s Premium Agent package starts at $39/mo. Even if HH adds a few bucks and passes the cost to its agents (say  in the form of a $15/mo technology fee increase), those agents can do math and see that they save money by using HH’s rate than by doing their own thing. Zillow, however, has no incentive to offer a 5-person brokerage the same $10/person price that it gave Howard Hanna.

That is a cost advantage for HH when it goes recruiting. Period. This fact is not particularly debatable, in my opinion.

As we think about the idea that Zillow in particular plans to expand into providing technology products and related services, I have to think that the same cost advantage that Howard Hanna (and other large brokerages) enjoy in doing deals for syndication would hold for deals on those products and services.

At the end of the day, if a large brokerage like Howard Hanna ends up offering the full suite of products and services sought by agents, and enjoys a 40% cost advantage in procuring “inventory”, it can (a) lower prices to agents, in the form of higher splits, or (b) offer more stuff to agents, in the form of more tools, more training, more whatever, at the same price, or (c) both.

The question is, can these larger brokerages leverage their temporary competitive advantage to lasting gains, or will they fritter away the advantage due to inefficiency, corporate infighting, and lack of leadership.

But Boutiques Survive

The counter point, and one that is often made, is that the small independent businesses are hardly out of business in the age of Walmart and Home Depot. Not everyone enjoys going to big box stores. Not everyone wants what Macy’s offers. That is absolutely true.

But looking at retail, fact is that the small stores survive by avoiding where the big stores compete. They buy products that the big stores won’t carry, because the consumer demand for those products is low. They offer services that the big stores do not offer (concierge? personal shopper?). Or they do what every small business owner thinks is the path to success: rely on relationships. Mr. Jones has been my customer for 20 years; we’re on a first-name basis — he’d never go to Home Depot… or so they say. Until he does. Because Mr. Jones might like you a whole lot, but I guarantee that he doesn’t like you more than he likes his own wife and kids. And the money he keeps in his pocket goes to them. There is a tipping point when it comes to cost that “relationships” cannot overcome.

In brokerage, one can substitute the word “culture” for the word “relationships” above. And yet, when one digs deeper, some parts of the “culture” are actually services an agent does not get at a big brokerage. For example, Jay Thompson’s emphasis on individual freedom — his agents can do pretty much anything they want to do, as long as it isn’t illegal and doesn’t go against some unspecified client-service mindset. So, for example, they don’t have to attend office meetings, or put up signage dictated by the broker. That freedom to conduct business as one chooses isn’t simply culture; it’s a service offering.

So ultimately, even in boutique brokerages, the actual promise boils down to money: “You will make more money with us.” Either the boutique promises levels of support, personal attention, coaching, and a highly integrated technology system that one could not get at a Big Brokerage (e.g., GoodLife Team), or the boutique promises fewer expenses of doing business whether in splits, fewer fees, or freedom.

Technology Cycle

Today, we are on the technology curve where costs are fairly low. I believe that the phenomenon of fragmentation, of numerous small independents, of powerful agent teams, and so on is driven largely by the low cost of technology. But technology adoption is always cyclical; the early innovation is always expensive, since products early in the curve have to recoup the investment into R&D, while mature technology can push costs down. The first websites in the 1990’s were not inexpensive, templated things; they cost millions of dollars in some cases, as the talent and know-how to work with HTML and CSS were scarce. Platforms like WordPress did not exist. Facebook and Twitter were unknown things.

The next technological wave will be in mobile and in artificial intelligence. In both cases, the technology is not cheap. The cost to build a website does not compare, yet, to the cost of building an app (or more likely, a series of apps for all the different mobile OS’s). And AI/expert systems, such as IBM’s Watson, are beyond the capabilities of virtually every single brokerage in America today.

Eventually, as vendors proliferate, as engineers flood into new technology markets, and so on, those new technologies will mature. The question is whether the big companies with the budgets to purchase the latest technology can use the temporary competitive advantage to gain market share and profits, or the tech vendors will scale production quickly enough to sell the technology to all and sundry at low enough price points that the advantage of size is nullified.

My feeling is that the dealmaking advantage of size remains, and that the winning brokerage of the future is the one that can form the best, most cost-effective partnerships with manufacturers (i.e., tech companies), outsource as much of the non-revenue activities as possible, and focus on customer service and superior pricing to their customers: the Agent. In short, they are retailers.

The Significance of Redfin 3.0, Once Again

Into this analysis, then, throw in the decision by Redfin to modify their broker-centric model to become more agent-centric. A number of people have commented both on my blog and on Facebook that Redfin’s decision was kind of a big shrug. What’s the big deal, they ask? All it means is that Redfin and Glenn Kelman spent tens of millions of dollars of VC funding to learn what these brokers and agents knew all along.

I don’t think so. Because on the technology/product side, Redfin was — in my mind anyhow — the standard bearer of the vertically-integrated operation. Redfin didn’t just buy technology; it built technology. It still does. It wasn’t a brokerage-as-retailer, but a brokerage-as-company, producing every aspect of the consumer service offering.

The Redfin 3.0 decision essentially says that the competitive advantage from producing your own products and services is unsustainable in real estate, due to the highly personal nature of the transaction. Agent-centricity isn’t just a business model, but a permanent feature of the home buying and home selling process.

This fantastic essay by Jeff Turner suggests why that might be the case:

Garber rightly points out that, “Realtors and house agents often find themselves functioning as therapists, psychologists, and marriage counselors.” I know from my own personal experiences and also from talking to real estate professionals all over the country, the process of searching for a house spurs questions similar to those we might ask before we truly commit in a relationship. “Is this where I want to spend the rest of my life? Is this who I want to spend it with?” Even affirmative answers to these questions can have both positive and negative effects.

Understanding that questioning is an important part of understanding the buyer side of the equation. The questions that the buying process bring to bear in their personal lives can be monumental, especially for first time buyers. This is one of the reasons why buying a house is such a stressful experience. The questions that this process force us to ask can often be more than we’re ready to answer. It’s not just about the house. It’s about our concept of “home.”

Given the above, if we accept this “falling in love” aspect of real estate as true, then there is no compelling reason why a brokerage should build its own technology as Redfin has and does. There is no reason why a brokerage or an agent should worry about “third party portals”; just work out a deal with them, as Howard Hanna has. The various attempts to control the “consumer experience” ultimately fall short, not because the brokerage did a poor job, or because it didn’t have an effective brand, or what-have-you, but because the consumer experience is as unique as the individual falling in love, individuals hit it off with different individuals for different reasons, and individual agents work at different paces, using different techniques, and they are the ones that hold the customer relationship.

The Theoretical Example

Taking the “retail” model to the extreme, let’s imagine for a moment that a sizable brokerage (say with about 1,000 agents) makes the full-throated conversion. Let’s call them Nifder Realty. As Howard Hanna did, Nifder goes out and strikes favorable deals with all of the major portals. In fact, Nifder takes it a step further and has Zillow (to pick just one) become the brokerage website at The original website, at simply redirects to the sub-site. Now, Nifder’s “website” has all of the technology, all of the SEO tricks, all the engineering and product development of Additionally, this allows Nifder to get a white-labeled version (a different skin, but same underlying platform/technology) of Zillow’s mobile app. All of Nifder’s agents receive a Diverse Solutions IDX website at drastically reduced prices, since Nifder is able to buy in bulk.

And as Zillow releases more products, such as CRM, transaction management, etc., Nifder gets Most Favored Nation pricing and terms, as well as exclusive features.

Additionally, Nifder goes and strikes deals with other prominent technology vendors. DocuSign to provide e-signatures for all Nifder agents, CloudCMA, Altos Research, RPR, and what-else-have-you. Nifder also does bulk deals with top coaching organizations such as Brian Buffini or Mike Ferry or whoever-you-think-rocks such that Nifder agents have access to industry’s best coaching at very low prices. Nifder does deals with large virtual assistant companies to provide VA services at deeply discounted rates, because they are paying for 1,000 people at a time.

And if a Nifder agent wants to go “out of network”? No problem — go right ahead, but you pay for those on your own.

After it’s all said and done, what Nifder realizes is that all of these products and services sought by an agent might cost them $200 per agent per month. “Hell with splits,” says Nifder’s CEO. “How about you just pay me $300 per month flat fee, and keep 100% of your commissions?”

This would be a brokerage similar to Jay Thompson’s company, in that there are no arbitrary rules and policies. Agents have to adhere to the laws and regulations, and to the Code of Ethics, but beyond that… do what you like. There are no sales meetings, no required training sessions, no face time, no required training courses, no broker branding requirements — after all, at 100% split, Nifder doesn’t really care whether you convert leads, follow up on them, generate them, nothing. For Nifder, making 50% margin per head ($300 in revenues vs. $200 in expenses per month per person) is good enough.

With that 50% margin dollars, Nifder would invest in two things: recruiting, and agent services. Recruiting for Nifder isn’t HR; it’s sales. Their agents are not their employees, but their customers. Agent services, then, isn’t your classic office manager riding herd on a bunch of recalcitrant agents, but Customer Service people who strive every day to make sure each and every Nifder Agent is as happy as can be.

The Nifder agent, then, has total freedom to run her business exactly as she wants, use any vendor she wants, but has access to the full panoply of the more established technology vendors from Altos Research to Zillow at her fingertips at no additional charge. Her office manager isn’t calling her every week to see if she followed up on that buyer lead; instead, he’s sending her flowers when she closes a deal and telling her how wonderful she is, and how much Nifder appreciates her business. How about some fresh home-made cookies next time you stop by the office?  And she can keep 100% of her commission check?

Think this is pure fantasy, and no actual real estate agent would want such a thing?

Think again: Realty One Group is one of the fastest growing brokerage companies in America today.

Next… Considering the Counter Arguments

Since we’re already clocking in at 3,500 words or so, let’s defer the discussion of all of the counter arguments in the next part. There are some really good insights and good counterpoints from a wide range of industry experts that I’m eager to engage.


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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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