Revisiting My Theory of Real Estate Brokerage

I’m writing this on Sunday night, because there was something tickling the back of my head all week as I was thinking about Zillow’s announcements. That itch got scratched in part because of my friend Phillip Cantrell’s post on LinkedIn (which I have reposted with permission here) which answered one piece of the puzzle. Another part got scratched in conversation with the CEO of a national franchise as we discussed the possible impact of Zillow’s moves. And finally, a lot of the feedback (some very smart observations as well as batshit crazy OMFGasms) from brokers and agents throughout the industry scratched a part.

For some of the industry feedback, Inman wrote up an article on the subject, but if you spent any time on real estate social media the last few days, you’ve seen it all.

So what is there to add that is of any utility?

Turns out, that itch tickling the back of my head stems from something I have been pondering for quite some time. In light of both the news from Zillow, and more importantly, the more rational responses from the industry, I think it’s time to revisit the topic.

Back in 2012, I wrote a big-think post titled “A Theory of Real Estate Brokerage: Thinking About Dr. Dunbar” in which I thought about the Dunbar Number and its implications for real estate brokerage in the social media age. So not only was that post Pre-COVID, it was an eternity ago. Nonetheless, I think it’s time to revisit the idea in 2020. Feel free to read the whole thing, though I will summarize and quote key parts.

The Theory in Brief

In 2012, I was just getting started, more or less, doing strategy for the real estate industry. But I was very, very interested in all things social media, having come out of the blogging and online marketing world.

My basic thesis in that old post was that social business models were of limited utility in real estate brokerage because human connections are irreplaceable:

The trouble for me is that I simply don’t see those “social branding connections” as being anything like a real relationship. Brand marketers love to talk about engagement and relationship to the brand as if the brand is a live human being. That’s simply not true. People can like a brand, hate a brand, love a brand (see, e.g., Apple fanbois), but they know instinctively that the brand is not a person and therefore, there is no relationship there. There’s something else there, but it ain’t a relationship.

Social business models, therefore, are analogous to voicemail systems: they approximate human behavior, try to seem human, try to sound human, but they are clearly not human.

If that sounds a whole lot like what just about everybody in real estate has been saying for the past few days, I don’t think that’s a coincidence. So far, this is the first line of the REALTOR Creed as has been recited in the Church of REALTOR since time immemorial: relationships, relationships, relationships.

The Dunbar Number

But where that idea that human connections cannot be replaced with social media “engagement” led me in 2012 is into the Dunbar Number. Since I went into it in 2012, let me just quote that part.

Robin Dunbar is a British anthropologist who came up with the idea that human beings have a finite number of connections or relationships that they can manage. From Wikipedia:

Dunbar’s number is a suggested cognitive limit to the number of people with whom one can maintain stable social relationships. These are relationships in which an individual knows who each person is, and how each person relates to every other person. Proponents assert that numbers larger than this generally require more restrictive rules, laws, and enforced norms to maintain a stable, cohesive group. No precise value has been proposed for Dunbar’s number. It has been proposed to lie between 100 and 230, with a commonly used value of 150. Dunbar’s number states the number of people one knows and keeps social contact with, and it does not include the number of people known personally with a ceased social relationship, nor people just generally known with a lack of persistent social relationship, a number which might be much higher and likely depends on long-term memory size.

Dunbar’s number was first proposed by British anthropologist Robin Dunbar, who theorized that “this limit is a direct function of relative neocortex size, and that this in turn limits group size … the limit imposed by neocortical processing capacity is simply on the number of individuals with whom a stable inter-personal relationship can be maintained.”

The first idea is that there is a finite number of relationships — 150 or so — that any person can maintain at any given time. Note that Dunbar’s Number specifically excludes ceased relationships (“My ex-girlfriend from high school”) or casual acquaintance (“We’re Facebook friends.”) We’re talking about people you know personally, keep in touch with, interact with, etc. The key phrase for me is “persistent social relationship”.

The second idea — from Robin Dunbar — is that this limitation is a function of biology: the size of the neocortex. In other words, it’s kind of a hard limit. There may be individuals who are better than others at maintaining relationships, but we’re not talking orders of magnitude here — some human being who can maintain 50,000 interpersonal relationships, for example.

The inference I draw here is that most of what service providers call “relationships” is actually not a relationship. It falls more into the casual acquaintance arena, or into the area of ceased relationships. This is particularly true in real estate, where an agent might work closely with a seller for six months, establishing a close working and often personal relationship, and then go seven years without hearing a peep from him.

My Hypotheses in 2012

From that, I came up with three main hypotheses about real estate brokerage.

  1. An agent can only maintain a limited base of referrals and repeat business with past clients, since some part of the 150 relationships has to be taken up by family, friends, colleagues and current clients.
  2. A brokerage in turn can only maintain a limited number of highly productive agents, because each manager is limited to the 150 Dunbar Number. Quote:

    The theory of Dunbar’s Number would suggest that the smaller offices would have lower rates of sub-par performers, simply because the manager who is tasked with training, coaching, educating, and working with agents to maximize their productivity has enough slots in his Dunbar Circle to effectively manage the agents — or get rid of them and bring in new ones. The larger offices, in contrast, might have a manager who would love to do all of that, but simply doesn’t have enough leftover slots in his Dunbar Circle to do anything more than send out a memo once in a while to agents who never show up to the office meetings anyhow.

    That would point towards a strategy in which a large brokerage would intentionally reduce the office size to allow the manager to do his job effectively. The Swedish Tax Office has apparently embraced the idea and reorganized the workforce to limit each office to a maximum of 150 people. We also know that Gore-Tex embraced the concept, and limited its office and factories to a maximum of 150 people, building new ones when the number went above 150. And business has never been better, apparently, for Gore-Tex.

  3. In order to maximize productivity, a brokerage must limit the number of active client relationships per agent as well as limit the number of agents per manager, and engage in intentional distribution of client relationships so as to keep them under the Dunbar Number of each agent.

I noted that all three were perhaps not even hypotheses, but rank speculation. It was an interesting intellectual exercise on a Sunday afternoon, that was all.

I’m thinking it’s time to revisit it.

The Smart Reaction to Zillow

For the purposes of this thought exercise, let us posit that brokers now truly see Zillow as a fearsome competitor, “THE 900-lb gorilla of competitors” as Phillip Cantrell put it in his post. Whether that is fair or not is beside the point: if the brokers see things that way, then they see things that way.

Just about every sane response I have seen then moves directly to, “We must hold on to the client relationships” in some way. There are calls for higher service levels, for more personal touch, for tools and systems to let brokers compete against the might that Zillow brings to the table, etc. Individual agents everywhere are boasting that they have nothing to worry about, because they bring so much value to their clients, and have ironclad relationships with them. There are hundreds of variations, but boiled down to the core, it is, “We have relationships; Zillow does not.”

It’s a smart approach since study after study shows that agents actually generate most of their business from friends, family, past clients, and… in short, from human connections. While a few large teams have figured out how to work online leads effectively, whether from Zillow or Opcity or Redfin or their own websites, most teams and agents are still getting the lion’s share of their business from somebody they know, or knows them.

So let’s take it as a given, then, that once brokers and agents realize that the only way they can compete against the 900-lb gorilla is by expanding and strengthening their relationships, they will focus on that like a laser.

So far so good. CRM vendors are about to have the best year ever.

But… what about the Dunbar Number?

Real Relationships vs. Casual Acquaintance

As I wrote in 2012 (quoted in full above), most of what service providers call a relationship is actually not a real relationship. I think my lived experience over the past 8 years supports that conclusion. I get emails all the time from Redfin (because of a home valuation I did years ago) and somehow have ended up on the mailing list of dozens of brokers and agents. I don’t have a “relationship” with Redfin, nor do I have a relationship with any of those agents.

Dunbar himself defined a “stable relationship” as “the number of people you would not feel embarrassed about joining uninvited for a drink if you happen to bump into them in a bar.”

I have a relationship with one, maybe two, agents who helped me buy and sell my own houses in the past. And the one is because he’s also a gun nut, and a great guy, but even that is challenging now that I don’t live in Houston anymore. It’s not anybody’s fault; he has a Dunbar Number and so do I. We are both limited by the size of our neocortex.

Lord only knows I could do a far better job keeping up my stable relationships.

But let’s say that Dunbar was far too conservative, since there are academics whose research shows that maybe the true number is closer to 300. (Look up H. Russell Bernard and Peter Kilworth.) Even at 300, most of us are not simply work addicts living the hermit life doing nothing but schmoozing past clients. We have families and actual friends and colleagues and go to church and social clubs and volunteer at charities. Agents have relationships with other agents in the marketplace, or with vendors, or in REALTOR Associations. None of us are so one-dimensional as to fill up our 300 relationship slots with only clients and past clients.

Let’s say that the unusually driven and dedicated agent has 200 of the 300 slots filled with client-type relationships. (I think that’s crazy high, and I worry about that agent’s home life, but let’s go with that.)

Neocortical Limits to Transactions?

So here’s the question: how many annual transactions is that?

According to NAR, as of 2018, the median duration of homeownership in the U.S. is 13 years. The shortest median duration is in Las Vegas (where I now live), and that’s 7 years.

So if our workaholic agent lived and worked in Las Vegas, with 200 of the 300 stable relationships taken up with real estate, we’re talking fewer than 30 transactions a year.

Maybe if the agent also gets the buy-side from a listing, and all 30 are listing transactions and none of them are moving out of town, we’re talking 60 transactions a year.

That might be a hard limit, because the Dunbar Number is the result of the size of the neocortex. You can train an agent to be an awesome relationship monster, and give her the world’s greatest CRM platform. You can’t increase the size of an agent’s neocortex.

Ah, but Rob, relationships doesn’t mean just repeat business; it means referrals! So those 200 stable relationships can each refer 3 people a year, voila, you’re sitting pretty at 600 transactions, all from your sphere of influence!

True… but you can’t maintain 600 stable relationships. It is impossible. Something has to give. Meaning, some of those new referred clients become your new stable relationship, and someone you haven’t heard from in four years drops out into a past relationship, a casual acquaintance.

So a highly productive agent might be able to maintain 200 relationships at a time, and generate hundreds of deals from said relationships, but she can’t maintain relationships with those same 200 people. People will flow into and out of relationships.

Technology Helps… But Only a Little

A key corollary here is that technology cannot help that much. A great CRM system might let you fake it when you do hear from a client you haven’t spoken to in years. But if the relationship isn’t a real one, it’s not a real one.

Everyone who has ever done sales using a CRM has this experience, or something similar:

“Joe! How are you? So great to hear from you.”

“I know! It’s been years!”

“How are… (looking up the record)… Susan and the kids?”

“We got divorced three years ago….”

“….”

The real estate industry, particular agents and brokerages, have this faith in CRM systems that is… well… kind of a mantra. Coaches tell agents that their database is their business, and to have thousands of names and phone numbers and emails in their database. Agents then bang the phone in the daily “hour of power” to schmooze and fake a relationship that does not truly exist. They send out email newsletters on the regular, because relationships.

But you know what all of those technology-assisted things are? They’re more like the “social media engagements” that brands do, than actual human connections and stable relationships that the Dunbar Number talks about. People may be familiar with your name, or even your face, but they don’t have a real relationship with you. They’re not going to sidle up to the bar next to you uninvited when they run into you.

CRM is important. They do help, and enormously. But the point is that technology is no replacement for human connection, for real relationships. If that were not true, then Zillow and Redfin would have already eaten the industry. If those tech giants couldn’t do it, then chances are, your CRM isn’t going to let you do it either.

Technology has real limits.

The Implications in 2020

With all of that said, then, what are the implications (if any) in 2020 as brokers look upon Zillow as the competition?

I think my 2012 hypothesis still holds:

  1. Smaller offices (under 150 each, as per Swedish Tax Office and Gore-Tex)
  2. Managing brokers who are actively managing their Dunbar Number of agents
  3. Fewer more stable relationships per agent
  4. And active management of the Dunbar Circle for each agent.

Brokers who are reading along were nodding to #1 and #2: “I can do that. More expensive, but sure, I can do that.”

#3 and #4 are a bitch though ain’t they? Imagine telling independent contractors who hate being managed, “You have too many relationships; lose these seventeen here.”

As a result, my conclusion is that the future of brokerage is teams, particularly teams that are organized as W2 employee shops rather than 1099 independent contractor shops, where compensation is far more communal and far less “eat what you kill.”

Imagine:

  • Each team is limited to a maximum of 150 team members, including support staff; get bigger than that, and spin off another team.
  • Each agent on the team is limited to a maximum of 150 client/past-client/sphere relationships. (Probably less, since each agent has friends and family.)
  • Adding a new relationship means passing an old one to a different team member.
  • Since they’re W2, they don’t get much of a say beyond picking which relationships to keep and which to pass on.
  • The technology stack exists to maximize those 150 relationships, to distribute them with maximum efficiency, and to generate the highest level of customer satisfaction in order to create new relationships that can be distributed within the team.

A large brokerage, then, might be comprised of a dozen or more teams like these. You end up with thousands of agents, but the entire structure would be different… and consequently, the business model would need to adapt.

The irony of ironies is this:

A team like that, which maximizes the Dunbar Circle of its agents, is exactly the team that can also maximize servicing online leads… from Zillow. A broker structured to operate this way is exactly the partner that Zillow is likely looking for if you believe anything Rich Barton and Errol Samuelson have said thus far. Even if you truly believe that Zillow will eventually go all out and do full-blown brokerage, a brokerage like this is the first one that Zillow would acquire for millions of dollars. Ironic.

Or if you hate Zillow with the passion of a thousand suns, substitute Opcity, Redfin, Opendoor, Facebook, or Amazon instead. The point is that an operation disciplined enough to maximize relationships is disciplined enough to maximize online leads business.

Wrapping Up

The industry may actually be at a watershed moment today. It isn’t because Zillow brought Offers in-house; that’s really quite minor. It isn’t even that Zillow is now a Participant in the MLS, and therefore no longer needs to kiss anybody’s ass for data.

The industry might be at a watershed moment because the only thing it has to compete with is “relationships”, and “relationships” might mean far more than what coaches and inspirational speakers and sales trainers say they are. A Mailchimp campaign might not be a relationship. Having someone’s phone number might not be a relationship. Sending people thousands of “Just Sold” postcards might not be a relationship. Even seeing someone at a Client Appreciation Party might not be a relationship.

At least if you go by Robin Dunbar’s definition.

And there just might be a hard limit, based on biology, on how many relationships any of us can maintain at a given moment. Technology cannot solve that problem.

I do think there are multiple ways to try and solve that problem, and I look forward to seeing what my friends and colleagues come up with, as the industry has some real talent in it. And there are numerous corollaries and rabbit holes for all of us to explore in the months and years ahead. Just to give one example, if a past client from five years ago you lost touch with remembers how great you were, and refers his cousin to you… what is that? It’s not a relationship. Is that… brand? (To be explored in future posts.)

So for now, let me close by suggesting that a business based fundamentally on human connections ought to at least give a thought to human limitations as well. Not every past client is a relationship; sometimes, they’re just somebody that you used to know.

-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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1 thought on “Revisiting My Theory of Real Estate Brokerage”

  1. Thanks for the nod. Interesting that you should say “So far so good. CRM vendors are about to have the best year ever.” As we just rolled out MoxiEngage to all our affiliates last week. I know that was not your main point, but it did jump out at me. 🙂

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