Real Estate at a Crossroads

by Gregory Charlop

  We will see a robust virtuous cycle where the top associates have the most impressive MLS track records and the best reviews. More folks will flock to those elite salespeople which will generate an even more impressive track record and a flood of positive reviews and the cycle will repeat. Success begets success.

  Real estate sales will be dominated by the few, and you want them on your team.

  Focus on top talent

  The old farm team model is broken, and you won’t be able to fix it. Don’t count on the top performers sticking around long enough for you to groom the next generation of high-achievers. It ain’t gonna happen.

  Unless you create a compelling reason for the top folks to stay, they’re going to jump to another firm. If that happens, you will lose.

  As the talented few come to dominate real estate sales, your firm’s model will have to shift to keep up. The old model of a constant cadre of superstars coupled with nurturing a farm team won’t cut it anymore.

  To put it bluntly, you need the top agents. Without them, you’ll be in for tough times. Therefore, you will need to reorganize your system to do whatever you can to attract the top salespeople even at the expense of losing your farm team infrastructure. The top agents are paying your bills; the underperforming folks are taking up desk space.

  Sure, some of your new agents might one day turn into superstars. Perhaps one day an agent who’s been mired in the third quartile of sales may bump up to the second. But that will take time, money, and luck.

  You might ask, “Why can’t we have both, top agents and a farm team?” The trouble is, the infrastructure needed to attract and retain top agents is almost 180 degrees opposite what you need to nourish and cultivate novices and underperformers.

  Why is that?

  To nurture your farm team, you need some sort of hiring or talent manager who can review all the applicants and determine whether they have the potential for success despite lack of a track record. That’s a unique skill! You also need a broker to provide legal coverage. Then you need to support these folks with advertising, mentorship, and significant technological resources—as well as more senior people who will always be available to provide them with work and tips. You might even want to make a big, beautiful office and conference room to provide these trainees with a veneer of success. In short, you will need to spend a lot of money to make these new agents successful!

  How do you pay for all the training, conference rooms, advertising, and technological support? High fees and a large cut of the commission. You give these folks a rich, nurturing environment, but you need to charge them for it. You’re a business, after all.

  What do the top performers need?

  Well, they’ll still need the broker for legal coverage. Some of them may want some assistance with technology such as a web page or CRM. And that’s about it.

  They don’t need all that much help. And, to be candid, they may not want it! They have their own way of doing things that works for them and they probably don’t want you to impose your system on them. What they’re doing is working, and you should get out of their way.

  They work hard and deserve to be rewarded. What they truly want is a flexible, inexpensive system that lets them keep their commission.

  Herein lies the problem. The newer folks need to be pampered and monitored. They need lots of advice and lots of stuff. And, they’re willing to pay for it since they know they won’t generate sales without all the help. Conversely, the top performers want an inexpensive, agile system that doesn’t interfere with their routines or their paychecks.

  The needs of the savvy elite agents and the underperforming beginners are so diametrically opposed, it seems nearly impossible to house them both under the same roof and deal justly with either camp. Skimp too much on services and supervision, and the newbies will falter. Build up a full-service shop with systems, support, and fancy conference rooms and you’ll scare away the best producers.

  What’s a brokerage to do? That’s easy: focus on the top performers. They bring in the business and pay the bills. Do whatever you can to keep those folks with your brokerage. Just a couple master associates will generate more revenue than legions of more mediocre salespeople. The 80/20 principle rules the day.

  You know what you must do to attract and retain the cream of the crop. Let them keep most of their commission and be available to help with some technological challenges. For example, you could help create a website or a drip Mail Chimp campaign; offer them tools like TLCengine, Porchd, Voiceter Pro, The Real Estate Flash, and a virtual assistant. But, for the most part, you should just stay out of their way. Don’t impose your systems or personnel on them. Let them chart their path.

  I know what you’re going to say. You reserve your highest charges for the newbies and bill the top performers a smaller cut of their commission. You charge a lower rate or cap your fees after a certain level of sales for your top people. Perhaps you even have secret deals with your elite performers. That’s all great.

  But, is that really enough to compete with the discount and internet brokerages that are springing up everywhere? I think not.

  The trouble is, you have high fixed costs: rent, building maintenance, utilities, branded advertising, your receptionist, that fancy photocopier, and franchise fees. What do your online competitors have? A website and a couple of computer programmers? The contrast couldn’t be starker. You have bills to pay that they don’t.

  How do you cover your costs?

  Let’s be honest. You aren’t making that much from your novices and lower quartile agents. Sure, you charge them a higher rate. But, a large percentage of zero is still zero. You need your racehorses. And you have big bills to pay for the whole infrastructure you’ve set up to train the apprentices. You can only reduce your charges to the top folks by so much if you want to keep the lights on.

  With all of your expenses, you’ll be hard-pressed to keep your charges in line with the lean, mean, online brokerage machines.

  You’re also in a bind in terms of flexibility. You’ve created a magnificent system of CRMs, websites, integrated pathways, etc. These are a great help to the novice, but they might tie the hands of the pro. Do you really want to impose bureaucratic hurdles on your rock stars?

  To make this business model work, you need to keep your costs low and your systems simple. The plush conference rooms, expensive photocopiers, and prestigious corner addresses won’t help you. They just drive up your expenses. At the same time, you need to avoid excessive rules, and needless one size fits all solutions to problems which will snuff out the creativity and individual prerogative of your elite performers.

  In short, you need to focus like a laser on your winners. To do this, you may need to fundamentally restructure your business model to make your company appeal to the cream of the crop.

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  A Quick Aside: Tragedy of the Commons (Tragedy of the Novice Agents)

  Humor me for a brief diversion.

  You may ask: “if I just focus on recruiting top talent and neglect novice agents, what happens if every other broker does the same thing?” If every company only wants the best-established players, who will cultivate and train the next generation of associates?

  Fair question.

  The trouble is that the trainees aren’t economically productive now, but the future of real estate depends on them. Right now, the newbies cost money to train, require an expensive infrastructure to nurture, and rigid systems to keep them on the right path. They need mentors and leads. And they aren’t generating revenue.

  Yes, most will fail or go on to mediocre careers, but not all. The fresh-faced kid of today who doesn’t know the difference between an APR and the LTV may very well be the top agent next year. But, if everybody snuffs out their training and mentorship programs today, she’ll never have the opportunity to become a successful salesperson.

  It’s a tragedy. Better yet, it’s a Tragedy of the Commons.

  The Tragedy of the
Commons (TOC) is a classic demonstration of game theory. First described in 1833, the TOC explained why we as a society tend to ruin collectively-owned resources.

  Consider this example. Imagine that you are one of many cattle ranchers adjacent to a large community pasture. The pasture is a public good - nobody owns it, and it benefits everybody. The field is perfect for grazing cattle, and anyone can use it. The pasture is loaded with lots of tender grass for food and streams for refreshment; it’s a cow paradise.

  But, you’re in business to make money. Since the more cows you raise, the more money you make, you have an incentive to keep buying and breeding cows to put on the pasture. The trouble is that all of your competitors have the same incentive.

  As a result, you and all your competitors keep loading the pasture up with more and more cows and eventually the pristine place is swamped with hungry bovines and ruined. The public good is destroyed by overuse and neglect.

  It was in the rancher’s collective long-term interest to maintain the pasture and not overgraze it. After all, if they each used the pasture at manageable levels, the pasture would be around for all of them forever. But, it was in their individual best interest to jam the pasture up with as many of their own cows as possible to maximize their short-term profits.

  Moreover, if one rancher decided to be a team player and limit her use of the pasture, how does she know that the other ranchers will follow suit? In a valiant effort to protect the future, she may restrict her use of the public good, only to have her greedy competitors force even more cows on the pasture. After all, the more cows they have, the more money they make. As a result, unless ALL the ranchers cooperate to save the pasture, the place will still get destroyed and the good folks will just lose out sooner.

  How does this relate to newbie real estate associates? Cultivating new real estate associates is like tending to the public pasture. Creating and maintaining a large pool of talented real estate salespeople is in every agency’s long-term best interest. However, focusing on the newbies offers no short-term benefit at all. Worse, if you spend time and money training new folks and your competitors don’t, you might be squandering your precious resources only to have your top apprentices leave and set up shop with an online brokerage which didn’t spend a dime training anyone!

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  Some low-cost options

  The Tragedy of the Commons is a tough problem to solve. If you do decide to take on new agents, one way to help them might be through specialization. You won’t turn novices into pros overnight, but you might be able to train them to master a specific niche within a reasonable time. Throughout this book (particularly in Chapter 1 about real estate agents), I offer some suggestions about how to specialize.

  Two other options to pay it forward and help the community of new real estate associates are pro bono help within your firm and apprenticeship matchmaking between novice applicants and your top agents.

  Pro bono help within your firm might take the form of regular lectures, meet and greets, office hours, and access to your library of educational materials. The idea here is to offer a helping hand to folks just starting out without structuring your business around them. In other words, you can pursue a low-cost strategy needed to attract the top agents and just add some useful teaching (for free) that might benefit novice associates. You’ll feel good knowing that you’re supporting the next generation of associates, and you’ll generate some great PR. The newbies will appreciate you, and your brokerage will be a destination for those agents once they come of age.

  Matchmaking works by connecting interested new agents to willing experienced mentors. It is a true apprenticeship. You don’t structure your systems around the newbies—you keep costs low and routines flexible. Instead, you create an optional sign-up form that helps interested novice volunteers sign up to ride along with your top dogs. This way, you’re enabling motivated freshmen agents to find willing mentors without structuring your entire business around this process. It's inexpensive, easy, and will give you some great PR.

  Not every brokerage will be able to lock down the top agents. After all, there are only a few top agents around, and competition to sign them will be fierce. If you’re unable to recruit exclusively top agents, fear not! Here are two other strategies to help you win the marketplace of the future.

  Alternate strategy #1—The Long Tail

  The first strategy is to focus on the long tail. Amazon.com and Netflix used this strategy to win the market and crush their brick and mortar competitors. Here’s how it works. Imagine it’s the 90s and you want to rent a video. If you wanted a top movie or new release, you were in luck. The shelves of Blockbuster stores were busting with chart-topping new movies. But, if you wanted to see a rare, old, niche, foreign, or campy movie, your odds were not too good. After all, Blockbuster only had so much shelf space, and most of that was consumed by the new releases. They had very few older or obscure titles. Those older, rare, non-mainstream movies are known as the long tail.

  It’s true that the top 20 movies were the best sellers, but there was considerable demand collectively for movies in the long tail. That was the opening for Netflix. Netflix cornered the market on the long tail. Did you want to see that surfing movie from the 60s? That campy sci-fi flick from the 50s? A documentary on the history of Thailand? You had to go to Netflix. Netflix captured the video rental market by owning the long tail.

  Amazon followed the same strategy with books and music. Since they were online and offered nearly every book and album, they captured the long tail and ultimately snuffed out iconic brands like Borders, Tower Records, and Virgin Megastores.

  You can do the same with real estate. Sure, single-family homes, condos, and townhouses represent the bulk of real estate. But, you can focus on the long tail.

  Own the niche! Corner the market on vacant lots, four-plexes, short sales, cloudy title sales, distressed sales, international buyers, senior living, mixed-use, or vacation property. Encourage your associates to specialize. Find folks who like bankruptcy sales and RV parks and get them on your team. Train them! They’ll stay with you because your brokerage specializes in just the stuff they like.

  Control the long tail. You may not sell the most 3/2 single-family homes, but you might capture everything else.

  Alternate strategy #2—The Boutique Full-Service Brokerage

  Make your brokerage a destination.

  Throughout this book, I make the claim that the massive physical assets of traditional brokerages are liabilities. The corner offices, impressive conference rooms, and beautiful office furniture are expensive to maintain and drag down profits. You need to take a large cut of your associate’s commissions just to pay rent. How can you compete against an internet agency like eXp or Purplebricks with their low overhead?

  Here’s one way you can.

  Tony Vitale, president of residential real estate consulting service Talk2Tony, advocates a concept he calls real estate 3.0. The idea is to turn your physical liabilities into an asset. Convert your office into a place agents want to work and clients want to frequent. Transform your brokerage into a destination!

  Offer your clients more than just a real estate transaction. Help them remodel their homes by turning your office into a showroom. Hold free classes on remodeling, mortgages, and short sales. Go from a real estate transaction office to full-service hub for real estate needs. Make your brokerage a place clients want to visit even after they buy their home. Here’s Tony’s roadmap:

  “As you know, every home we sell affects roughly 40 local businesses—cleaners, landscapers, painters, carpet stores, kitchen renovation centers, handymen, swimming pool installers, deck people even doctors, dentists and attorneys. You get the picture.

  We real estate agents have the first contact with new residents coming into a community, and our connection is valuable. As the industry enlarged, it left behind that valuable relationship. Real estate agents once provided the community a conduit between the new homeowners and
local business owners—the “Welcome Wagon” of the Real Estate 1.0 era.

  We once again have an opportunity to monetize all those valuable warm and fuzzy connections in a new and potentially highly profitable way. In my vision, Real Estate 3.0, the brick and mortar office will serve as a hub, bringing together our buyers and sellers with our community. Our offices will become a facility for merchants to display and merchandise their products.”

  Tony continued, “Consider this: on Saturday morning a local kitchen renovation or interior design merchant might hold a demonstration on how to re-tile a backsplash or choose curtains for your home. Our real estate office can provide the demo space, and both parties can send out invitations to their clients as well as the public. Ideas like this will be the basis for utilizing the real estate office as a hub to celebrate homeownership. The merchant gains access to new potential clients, and real estate agents establish their offices as a place for the public to view them as a holistic environment that cares for their home needs before, during and after the sale of a home.” Here’s a link to my complete interview with Tony Vitale.

  As a boutique, full-service brokerage, you can and should position yourself as a pillar of the community. Show that you care about your neighborhood and join a philanthropic cause.

  When I asked leading social entrepreneur David Ament how a brokerage can engage its salespeople in volunteering, he suggested, “The firm could say, “we would love you to participate in a charitable cause. Go out there and put something together for the community.” It’s great PR, and it's not necessarily costing you a dime. The agents get to put their face out there, which is a big part of their job as independent marketers and salespeople. And, of course, if they're hanging their shingle under your brokerage, they're getting you good press. That one decision, to request agents to participate, yields an exponential return on investment and benefits society. You’ll all enjoy lots of positive attention.” Read the full David Ament interview by clicking here.