In my previous post on Internet disintermediation, I argued that real estate is primarily a relationship business, and that the only real estate professionals who should fear the Internet are those who really, really suck at the whole client relationship thing.  For the rest of us, the Internet represents a big challenge, yes, but also a huge opportunity.

The Internet, in fact, is arguably the best relationship-building tool to enter the business in a long time, far better than carting pumpkins around at Thanksgiving, sending out fridge magnets, plastering our high school prom mugshots on shopping carts, or buying full-color ads in the local paper.  The only better relationship-building tools I can think of than the Internet are the really personal, high-touch ones, such as taking clients out for a meal, calling them on the phone, or sending them birthday cards.

The Internet excels as a relationship-building tool for at least four reasons, which — tadah! — all begin with the letter “T”!

1. Target
2. Tracking
3. Tweaking
4. Timing

The main purpose of much of our advertising efforts in this industry is to lay the groundwork for potential client relationships.  We want our prospective customers to see us in different contexts, to get to know us, to recognize our names and faces.  When they drop by our open house, we want them to say, “Oh!  You’re the dude that mails those helpful cards!” or, “Hey — I thought I recognized you.  Aren’t you the Realtor that’s always advertising in the paper?”  If we can establish at least an ephemeral relationship, we stand a better chance of getting the business.  Consistent advertising in numerous settings increases our brand awareness.

And that’s precisely why the Internet is such a great tool.  Let’s look at the three points above.

1. Target:  Advertising in the local newspaper reaches primarily a local audience — and that’s a good thing, because real estate is primarily a local business.  But there are prospective clients out there who happen not to get or read the local paper.  Perhaps they live across the country and are planning on moving.  They’re not going to find you in the local paper, but they may well do so on the Internet.  And if they do find you on the Internet, it’s often because they were specifically looking for real estate content.  My logs show that though there are occasional visitors who randomly stumble on my site (such as a recent one who was searching on MSN for “how to balance your checkbook powerpoint“), most of them come by to learn more about real estate, for example “Alan Dalton Zillow NAR” and “November 2006 real estate market values Silicon Valley.”  My presence on the Internet simultaneously reaches a broader, and yet a more focussed audience.
2. Tracking:  Quick!  Tell me how many people read your ad in last Sunday’s paper!  How long did they look at it?  30 seconds? 2 seconds?  Was there a part of the ad that attracted their attention more than another?  In the offline world, we have only very rough estimates of these metrics, like the circulation figures of the paper in which you advertised.  With the right tools, on the Internet you can slice and dice your audience’s interest nearly any way you like.  You’re getting a lot of readership for the articles you write on current market conditions?  Keep cranking them out! Nobody’s reading your regular recipe contributions?  Ditch ‘em!
3. Tweaking:  Do people respond better to an ad which describes your listing as, “Magnificent” or “Splendid?”  Do they seem to prefer from-the-street photos, or inside ones?  Even if you could easily get this information in the offline world, it would take you at least one advertising cycle to tweak the message accordingly.  Online, once you get audience feedback, you can change your message in minutes.
4. Timing:  Once your ad has run in the local paper, that’s it!  You’re not going to get much more exposure from that particular run.  That’s probably a big reason for the enduring popularity of real estate advertising gimmicks like putting pictures on buses and sending out fridge magnets:  these tools have a longer shelf life than newspaper advertising.  The same is true on the Internet:  unless you get sandboxed, search engines archive your content long after you’ve forgotten about it.  An article you wrote 18 months ago might pop up as a top entry on somebody’s Google search today.

So there ya have it…the Internet is our friend, not our enemy.  Far from cutting us out of the action, the Internet enables us to become better at building the relationships that are so critical to becoming successful.

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Patrick Kitano’s recent post on the Internet and outsourcing got me thinking about a pretty neat kind of outsourcing — the kind where you pass off some of your work to your clients, sometimes without compensation.
Client outsourcing is one of the drivers behind the Internet’s cost efficiencies. If a consumer can download copies of old checks from a bank’s web site, that means the bank no longer needs a department of people to follow up on requests for dated checks. It’s not that nobody is doing this job any more; it’s that the client is doing it instead of internal staff, and the client isn’t really being compensated for it either, especially when you consider how much bank fees have increased over the last decade.

Google does some very creative client outsourcing:

• Google Image Labeler: This is an entertaining, nearly addictive game, masking its real purpose, which is to provide labels for the millions of images Google has in its archive. Rather than spend millions on technology to scan the images and label them (technology which may not even be completely possible with what we have today), rather than hire several hundred new folks whose sole (and boring) job it would be to write labels — Google has simply outsourced that job to its clients! Pretty neat.
• Google search: While nobody outside the company knows Google’s secret sauce for ranking pages and relevance, we all know that part of it is analyzing incoming links. The legitimate (non-link-farm) links are generated by millions of real, live people who essentially “vote” on how good a particular page is by linking to it. Again, Google’s users are doing part of its job.

What does all this have to do with real estate? Quite a bit, actually — one of the growing current trends in real estate is client outsourcing. In the bad old days of data exclusivity, Realtors took clients around to see properties. Though that still happens a tremendous amount, there are a growing number of home buyers who take themselves out to view properties, thank you very much. Redfin didn’t invent this model, but they certainly have made a big splash about it, and they compensate their clients for doing some of the work by giving them back part of the commission.

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Realtor-haters and Internet-fearing-Realtors may not love each other, and they may not have much in common, but they do agree on one key thing: the Internet is the death knell of our profession, about to consign all of us to the same sad scrap heap of history on which travel agents were once summarily, and somewhat brutally, tossed.

It is therefore perhaps ironic that on this one issue, the only issue on which these two diametrically, almost pathologically, opposed groups agree, they are both wrong. Sorry, folks, the Internet ain’t gonna put us out of business, no matter how badly the first group wishes it would, and the second group hopes it won’t.

To both groups I say, in my best James Carville-inspired Clinton-esque campaign trail voice, “It’s the relationship, stupid!”

Before I explain, let me clarify what I don’t mean, in the interest of avoiding a winged-monkeys flame war.

• First, I don’t mean that the Internet hasn’t had, isn’t having, and won’t have a large impact on the way real estate business is done. Quite the contrary, the Internet has changed and continues to change the industry in many ways, most of them good for the consumer.
• Secondly, I don’t mean that an average Realtor, or a top-producing one for that matter, wouldn’t benefit from becoming more Internet-savvy. Quite the opposite — the rich efficiency-and-effectiveness-enhancing fruits of the Internet are there for all to feast.

So, what then do I mean by, “It’s the relationship, stupid!”

What I mean is this: the real estate business is not really about homes, and transactions, and escrows, and mortgages. It’s not about negotiation, and home inspections, and contracts, and deadlines. It is, instead, primarily a business of relationships, and of the dreams that such relationships can achieve.

When clients engage a Realtor to help them buy or sell a home, they are entrusting that person to guide them through what for most of them is the biggest financial transaction of their lives, a roller coaster of elation and disappointment, of happiness and sadness, of agreements and arguments, of satisfaction and stress. It is, in short, a relationship, and the success of the whole process depends to a large extent on how well that Realtor cultivates and manages that relationship.

Similar relationships are also found in other “intermediary” professions in which an agent acts on behalf of a principal. The extent and strength of that relationship is, I posit, directly correlated to the difficulty in disintermediating it.

Why has the Internet been so successful in driving the travel agent industry to near extinction? A big reason — not the only one, to be sure — is that most people never thought of their travel agent in the same way they did of their attorney, their Realtor, their accountant, or their private money manager. A travel agent was simply the person on the other end of the line who helped you buy a ticket from Peoria to Pretoria. The next time you called the 800 number, or dropped by the travel office, you would often deal with a completely different person. Consumers never really developed a deep relationship with travel agents, because the travel agent industry was not one in which relationships were key to being a successful intermediary, so when a cheaper, more efficient way came about to get tickets, consumers did so.

Back to the original question — will the Internet disintermediate Realtors? It might, for that relatively small percentage of folks for whom this relationship simply isn’t that important — the die-hard do-it-yourselfers, the inveterate Realtor-haters, or more benignly, investors who buy and sell frequently and simply don’t need the hand-holding.

For the rest of the population, those who appreciate the need for guidance, for counsel, for support — for the relationship — Realtors will always be around and needed.

Winged monkeys, go home, and please leave us alone.

Internet-fearing Realtors, take a deep breath. The Internet will not cut you out of the business, unless you deserve it, unless your client relationship skills are so bad that your clients prefer no relationship to one with you. If that’s the case, then you, my friend, have a much bigger problem than the Internet.

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I’ve done a bit more thinking on my previous post…

The “base-plus-commission” compensation model is attractive in many ways, but as Nadal correctly points out, the key difficulty may be in getting the seller and her listing agent to agree on what the “target” price is.

That may be because both parties are fixated on a fixed price instead of a range, and realistically, nobody really knows in advance what exact price a home is worth. So how about if we tweak the compensation model to reflect a price range?

Back to our hypothetical $1M home…we don’t know in advance whether the home is really worth $970,000 or $990,000 or $1,015,000. What we do know, however, is that the highest price at which it would sell pretty quickly and with minimal effort (the price that a monkey posing as a Realtor could get) is roughly $950,000.

So here’s how we do it: If the agent only gets the “monkey price”, she only gets monkey pay — let’s call it $2000. Her incentive commission is on a sliding scale, based on the final price she gets, along the following lines:

She gets 20% of every additional dollar she gets for the home between $950,000 and $975,000 and 40% of every additional dollar between $975,000 and $1,000,000 and 60% of every additional dollar thereafter.

To spare you getting out your calculator, here’s what the final compensation looks like:

With this scheme, the Realtor’s compensation is directly tied to her success. Notice how quickly her overall compensation climbs above that arbitrary holy grail of a 3% commission. If she can indeed get 15% ($150,000) more than what we roughly believe the home to be worth, she gets a cool 9.3% commission.

The lynchpin in this whole scheme remains the base price, and though reasonable people could certainly come to an agreement on this, Greg Swann points out how an unscrupulous agent could certainly fleece an unsuspecting victim.

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Mark Nadel’s recent paper has certainly provided a lot of blogger fodder!
While much of the excitement generated by his paper has been about buyers’ agents’ commissions, there’s a hidden nugget on the listing agents’ side. Nadel suggests that instead of the traditional 3%-of-price-per-side fee, how about using a base-plus-incentive model?

It would work something like this…a seller and her agent would agree on what the baseline value of the home is — say, $1M — and what the baseline commission will be — say, $10,000 — if the agent sells the home for that $1M. For every dollar above $1M that the agent gets, she pockets a large percentage, like 50%.

So if the agent is particularly talented (or lucky!) (or both!) and sells the home for $1,050,000, she would get a total commission of $35,000: the $10,000 base plus 50% of the additional $50,000.

Now the incentives are indeed truly aligned. Should the agent spend $2000 to stage the property? Only if she thinks that will increased its value by more than $4000. Should the agent recommend her client accept an offer of $1,005,000 on day 3? Only if she really thinks there’s nothing she can do to increase the offer.

Nadel acknowledges one very sticky point: how to get the seller and her agent to agree on what the baseline is. Get an independent appraisal? Zillow the property?

There’s one other sticky point he doesn’t mention: there isn’t a large broker in the country that would allow any of its agents to try something like this…which doesn’t at all mean somebody shouldn’t try it!

I propose a further twist to really align the incentives: let’s make the 50% deal go in both directions, up and down. So if the agent only gets $990,000 for the $1M home, her total commission would only be $5000: the $10,000 base less 50% of the $10,000 below $1M.

Any takers?

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As I continue to dissect Mark Nadel’s tome, he reiterates a favorite point of the Freakonomists: the current commission-based fee structure makes Realtors do things that might not be in their clients’ best interest.

An example of this mis-alignment of interests is that while a homeowner would certainly love his Realtor to spend an extra 20 hours to get an extra $10,000 for his home, a Realtor’s not likely to do so because the extra income from those 20 hours is paltry — $10.50/hr by Nadel’s calculations. (Nadel may need to check his math on this one; using his same assumptions, I get $4.50 an hour. Either way, the Realtor might as well be flipping burgers.)

For those Realtors who don’t look past the end of their noses and regard each transaction as simply a one-off deal, this is indeed a pretty damning indictment.

Successful agents, however, know that a solid business is built on long-term relationships with satisfied clients. If a past client indeed thought his Realtor had left $10,000 on the table, that would be the end of that relationship. No more future deals, and no more future referrals.

For agents who think long-term, however, the math goes something like this:

20 extra hours of work =
75% greater chance of doing another transaction with that same client in 5 years
+
75% greater chance of getting 1 referral a year for the next 10 years from that client.

No matter how you slice that one, that’s a lot of money the Realtor is leaving on the table by being shortsighted.
Ultimately it comes down to this…there are two kinds of incentives: short-term and long-term. If you emphasize the short-term ones, then, yes, a Realtor will look after himself every time. If you think long-term, however, a Realtor’s best interest will indeed be the same as the client’s.

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When you think you have something compelling to say to the world, better say it fast before somebody else beats you to it, and says it better than you could.

I have a lot of strong thoughts about how we currently do business and how the Internet is changing that. As it stands now, much of what we do, especially our rules about what we can and can’t do with MLS data, absolutely do not benefit the consumer, for the most part do not benefit us in the industry.

Todd Tarson beat me to the punch with a well-written, analogy-based explanation of many of these changes. I’ll chime in later with more thoughts, but for now feast on what he has to say.

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Weighing in at an impressive 77 pages and 394 footnotes, Mark S. Nadel’s recent tome on real estate commissions is not for the faint of heart. Since I’m skeptical about anything written about real estate by the Freakonomics economists I decided to ignore their advice and read Nadel’s piece about alternative business models (ABM’s) in real estate (RE) anyway.

I often find it best to use a grain of salt when digesting content from any potentially biased source — be it the conservative American Enterprise Institute-Brookings Joint Center (which hosts, and presumably sponsors, Nadel’s research) or the liberal Center for American Progress.

While Nadel is quite critical of NAR itself, he has a refreshing absence of the extreme anti-Realtor vitriol so common in writings of this type. His proposed solution to the problems he sees with today’s real estate industry is not, as one might expect of a conservative commentator, simply “let the market take care of it.” On the other hand, he does not propose, say, nationalizing the industry.
In all, it’s a good read when you’ve got some time on your hands. Starting here, I’ll post some thoughts on what he has to say.

Nadel’s hypothesis is pretty straightforward:

The traditional, straight percentage-of-sale residential real estate brokerage commission does not serve the interests of either home buyers or sellers.

His solution leads me to suspect he’s been reading Greg Swann’s blog:

The foundation of a new fee structure should have buyer’s brokers setting their own fees or negotiating with buyers, not relying on standard, default commissions set by sellers’ brokers in the MLS.

More thoughts later…

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It’s late — very late — and I don’t have the energy to look it over in depth now, but it looks like our Freakonomics friends — you know, the ones who believe it takes 20 hours to sell a home — are at it again.

In all fairness, this particular post is short and mostly alludes to a somewhat longer Brookings Institution paper which, at first glance, does seem to have a lot of meat in in.

None other than our very own Ardell Dellaloggia is mentioned in at least one footnote!

A lot of food for thought for Greg Swann and the others discussing alternative business models.

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