The New Real Estate Model - Part 3.2: The Firm

A Real Estate Firm based on the legal model could have many looks, as do actual law firms.  But for a starting point I am going to lay out an achievable structure that will accommodate the greatest majority of agents.  The firm would consist of three distinct levels as well as an administrative staff.

1. In the top level are the named agents: let’s say Ms. Patrick, Mr. Dunne and Mr. Purcell. These are the founders of the firm and generally speaking they are all three tremendous rain makers. They have a large and active client base from which they receive a tremendous amount of referral business.  It is also quite likely that one or more of them has a strong presence in a niche area.  They are not only the face of the firm, but it is their style and personality that colors the firm’s corporate vision.
2. Under the named agents are the partner agents.  It is within this level that we see so much of the communal benefit that Mike Farmer has written about.  Similar to the named agents, partner agents bring in a lot of transactions.  They also may have areas (geographic, industrial, network, etc.) of specialty.  These agents have reached a level reminiscent of tenure.  They share ownership of the firm as well as decision making duties and have a say in its direction.
3. The associate level is where the greatest number of agents are found.  From fresh beginners to agents with years of experience.  The associate level is also the workhorse of the firm.  Associate agents are not only working hard to take care of clients assigned by the partners, but are at the same time trying to impress the partners with business they generate themselves.  The presumed goal of an associate agent is to be made partner.
4. Finally, there is an administrative staff which grows as the firm’s growth dictates.  It could be as simple as one administrator or as complex as a multiple level staff covering everything from answering the phones to creating the marketing to processing the transactions and more.  Staffing might be the one place where someone looking for part time work while deciding whether to make a career change into real estate could get some exposure.

Responsibilities and Remunerations

The Associate
The most significant accumulation and degree of change versus the outdated brokerage model can be seen at the associate level.  First and foremost, associates are employees and as such receive a salary.  There is no more winking at the independent contractor rule by the IRS and no more tax advantaged hiring practices.  Responsibility, accountability and liability for associates as employees rests with the firm.  The hiring process will by necessity be focused and purposeful.  Associates will have the luxury of choosing between competing firms with various personalities, numbers of employees, areas of focus and methods of billing clients.  Of course, top firms will be sought after by many and the competition may be great.  This competitive edge will improve the firms as well as the associates and serve the clients who benefit from that honing process.  No doubt there will be some associates who do not wish to participate in such a competitive market and there will be firms that cater to them as well.  Firms that practice real estate from a different perspective.  Such boutiques, as well as the career path of solo practitioner, allows for anyone to make the choice and enter the field of professional real estate agent.  How long they stay will be up to them.

The associate life at a large real estate firm is a tough one.  They are expected to put in 60 or more hours per week.  There may be training sessions or mentoring programs (as the individual firms decide), marketing duties and clients assigned by the partners.  They may be asked to assist partners or other associates with specific transactions.  On top of that the associate is working hard to generate their own client base as this is one of the primary talents evaluated when an associate is up for partner.  An agent at the associate level receives a great deal of on the job training and a wide variety of experiences.  They receive a salary and possibly benefits.  The firm is liable for their development and their actions; the associate is accountable to the firm.  In the parlance of law firms their job is measured in billable hours.  I suggest that real estate firms abandon the practice of billable hours and keep the focus on value added goals.  I can imagine some variations though: minimum required monthly marketing hours, home viewing hours and so forth.  The firm may use this as time management training and even require the associate to document their days the way a lawyer must.  The difference: the agent is not documenting in order to grow the clients’ billable hours but rather to assure they are doing the proper activities while on company time.

When all is said and done, not all associates will make partner.  In fact at some firms the percentage that make partner may be quite small.  Those that do not move up may be asked to stay on as associates with some type of defined pay structure or they may be asked to leave or they may resign and test their ability at another firm or out on their own.

The Partner
Partners are part owners.  Real estate firms may be set up as corporations, LLCs, LLPs or sole proprietorships.  The partners receive a percentage of the profits as owners and this has significant repercussions.  Again, the wink at independent contractor status is eliminated.  More importantly, the desire to create a firm with profits and the desire to be part of a firm with profits lead to better firms doing better business for their clients.  Generating enough profits to share means the firm is creating satisfied clients and doing so in an efficient, price conscious way.  Pricing will probably be based to a large degree on the firm’s reputation for results.  That reputation is created and nurtured by the partners.  The partners will most likely meet at regular intervals to make decisions on all matters firm related.  This relieves any one or two people from carrying all the weight or spending too much time on running the firm instead of generating business.  If you will remember, this is one of the main set-backs to the Super Team model.

Partners may be general or they may have areas of interest and specialty.  A small firm may take care of all manners of real estate or they may specialize in just a few areas or niches.  On the other hand, a larger real estate firm might have have specific divisions that handle residential, commercial or investment.  There could be divisions based on type of marketing (online, door to door, network, etc.) or they may have divisions broken into geographical areas.  It would depend on the nature and proficiency of the partners as well as the size and vision of the firm.  Partners would continue to generate business as rain makers and have the added benefit of associates to help them handle the leads.  As previously mentioned, partners would receive a percentage of the firm’s profits.  On top of this they may receive a salary, a percentage of the transactions they themselves bring to the firm or both.  Their share of profits may be a fixed percentage or based on the percentage of business they generated.  It might also be influenced by the responsibilities they take on over and above real estate transactions such as training associates or creating marketing strategies.  It might be any combination; the possibilities are almost limitless.

The Named Partner
The named partners will generally be the creators of the firm.  Being named a partner may also be a reward to an existing partner agent or a carrot used to entice a top producing partner from another firm.  The named partners, besides the cache, may receive a higher salary or percentage of profits.  Named partners, as such, also serve as the “face” of the firm.  They are the corporate personality as well as the impetus behind the vision for the firm.  This uniqueness based on the named partners (and to a lesser degree on the partners in general) serves to further differentiate firms from one another; providing clients as well as employees more choices and a greater fit for their individual needs.  A model such as this fosters diversity in the name of the marketplace rather than requiring it by inefficient mandate of law.  Perhaps of greatest benefit to the general public: named partners have a personally vested interest in the level of professionalism and the reputation of the firm.

The Others
Beside the three main levels of the firm there is most likely a support staff.  Given our current licensing laws much of the staff would probably need to be licensed themselves.  Some, if not most, staffing needs can be outsourced so as not to drain so much of the partners time.

There is one other position a larger firm may fill: that of managing partner.  This person is designated as the partner that handles much of the staffing and administration aspects of the firm.  They are not brought on due to their rain making ability so much as their organizational skills.  This would create even more opportunity for the named partners and all the partners in general to focus on business.  I am not a fan of our current licensing laws, but one requirement of our model is that it be achievable quickly.  As current law requires a brokers’ license, that need would also fit nicely in the arena of the managing partner.

In the final section on Wednesday, I will talk about one possible path for implementing our new model.

The New Real Estate Model - Part 3.1: The Solution

This final post (Part 3) grew rather lengthy.  Considering the fact this has already stretched into a three-part series, I chose to extend the series to five rather than attempt a conclusion of  somnolent proportions.  If brevity is the soul of wit, creating a new model for real estate is witless.  So grab a cup of coffee or your favorite bagel and settle in.  Fairly warned be thee, says I…

The Preamble
In Part 1: Disbrokeration, I looked at the problems that exist within the current, brokerage-based real estate model.  The shift to a 2.0 world is making the traditional position of broker obsolete.  The tax advantaged laws that helped create this model now create a drain on the industry and the level of professionalism is widely perceived to be at an all time low.  This is a topic of some concern, as the most popular response to the current state of affairs is more legislation, more licensing and more efforts to validate capability through pernicious membership rather than actual results.  As Big Al said: “We cannot solve our problems with the same thinking we used when we created them.”

In Part 2: Super Teams, I looked at a natural progression that is already occurring in our industry: Real Estate Teams.  I took that notion further and looked at how a Super Team might be constructed.  There was also a link to some great writing on the concept by Mike Farmer.  There are some problems with the Super Teams though.  They do not go far enough in dealing with issues of independent contractor status, education, professionalism and image.  Their success depends upon either a self-less communal work effort or a strong, unique figurehead to hold all the pieces together.  The former is not realistic across an entire industry and the latter is too uncommon.

The Outline
It is time to outline a new model for the real estate industry.  I believe the following to be a reasonable list of minimum expectations:

• The new model should account for the natural desire in many people to achieve.  It might even embrace the concept that a great many people enter the sales profession because of the unlimited income potential.
• The model should recognize and reward agents who generate leads.  No matter how well a firm may treat their clients, in order to survive as a firm they must first have clients.  Our new model must center around these rain makers or RMs.
• While imparting no barrier for entry into the industry, the model should not indulge what I call the water cooler whiners either.  It should not accommodate, never mind encourage, part-timers as the current system does.  Serious professions deserving of respect are not, by and large, part-time.
• As a byproduct of its very design, the new model should encourage education, training, dedication and professionalism.
• In the interest of self-preservation, the new model should not rely on industry advantaged tax laws, specious employment relationships and Rotarian Socialism for its existence.  The idea of a churning work force must be the antithesis of our new model.
• Finally, and most important to universal portability, let’s create a model utilizing our existing skill set.  By which I mean it should be achievable relatively quickly; perhaps even a paradigm from another industry that already enjoys success and simply needs to be lifted, tweaked and laid in place.

The Solution
Working the list backwards, is there an existing industry made up of skilled professionals acting independently within the framework of a large firm?  Is there a model that possesses the benefits Mike Farmer talked about in his Team concept while adhering to our outline above?  And if so, is the model successful and easily copied?  The answer to all three questions is yes: the law firm.

Law firms provide a model that the real estate industry should adapt and copy.  Within that model are quite a few options, as not all law firms are organized the same way.  But that is a good thing.  If I were to add one thing to the outline of requirements listed above, it would be this: our model should allow for agents to work with as much free choice as possible.  They should be able to work completely alone if they choose, or within small boutiques or as part of a large firm.  I am not advocating a mandate, but rather suggesting a model to improve the industry as a whole, all the while based on a structure that can be widely accepted.  Now it is true that lawyers as individuals have been the butt of jokes going back at least five hundred years, but law firms themselves often command a great deal of respect.  So let’s take a closer look at the benefits.

The Benefits
By using the legal profession model as our model, we import some added benefits beyond ease of imitation and number of options.  The structure, which I will lay out more specifically in the next post, by its very nature creates a need for professionalism.  The reputation, and by extension success, of the firm is based on how it treats its clients.  Professional behavior, knowledgeable agents and ethics that are beyond reproach become paramount.

Within the firm there can be areas of specialty, the firm itself may specialize or the firm might be a “general practitioner”.   Whichever the case, the sum is greater than the whole of its parts and the best aspects of the Super Team are borne out minus the pitfalls of our current brokerage system.  The personalities of the firms differ and this creates diversity for agents and clients.  Accountability is clarified… and this may be one of the most important long term benefits of them all.  Dual agency is an embarrassment to our industry.  Can you imagine the same lawyer representing the plaintiff and the defendant!  A law firm very, very rarely represents opposing sides in the same case, even if different individual lawyers are doing the work.

Adopting the law firm model adds a competitive edge in client relations as well as hiring and that hones the skills of the entire industry.  It abandons the independent contractor model and requires no tax loopholes for its success.  Because salary comes into play now instead of pure commission, this model also creates some stability in an industry notorious for its roller coaster nature.

In the next section, posting later today, I will discuss how such a firm may be organized and clarify the specific positions which will lend support to the benefits I have outlined above.  This will be followed by the final section (I promise) where we look at some ideas on how to implement this plan.

Are You Making Music?

I recently attended a birthday party with my two beautiful boys (yes they are the most beautiful boys in the world and no, I am not biased).  The birthday guest of honor received a great many gifts and it was lots of fun.  Save for one interesting observation… an odd note that just might reflect a growing problem many agents face in real estate.  But I am ahead of myself.

In particular, the boys all gathered around a video game (I think it is called Guitar Hero) that comes with drums and a guitar.  You put the DVD in and the TV provides music and a video while the boys watch a visual cue telling them when to strum a chord or bang a drum.  Anyway, they all jumped in and so did I.  (Little kid at heart still…)

Now here is the interesting part.  I did well at that game. I did well because of my athleticism.  I still have very good eye-hand coordination and I pick things up pretty quickly.  In hindsight, maybe that is not so interesting.  But let me add this: I am completely tone deaf and possess no rhythm whatsoever.  My ex-wife used to laugh at me when I clapped my hands or tapped my foot along to some song.  Apparently I was never on the beat.  I tried to tell her I was keeping with the “back beat”… but she wasn’t buying.  In any case, I was the source for a good deal of amusement.  Now imagine: a guy with no beat excelling at a game involving music.

(Stay with me because I am going to tie this all together in a moment.)  A day or two later, I catch an episode of Gene Simmons’ Family Jewels on cable.  If you have not seen this you are missing out on insights from one of the greatest marketers of our time.  In this particular episode Gene’s son, along with some friends, challenge Gene to this very same video game… and kick his rock & roll butt.  Gene decides this is not right.  So he calls his buddies Tommy Thayer and Eric Singer (yes, those are the actual members of the band KISS) and together they challenge the kids again.  The kids even agree to use a KISS song on the DVD.

Guess what?  That’s right - the kids beat Gene Simmons and his KISS band mates in a game based on a song made famous by KISS!  How is this possible?  They lost a game playing computerized instruments to their own music.  You see the problem now, right?  The computer game is about music, but does not capture the essence of music itself.  I can learn to bang on a drum because I have great eye-hand coordination.  The kids can learn to beat the game through sheer repetition.  But not a one of us is making music.

You see, you can be someone who masters online networking, social media marketing, blogging and whatever other computerized instrument you might find out there.  Or, you can be Jeff Brown: the Mozart of investment advice.  You can be Brian Brady: the Elvis Presley of marketing.  You can be Russell Shaw: the Rolling Stones of listings.  Just remember this: in the end, to be an actual musician, you have got to get in front of people and you have got to play music.  I think it was Beethoven who said: “You have got to sit down at the piano and skin some cats.”

The New Real Estate Model - Part 2: Super Teams

In Part 1, I discussed the concept of Disbrokeration; some of its causes and effects. When I originally wrote about Disbrokeration I thought I had a pretty good idea what the next iteration of the industry would be: Super Teams.  This type of development is not new and successful Super Teams abound right now.  For me it seemed the logical next step in a 2.0 world where the Brokers have lost a great deal of their function.  Having said that, I see some flaws with Super Teams.  Especially in their ability to transcend a relatively common problem faced by many self-employed entrepreneurs.  My purpose here is to discover a model that will not just work, but work for the majority.  Let’s look at the pros and cons of the Super Teams and in Part 3 of this three-part series, I will share a model that I think may best serve the future of our industry.

Basic Real Estate Teams
Agents may have more than one reason to create a team in real estate. Some may do so for geographical reasons, some may do so to create multiple streams of income.  It can even be done simply for social reasons.  But the primary reason to create a team is economies of scale.  Simply put, a well managed team can be more efficient through intelligent design and effective division of labor.

Gary Keller, in arguably the best book ever written for real estate success: The Millionaire Real Estate Agent, discusses the team concept as a matter of course.  It is simply a requirement for reaching the millionaire level.  This is due to the economy of scale mentioned earlier.  Mr. Keller’s point is that one person alone cannot see enough clients, list enough homes and work with enough buyers to achieve a million dollars in income.  One simply cannot carry the work load necessary for such a goal.

Others have written on the benefits in creating teams.  Mike Farmer looked at it from the perspective of geographical and technological symbiosis rather than a purely profit driven necessity.  I think I do Mr. Farmer no disservice when I summarize his thoughts as: the sum is greater than the whole of its parts.  While I agree with the conclusion of Mr. Farmer’s thesis, I do not agree with its premise.  Bringing together various people to create a team for the betterment of everyone involved is lofty to be sure, but not realistic on a grand scale.  Communal enhancement is not the biological impetus upon which most of us base our actions.  There are a great many examples of people coming together to work as one group for a higher ideal, but there are even more examples of those same groups coming apart under the strain of a more basic drive: greed.

Greed
The point is, ladies and gentleman, that greed — for lack of a better word — is good.
Greed is right.
Greed works.
Greed clarifies, cuts through, and captures the essence of the evolutionary spirit.
Greed, in all of its forms — greed for life, for money, for love, knowledge — has marked the upward surge of mankind.
Gordon Geckko in the movie Wall Street

Our Goal Model Defined
Yes, greed must be accounted for if we are to design a blueprint for the industry as a whole.  Even more importantly, we must acknowledge the premier ingredient in creating real estate success: lead generation.  The broker is no longer germane.  The ability to create leads is THE most important factor and defines the primary actors in the model that will take us forward.  But we are looking for more.  If we wish to create a model for the future, let’s charge it with an even higher level of responsibility.  Let’s create a model that also rids the industry of loafers and under performing “shoe salesmen“.  Let’s create a model that sustains its growth by success rather than law.  Let’s create a model that generates its own need and reward for education.  Let’s create a model that allows any to enter, but demands dedication and professionalism for success.  Let’s create a model without help from rigged tax laws and a “loose” interpretation of independent contractors.  Finally, and most important to universal portability, let’s create a model that is achievable now and with our current skill sets.  The Basic Real Estate Team model fails right from the beginning.  It takes into account almost none of our needs and few of our desires.  What about Super Teams?

Super Teams
They look like this: one or possibly two agents are the Team Leaders; they are the Rain Makers (RMs).  Beyond the RMs there may be nothing more than a part time administrator; or there may be multiple buyers’ agents, listing agents, lead coordinators, customer service managers, marketing directors and so on.  What makes them unique is the fact that they all work on the RMs’ team and directly for the RMs.  They may bring in some business of their own (and the splits on that business may be higher) but the primary responsibility of those that work on the Super Team is to benefit the RMs.  The entire team exists to enrich the RMs; to help them in their mayoral marketing - to help them become mayor for life.  Super Teams do allow for change.  If someone on the team decides they can be an RM too, they are free to start their own team (and well trained for it too).  But for a great many, the idea of enjoying the profession of real estate without all the messy marketing and concerns over a commission lifestyle makes the Super Team a cozy home.

This model certainly accounts for the greed aspect and literally defines the importance of lead generation.  It also quite adequately rids us of loafers and water cooler whiners (RM’s would have short patience for someone not pulling their weight).  After that though, this model begins to fall off.

The Problems
It rewards education, but only to the degree that the education benefits the RMs.  The Super Team model also suffers from our current “loose” interpretation of what an independent contractor is and continues to muddy the waters of accountability.  The Super Team is also easily susceptible to internecine battles and requires a tremendous figure head as RM to hold it together.  Which leads us to a problem usually overlooked until it is too late.  Often referred to as The Peter Principle, it is what can happen when someone moves from their position of success to a position of managing that at which they were successful.  Being an RM is a highly skilled and deservedly well paid achievement.  But reaching that lofty height in no way ensures you will be successful running a team.  The skill set is different.  In Mr. Keller’s book he suggests that you hire an administrator who will eventually oversee the employees, do the hiring and firing and basically run the business. This makes sense in a small, one man operation that is expanding.  But a well paid assistant is hardly the solution to running a large firm.

At its most basic level: a Rainmaker needs help in handling all of the leads they generate.  Yet by taking on the required help they must divert their time and some portion of their rainmaking to management.  This is, in the end, still a self-employed entrepreneur… but with a growing staff.   Either the model falls under its own weight or the RM morphs into something unintended and unproductive.  In either case success leads to more hours and less enjoyment for the Team Leaders that began as Rainmakers.  This is an unlikely proposition on which to create a new business philosophy and its success is most probably not exportable beyond a select group of people.

A Fix?
One possible solution for the Super Team model is to refer all of the leads out to other agents.  Maintain no overhead and no employees other than a coordinator to track the leads.  I submit, however, that the referral fees currently paid are not large enough to justify the work and expense.  On top of which, at this point you are a Rainmaker who is coming dangerously close to being simply a lead wholesaler.  Our goal was to create a model of success within the real estate industry going forward.

So, our problem continues.  The idea of a broker becomes archaic.  As information becomes more readily available there is a natural progression: middlemen (brokers) go from providers to gatekeepers to restrictors (chokepoints as Greg Swann calls them) and eventually they just become unnecessary.  Yet the sole entrepreneur atop a Super Team still suffers from many of the existing problems and struggles under the weight of their own success.  We need a new model.

Next time: An Old Tool for a New Problem

Go Figure

On the radio over the weekend, they discussed a survey that had come out about gas prices and people’s habits.  It was reported that 20% of those responding said they would drive 10 miles out of their way to save 5 cents per gallon on gas…

For those of us that are mathematically disinclined, the average car would require an 80 gallon tank just to make that little investment break even.

For me, that survey response is not the scary part. The scary part is… how many of these people vote?

The New Real Estate Model - Part 1: Disbrokeration

Ch-Ch-Ch-Changes
The Real Estate industry is going through some pretty rapid changes lately. We have everything from Apple’s iPhone to Zillow’s Zestimates. There is a lot of conflict too. Your local Board of Realtors is most likely still trying to throw a fence around listing information, while a wired world questions the nature and even purpose of a real estate agent. The RE.net is creating opportunities and shifting the nature of the game. The world is 2.0 and it communicates differently. A 2.0 world markets differently and rewards differently too. Throw in the most destructive credit crunch since the Great Depression and you have a recipe for… WHAT? Only one sure answer: change. But the question is this: change into what? What does the future of the real estate industry look like? Will there be agents? Will there be brokers? Will there be a real estate industry? This is the first of a three-part series that will attempt to answer some of these questions.

Back in March I wrote a post on Disbrokeration and the coming changes in the real estate industry. I suggested that Brokers, more than agents, were going to see their positions and their livelihood challenged. I still believe that to be true. In part two of this series I will run through the first evolution I saw for our industry: The Super Team. Not an uncommon idea, the Super Team already exists and the refinement of it is discussed in many areas. Mike Farmer has written about it in great fashion. I will discuss why it may work for some, but in general it simply does not solve enough problems. Worse yet, it adds new ones. In the final installment, part three, I suggest a new model for the real estate industry. A model that is easily copied, well developed and most suited to solving the issues in our industry. But first, we must understand why the current model will not last.

Disbrokeration: The End of the Current Model
The existing Broker model is actually a pretty old one, found in almost any industry that is focused around the act or process of sales. From large Wall Street securities firms to small water purifier companies going door to door, we see the same basic structure: a principal surrounded by representatives. It goes back to the earliest days of retail. One person has an idea, a store, or a product/service that they wish to sell: a shoe store for example. They can only see so many prospects at one time or in one day so to increase overall sales, the principal brings others on-board. For a reduction in profits per pair of shoes sold, the principal hopes to see a lot more shoes sold. In this sense a store clerk, a stock broker and a real estate agent all serve the same purpose: help sell something that belongs to someone else in return for a piece of the profits in wages or commission. (Important Note: to sell something that belongs to someone else in real estate has nothing to do with who owns a piece of property. Agents are selling a listing or purchasing service that belongs to the broker. The broker is the store owner and the agents are the clerks. They help the broker sell more shoes by assisting clients in finding the proper style and fit.)

This made good sense for a long time and even worked as an incentive within the industry: work hard as an agent and eventually, if you have the desire and the money and the wherewithal, you will create or purchase your own real estate shop.  You are then the Broker and you hire agents to represent you in dealing with clients who wish to buy or sell a home.  In many ways it was a grand retirement plan.  New agents counted on the Broker for everything from an office to phones; from training to accounting and from organization to guidance.  In return the broker kept a hefty portion of the commission.  It was rare for an agent to even reach 50% as it was the Broker who had taken all the risk, fronted all the bills and established him or herself as successful enough to own a brokerage in the first place.

Over time, the real estate industry expanded and grew, as any living organism will. Under the pressure of this growth, weaknesses are exposed and even exploited. The industry grew a very strong lobby and laws began to benefit the principals even more. Licensing standards were put in place, protection and confidence of the consumer being the objective. But the bar to entry was set so low as to be beyond meaningless. Some have argued it merely gives consumers a false sense of confidence. Tax laws were changed to minimize the cost of bringing a new agent on board. This may have made more sense at a time when there were substantial costs involved in hiring on a new agent, but times change. The internet has given agents unfettered access to buyers, sellers and available inventory.  The fluid nature of the business dictates that agents brand themselves now, making the need for a big name obsolete.  Pricing structures and commission splits have driven training out of the picture at most of the brokerages.  Few agents receive anything for free and those that do are likely “loss leaders”: top producing agents there not to make the brokerage money (quite the contrary), but rather serve as a beacon for recruitment and a marketing tool for the rest of the agents.  Most Brokers now engage the business philosophy of the lowest common denominator (also known as “putting butts in seats”). Thanks to the tax laws, the brokerage looks to profit on the one or two deals a new agent might stumble across from family and friends before the revolving door swings another agent through.  I am not judging this.  As long as everyone knows up front what they are getting it is a legitimate model of business… just not a very good one.

The Problem Defined
With the changes in tax laws and the power shift brought about by the internet, we have ended up with a very different kind of shoe store. The owner now hires as many clerks as possible (which is made easier by the low standards to entry) and puts them on the floor right away (which is not a liability due to the beneficial tax laws). The clerks want the lion’s share of the profits so the owner forsakes any type of training or mentoring. Why take the time and expense to move someone from apprentice to journeyman to master when the expectation is two to three sales of shoes to family and friends, followed by a quick exit and the next batch of shoe salesmen coming through? Of course, if the store is physically large enough or the brokerage has enough desks, the principal can just keep hiring without letting others go - why risk losing an extra sale they may trip over? In the end one finds three distinct levels within the store: those that have found true success through self-education, luck or experience from a previous job, those that are in the midst of their revolving door spin and finally, in those larger firms, those who “used to make a lot of good sales” (their family/friend stage) and are now filling seats, known simply as “water cooler whiners”.

The result is a number of detrimental outcomes:

• the knowledge and training possessed by the average agent is lower
• the collective wisdom of the industry is necessarily reduced
• professional standards are lowered, as is professionalism itself
• inclusion of the “water cooler whiners” in statistical studies lowers the perception of aptitude and success within the industry

The current brokerage system has devolved from a shoe store in which the principal hired on new representatives, trained them to know shoes as well as he did and increased profits by sharing profits and increasing revenue; to a shoe store that is overcrowded with underperforming reps. A store where the principal’s primary focus is making sure the lights come on, the plants are watered and there are enough desks to accommodate available butts

Next time: Super Teams: A Solution for the Few

Greed is Good, But Greedy?

In a comment on a recent post, I shared with David Shafer the “revulsion that an ignorant, greedy originator causes.”  The Great and Powerful Oz - one of the sharpest minds in lending… actually just one of the sharpest minds period - called me on it and asked if I might define “greedy originator”.  Never one to back down from a challenge, I decided to give it a try… but in a post.  I want to hear what the ‘hounds on the street’ think.

The primary purpose of any business is to maximize profits. To quote the great Gordon Gecko: “Greed is good.” But I believe “greedy” - especially when used in a pejorative sense as I am doing here - defines someone who has crossed an ethical line in service of that greed. Lies of commission and omission are obvious examples of such a breach. More common and more directly related to my comment, however, is the originator  who chooses an inappropriate product for their client because the profit in that product is greater than the appropriate recommendation.

I do not believe (as I once did) that there is a fiduciary obligation between originator and borrower.  An originator is not working as an agent on behalf of a client the way a real estate agent does.  An originator is in the retail business.  Some originators are in the Kmart retail business (a market for clients who want very little service - simply shelves of loans to choose from) and some are in the diamond store retail business.  I argue that a great many, if not most, originators see themselves as the latter.  In which case, the borrower is paying the originator, at least to some degree, for their advice. There is an expectation and perception (usually encouraged if not advertised) that the originator is helping the client to choose an appropriate financial tool. Maximizing your profits in that process is just plain financially sound business practice. But suggesting a product that may not be among the best options - or in some cases is demonstratably a bad option - solely because the profit is greater… that is crossing an ethical line and earns that originator the label of greedy to say the least.

The Mortgage Dance? EZ: Just Follow the Bouncing Ball

And the beat goes on…  but sometimes it helps to have that little bouncing ball show us exactly what lyric we are singing this week.  All together now:

Today the Fed suprised no one by opening the discount window to ailing siblings: Fannie Mae and Freddie Mac.  Together they hold more than half of all mortgages in the US and the guarantee that they would not fail has been implied for some time.  The Fed also intimated there would be no other bail outs in the foreseeable future.  Who is walking the thin line?  WaMu, Wachovia, Downey, Indy Mac (oops, they were written out of the chorus last week).  Now it looks as if the Fed has reworked a few more lines and their song to the Wall Street firms goes a little something like this: if you can not fix your problem with the ability to borrow at 2.25%, your problem is not fixable.

This does not bode well for our short list.  Downey is more of a regional and will likely go down under its own weight of Losses and Lawsuits (the real ”L” words).  Previous posts have fixed WaMu as the consensus “next big one” to fall.  Wachovia, in my opinion, is more of a question mark.  Straight-laced, tea-loving bank goes to a frat party where “everyone who is anyone” is drinking and the peer pressure just becomes too much.  This is a hangover for which they are ill prepared.

What does this mean for real estate and the mortgages that drive its cycles?  Here’s one thought: if you are a specialist in homes that do not play the Fannie/Freddie tune, you may want to create some more income streams and fast.  Any regional that has not already eviscerated it’s “improvisational jazz” lending will find themselves looking at a Wall Street that no longer believes anyone is above failing.  If recent history has taught us anything it is this: the big firms currently involved in lending are either asleep at the wheel or lying outright.  We watched Counrywide lie about their financials right up until the end.  We watched WaMu take hits twice their predictions.  Even Wachovia, a stalwart bank, was “surprised” by losses more than double what they had predicted for Wall Street.  Not sure why anyone believes anything these firms say now.

I believe this all goes back to a problem that is not discussed in the media (whether for lack of a sound bite or just ignorance is anyone’s guess) and never given the light of day by these firms themselves: the accounting debacle tied to neg-ams.  Want to know who is going down next or where “surprise” losses will most likely come into play?  Look to the firms that made a killin’ putting clients into neg-ams.  (And before some of you start commenting on how neg-ams are just a tool and can be a good loan to boot - you know who you are - let me say “I know.”  Loaded guns are just a tool too.  Cars are just a tool.  I am in favor of both.  But if I stand at the door handing out keys and guns to everyone as they leave the party… let’s just say the onus of responsibility comes back to me.)

I guess it is not so difficult to follow the bouncing ball afterall.  I think I’ll go to bed tonight and dream about how attractive Fannie & Freddie have become lately.  They just may be the only two left on the dance floor.

Custom Signs & Brake Lights

Recently experimented with one of the many ideas we use to be different… and better.  Created a single site blog page and a custom sign for a listing.  The idea, of course, is stolen from Greg Swann and some of the other brilliant minds that visit BloodhoundBlog.  The purpose is this: be so much better as an agent (which is to say: so much better at marketing), others will have to increase their value proposition markedly… or get out of the game.  Here are a couple pictures of the sign:

The first one is an overview and the second one is a close-up.  I think they turned out nice and I was VERY happy with the process.

But that is not why I am posting.

Here’s the really interesting part.  After hanging the sign I started to pull away and had to stop and get my camera out again.  Three cars in a row stopped to look at the sign and one actually sent their child out to get the flyer.

 

So… within minutes of hanging the sign I had eyeballs from three cars and conversion on one; you have got to love that kind of impact!  BTW, the first thing my clients said was they loved the sign.  I remarked how standard signs only tell people a house is for sale while marketing for the brokerage.  One of the ideas behind a custom sign is to encourage people to stop the car and get out to read the sign (thus increasing the possibility of interest).  They replied: ”This should do it.  You know… every agent in the area is going to stop and read it!”  Just love that.

Downpayment Gift Programs

On June 9th, in a speech to the National Press Club, FHA Commissioner Brian D. Montgomery announced that his agency plans to create new regulations banning the use of down payment gift programs.  The most popular of these programs is The Nehemiah Program and you can go to their site for more details, but the gist is this: seller contributes 3.5% to this charitable organization, which then contributes 3% to the buyers purchase, serving as their FHA downpayment.  Appears to be a win-win: the seller gets their home sold, the buyer gets into a home with no money down and a charity gets .5% for helping.  The problem, according to Montgomery, is that loans using this type of problem are defaulting at two and three times the rate of their traditional down payment loans.

There is no question that this type of program gets more people into homes than would otherwise be possible.  But… what of the ethics?  Although legal and within the bounds of FHA’s current guidelines, is there any question that this type of program also eviscerates the very spirit of the guidelines?  FHA allows charitable gifts with the understanding that there is an implied vouching for the client.  Whether it be family, employers or a city program, the idea is that the donor has some knowledge, purpose or interest in seeing the buyer succeed.  But with the down payment gift programs, the donor is the seller and their only interest is in selling their home.  (In fact, at times the home’s value is inflated to cover the 3.5% donation creating a circular interest of the buyer for the buyer.)

A down payment gives the buyer some “skin in the game” and creates within lenders a sense that the buyer won’t walk away at the first sign of trouble (which sense was confirmed as we watched homeowner after homeowner walk away from their mortgage recently when there was no equity to protect - not an ethical consideration, purely business).  Without downpayments, rates would climb to cover the inherent risk.  Maybe that type of loan will come back once the risk can be assessed, but don’t hold your breath.

So here’s the question: how do we, as agents and originators, stand on the issue of down payment gift programs?  Their existence has the potential to generate for us more business and therefore more income; does that outweigh their “spirit of the law” contempt?  More homeowners get into homes because of these programs than those who go into foreclosure.  Does that fact justify these types of programs?  More foreclosures due to the fact that the homeowner has no skin in the game leads to increased rates on mortgages.  Should the FHA ban them for this reason?

Can we divorce ourselves from our income goals and evaluate something from purely an ethics viewpoint?  If you agree that these programs are a laugh and a wink at the guidelines, can you justify using them?  If you don’ agree on the salaciousness of these programs, why not?