Comprehending the New Business Models

An extract from the new audio series Real eConnections
by Stefan Swanepoel

Don’t let someone deceive you and tell you that the real estate industry has not experienced change or that we are still practicing real estate the same way we did in the 60’s. That would be ignorance, a charade or just plain stupidity.

Looking back at the last five decades one sees a dynamic, constantly evolving industry. You see many new business models that have over time dramatically influenced the real estate business and changed the way we conduct and manage our brokerage companies.

Yester-year

In the 1970’s, with brokers squarely in control of their companies and the listing inventory, they searched for ways to expand from a local to a national level. Franchising blew into the real estate industry with a vengeance and created new companies such as Gallery of Homes and Red Carpet. In the glory days of franchising literally tens of franchises were sold daily and companies such as Century 21 and Electronic Realty Associates exploded into the nation’s first real estate companies with over a thousand offices.

Today, scarcely 30 years later, franchised companies account for about half of the business in the industry. The franchising legacy has created household brands, positioned companies such as Coldwell Banker and Prudential at the upper end, facilitated an unprecedented amount of mergers and acquisitions and influenced the independent brokerages like never before.

The 1980’s was in turn dominated by another new trend, that of the 100% concept. At that stage this new business model was contradictory to the existing broker centric model and was not expected to survive. Yet, riding on the coattails of the franchising trend, this well timed concept expanded to become one of the top three real estate companies in the world. This trend has had a dramatic impact on how commissions are paid and how brokerages are managed and today real estate is agent centric rather than broker centric.

Even the 1990’s have left us a significant legacy – one that will be remembered as the decade of automation and the Internet. National and international companies were now participating in more transactions than ever before. The time had come to automate the various tasks of managing a real estate office and we were introduced to software products such Top Producer, Online Software and PREP. By the mid 90’s the need to link offices and integrate databases swept the nation and the real estate industry dived head first into the Internet and companies like Realtor.com and HomeAdvisor were born.

Although the dominant trend for the first decade of the 3rd century has not yet been established, various trends are already flexing their muscle. Expect the 2000’s to bring us new players and new business models. These new models will endeavor to better satisfy the needs of the consumer and of Corporate America. Although we are at the early stages of evolution, there are various business models that are showing excellent promise. Most new business model companies do not fall into a specific category and many have not yet developed well enough to establish a dominant new service type. The following models however warrant close attention:

Buyer Brokerage

Probably the most established of the new models, buyer brokerage has, since becoming part of NAR exploded from 6,000 to over 40,000 members. This has allowed the Real Estate Buyer’s Agent Council (REBAC) to surpass all other Associations within NAR to become the single largest of Council or Association. Ongoing consumer pressure to separate simultaneous representation of both the buyer and the seller will have a long term impact to the industry and subsequently further sensitize the value and commission potential of each previously perceived equal contributors (listing and selling side) to the overall transaction.

One-Stop Shops

Already partially introduced by large brokerages a few decades back this logical business addition became a “cool” concept when it was popularized in the 1990’s by the Internet generation. Frequently referred to as the “Integrated Model,” it has, after the Dotcom crash, been accepted by the existing real estate brokerages as a vital strategy to strengthen existing companies against the onslaught from outsiders and dwindling commissions. It is of course this very cross-selling feature that has the banks gleaming at the real estate transaction, again.

New Paradigm Companies

Largely associated with the Dotcom era, this model has also been called “Online Offices”, “Internet Brokerages” or “Virtual Real Estate Companies.” Many Realtors® have written them off as a passing fad yet this is not sound thinking. It is true that many similar companies are now members of the graveyard, but there are some such as eRealty, YHD and ZipRealty that are proving that it is possible to create a more streamlined real estate transaction with many of the traditional services being conducted over the Internet.

Annuity Agencies

Slicing up, repackaging and offering real estate commissions in a different way is exactly what helped REMAX grow from hot air to one of the worlds largest and most respected companies. This time a rapidly aging Realtor® industry is enthusiastic about discovering income after retirement. So don’t ignore these residual income stream franchises such Keller Williams and EXIT Realty – they will most likely be around for a life time.

Fee-Based services

These are also known as the “Menu”, “Smorgasbord” or “Consumer Assisted Models.” Although a variety of companies have recently sprung up variations of this model, few are as interesting as the rebirth of Help-U-Sell. This once household industry name died in the early 1990’s when parent Mutual Benefit Life went into receivership. However, in 1997 Help-U-Sell was bought out and has returned to offer consumers the choice to select what services they want and what they would like to pay.

Employee Estate Agents

“Agents will never work for a salary,” a million-dollar agent once told me. I said, “You’re right, you do fit the profile, but there are thousands of other people that will welcome a more steady job, with a steady paycheck and benefits.” Various companies have tested a change from the independent contractor status business to a salaried compensation structure and this option is not that far fetched anymore. From a bank or Corporate America point of view, this salaried compensation idea would appear to be a very interesting option to consider.

Superstores

No-one does it better than mega player NRT. They have propelled what was already a premier brand and arguably the third largest company, Coldwell Banker, to real estate stardom and number one spot in the nation. Since the 1980’s introduced us to the concepts of superstores we have during the last two decades become enamored with giants such as Staples, HomeDepot and CompUSA. It was just a matter of time before it was real estate’s turn. The question is of course: Is their room for another and, if so, who will be next?

Summary

Don’t underestimate these new business models. By no means are any of these models perfect and neither will one dominate the entire industry. However, many of them will significantly contribute to the evolution of industry. Your challenge is what legacy they will have on your company and future, irrespective of whether they succeed or fail.