The Idea Blog

“Who’s responsible for the subprime mess? Not us, say the lenders that made the risky mortgage loans to consumers. Similar denials come from the Wall Street firms that bought, packaged, and sold the loans to investors; the bond-ratings agencies that said those investments were safer than they turned out to be; and the hedge funds that gored on them. As the allegations fly, various players are busy issuing disclaimers and pointing fingers at everyone else.”

Thus opens an article in the August 6 BusinessWeek, Let the Blame Begin. As in so many political, personal and professional conundrums today, “it’s not my fault” is the characteristic response, but it’s not a solution.

I want to solve a problem in the real estate business. It’s a classic marketing issue, but the first reaction among many who are in the industry is to say it is what it is, or “it’s not my fault.”

Let’s begin with the problem. Identify it. In the real estate business, the problem is largely the convergence of three phenomena that makes it difficult to see clearly through the same old glasses.

First, there’s the split, the commission sharing between company and agent. Used to be that the company and the Realtor® split 50-50. The company did the advertising, the branding, built the systems, delivered the infrastructure, took on much in the way of operating expenses … all that kind of stuff. And the agent did the selling.

Today the splits are closer to 70-30 in favor of the agent, more often 75-25, 80-20, even 85-15. Agents do much of their own branding (”Sellin’ Ellen” comes to mind here in the Charleston market), attempting to stand on their own, stand apart from their fellow agents at the same company, even standing taller (louder?) than the company itself. The windfall that used to come in good business times may still be there, but for the company earning between 15% and 30% on a single transaction needs “good times” in order to cover expenses, especially if many of those traditional expenses are still delivered. And in not-so-good times, times such as these, you just can’t make it work with splits of 15-30%. It doesn’t pencil.

Second, there’s the competition. On the one hand, real estate brokerages compete for agents. The surest way to gaining market share in a world of shrinking splits, they think, is to hire more agents, more agents. Some are virtual (less need for office space when I have a mobile phone and a laptop), others form “teams,” the equivalent of co-ops and communes, veritable companies within companies. But on the other hand - and more to the point for this issue - there is a tremendous competition for listings.

Think of it this way. There are two sides to every real estate transaction, the buyer and the seller. Realtors® have long lusted for sellers as customers. The listing agent for a property is assured 50% or more of the fee off the transaction. All the other agents in the market are selling for them. Today, to get the listing, every agent is competing, and in the dumbed-down marketing environment you have when there are more and more agents and companies fighting over listings, what happens? Of course. The listing price or percentage becomes the competitive tool. What once was 7% falls to 6%, then 5%, then 4% and, believe it or not, it’s not found a floor yet.

So where are we now? The real estate company takes less of a share on each transaction, and the size of the transaction is smaller too. Aaarrrrgggghhhhh!

But wait. There’s something else going on.

The consumer is more knowledgeable. Duh! The internet works in this market too. Friends in the real estate business tell me that their clients search online, whether with the Multiple Listing Service (MLS) or with one of the commercial knowledge bases such as Trulia or Zillow. The result is a client who has already narrowed the field of properties he or she wants to see and some sense of the comparables in the same area. Heck, they’re shopping mortgages online and already have a pretty good idea what rate they can get and what they should be able to afford. So the agent isn’t the expert he used to be - or pretends to be. Increasingly, the average agent is little more than a driver during the shopping stage and a coordinator on the way to closing. (And increasingly they’re not even drivers. The client has already seen a video of the property, reviewed an elaborate slide show of photos of every room. They’ve narrowed the list of what they’re willing to even go by and see. “We’ll meet you in the driveway at 1234 Madison Street.”)

These three issues have led us to where we are today. What do you do if you’re in this business? How do you change in order to face the realities of lopsided splits, lower commission rates, and - horrors! - more knowledgeable consumers? Can dear old innovation and solid marketing lead us to the solution?

Of course it can.