Editor’s note: The following guest opinion was written by real estate industry executive Steve Kropper, and reflects his views on future changes in the real estate industry.
Every year, Inman News‘ Real Estate Connect conference in San Francisco introduces the latest Krispy Kreme threat to the dominant Dunkin Donuts. Every conference debuts a new entrant threatening to take over the real estate and mortgage business. Most are gone a year later (see table at end: New Entrants, Fast Exits). A few players find a niche and a few points of market share. Each makes a contribution to the pile of industry intellectual property and experience.
Every year brokers and agents wring their hands anxiously trying to make sense of the new entrants. Hype, angst and anxiety notwithstanding, the traditional players’ role remains mostly unchanged. I believe that the new technology entrants have had little impact on the industry thus far. The most tangible measure of change is commissions. Yes, the split of commissions between brokers and agents has shifted, but total commissions have increased steadily in the last decade (not a typo – see: Crude and Commissions).
Consumers and agents are resistant to change. And stifling regulation of all aspects of lending and real estate brokerage protect the status quo. For example, RESPA (Real Estate Settlement and Procedures Act) restricts the free flow of compensation outside the brotherhood of brokers and agents. I estimate the cost to consumers is $1,600 in redundant acquisition costs. Also, the secondary mortgage market kills innovation because lenders’ retention concern with borrowers ends once the loan is sold. So where is the innovation?
Lead Generation Split From Sales
I see only one area experiencing rapid change: lead generation and incubation. Today, agents acquire leads and handle the sales process. That’s the old model. In the future, media (especially the Web) will find the leads and deliver them to brokers and agents. Agents will continue to “own” the sales process, but lead generation will have been split off from selling. More media buying means that brokers will centralize lead buying and filtering — then parcel them out to agents. So splits will improve in brokers’ favor. In total, agents and brokers will take a shrinking share of the commission as they pay media more. Agents and brokers who embrace this lead acquisition/sales process split will find improved margins. Specialization is more efficient. On and offline media will drive lead generation. Place your bets on innovation in lead generation and incubation.
In Search of FUD
So, how can you tell a winner from a loser? Knowing which venture will succeed is very hard. I have four tests for certain failure. But first check the “FUD.” My father used to talk about IBM fostering FUD about new entrants: “fear, uncertainty and doubt” (FUD) was designed to scare customers about new entrants. There was lots of FUD at Connect. New information (unverified) + New possibilities (untested) + New entrants (not vetted) = Fear, uncertainty and doubt.
Here are four failure factors to identify likely losers:
1. Be isolated. Keep industry veterans/vertical market specialists out of top management. Staff the venture with techies “smarter” than the Realtors who will be paying their bills. Homes are just like airline tickets or stock trades. Generalists are good enough.
2. Be arrogant. Alert incumbents to your plans for world domination and disintermediation so the enemy is vigilant. Why have the old school wonder if you are a threat? Remind them frequently. Arrogant firms resist market intelligence or internal scrutiny of failure (see sidebar New Entrants, Fast Exits).
3. Be rational. Dismiss the unique, peculiar consumer behavior of home buying and the professional culture that evolved. Assume rational behavior. Today, real estate needs someone to manipulate buyers and sellers. Tomorrow will be different.
4. Don’t incubate. Deliver raw, low-commitment, low-conversion leads directly to agents without incubation or filtering. Don’t bother with technology or labor-intensive work to warm up leads. Realtors love making 50 calls to sell one home. (Read www.kropper.com/WhitePapers/LetThemEatDough.pdf.)
Big Bang or Big Muddle?
What would the end of the MLS look like? The MLS is like the Pentagon Papers in a room with Daniel Ellsberg and a copy machine. Leaks are inevitable. The critical question is how fast does the leak turn into a dam break?
Private equity investors (venture capital) believe that a big bang is inevitable and desirable. (See “How the (MLS World) Ends.”) The “big bang” theory says that the MLS will blow up under pressure from consumers, the Justice Department and Web technologies. Big bangs deliver big payoffs if you invest right. Members of the secret priesthood of real estate (insiders) are divided. Will each regional board become an open utility or retrench under control of a few top brokers? Outsiders believe all markets must submit to the Web, and that data wants to be free. I predict that boards will navigate the difficult waters to a gradual opening up. I see no big bang. Control of listings is eroding, and technology makes it an inevitable. But this slippery slope is slow.
Deception
The chain of events needed for a home purchase needs a link that is willing to deceive and manipulate the home buyer and seller. No thoughtful investor would buy a $400,000 asset with such shallow due diligence as is typical for home purchases today. And no sane person (certainly not the uninitiated 35 percent of the market that is first time buyers) would take on a huge mound of debt without undue pressure. To bring buyers and sellers together requires lying, cheating and manipulating. Can you identify which link has kindly volunteered to take this role?
Buying a home is like marrying and having kids. It’s a really good idea, a great investment, and one reason why America is a stable nation. But it is done with imperfect information. None of us really knew what we are doing when we bought our first home. The value chain needs one link that is willing to fill the gap in our ability to make a decision. So far, Web sites have performed poorly at such fundamental consumer marketing tasks. Realtors do better. Online ventures should revere this link in home buying.
Steve Kropper is president of Bank on Real Estate, a director of New Homes Realty, an advisor to IFLEX Solutions and consultant to TotalMove. He can be reached at steve@kropper.com; (617) 306-9312.
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