Editor’s note: Inman News is seeking input for our Roadmap to Recovery editorial project, which focuses on the future of the real estate industry. This article features responses to a set of forward-thinking questions posed by Inman News. You can view this list of questions at: Inman.com/Reinventing — if we publish your responses you win a free pass to the upcoming Real Estate Connect conference (for new registrants only). Participate in an audio town hall meeting related to the Roadmap to Recovery project: click here for details.
The following is an Inman News Q&A with Robert Hahn, vice president of marketing for Onboard Informatics, a data and Web services company:
Q: Imagine how the real estate industry will be different when we recover from the current downturn.
A: Assuming for the sake of the answer that it will be 2011 before the industry recovers, and that things might get worse before they get better, I see significant change for the entire industry.
For one thing, mortgage lending of tomorrow may look like student loans of today: private lenders in theory, but all-but-nationalized in reality.
The biggest change, however, will come from the ranks of brokerage. I believe that over the next three years we will start to see the rise of systemic brokerages that have fundamentally altered the relationship between owners (aka brokers) and workers (aka agents) through the use of technology.
From the original broker-centric model of the pre-1980s to the post-RE/MAX agent-centric models still dominant today, I believe we will see the rise of technology-centric modern brokerages that leverage capital investments to create lower capital costs leading to higher profit margins. That, in turn, leads to substantial competitive advantages and higher barriers to entry.
The weak will get culled, whether through bankruptcy or mergers and acquisitions. Weak agents will be culled as well, likely through attrition.
Q: How will the business model or business practices of the title, brokerage or lending industries change in the future?
A: Brokerages simply cannot sustain a 3 percent profit-margin business model for long. There are far too many interlopers and third parties that provide far too much value. Brokerages that survive the coming age will be higher-margin businesses built on usage of technology to reduce the biggest cost of business: commission splits.
I believe the "desk-fee" model of brokerage is probably headed for extinction, as I simply cannot see a way for these brokerages to increase their margins significantly.
Q: Will the industry be regulated differently in the future? If so, how?
A: Unsure about this. I could see federal oversight and regulations increase at the expense of state regulations. At some point someone in Washington is going to realize that it does not serve the national economy to have hundreds of local MLSs, all of them with different rules and different data standards.
Q: What must the industry do now to prepare for this new direction?
A: I believe owners have to understand that they are first and foremost business managers. Too many principal owners started out as real estate agents in the trenches and have the sales-driven mentality. That works well in growth cycles, but in down markets they often don’t know how to drive efficiency, drive margin growth, and contain costs.
Training in fundamentals of management financials, return-on-investment metrics, management accounting and management techniques might be a good investment for broker-owners.
Large brokerages that do not have marketers — actual professional, trained marketers and not administrators with marketing titles — on staff might want to start thinking about hiring them.
Broker-owners have to start thinking about capital investments today in order to realize the returns by the time the market turns around. If you can’t get your costs down to a point where you’re at 8 percent to 10 percent profit margins, you’re likely going to end up on the wrong side of the competitive advantage matrix. If you can’t trim your profit margins to that level, other companies will be there and will outspend you in every area or simply undercut your prices to where you can’t compete.
Seeking "more productive agents" by paying them better splits is not likely to be a long-term solution. Only by increasing capital expenditures in technology can you hope to capture that sort of productivity gain.
Agents have to start preparing for a situation in which their per-deal commissions will be significantly lower but they can do even more deals than before, thanks to broker investment in technology. They also have to prepare for an industry in which the value they add is fundamentally shifted away from the transaction and towards knowledge.
Control over data will not be possible and will not be an advantage. It will have to rely upon judgment and wisdom.
Q: What technology trends will change the industry in the future?
A: Enterprise-level customer relationship management (CRM), married to truly effective and measurable interactive marketing technology.
In the alternative, third-party systems that replicate all or most of the value from a brokerage system may create a whole new paradigm: the "Swarm." This is Trulia’s play, in my opinion. I am, however, not certain that these third parties have enough profitability to truly compete with the big brokerages and the power they can bring to the market.
Q: What skills will the real estate agent of the future require?
A: Financial analysis, location analysis, much stronger understanding of laws and regulations affecting real estate, and true local market knowledge. They will also need to be comfortable with technology and the use of data.
They will need to significantly increase their understanding of CRM and the use of CRM tools and techniques, and figure out how to build barriers of entry for others.
The value of the agent going forward will be as an adviser — we’ve seen this in the travel industry and in the financial services industry. It’s going to happen to real estate as well. So knowing more than your client and knowing the niche specialty knowledge that your client does not will be critical.
Q: How will real estate advertising dollars be spent in the future? How will real estate marketing be different?
A: I believe that branding dollars will increase after the renaissance, as the only players left at that point will be the strong who consolidated control over their markets or market segments.
But I do see a significant decline in lead-generation ad dollars, including paid search, as more and more companies are able to quantify ROI numbers for things like a click to the Web site. The resulting insight into metrics like "cost of acquisition" and "lifetime value of customer" will drive down the ad spend.
Print advertising is likely dead, although local newspaper Web sites may enjoy a resurgence in real estate advertising from brokerages employing sophisticated targeting.
Real estate marketing, under systemic CRM, is really a lifetime engagement that is welcomed by the recipient. I believe the companies that successfully implement techniques and systems that can keep a customer throughout an entire lifecycle (from first-time homebuyer to retirement, taking the seven-year gap into account) will have such a major competitive advantage that they will displace most of the competition. We haven’t seen this yet, but I think casino operators come the closest.
Robert Hahn is vice president of marketing for Onboard Informatics, a data company that offers Web tools and services. The company, based in New York City, has worked with real estate, media and technology companies. Participate in an audio town hall meeting related to the Roadmap to Recovery project: click here for details.
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