Pizza and Wall Street - The Real Estate Brokerage Bundle

I have an idea. I know it’s a little out there, but difficult times call for innovation.

A lot has been written lately about how the current real estate brokerage model is broken. What went wrong? The answer may lie on Wall Street. And the solution may lie in our ability to start thinking a little more like Pizza Hut.

The traditional real estate brokerage is big. The broker provides large, shiny offices — many of them scattered throughout Your City. Where the office used to be necessary to do business, back in the days when the customer came to the service provider, now real estate is in the home delivery business. Computer wielding home buyers and sellers search the thousands of on-line menus from the thousands of on-line storefronts, rarely knowing or caring from which street the drivers are dispatched.

Yet we continue to have the shiny office buildings. The big brokerage model operates off of small margins. A three to five percent profit is generally considered a success. To increase profit, you must increase volume or reduce expenses, or a combination of the two. Duh. But in a business where virtually anyone can be a pizza, all of the pizzas tend to be treated the same. The thin-crust, unseasoned new agents and the stuffed-crust experienced ones all appear on the same menu and at roughly the same price to the consumer.

The problem is that the cost of goods to the brokerage are not the same. The experienced, stuffed-crust variety involves more dough. These agents command higher commission splits, because they bring in more orders and they are in limited supply. Every pizza joint wants them on the menu, which further drives up the their cost and reduces the broker’s margin. And here is the paradox. The newer agents are traditionally on a much higher split with establishment, which means they are really the product being pushed. A thin-crust offering may only attract one hungry customer a year, but with the margin being so great, the temptation is to carry the greatest possible inventory of these products at all times, even though they may not sell as often — or at all.

There is a cost to carrying a large inventory. You need to manage it and account for it. You need someplace to put it. You need a bigger staff to oversee the operation. You need big, shiny office buildings.

And here is where Wall Street comes in. The brokerage model has been bundling their pizzas. This paper has become high risk. The newer stated-income agents who may never reach maturity are packaged with the full-doc, lower risk, lower reward experienced agents. And now the market has shifted. The riskier investments in the portfolio are defaulting. The solid investments continue to perform but their numbers are not as great, so the company is on the verge of needing a bailout. But, a bailout only makes sense if the fundamentals that got us here are reconsidered. A bailout only makes sense if the business model is retooled.

It may be too late for the industry giants, but there may be room for their smaller competition. What if you were only to carry A paper? What if you focused on the more secure, less labor and capital intensive stuffed-crust product? You will make less profit per unit, but you will sell more. It is less risky, and you will reduce costs. The experienced agents don’t need big shiny offices, company-provided computer banks, office voice mail, canned web sites, and an expensive, over-sized oven full of weekly training and mentoring meetings. They come with their own toppings.

Where does that leave the sub-primers? Maybe, the industries giants could rethink their roles. Before an agent gets his license, he must pay for his required courses and he must pay his license application fees. Why, then, can’t the new agents be expected to continue the process of investing in their training and their success outside of the broker model? I can’t walk into Qualcomm with a formal education in art history (or no formal education at all) and get a job on the condition that they teach me all about electrical engineering; I have to come armed with the knowledge and tools. I am expected to pay for my education, and they in turn will pay me to produce.

I am willing to bet that there are countless entrepreneurial real estate experts out there who would gladly provide real estate job training for a fee. And I know first hand that Best Buy would be delighted to sell each of them their own computers, Staples their own office supplies, and a boat load of independent vendors their own tech and non-tech coaching and support. Then, instead of the brokerage having to continue to operate as a bloated, full-service, fully stocked training camp, they could focus on a cost-effective home delivery approach. After all, this is really what the customers want.
photo credit: Mr Wabu