[FREB] On Culture: Show Me the Money!!!!

Over at Inman, Bernice Ross pens a column refuting the idea that traditional brokerages are dying a slow death. It’s worth reading in full because it lays out so much of the conventional wisdom when it comes to brokerages.

I like Bernice Ross a lot; she’s a wonderful lady full of the virtues she preaches like kindness and authenticity. But in this case, she’s authentically wrong and misleads people down the path of comfortable illusions, out of the best of intentions.

Nonetheless, the end destination remains the same: irrelevance and ultimately death.

Since we have decided to engage the brokerage community with the Future of Real Estate Brokerage Black Paper, I felt we owe it to the industry to question assumptions, destroy illusions and tell the truth as we see it, no matter how uncomfortable that may be.

So let’s talk about comfortable illusions versus the hard cold truth that will nevertheless set you free.

Bernice’s Comfortable Illusions

Bernice begins by refuting Pete Flint, formerly of Trulia, and Robert Reffkin of Compass, both of whom said on stage at Inman New York that traditional brokerage will die within ten years.

Flint thought the reason is a “technology tsunami” swamping the real estate industry, which is not prepared for it.

Reffkin said that agent teams will replace the brokerage. Inman characterized his presentation as saying:

The demise of the traditional brokerage will come when agent teams uncouple themselves from companies by taking control of the lead generation tools, customer relationship management software and Multiple Listing Services (MLS) they once depended on their firms to provide.

Countering both arguments, Bernice writes:

I disagree with their assessment — the traditional real estate model is alive and well at many of the big companies, but more importantly, in the myriad of small independent brokers that form the unsung backbone of the industry.

While she concedes that technology tsunami is indeed coming, she thinks that these small independent brokers will simply evolve as they always have. She points out that the doom mongering about technology goes back to 1999, and real estate is not only still here but going stronger than ever, and that AI doesn’t do “non-linear” very well.

She dismisses Reffkin’s assertion about agent teams by simply noting that license law requires the agent team to work under a broker.

Then she moves on to her real thesis on why the traditional brokerage model is alive and well:

The first model is the one everyone recognizes and talks about — it’s about GCI, profitability, a structure that often is agent-focused (rather than consumer-focused) and is male-dominated at that top.

To illustrate this point, of the top 100 producing firms in California, only 14 are run by women.

The second “stealth” model has been operating virtually unnoticed in tens of thousands of small (and some very large) brokerages where value and culture matter and a customer focus is paramount.

Bernice contrasts this female-dominated “stealth” model where value and culture matter with male-dominated “commission and profitability” model, like Compass under (the very much male) Reffkin.

She finishes by noting that both models work, but that the real question for the industry is which model will have staying power into the future.

This is comfortable illusion. It must be shattered if the industry is to move forward. But first….

What’s With the Gender Identity Politics?

I confess that my initial reaction was my right eyebrow going up. Did Bernice Ross intend to just offend half of the population, and some 60% of brokers and 40% of agents? I know she’s a big part of the #WomanUp deal, and I celebrate efforts to get more women involved in leadership and as broker-owners but… #WomanUp doesn’t have to mean #ManDown, does it?

It’s one thing to say that women can make great leaders; it’s another thing altogether to suggest that men can’t. And maybe I’m reading into things but those paragraphs, followed immediately by her findings from interviewing 40 successful female brokers, strongly suggest that somehow men can’t run brokerage companies where value and culture matter, and customer focus is paramount.

Hi Bernice, I’d like to introduce you to Gary Keller, whose company you quote with such admiration. I believe he’s very much a male. Then let me introduce you to men like Budge Huskey, Phil Jones of CB Coastal Alliance, James Dwiggins of NextHome, Thad Wong of @Properties, and hundreds, thousands of other male brokers who obsess about value and culture and preach customer focus day in and day out.

It’s absolute insanity to suggest that somehow women are about value and culture and customer focus, while men are about GCI and profitability. It smacks of sexism in exactly the same way if we were to invert what she says: “Well, women don’t care about profitability.”

Stop it! #WomanUp doesn’t have to mean #ManDown. Great business leaders of any gender, any race, any background, care about values, culture, customer focus and profitability.

But Do Let’s Talk About Culture

Which leads us into the real topic of this post.

Culture and values are absolutely important in any organization. But they are important only insofar as they further the central goal of that organization. This is something that many real estate brokers, pushed to the limit as they have been, have forgotten.

As Sunny likes to say, this is the real estate business, not real estate friends.

I commented on Bernice’s Inman article asking for numbers. Because there are too many grandiose words in real estate, without the numbers to back them up. Numbers tell a story just as powerful, if not more powerful, than words.

In our Black Paper, we laid out why we think Redfin is one future of real estate brokerage. It wasn’t because of Redfin’s values and culture and relentless focus on customer services, although Redfin spends an inordinate amount of time and resources on all of those things. It was because of the numbers. In Q3/2017, Redfin posted:

• $110 million in revenues, a 35% YOY growth.
• 38.1% gross margin (rough equivalent of Company Dollar)
• 9.7% net income profit margin

Considering that the average traditional brokerage in North America gets 15% Company Dollar and 3% Profit Margins, those numbers tell a story that is equally as powerful (and I would argue more powerful, see below) as any flowery prose about a vibrant company culture empowering agents to be consumer focused and so on.

I realize I’m playing right into Bernice’s stereotype about the profitability focused male manager, but let us shatter that.

I have very little doubt that Redfin’s culture and values are hugely important to its posting those numbers. I know Glenn Kelman would tell you the same, as he did in this interview article, talking about Amazon:

On Amazon and its core leadership principles: “I think the company that has the clearest set of values is Amazon. That company knows what it is. It may be that it’s not your cup of tea, but every single person at that company knows what the Amazon values are. I think many people who don’t work out there, if they only read those values carefully, would have saved themselves a bit of grief, and I think it’s the source of much of Amazon’s success. When you are good at not just retail but cloud and many other businesses, at some level it just has to be that you have a unique approach to business. Your values have to pass that test, that they have to draw some people in with a special strange intensity as if built for them alone, and they have to put off other people. If your values don’t alienate anyone it is just platitude.” [Emphasis added]

Culture is of paramount importance, but platitude is not. What’s more, culture is important only insofar as it advances the core mission of the organization.

The US Marine Corps has a culture that will not work in any company I can think of. It is extremely top-down, hierarchical in the extreme, demands immediate unquestioning obedience to orders, and celebrates a “warrior ethos”. But for a warfighting organization, there are few equals to the USMC.

Churches have a culture and a set of values that is ill-suited to the business world — but they work very well for the core mission of churches.

What then is the core mission of a business? Specifically, what is the core mission of a real estate brokerage?

Nobody, not even the 40 successful female brokers that Bernice interviewed for #WomanUp, starts a not-for-profit brokerage company. Not one. For all of its giving back and charitable works, KW is not a non-profit organization. In fact, KW is very much a profit-seeking, profit-maximizing organization that celebrates how much profit it has made… and shared with its agents: over $1 billion to date in November of 2017.

It’s not real estate friends, it’s real estate business.

So Where Are the Numbers?

Since every single real estate brokerage is organized with the core mission of generating a profit for its owners — like every single business in the history of commerce ever — the values and culture of real estate brokerage must contribute to profitability… or it’s a broken culture.

In fact, the industry should evaluate claims about culture by the numbers of the brokerage.

As it happens, one of the 40 brokers told me her numbers during the Inman Connect Indie Broker Summit. They’re fantastic — obviously, I’m not going to share them with the world since she told me in private, but I will attest that they are way above the 15/3 numbers of traditional brokerages.

I accept that her values and culture are good ones for her company since the results speak for themselves.

Now, I don’t know that culture is the reason why she has such fantastic margins. It may be something else at work — smart management, intelligent coaching, smart use of technology, and a dozen other possible factors, including market conditions. But with numbers like those, I can accept that the culture and values are working in the same way that I can accept that Redfin’s culture and values contribute to its above average performance.

I’d like to see the same from any company, any brokerage, making claims in words about their wonderful culture. Show me the numbers, or as Rod Tidwell would put it…

Show Me the Money

Some of the claims about culture from Bernice’s article are that the KW’s three key value components of its culture underpin its massive success.

Really? KW Cares is why KW has been so successful? Not the novel cap on commissions, profit sharing, enormous focus on coaching, and a dozen other strictly business factors?

Maybe. If you’re a KW franchisee, and you genuinely believe that, try going to 50/50 splits with no cap. See how those core values and that culture and all that KW Cares and Red Day do for you then.

Further on, she writes:

Based on my interviews with over 40 successful female brokers, there are four other major components as well:

1. The no. 1 thing that agents want is to know that their broker “has their back.”
2. Agents also want to know that their broker has the contract expertise they need to navigate the legalistic waters of today’s real estate environment as well as providing them with the technology and tools they need to grow their businesses.
3. Successful value-based brokerages form “business families” that not only work together, but also play together as well. They are often immune to recruiting efforts because the close connections agents have with their broker and their fellow agents.
4. They volunteer and actively give back to their community.

Assuming that’s true, can we see the numbers for these successful value-based brokerages? If these 40 brokerages, including the 14 out of the Top 100 top producing firms in California, are averaging 35% Company Dollar and 10% Net Income, maybe these principles are worth exploring. If not….

While we’re at it, can we get an explanation of how the “technology and tools” lead to higher Company Dollar and Profitability? We can begin with agent adoption rates at these women-run “business families” where people not only work together but play together as well. Then we can perhaps look at how these “business families” lead to top producing real estate agents gladly agreeing to lower splits, raising the broker’s profitability.

If the point isn’t profitability, if these new “stealth model” brokerages have some other core mission that isn’t profit, can we ask what the core mission is? And if the goal isn’t profit, then why are they not organized as 501(c)(3) charitable organizations that provide brokerage services for free to deserving families?

Rethinking Flint and Reffkin

Here’s the thing. If you only look at words, only hear words, then Flint and Reffkin’s pronouncement of doom seem… well, deniable. You can, as Bernice does and as so many people in real estate clinging to their illusions do, simply talk about culture and values and business families.

But if you look at numbers in addition to the words, then what they’re saying takes on a slightly different cast.

Flint saying the technology tsunami is coming and that real estate isn’t ready is not a diss (or at least not just a diss) on real estate leaders. There are plenty of brokers, plenty of MLS execs, plenty of very smart people at places like Realogy and HomeServices who know the technology tsunami is coming. It’s not like they’re burying their heads in the sand going, “It’s not happening! It can’t be happening!”

No, Pete’s statement has to be interpreted with the asinine profitability of traditional real estate brokerage in mind. It’s not a diss on the talent in real estate; it’s a diss on the financial capabilities of real estate brokers to do anything about the tsunami.

When tech companies are making around 50% in gross margin, and 20% in pre-tax net margin, while brokerages are stuck at 15% Company Dollar and 3% profit margins, there isn’t enough money in brokerage to invest in technology in a significant way. No investor anywhere ever is going to look at 3% profit margins and think, “You know, I want to put $10 million into that business.” And with agent adoption problems, a brokerage simply can’t invest intelligently in technology and get a decent return on investment.

Reffkin saying agent teams will take over can be pooh-pooh’ed away with talk of real estate license law or “my broker has my back” until you realize that the average agent team is on 50/50 splits with its buyer agents and on average sees about 25% in net profit margin for the team owner. Who has more money to spend on technology tools, on culture, on team-building, on training, on whatever else is necessary to run real estate brokerage operations? The agent team or the brokerage?

Dismissing that concern with “well, state law requires agents operate under a broker” simply ignores the fact that you can hire a broker as an employee to fulfill your legal requirements — in case you don’t want to take the oh-so-onerous step of getting your broker’s license as an experienced successful agent team leader.

Destroy Your Illusions

I’m not writing this out of some spite for Bernice Ross. I think she’s a genuinely wonderful person, with a good heart, smart about the real estate business as it is today, and trying to help brokers, agents, and the industry as a whole. Her insistence on focusing on the consumer is spot on, as an example.

I write this because she is preaching comfortable illusions that have been preached for years about real estate brokerage. Culture and values are wonderful, necessary, and can contribute to profitability. But we can’t delude ourselves on the central goal, the core mission, of any for-profit business. Profitability is the whole point, and culture must support profitability… or be changed so that it does.

Because brokerages that don’t turn a profit go out of business. What do the culture and values matter then?

Destroy your illusions. Destroy them even if you love them. Destroy them even if those illusions comfort you and make you happy and make you believe everything’s gonna be all right.

The truth will set you free, no matter how uncomfortable, no matter how painful, no matter how disturbing. It’s the only way to survive.

And the truth is, in business, the only thing that matters at the end of the day is sustainable profitability. How you get there might be values and culture and technology and management and all of those things. But don’t forget the goal.

Recap and Final Note: Culture Is Not a Business Model

Let me wrap up as this got long. [Editor: Shocker! What doesn’t get long with you?]

The core mission of a for-profit enterprise is sustainable profit.

Culture and values are necessary part of driving profit, but they must drive profitability. If they do not, that culture is broken and must be changed.

Furthermore, culture is not a business model. Business model is how your organization generates revenue. Redfin’s business model is not based on commission splits with agents; Compass’s business model is. HomeSmart’s business model has nothing to do with commission splits with agents; many of the 40 female brokers of Bernice Ross operates on the same commission-split model of the most traditional of traditional brokerages.

That model — deriving revenues from commission splits of agents — is a walking dead zombie. The laws of economics dictate it. The culture of brokers who have their agents’ back, who create business families, who do wonderful things for their communities, that culture might survive… but not with the split-based business model of traditional brokerages on the evidence we have so far.

If you would dispute this, then you need to come up with more than words. You have to show first that your split-based brokerage is generating better than 15% Company Dollar and 3% Profit Margins, and then show how the values and culture and giving back is causally related to that greater profitability.

Because a great business model with a shitty culture will survive to be able to change its culture. Look at Uber. The reverse is not true. Companies with a great culture and a shitty business model go bankrupt and die off.

So, more than words. Show me the numbers. Show me the money.

-rsh