Tylenol vs. Chemotherapy: Brokerage Edition

This is the week when work returned to something approximating normal, although that is a word I have trouble applying to my life in a lot of ways. I do hope everyone has had a wonderful holidays and a happy new year and is as excited about tackling 2020 as I am.

I didn’t make a New Year’s Resolution because I’m old. I’m old enough to remember making mix tapes, using a rotary telephone dial, and to know that New Year’s Resolutions never work. The only resolutions I’ve ever made that has worked are ones made on a random Tuesday, because I wanted to change, not because of some milestone date or event. So it isn’t a resolution to say that I will continue to do in 2020 something that I wish others in the industry would shamelessly copy: don’t tell pretty lies.

Specifically, consultants, experts, gurus, and advisors of all stripes should stop telling brokers pretty lies about where they are and what they need to do. Unlike VC-backed tech companies, they don’t have millions in the bank to fall back on. Unlike Associations and MLSs, brokers do not operate a local monopoly that can afford to snooze quietly for a couple of years and remain in business.

Telling brokers pretty lies in the face of deep problems is like prescribing Tylenol for a cancer to lessen the pain. What they need is chemotherapy, no matter how painful, even if they’ll lose all their hair and spend a year throwing up every day.

What got me on this line of thinking is an email newsletter I received from 1000watt, written by Marc Davison, titled, “Getting brokerage unstuck.” Now, I happen to think that Marc — and the rest of the team at 1000watt — are some of the best and brightest in the industry, and their branding work is unbelievable. I still think his saying, “I am not a lead” is one of the enduring truths about real estate that everyone should understand.

But in this case, I’m going to have to take that post and its advice to task, because it is giving cancer patients Tylenol. A broker following that advice, because it’s easier to do and makes them feel better about themselves in the short term, is simply not facing reality. They might die in less pain, but die they will.

Let’s get into it.

What is a Pretty Lie?

Let’s start here, because I really want to emphasize that I am not calling Marc Davison a liar.

A Pretty Lie is a story we tell ourselves to make ourselves feel better. Urban Dictionary defines it under “beautiful lie”: “Something so amazing that makes people feel all good inside, even if they know is not true.”

For example, I’ve been telling myself pretty lies for almost two years. They went like this:

“I’m putting on all this weight because of my thyroid condition. Plus, with all my travel and terrible food options, I don’t have a choice sometimes. Working out isn’t going to help when I have a physiological and hormonal condition. I can’t control biology!”

All of those made me feel better about myself even as I kept putting on the pounds. None of them actually addressed the underlying problem, but boy, did they make me feel all good inside.

It turns out that even if you have no thyroid, a combination of working out and diet does help. Both of those suck, badly. And as a Korean-American, it really sucks to give up rice, noodles, dumplings, kimchi (has sugar)… but that appears to work. I can’t tell myself pretty lies anymore about my body and my health.

The truth sucks, it hurts, I want to ignore it, and it turns out to be something I really, really wish were not true… but it is. As Marlo from The Wire says, “But it’s the other way.”

So, a Pretty Lie isn’t necessarily an intentional falsehood. It wasn’t like I wanted to lie to myself. It’s that I knew deep down that I was telling myself feel-good stories to avoid having to face the harsh truth about myself.

Whether it’s Marc or me or anybody else telling stories to ourselves or to our clients or to the industry, a Pretty Lie is not a lie per se but a feel-good story that lets us avoid the harshness of the truth.

Pretty Lies, Brokerage Edition

Consider the way that Davison starts the post. He recounts that a brokerage CMO told him that while they do a good job marketing property, people know their brand name, consumers just see them as a utility. As a result, their future is at stake.

He then writes:

This was reinforced for me the week before Christmas while hanging in New York with some broker/owner friends, all of whom shared the same lament: things aren’t improving and something’s gotta change.

“Traditional” brokerage is under attack by serious competitors. Compass. KW. eXp. Agents are leaving older brands, and taking their clients and their listings with them.

During the last decade, the most common response to this has been to simultaneously concede company dollars to agents, slash marketing and invest in more tech – a dispiriting rinse-and-repeat cycle.

Respectfully, that’s fighting a 1,000-year flood with a trowel and sandbags. By most accounts, it’s not working. Realistically, it’s unsustainable.

Things aren’t improving and something’s gotta change. Conceding company dollars to agents, slashing marketing and investing in tech — that’s not working and it’s not sustainable.

Okay, so far so good… although I don’t understand what Marc thinks a “traditional” brokerage is if Compass isn’t one. And if KW isn’t an “older brand” given that it was founded in 1983… well, guess we’re only talking about RE/MAX and Coldwell Banker? Anyhow…

He continues, saying that the idea to get the brokerage “unstuck” came to him.

Essentially, the idea is for the brokerage to embrace its core identity as a “local business.” He writes:

Peel back the outer skin of a brokerage. Underneath beats the heart of a local business. A real estate brokerage holds within it a purer essence of place than most other establishments one can think of. Its workforce is local. What it sells is local. The money it generates flows back into the local economy in generous amounts.

Given the rising awareness and support for all things local, why shouldn’t a real estate brokerage be the pride of its community? Something understood by residents, loved by sellers, regarded by buyers?

What agent wouldn’t want to work underneath such a halo?

Then he tells brokers Pretty Lie #1:

While the agent is often the face of a successful transaction, the brokerage is the financial, legal and organizational platform that makes it all possible. It’s the entity from which good work and goodwill are reflected back into the community.

Further on we get Pretty Lie #2: “You’re a local staple. You’ve sold homes to generations of families.”

After talking about an idea involving locally made goods from local creators and makers, he tells Pretty Lie #3: “If you can own local love, you will inspire your agents and recruit new ones — the ones you want. And preserve all you have built for decades to come.”

It is an alluring message, and one that Marc as a master marketer, delivers in a powerful way. It stirs the emotion and the imagination.

And it is all Tylenol, all analgesic, designed to dull the pain and provide temporary relief… rather than to cure the underlying disease.

The Horrible, No-Good, Awful Truth

Let us get real for a moment here. It’ll be horrible, no-good, awful and uncomfortable but let’s get real.

Pretty Lie #1

The idea that the brokerage is the financial, legal and organizational platform that “makes it all possible” sounds like something from the 80s and 90s before the world moved on.

If brokerage is such a platform, it isn’t because of the brokerage but because of real estate law. Agents are required by law to have broker supervision; they’re not seeking it out because they want to.

Financial platform? Because state law requires that commission checks be made out to the brokerage? Brokers aren’t providing financing to agents to build their businesses (unless you’re Compass) or managing the agent’s assets for them.

I’m not sure what “organizational platform” means, but the very existence of agent teams who reside in separate offices from the brokerage itself says to me that whatever you want it to mean… “it’s the other way.”

The contemporary brokerage, with exceptions as I may describe below, is a business services provider to real estate agents. It is a vendor to agents in much the same way that Imprev or Boomtown is a vendor. Let’s not tell ourselves pretty lies here.

I was recently at a strategy planning meeting where a dispute arose between an agent and a manager. The agent gets up and says, “You see, the difference between us is that the broker pays you, and I pay the broker.”

The agents know. They have known for years. The ones who don’t know yet soon will, especially if they get productive. The idea that the broker is the employer who “hired” them, or a manager they have to listen to, or some sort of authority figure is as outdated as making mix tapes. I’m sorry, I truly am. But that’s the harsh, unpleasant truth. Most of you brokers actually know this in your gut.

Pretty Lie #2

Pretty Lie #2 is directly related to the above. You haven’t sold homes to generations of families. Unless your brokerage pre-dates RE/MAX in 1974, you haven’t sold a home to anybody in your capacity as a broker. Your agents have, but not you.

All you have done is recruiting and retention of those agents. If you’re a player-coach who still sells and competes in the marketplace with your agents, then yes, as a real estate agent you have sold homes to people. But as a broker? No, sorry. You haven’t. I can guarantee that even someone who walked the walk as a real estate agent, like Nick Bailey at RE/MAX, hasn’t put up a yard sign in years. [CORRECTION: Apparently, Nick did in fact sell three houses before he joined RE/MAX. I should have listened to my initial gut feeling and named someone like Harold Crye instead, but wanted to acknowledge a younger leader who has been in the trenches. Doesn’t change the fact that most broker-owners of larger companies do not sell and have not sold for years.]

The unpleasant truth is that brokers are not in the real estate business anymore and haven’t been for decades. They’re in the business services provider business, and what we have all called “recruiting and retention” for years really needs to be called “sales.”

Because you don’t sell houses. You provide services to people who sell houses.

Pretty Lie #3

And so we get to Pretty Lie #3: “If you can own local love, you will inspire your agents and recruit new ones — the ones you want. And preserve all you have built for decades to come.”

I have heard over the past ten years story after story from broker after broker — including one recovering broker to whom I am married — about how they lost agent after agent despite being the local firm in town since the Eisenhower administration. They completely owned local love. But the agent left for a new competitor over a few thousand dollars more in splits.

Need an example? Here’s one from just a couple of weeks ago:

Top Houston agents Laura Sweeney and Lisa Kornhauser, both formerly with John Daugherty Realtors, have joined forced with Compass, the company announced.

Named by the Houston Business Journal as No. 1 residential real estate agent by volume in 2019, Sweeney also topped the Houston Business Journal’s 2019 Luxury Residential Real Estate Agents List with an average home sale price of $2.111 million. In addition, Sweeney was ranked No. 68 nationally by individual transaction volume ($130,132,321) via The Wall Street Journal & REAL Trend’s 2019 Individuals by Transaction Volume list.

If you know anything about Houston real estate, you know that John Daugherty Realtors owns local love like crazy. They have been one of the top brokerages in Houston since 1967, and have been a pillar in the community for decades. This is from their About page:

You won’t learn the nuances of a city or its neighborhoods by studying charts on the internet. You must live and breathe their history and understand what the future has in store. We live and work in the areas where you live and work. Together, our local knowledge and incomparable sales team are the reasons we have been and will remain the leader in residential real estate.

Unfortunately for them, local knowledge and living and breathing history didn’t mean squat to their #1 agent who jumped ship to a company that nobody believes “owns local love” in Houston in any way shape or form, being a total newcomer to the city.

If you’re a broker, you know in your heart that as much as you hate hearing it, no amount of locally made goods in your windows from local artisans will stop an agent from leaving you. You can inspire them until they weep tears of joy, then have them tell you that they’re going to JP & Associates because they will keep 100% of the commission. You know this. It’s time you admit it at least to yourself.

And local love is going to fix that? Some kind of cool flashy branding campaign is going to change that?

As Marc said himself, things aren’t improving and something’s gotta change.

Prognosis: The Fundamental Problem

The first step to recovery is admitting you have a problem.

The second step might be understanding what the problem actually is. This is why doctors order tests and x-rays and CT scans. If they don’t know what disease is causing your stomach cramps, they can’t prescribe treatment.

The CMO in Marc’s story thinks the problem is that the public has no idea what they do and see them as a utility, an unpleasant necessity. He or she recognizes that they have a problem — their future is at stake. But he or she has made a fundamental misdiagnosis.

The fundamental problem of brokerage, as I have written many times in these pages, is simple. And there are two of them. Everything else flows from these two problems. If you’d like, go back and re-read Musings on Defining Fundamental Problems published before the holidays.

Profitability Is Inversely Correlated to Productivity

First, more productive an agent, less money you make. It is the most bizarre compensation scheme in the annals of business, but that’s the dominant one in real estate.

And you can’t recruit your way out of it. The data tells us that. The chart below is Realogy’s NRT division’s agent count vs. profitability.

Realogy has been trying to deal with worsening commission splits for years now. That predates the Ryan Schneider era. I’ve listened to earnings call after earnings call where Richard Smith, then-CEO, would talk about how commission pressure is moderating.

Meanwhile, earnings keep trending downward inexorably. This is a fundamental problem of real estate brokerage, not lack of branding in the marketplace.

Brokerages Do Not Control the Consumer Experience

Second, you do not control the agent and therefore do not control the consumer experience. You could have the greatest brand story in the world, hire Marc Davison and 1000watt to design you a spectacular branding package and an amazing website. You know who your brand ambassador is? The least competent agent in your company doing whatever the hell he feels like because, “You don’t pay me; I pay you!”

You could be a boutique brokerage who only hires the very best. That’s fine. But among your 10 awesome agents, the worst of the 10 is who represents your brand to his clients.

This is the business equivalent of lung cancer. Painkillers can help manage the pain, but it won’t cure the disease.

The Treatment: Painful and Sometimes Experimental

When the fundamental problem is that deep, surface treatment is hardly going to help, is it? How will a new branding package change your net profit margin from the 2.5% it is today to 8% (the average for the NYSE)? Will putting up local crafts get your 1099 independent contractor agents to suddenly follow your orders?

Hell, you can’t even give them orders for fear that you’ll run afoul of your state’s labor laws.

If you are a traditional brokerage, and you find yourself saying what Marc’s broker/owner friends said — things aren’t improving and something’s gotta change — then you need to solve at least one of the two fundamental problems.

I can’t get more specific, obviously, because I don’t know your situation but here’s a general approach that might be helpful.

First, decide who your customer is. It is either the agent or the consumer. It cannot be both. Let me say that again: it cannot be both. It. Cannot. Be. Both.

The Agent Is the Customer

If your customer is the agent, then you need to explore the 100% Next Generation Brokerage model. Those are brokerages like HomeSmart, Realty One Group, Benchmark Realty, Fathom, JPAR, and dozens of others. I wrote an entire Red Dot on them, so if you’re truly interested, go check that out.

You see, the 100% shops do not have the inverse correlation problem. They make more money from their more productive agents, although productivity is defined in terms of transactions rather than volume. (Because their business models are usually based on a per-transaction fee, rather than a split of the commission.)

They don’t control the agent, but they don’t want or need to control the agent. They don’t really care that much about their consumer brand; they care a great deal about their industry brand, of course, since that’s the one their customer (the agent) sees. (Let me rephrase that, since someone from a 100% shop is bound to show up in the comments to disagree: they should not care about the consumer brand.)

The Consumer is the Customer

On the other hand, if your customer is the consumer, then you need to explore the W-2 employee model. Those are companies like Redfin, REX, Houwzer, Door, and others. Don’t let the fact that they are “tech brokerages” deter you. There are dozens if not more of “traditional” companies that are using the employee model to great success. Many are not called brokerages, because they are agent teams… but we’ll talk about that more. The fundamental business model remains the same, and I’ve written a free white paper on The Firm model that might be helpful to you. (Check the Publications tab above.)

These guys care a great deal about the consumer brand, because that’s who their customer is. The agent is just the workforce for service delivery… but that means they have to pay the agent, and not the other way around.

The key to the W-2 model is simple: you must generate your own leads. You cannot leave lead generation to your employee agents; you must do it yourself for them.

If you think about it, that’s basically what an agent team is: a boutique brokerage that generates its own leads, then brings on employee agents who work them. (Yes, yes, most teams have their team members on a split… but that’s only because no lawyer has sued them yet. You can look up all of my writings on the employee misclassification problem with agent teams if you’d like.)

Whichever path you choose, though, transforming your ongoing business into one of those two will not be pleasant. In fact, to paraphrase Marsellus Wallace from Pulp Fiction, it’ll be pretty fucking far from pleasant. But to deal with cancer, you need extremely painful treatments. Chemotherapy sucks. Radiation is an ordeal. Sometime, you need to try experimental treatments that haven’t been proven out fully.

But if that’s what it takes… then that’s what it takes.

Nothing Wrong With Pain Management

Having said all of that… I am a fan of palliative care, otherwise known as pain management. I don’t believe that people have to fight incurable diseases with everything they have and go bankrupt in the process if they don’t want to.

If you have spent your career operating a traditional brokerage, things aren’t improving… but the potential cure is even worse to contemplate… there’s nothing wrong with deciding on a “treatment” of painkillers to ease the end. In that case, just embrace the decline, try your best, make what you can, save as much money as you can, do some local love type of things, spend on fancy branding, recruit who you want, retain who you want, and more importantly, don’t recruit people you don’t want.

Maybe sell the brokerage if you can, and if you can’t, operate it with dignity and peace of mind knowing that you don’t have to compete with the next generation of players. Because you’re not competitive and you won’t be… but that’s perfectly okay, because you’re choosing that path.

Choosing to go gently into that dark night is a perfectly rational — and perhaps even admirable — choice for someone who has dedicated his or her life to a particular vision of brokerage and how to operate one.

That’s not buying into Pretty Lies. That is choosing a dignified exit fully knowing the harsh truth.

I think there is a nobility to taking that path.

You Have the Power and the Responsibility

As I see it, extending the medical metaphor even further, you as the broker/owner have both the power and the responsibility to choose.

You can choose which doctor to listen to. If you don’t like what one doctor’s prognosis is, get a second opinion. Get a third. Get as many opinions as you’d like until one resonates with you in your heart. I’m a strategy consultant, and I think I’m usually right… but I’m a fallible human being and maybe I’m wrong. Get someone else’s opinion as well. That is your right and your responsibility.

Even if you agree on the prognosis, you can talk to your doctor about the treatment options and push back. If you’re not willing to do experimental treatments, then make that clear. If you’re not willing to take on the pain and suffering of a treatment, that’s your call, because it is your company at the end of the day.

You get to choose whether you’re going to fight like hell and do whatever it takes to survive, or wind things down with dignity and grace. Sometimes the cure is worse than the disease. That’s your call, not anybody else’s, and no one can judge you.

Whatever your decision, however, it has to be based on the truth no matter how unpleasant rather than on Pretty Lies we all tell ourselves to make ourselves feel good.

-rsh