No, but it is a brilliant business model that you need to understand if you are, or will be, a homeowner. Steve Jobs created a model that revolutionized the music industry. Not only has Apple dramatically changed how we buy and consume music, they have changed how we experience the world. Jeff Bezos created a model that revolutionized the retailing industry. Amazon did the impossible. They proved to us that we will voluntarily transmit private financial information across the Internet to purchase products that we can not physically touch. Both Apple and Amazon are two examples of amazing business models that have securely anchored themselves in our daily lives and continue to thrive.
But, what has made the residential real estate brokerage business model so consistently durable, sustainable, and resilient for decades? A model that generates over $60 billion in revenue, a.k.a. realtor commission fees. A powerful economic engine that has remained fundamentally unchanged since the 1800’s. An evolutionary specimen that can be admired for its ability to adapt and protect itself.
To answer that question I embarked on an expedition to sell my own home and purchase the next one without a realtor. My journey had two goals. The first goal was to learn more about this amazing business model by experiencing it first hand from the inside. The second goal was to protect something near and dear to my heart and my future, my home and its inherent equity.
I’ll spare the excruciating details of my unique experience. But, I certainly encountered my share of trials and tribulations along the way. Which is to be expected when you are the out of towner moving into a tightly knit small town community that does not take kindly to strangers. If you’re interested in hearing more, feel free to contact me. I love opportunities to learn from other experiences and perspectives while sharing mine.
After successfully completing my expedition, with home and equity in tact, I discovered five pillars that serve as the foundation for such a hardened model.
Business Model Pillar #1: Simplicity. The fundamental simplicity of the model itself. There is a product, a home. An owner who wants to sell their home. A buyer who wants to own their home. A consignment process to facilitate connecting the right buyer with the right seller and transfer ownership of the consigned product that results in both satisfied with the outcome. A pure free enterprise transaction that embodies our fundamental belief in capitalism and the free enterprise system.
Business Model Pillar #2: Sales channel control of the buy side. Contrary to what we may have learned in econ 101, it appears that there are FREE lunches. This model brilliantly employs a FREE lunch strategy to effectively influence and control the buyer side of the sales channel. Services are provided by an agent to the buyer at no perceived cost. In essence, those services appear to be FREE to the buyer. All buyer service fees are fully paid by the seller. Keep in mind, the seller does have the most liquid position in the equation and ability to pay. Make sense? If you were a buyer, why wouldn’t you use a FREE resource? What do you have to lose? Although it is true, according to The National Association of Realtors (NAR), that 90% of buyers use the Internet to search for a home on their own. It is also true, according to NAR, that 87% still use a real estate agent. Also makes sense, doesn’t it? Buyers can easily shop, research, and review a wide range of expert perspectives from the comfort of their computer before engaging a FREE resource to do their follow on administration and coordination.
Business Model Pillar #3: Sales channel control of the sell side. How powerful could a business model be if it significantly influenced both the buy and sell side of the sales channel? The model does precisely that. It employs equally effective methods to control the sell side. Product inventory on consignment (a.k.a., homes for sale) and access to that information is strictly controlled by real estate agents through closed Multiple Listing Service (MLS) systems. MLS systems are the most effective channels available to advertise a home to the 90% of buyers searching on the Internet on their own and 87% using a real estate agent. If a home is not listed in an MLS system, it’s highly unlikely it will see the light of day. Hence, the pool of prospective buyers will be extremely limited. Even a home listed in an MLS can find the pool of prospective buyers reduced to a faint trickle if it doesn’t comply with the fee structure highlighted in pillar #4 below. It’s no surprise that only 9% of home sales are sold without a real estate agent, according to NAR. Yep, I’m one of those 9%’ers now.
Business Model Pillar #4. Premium price control. A simplified and widely accepted “industry standard” fee for services has been established and relentlessly protected. Fees are always expressed as a percentage, typically 6% of the value of the consigned product being sold, as opposed to actual dollars (i.e., $30,000). Doesn’t a percentage do a nice job of creating a sense of equality while buffering consumers from the reality of hard dollars? Those fees are also well insulated from the actual quantity and quality of service delivered. As the single largest expense in the consignment transaction, these fees are always positioned as a non-negotiable item between seller, agents, and buyer.
Business Model Pillar #5. Regulation of status-quo. Finally, any organization will struggle implementing even the best model without creating a strong culture. Culture, simply stated, is “how we do things around here.” It encompasses ethics, values, communication channels, how decisions are made, what gets recognized, and what gets disciplined. A strong culture doesn’t just happen, it is managed. And the NAR is the association that does a phenomenal job of managing the residential real estate brokerage culture. The NAR in conjunction with state and federal regulation, licensing, and certification requirements ensure the viability, consistency, longevity, and extremely lucrative profit margins of the current model.
Looking at the model through the lens of Harvard Professor Michael Porter’s “Five Competitive Forces”, it’s easy to see that the residential real estate brokerage business model has evolved to become exceptionally profitable, because:
- The threat of new entrants is high, barriers to entry are also high while exit barriers are low.
- The threat of substitute products and services is low, but slowly on the rise.
- The bargaining power of customers (i.e., buyers and sellers) is low.
- The bargaining power of suppliers (i.e., agents) is low.
- The intensity of competitive rivalry is high.
From a business perspective, I respect the power of the current model. From a consumer perspective, I plainly see that I am not the prime beneficiary that is in control. Is that alright? Think about this.
- Freely allow others to redistribute your wealth as they see fit?
- Always want others making your critical decisions?
- Prefer filtered and biased communication?
- Rely on people telling you what you want to hear?
- Willingly accept inconsistent levels of service?
- Enjoy paying more for services and products than you should?
If so, the current model will continue to serve you well. Personally, I would love to see a model that relentlessly focuses on understanding and delivering an amazing consumer experience that increases consumer control. Apple and Amazon immediately come to mind as models that relentlessly focus on the consumer experience while transferring control to the consumer. Tony Hseih shares a similar mindset. How does a Zappos for real estate sound?
Valiant efforts are underway to revolutionize the industry and genuinely focus on the consumer. David Eraker, founder of Redfin.com, did a phenomenal job innovating an online user experience that made it easier for consumers to find houses from the comfort of their laptops. Other forward thinking leaders like Joshua Hunt, founder of Trelora, are taking innovative, team based, high tech, high touch approaches to vastly improve the consumer experience while simplifying and increasing visibility into the process.
The disruptive innovators revolutionizing the residential real estate brokerage industry have my full support and undivided attention. The real estate industry is one of the most powerful drivers of our nation’s economic engine. Consumers need it, and most importantly our country needs it, as we each strive to create a better future for all.