Foundation of Business Model Arguments Subject to Earth Fissures

Let me clear my throat … check one, two …

Late last week I received an inquiry from a prospective buyer in Canada asking about earth fissures – the rather unpredictable phenomenon by which large cracks appear in the Valley’s soil. Leading theories say the fissures are caused by settling in the Phoenix area’s water table; they generally seem to appear after heavy rains start to filter back through the soil toward the water table.

These fissures also tend to be limited to a handful of areas in the Valley. And if you’re really interested in any of those, there’s a very helpful website you can visit.

None of this has anything to do with the point aside from this fact – homeowners whose homes are built upon soil subject to earth fissures may one day discover that the foundation they believed to be firm was, in fact, not.

The scrutiny of the real estate business model

And that does lead to today’s subject: the scrutiny of the so-called real estate business model as we enter 2009 and the nation’s second Era of Good Feelings.

(Side note: the feelings in the first Era of Good Feelings really weren’t that good, especially if you happened to be a closet Federalist. But in school texts, the four-word description always wins over reality.)

In this space once upon a time, Benn himself proposed the abolition of the phrase “business model.” While such an action would leave many real estate bloggers with little left to write, thus making abolition more than a little extreme, it would probably behoove us all if a disclaimer was included in any discussion about the so-called “business model.”

There is no single business model in real estate. There has not been a single business model in real estate in at least a generation and possible back to the days of the Era of Good Feelings. There are, in fact, dozens of different models based on varying price, service and exploitation of dogs.

Discussions of the real estate business model, especially those surrounding what the non-existent single model MUST become because of entrants such as Zillow, Trulia, Obama, IDX and Walter from Fringe, are almost always rooted in some utopian ideal that may or may not bear any resemblance to what the public really wants. Just because it’s what we believe the public should have doesn’t mean that it is what the public will embrace or even is clamoring for.

The rise of “REO brokerages”

The perfect example of this, at least in the Phoenix real estate market, has been the rise in the number of real estate brokerages who handle nothing but bank owned listings, more commonly known as REOs.

What does it take to become an REO brokerage?

• You need a designated broker, per Arizona law
• You need to have established contacts with the lenders and/or asset managers such that they will send you Broker Price Opinions and, hopefully, listings
• You need MLS access.

What do you not need to run a successful REO brokerage?

• Negotiating skill. You’re an order taker, relaying instructions up and back between buyer’s agent and the asset management and/or bank.
• Lockboxes. Forget security, forget professionalism. Hire an outside vendor who can attach an $8 combination lock box you wouldn’t trust on a bicycle and call it good. As an added bonus, make sure it has the same code as 200 other boxes around the Valley.
• Courtesy. No need to answer calls. In fact, it’s best you preface all of your listings with “don’t call, the status is the status” even if the status isn’t the status.
• Salesmanship. There’s no selling involved. There’s almost no marketing. Put up the sign, stick it in the MLS and be done with it. If it sells it sells. If it doesn’t, who cares?

This is the model which is proliferating these days like pink eye in a kindergarten classroom. How many of these companies adapt when the market changes and actually selling skill will be involved, it’s hard to say. How many will even want to remain in business, it’s equally hard to say.

Sorry, but unicorns are mythical too

And this is where the mythical brokerage perfect in morals, ethics and Twitter Grade are losing the battle on the ground to a gaping market void to be filled.

How can this change? Only when the lenders and/or asset managers demand more from the listing agents (unlikely, since they care not what is done to sell a house as long as it sells), or only when the public rises up en masse and expects more from the listing agents (possible, though also unlikely since many in the general public don’t know what they don’t know in most cases.)

Similarly, there’s a near-constant debate over the future of the real estate brokerage as it relates to real estate agents. Splits should be higher. Splits should be lower. There needs to be more training. There needs to be less office infrastructure. Brokers should provide leads to agents. Agents should be self-sufficient as befitting any independent small business owner.

All agents care about is the split?

Paraphrasing what one broker said on Twitter last week, agents don’t care about leads, training, broker assistance or infrastructure (paid signs, lockboxes, etc.) All they want is higher splits.

For some agents that’s absolutely correct. For others it’s absolutely wrong. There’s no universally right answer for everyone in this business.

So while we can discuss what we feel an ideal brokerage will look like, those that don’t match that vision will continue to remain in business so long as agents are willing to hang their license there. And as long as the cash flow remains positive, the business will remain active.

One final thought …

The idea of “have to” is a red herring. Nothing “has to” change (even though change is coming to Main Street near you in just eight days, or so I’ve been told.) And even if there is a “have to” it doesn’t necessarily need to be the have to that you envision.

Put another way, change is inevitable. But the odds of you correctly guessing the path of evolution are thin at best.

Photo courtesy of the AZGS website. Original photo by Todd C. Shipman and Meagan Shoots