The Real Estate Broker Business Model is Dead: Part Two

“The old ways are dead. And you need people around you who concur. That means hanging out more with the creative people, the freaks, the real visionaries, than you're already doing. Thinking more about what their needs are, and responding accordingly. Avoid the dullards; avoid the folk who play it safe. They can't help you anymore. Their stability model no longer offers that much stability. They are extinct, they are extinction.”
― Hugh MacLeod

If you didn't read the first post in this series, stop reading this one and read that first. This one won't make much sense otherwise. This is the link:

The Real Estate Broker Business Model is Dead: Part One

Okay, now the good stuff. I ended the first post with a question - what is the one thing keeping the real estate industry as we know it afloat? I walked you though the process of technological diffusion and why technology kills entire industries. The real estate model is on life support, but what IS that life support exactly? What's the one thing that, if it goes away, the real estate broker business model immediately dies?

Like how I build suspense? ;-)

Let's do it a little longer. Seduction is fun, after all.

What are the Signs of Demise?

I personally knew about ten people that were successful real estate agents prior to getting into the field. They gave me an incredibly skewed view of the industry. It would be like assuming the average weekend basketball player's skill off observing NBA Hall of Famers. 

Once I started getting involved in the industry, I got to see all the warts. And oh man, there are a lot of warts. I realized there were a ton of agents that were incredibly desperate. Some of the peculiar observations included:

• The age of the average realtor. It's old. Like, really old. 
• The age of the successful realtors. This was even more telling.
• The sheer number of people successfully profiting off agents... like people promising to have the next great lead generation "system." I call this the "Amway" phenomenon (the corporation makes more off selling "how to sell our junk" resources than actually selling their shitty products. 
• The business model used by established, franchised businesses. New agents are recruited not for their skill in buying or selling. They're recruited so the "team" has a new source of quality leads via the new recruit's sphere of influence.
• ...and a few others. Here's a decent summary. 

The real tell-tale sign, though, was apparent when I started analyzing the mounds of data that's relevant to the industry. That's when I had a few epiphanies. There are a slew of tech companies that are spending huge sums of time, resources, and money to kill the one thing that prevents them from completely dominating the industry. 

That one thing that's keeping us on life support?

Our MLS systems. 

That hodge-podge of local databases loosely stitched together is all that's keeping the old model alive. Amusingly, a lot of people seem convinced the system is too big to fail.

That, of course, is the famous last words every dead industry muttered before they were proven wrong. We could spend weeks making a list of industries that were killed by technological development. Instead, I'll share this Bon Jovi meme because, you know, he's right:

The MLS Seriously Sucks

I've talked to a few technology-challenged folks that believe the MLS system does amazing things. "Incredibly powerful" they say. "Capable of amazing things!"

Yeah. If we were living in 2003.

I've found praise for MLS software is a good predictor if that person still uses an AOL email address. The fact of the matter is every single MLS system I've seen in action is poorly designed and lacks the functionality seen in some of the bleeding-edge real estate portals. The systems can do some amazing stuff, but there are hundreds of software solutions that do more with greater simplicity. 

This is understandable. The MLS is maintained by people that probably aren't leaders in tech innovation. It's maintained by people that buy and sell real estate. Nor do our local MLS systems have the venture capitalist funding of tech startups. Most importantly, our MLS systems will NEVER have an advantage. They will die.

I know what you're thinking - as agents, we control the MLS. How would it die if we all use it?

That's just a more nuanced way of believing the MLS is too big to fail.

The MLS is vulnerable precisely because it's big. Size = cost and inefficiency. Someone can and will develop a better system. Hell, most of us are unwittingly teaching tech startups how to kill our own MLS. How many agents do you know that use a consumer portal like Trulia or MarketLeader? Unbeknownst to many, every one of these companies collects and analyzes data, then use it to refine their products. At the time of writing, most of these companies have already become reliable sources of leads for younger people. Few agents seem to understand exactly how or why these companies are so good at generating (then selling) leads. In a nutshell, it means they beat us to the punch. Their ability to get eyes on their website is better than our ability to convince people in our local area to let us buy and sell their houses. 

That's a big deal.

We are slowly becoming slaves to companies that generate leads better than us. And they're getting better. And better. And better.

At some point, more and more companies will use systems like RedFin, only they'll develop their own replacement for the MLS. They'll hire cheap, desperate agents to carry out one particular task (like "Jim shows houses, Tina writes the listings, Cindy takes the pictures, Wade does the negotiating, etc.) It's the law of mechanical Turks (Google it if needed.) And of course new agents are going to jump on board... it's far more financially advantageous to join the big company for a salary then try to out-compete all the experienced agents that have spent years building a customer base. 

It is, after all, a numbers game. 

So What Do We Do?

Is all hope lost? Seems that way, right? If we see the writing on the wall, are we all just dead in the water?

Maybe. 

Maybe not.

In the last post, I talked about the diffusion of technology and the percentages of the population that fall victim to disruptive technologies. Some people assume learning to master the technology is the key. It's not. It's a trap. 

The technology itself, which you pay for, is constantly evolving. Right now, you're a necessary component in a process. The people selling you the technology could just keep doing what they're doing and enjoy the profits they make from you. But they don't because another company will continue to advance, thus making the Luddite tech companies as obsolete as you. In other words, there's always pressure to move towards a monopoly. This is the mechanism that will assure the death of the current real estate model. Our MLS systems have given us a monopoly of sorts, and the tech companies have the ability to create a fundamentally better monopoly. 

You CAN survive, but you have to find a path that's completely different than the path you're on right now. Furthermore, your future path can't rely on exploiting the current model of real estate. Remember, it's going to die.

My Crackpot Advice

The irony, of course, is that any established real estate agent is going to laugh at my prediction. Why? That's the Luddite Effect I talked about. Want to see it in action today? Check out news stories that interview taxi drivers. They are genuinely convinced Uber and Lyft aren't a serious threat to their industry. Shit, they don't even realize their industry is already dead.

So goes the The Luddite Effect. 

For the handful of you that DO heed my advice, get creative. Pay very close attention to exactly how the big real estate portal websites operate. There's tremendous opportunity in the future, but it's going really unorthodox and will probably require an outside perspective.

Me? I'm personally leveraging my outside education, work experience, and even hobbies. There are some things technology really cannot do, at least not for a while. That's the niche I'm aiming for.

As a new real estate agent, I have little interest in wasting time learning "the trade." Instead of memorizing scripts, honing my cold-calling skills, or spending twenty hours showing condos to indecisive newlyweds with unrealistic expectations, I'm studying data. I'm learning how and why people use social media on various devices. I'm spending time developing algorithms that can identify likely buyers and sellers based off unusual but predictable behavioral antecedents (like, for example, women that increase their underwear budget by more than 100% are roughly 50% more likely to sell their house within the next 18 months.)

Why am I doing this instead of following the path every new agent takes? Because following that path is a really, really stupid gamble. I have far more faith in my own ability to master skills lead generation and conversion than I have faith that the career of "real estate agent" will still exist in five years. 

In the interim, things aren't necessarily bad for everyone. Unlike teaching (per the past post), there are some incredible opportunities in real estate today. That's obvious by the number of people that are succeeding despite everything I've posted in these two posts. Unfortunately, their success has a shelf life, which is directly tied to the continued existence of the MLS. The moment it's replaced by something better, those that don't have alternate plans will be forced to become slaves to whichever company manages to pull the plug on the MLS. 

But Wait, Why Listen to You?

The short answer: You shouldn't.

The long answer: First, this is just one person's analysis, and I'm an outsider, too. Furthermore, odds are good I do not personally care about you because I do not know you, therefore I do not care if you heed this warning or not. I'm not selling you anything. I'm not recruiting. I'm merely reporting. If anything, this is written so I'll have an "I told you so" record to brag about should the prediction come to fruition. Yes, I might use it to springboard a career as a psychic. 

Hopefully, the people that will read this will keep their eyes open a little wider than they have thus far. Do your own research. Come to your own conclusions. If you DO come to the same conclusion, connect with me. I like discussing this shit, but it's obviously not a topic the general public necessarily cares about. And like Hugh said in the quote at the beginning of this post - avoid the dullards. Bring on the creative types, the freaks, the visionaries!

At any rate, I do with you good luck. Despite what I said earlier, I DO care about you to the extent successful people make the world a better place than unsuccessful people.

I want you to be one of the winners. Yeah, I know. It makes you very, very uncomfortable. That's precisely why you should listen to my advice.

###

The Greatest Hurdle to Becoming a Real Estate Agent?

My journey to becoming a real estate agent started approximately five months ago. I was sitting in a mall parking lot broiling in the summer heat (it was like 103° F outside) waiting to pick up some Uber rides. I had been using Uber to supplement the income I receive from writing projects. Normally I supplement that income with substitute teaching, but the job dries up during summer vacation. Anyway, the summer heat sucked. I was scrolling through my Facebook feed and I came across a post from Adam, one of my teammates from my mma gym. My friend (and another fellow teammate) Damian was looking for a new agent to join his growing agency. I figured "What the Hell, why not?"

Fast forward five months. I took the required classes. Passed the salesperson test. Now I'm just awaiting the approval of my application to the state bureau of real estate. Prior to deciding to take this journey, I did a little research on the profession. Apparently about half of all new licensees do not make it to their first anniversary before leaving the profession. That's a shockingly high number.

It also explains the sheer volume of "recruitment" letters I've received since the state announced I was taking the test (which must somehow be a public record... thanks California.) Interestingly, these letters aren't of the "apply to work with us" so much as "this is what we can offer you; PLEASE JOIN US!!!!!" The tone of the letters makes the point obvious - "recruiting" isn't a culling process to identify the best candidates. "Recruiting" consists of throwing as much pasta against the wall as possible and hoping something sticks... which is a tell-tale sign there are a whole lotta people that wash out.

So what's the big problem? Why do so many people fail? 

As it turns out, the issue is simple. Most people fail because they run out of money.

Even though the education, testing, and licensing for real estate is relatively inexpensive compared to other professions (it should cost less than $2,000 or so), it's extremely difficult to make money in the beginning. It takes time to break into an established market, make a name for yourself, and begin building a client base. As a real life example, I met a teacher who's spouse is a real estate agent. This agent has been an agent for three years. They've sold exactly zero houses during this time. None. Nada. The agent lives entirely off their spouse's teaching salary. If it weren't for that salary, this agent would have (and probably should have) washed out of the profession within the first year because they would not be able to afford to live. This problem is, without a doubt, the biggest obstacle new agents face.

Me? I'm incredibly lucky in this regard. I already have two sources of passive income from the aforementioned books and affiliate advertising on my various blogs, I can still work as a substitute teacher, and my wife has a full time job. On top of all that, my agency is generously (and wisely) set up to help us new agents weather this phase. Until we're licensed, we act as real estate assistants and earn income for non-salesperson duties. After being licensed, we're provided with leads to help us build that client base. All of this, coupled with a rather minimalist lifestyle, adds up to a great formula for surviving that income chasm. 

My Advice

If I were advising people that were interested in a career in real estate AND they wanted advice from someone that's going through the process currently, I would offer the following tips:

• Save Money! This is a biggie (and the one I really failed.) Having a repository of funds to pay the bills would go a long way to bridging that early lull in income. At a minimum, I would recommend saving enough to cover three to six months of expenses, and ideally have enough savings to cover an entire year. 
• Develop passive or semi-passive income streams. I did this in lieu of the big savings account, but the idea would be to combine these two strategies. Passive income is defined as income that requires no time or effort on your part; semi-passive refers to income that takes very little time or effort. There are a million possibilities here that goes well beyond the scope of this particular article. Google it.
• Don't quit your current job. This one is a little controversial because any amount of time spent working on anything besides real estate will, in all likelihood, slow your development as an established, successful agent. However, it adds a ton of security you wouldn't have otherwise. If the previous ideas are not feasible, working another job would be an undesirable but effective solution. Ideally, you'd want to be able to work this job during times that does not interfere with your work as a real estate agent. 
• Have a plan to develop leads. Leads are the lifeblood of a real estate agent. Again, there are a million ways to generate leads, which goes beyond the scope of this article. Without leads, though, you will fail. Do research and develop a plan. 
• Live frugally. It's far easier to spend less money than it is to make more money. Curtail excess spending. Eliminate debt. Make a budget. avoid major purchases.
• Pick your agency wisely. As I alluded to earlier in the post, some agencies are ideal for new agents. Most are not. Any agency that gives you the opportunity to earn income without having to actually sell a house is probably going to be better than an agency that's just going to throw you to the sharks. Some may offer an actual salary. Others, like my agency, act as a team and pay for doing various administrative tasks. Agencies that provide leads can also be a huge boost to new agents as it helps develop that all-important client base. 

If you're a new agent and you follow these steps, odds are excellent you'll avoid becoming one of those 50% of new agents that "flunk out" of the profession. 

Current long-time realtors - do you have any advice?