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January 2015

Brokerage Design

Two Contemporary Trends Converge to Contribute to the New Real Estate Industry

By Jeremy Conaway

January 2015 - NWREporter

Jeremy ConawayAfter years of pushback and denial from some elements of the industry media with respect to stories regarding industry change, it would now appear from the past three months of publication that both the print and electronic media now agree that the North American real estate industry is in a state of almost complete disruption. With this historic moment behind us one might surmise that the industry has now given itself permission to universally get on with the tasks of innovation and creativity that will be so critical if either the existing brokerage or agent communities are to assume a leadership position in the new configuration of all things real estate.

While many brokers and agents might suggest that such a succession is virtually guaranteed (and thus not worth discussing) the fact is that a review of the current industry environment does not allow any rational person to make any such assumption. In fact, to the contrary, there is every evidence that the convergence of one or more of the current trends, directions and forces impacting the industry may well be the turning point that creates the perfect opportunity for outside forces to gain control of both the marketplace and the transaction.

Most of our readers are more than familiar with the plethora of trends that are currently impacting the traditional industry. From regulatory forces to the growing number of internal and external portals, from the Realty Alliance's "Upstream" project to its cousin the Broker Public Portal project and from NAR's organizational realignment manifesto to the growing focus on broker profitability there is no shortage of potential game changers to monitor and for which to prepare.

With the current industry also comes the time to stop sweating bricks and to start taking meaningful action. For many brokerages the opportunity to respond to external change will be trumped by the record number of industry and brokerage executives who are now expected to cash in their chips and head for a hopefully happy retirement.

No one should be surprised by this industry trend. How many 65-year-old men or women brokers are going to be willing or able to ring the bell and announce that at such an age they are prepared to undertake the challenge of reinventing themselves and renovating their firms? For most of this group the challenges simply exceed the amount of energy and passion available to meet such opportunities. Accordingly the industry should assume that either sooner (as in now) or later (when the bullets start flying) many seasoned veterans will collect whatever hard earned chips they have set aside and be off.

Given the secondary fact that most brokerages are "light on the management bench" many firms will be forced to either turn the helm over to a well meaning senior manager who will attempt to push the traditional model for a few more years (thus exhausting institutional capital) or employing a new age executive who is likely to have some capital but no practical experience running a brokerage. From this later group the choice is likely to be between a young technologically fused person with little or no sense of management dynamics or a 40 plus year old member of the X Generation who has already been living with technology and digital disruption for over twenty years. This is the digitally native CEO. Easily stated, but difficult to implement, many brokerages will opt for this second option

Having made the decision to fashion the future of their brokerage on a strategic relationship with an individual who may look and act nothing like the departing owners, the ultimate challenge begins. By the way, both this article and the situation it speaks to assume that the legacy owners have been unable to find a suitably financed buyer for their precious business asset and thus will be carrying a lion's share of the unpaid balance themselves. The further presumption is that they will, in all likelihood find themselves, at least for a several year period, in some manner of a weird partnership with this new executive.

The next thing that we know is that, moving forward, most brokerage firms will have to go through a period of high impact innovation. It simply has to be done. If the current owner submits to the idea, generally sponsored by their legal counsel, that no significant changes can be made, in all likelihood they will condemn both the firm and the its new principle to certain failure.

So if the determining factor regarding the success of this succession plan is going to revolve around innovation, the solution is to selectively head into an innovation experiment. The objective here is to see whether or not the new recruit has the essential talent necessary to take the firm through what lies ahead and, perhaps of equal importance, whether or not the parties can work through the process without sinking the ship.

The following steps might just solve the problem and create a working resolution for all. The first step is to carefully study the firm's current business model, become familiar with the trends, directions and forces currently impacting the marketplace or industry and prepare a list of likely changes that will have to be made moving forward if the brokerage is to survive the new market environment.

The second step is to identify from the above list which of the potential objects of change the parties will use to test the needs of their new working relationship. The selected issue doesn't have to be a doomsday event, but it does need to have sufficient weight and importance to establish the key points.

The third step is to set about developing a solution. There are several benefits to this step. It allows the new executive to fashion the solution and allows the retiring broker to use the wisdom of his or her experience to make a judgment regarding the feasibility of the intended steps. Those who would suggest that such a process would unfairly limit the new person's options may not be familiar with the terms of today's commercial loan where no prior business history exists. Commercial lenders are not in the business to stand by while cavalier behaviors endanger their security.

The final step is to implement the plan by creating a new business model that incorporates the operational and financial realities of the new operational program, process or service.

The benefits of this program are several. Through this process the brokerage is availing both the creative and innovative competencies of the buyer and the wisdom and experience of the previous owners. Such an arrangement can be a "win-win" proposition.

Moving forward innovation will not be an option. However, success will remain optional. Protect yourself and your success by surrounding your innovation process with the perfect collaborative protection.