Recently, I was asked by one of the leading authors in the real estate industry to document my thoughts regarding the future of real estate franchising. Here’s what I came up with:

The Future of Real Estate Franchising

Real estate finds itself at a crossroads. It is not much of an exaggeration to suggest that the industry has never experienced such a “perfect storm”of events and factors which have combined to force wrenching, dramatic changes upon a staid industry not accustomed to dealing with such seismic shifts. The biggest factors impacting the industry today are:

The bursting of the housing bubble and the massive aftershocks of same, which has led to:

• Radical decreases in broker and agent income levels and a significant decline in the number of people selling real estate for a living, which has led to…
• A decline in the number of “big box” real estate office operations, which simply cannot survive given the high overhead levels typically associated with such large operations, which has led to…
• A number of high profile bankruptcies (example: Century 21 Town & Country, the largest C21 franchisee in the world) and reorganizations (example: major Detroit player Coldwell Banker Schweitzer acquired by local player Wier Manuel) within some of the biggest and most established brands in the industry, which has led to…
• An overall tarnishing of the brand images of some of the biggest and most established brands in the industry, which has led to…
• A major shakeup within the “old guard” of the industry and created an enormous window of opportunity for new companies, concepts and franchises to rise up and grab market share in a once static but now increasingly dynamic sector

The continued rise of technology, as nearly 90% of all home buyers use and or find the home they purchase using the internet, and as YouTube has risen to become the second largest search engine behind only Google itself, SMS text messaging technologies are starting to impact marketing methods, smart phones have become legitimate mobile computing devices, agents can connect with the MLS from anywhere, WiFi hotspots are becoming commonplace, etc.. This has led to:

• A dislocation of many of the older, more established Realtors who have failed to embrace technology
• A further erosion of overall profit margins accelerated by a new breed of agent and company who are effectively leveraging the economic efficiencies that can result from technology
• A growing chasm between the “techs” and the “tech nots” (that is, the tech savvy vs. the non-tech savvy)

An explosion in social media, which has led to:

• A change in the way people obtain and share information, communicate, collaborate and make decisions
• A diminishing of the advertising media traditionally used by Realtors to promote their properties
• 96% of Gen Y have joined social networks, and by 2010 Gen Y will outnumber the Baby Boomers
• A cultural shift many are calling the “largest since the Industrial Revolution”
• Even more intense pressures on Realtors to learn new skills and mindsets
• An even greater chasm between the “techs” and “tech nots”
• Confusion among agents regarding what to learn and how to leverage social media to help build their income

A shift in demographics and housing trends, specifically:

• The rise of “empty nesting” related moves
• A more conservative view of home ownership in terms of pricing and affordability, which is driving “right sizing” and pushing people away from “McMansions”

The continued erosion of consumer confidence in the real estate industry, as evidenced by:

• A recent Harris Poll that indicated that Realtors continue to rank among the “least trusted professionals;
• A report in the National Realty News that showed only 7% of consumers “completely trust” their Realtor

An unfortunate and ill-advised “race to the bottom” in terms of brokers and companies undercutting one another to recruit agents away from each other. This is at least in part the result of technology fragmenting the industry (even a small operation can appear significant on the web), diminishing the power of the big box brokers and changing the paradigm of how agents work (telecommuting, home office, work anywhere) and what agents need from brokers (and visa versa). These factors have served to:

• Create a never ending game of “musical chairs” in which many agents move from company to company to company, procuring slightly better commission splits with each move
• Further erode broker profit margins which were razor thin to begin with
• Multiple studies have shown that VERY FEW businesses can survive in the long run using ONLY “lowest cost” as its primary point of competitive differentiation. And, in any SERVICE industry like real estate, this is a recipe for disaster in terms of the quality of the service that can ultimately be provided to the end user, which is the real estate buyer and seller

A decades-long relational breakdown between agent and broker, the results of which are:

• The creation of a generally adversarial relationship between many brokers and their agents
• A financial tug of war in which the balance of power has shifted from broker to agent at a time when brokers can least afford for that to happen
• Agents viewing brokers as generic and providing no value and feeling no shame in wanting to pay as little as possible to work in a given company
• Brokers viewing agents as greedy mercenaries who don’t care about whether the broker survives or earns a reasonable return on their efforts

That’s a Grim Reality, But There is Hope…

All that being said, the clear trends in real estate franchising are as follows:

Smaller, leaner physical real estate brokerage offices that:

• Recognize that the old school, big box, build-it-and-they-will-come template is broken and likely gone forever
• Acknowledge that the ONLY way to for a broker to survive financially is by radically cutting costs and starting with a “fresh slate” financial model
• Mimic the social trend of providing “gathering places” for people to meet and hang out (ala Starbucks, Barnes & Noble, Ikea, etc.); e.g., have a “lounge” where people can walk in off the street, get a free cup of coffee and search for homes on company provided iMacs
• Dramatically reduce broker overhead, which in turn can allow brokers to…
• Give more favorable commission splits (to the agent) commission splits and STILL increase broker profit margins

A heavy emphasis on technology, in terms of:

• Having company websites that rank well on Google and generate web leads to give to agents
• Training agents to leverage smart phones, wi-fi environments and other mobility options to enable real estate professionals to work almost anywhere, any time
• Leveraging video to capitalize on the fact that YouTube is now the #2 search engine

A heavy emphasis on social media, including:

• A strong brand presence on Twitter, FaceBook, etc.
• Heavy interaction with the public and potential agents, brokers and franchisees, including virtual chat rooms, interactive blogs, live chat options on company websites, instructional webinars, webinars for the public, etc.
• Training to help agents and franchisees create a strong presence on Twitter, FaceBook, etc.
• Helping agents, brokers and franchisees learn how to create solid ROI on their investment in social media

A heavy emphasis on improving industry professionalism, which can be accomplished via:

• Having a barrier to entry that is greater than that of the industry itself
• Having some level of minimum educational and or experience requirements
• Having some form of “apprenticeship” before an agent is allowed to transact business on their own
• Legitimate agent training
• Training that leverages existing and future technologies, including distance learning (e.g.,training videos on demand, Webex training/office meetings, conference calls, text, email, video chats between agent and broker, etc.)
• Screening Realtor candidates for ethics
• Screening Realtor candidates for competency
• Looking outside the box to recruit from non-traditional sources, e.g., displaced professionals, Fortune 500 middle management, etc.
• A branding image that emphasizes professionalism

Some sort of legitimate residual income program to:

• Help bridge the gap and compensate for the decrease in income levels
• Get broker and agent back on the “same page” in terms of no longer viewing one another as adversaries while at the same time enhancing franchise stability and cohesiveness
• Bolster recruiting by leveraging this legitimate residual income stream to recruit from non-traditional places like industries where retirements and residual income streams are commonplace and expected
• Help agents build a long-term passive income stream that did not require a lot of effort to create

It is my opinion that the franchise that can incorporate as many of these solutions as possible into its franchise model and create momentum for itself stands to profit handsomely as this confluence of factors continues to reshape the real estate industry at an unprecedented pace.