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Jay Thompson (@phxREguy) wrote yet another sensational blog post recently.

This one is entitled “Does the Real Estate Brokerage Matter to the Home Buyer/Seller?”

As of this moment, there are 211 – 211! – comments following that post. Amazing!

If you haven’t already read Jay’s post and all the comments that follow, please do so. It is the best “#RTB primer” and the liveliest thread I’ve seen in this conversation so far. And special thanks to Marc Davison (@1000wattmarc) and his related blog post, “Can a Real Estate Brokerage Matter?,” as these two posts ended up being “companion pieces” that drove the entire conversation forward.

Within the mass of comments following Jay’s post, I had an exchange with Jeffrey Douglass in which he asked me some excellent questions regarding my views of the typical “big box” brokerage. Given that I write a lot about “big box” brokerages, if Jeffrey didn’t understand my frequent use of this term, I thought it wise to better define it for anyone who might read this blog occasionally and wonder what I mean when I say “big box.”

That’s the context and the background.

Here’s what I wrote to Jeffrey:

Jeffrey,

You raise a number of valid questions. I’ll do my best to answer.

First, what’s my problem with big box brokers? To answer this question, I should define what I mean by “big box brokerage.” Here are my subjective characteristics of a “big box” brokerage:

• An office based on a business model that is predicated on having more agents than could realistically be supported by the local market in question.

• An office that encourages participation by part-time agents.

• An office that has little or no performance standards.

• An office that encourages its management or franchisee to focus on “agent count.”

• An office whose desks are occupied maybe 25% of the time by 25% of its agents (or, in the words of the broker I referenced in a prior post above – who at one time had 200+ agents working in his big-box brokerage – “You could fire a cannon through our office on any given day and never hit an agent”).

• An office with little or no barrier to entry (before the crash, in our market, virtually every major franchise used a recruiting technique which proves this point in spades: they would send someone – usually the local broker – to stand outside the real estate testing site to approach people – PHYSICALLY approach people – as they exited the building).

• An office that charges its agents monthly fees.

• An office that “leads with expenses” and then forces itself to “find agents” to support its expense burden.

As you will note, I said NOTHING about the physical size of the office.

I am referring more to an overall BUSINESS PHILOSOPHY that favors QUANTITY over QUALITY.

An office that has this philosophy usually ends up in a large physical space, so “big box” is the easiest way to describe this type of operation.

I’ve spent the last 15 years of my life studying almost every major franchise. Almost all of them fit the description of “big box” in that almost every model focuses PRIMARILY on agent count.

I covered this in my blog post below this comment, but allow me to copy and paste an excerpt from that post:

• I worked at a big-box office for a short time. At its peak, that office had nearly 300 agents, of which less than 15% made enough money to cover their “cap.” Further, I would guess that 10% of those agents made 90% of the income.

• When you have a corporate culture built on this kind of philosophy, that means that 85-90% of the agents out in the world are NOT doing much business. And while I am NOT suggesting that there is any direct correlation between “sales volume” and “quality of service,” the hard reality is that it’s probably not realistic to expect that a uniform delivery of service when 85% of your agents are not doing enough business to support themselves financially.

• The point: in a “10/90″ environment, brand dilution is almost guaranteed. And there are a lot of “10/90″ brands out there today. For further support of this logic, check out Malcolm Gladwell’s “Rule of 150,” which was one of the key concepts of his book “The Tipping Point.”

Second, RE your question, “Why is a franchise better than a big box?.”

That’s easy. Using my definitions above, most franchises ARE “big box.”

Ergo, they not better – they are one and the same.

Third, RE your comment, “Big box brokerage has been brought to its knees by fixed costs and paying agents too much,” I totally agree. But here’s what you skipped: I blame those brokers for putting themselves in that position in the first place. It was bad business right from the start in most cases. Allow me to explain:

• “Hoteling” has been the rage in other industries for 20+ years. Back when I was a CPA, I spent most of my time at clients’ offices, so my firm forced me to share a desk back at our home office with three other CPAs. Real estate is even MORE transient than public accounting, and yet most real estate companies overbuilt to accommodate the ego-driven agent who “had to have” an office. I have never understood how brokers couldn’t just open their eyes and think “Wow, most of my offices are empty most of the time…why am I leasing all this space again?” My obvious point: brokers should have been downsizing a LONG, LONG time ago.

• Business 101: Lead with revenue. That is, unless you absolutely HAVE TO, don’t commit to pay for things until you know you can afford them. Every large real estate office ever built in American violated this fundamental rule of financial survival.

• You didn’t have to be Nostradamus to see where the real estate industry has been heading for the last 10 years: more technology, more mobility, less need for brick & mortar. Even without the crash – and that has certainly accelerated all of this, without a doubt – a prudent business person would have been looking to downsize because of all the changes borne of technology.

• To reinforce my point, when I began my company and we moved into our first physical space nearly seven years ago, I took MAJOR heat from my agents for not “going big.” Most of those people were old school, and had certain expectations which I would loosely label as we do things “because that’s the way it’s always been done in real estate.” I saw the trends, and knew that committing to a large physical space would be both foolhardy and probably a recipe for extinction. So, I went against the wishes of those agents, and I did the fiscally responsible thing: I leased a 2,700 square foot office in a great, high-profile location (and because most agents work at home BY CHOICE, we still have more space than we need!). Had I not made this decision, I would be out of business by now. My low overhead has kept me alive in almost literal famine. And my business is growing when others around me are closing.

Fourth, RE your question, “Don’t most franchisors take 6-10% off the top?” Yes, MOST do, and some even take more! And that has made it very hard for the franchisees of those concepts to survive. This financial model is unsustainable in the long run.

What comes through in all of your comments regarding “franchises” are the following:

• Most all franchises are about the same (I agree).

• Most franchisors charge their franchisees too much (most do).

• Most franchisors provide no real value proposition to justify those fees (again, I agree).

To underscore this point, I met with the broker of a large office of one of the “top 5” brands last year. His office dominates his mid-sized market, and has dominated it for many years. He is personally the past president of his local board of Realtors. He stated the following: “I have no idea how we continue to dominate this market, because we have no real value proposition to speak of. I think we maintain our position out of sheer momentum, and perhaps because our competitors’ value propositions are even worse than ours.” This gentleman made this remark in front of two other brokers in his same company. Neither objected to his comments.

Having said those things, just because most (not ALL, but MOST) franchises have in hindsight NOT delivered a solid value proposition does not mean that a new franchise – or a number of new franchises, for that matter – cannot rise up from the collective ashes and provide a real value proposition. And deliver that value proposition at a realistic price to its franchisees. I have no doubt that this will happen – and it’s already happening.

That’s why I wrote in a prior comment in this thread that there has NEVER been a better time in recorded history for a new franchise to be rolling out. I see most of the “big box” brands as vulnerable. I know I am far from alone in having this view.

As a final comment, please read my blog posts at P1Fran.com entitled “Bigger is Worserer,” “Character Driven Agents” and the very first post I ever wrote, “The Future of Real Estate Franchising.” Most of the things I write deal with the very issue we are discussing here: the relevancy of the real estate brokerage, and what a company should do to leverage the wrenching changes that are radically modifying the real estate landscape today…

I hope this clarifies my comments a little better for you, Jeffrey…

Best,
Michael

And here’s what Jeffrey kindly wrote in response to my comment:

Michael,

Thank you so much for taking the time to answer my questions. I agree with your 110% once you have defined “big box brokerage” for me – particularly the following;

”An office based on a business model that is predicated on having more agents than could realistically be supported by the local market in question.”

“An office that encourages its management or franchisee to focus on “agent count.””

I coined a phrase and wrote a blog post called “Is This Agenthousing Armageddon? with some wonderful quotes from Rob and Marc.

http://www.sandiegolifestyle.info/2009/07/is-this-agenthousing-armageddon/

Well done!

I will take some time and read your referenced articles on Franchises. I am most anxious to understand how a Franchise could make a difference to the Buyer or Seller and as stated many times before we in America do love Brands – so I know there could be value in “top of mind” recognition.

Michael, thank you again I really appreciate your response and I must say you have a wicked sense of the reality of our industry and I’m happy your voice is part of the change.