Part I of this article discusses the nascent sea-change in real estate practice and projects how to best succeed under the new real estate paradigm.

The great die-off

The aptly named Millennium Boom decimated trillions of dollars worth of asset wealth across the nation. In addition to destroying asset wealth tied up in the real estate market, it also leveled the practice of real estate itself.  Similar to the devastating effects of the prehistoric meteorite colliding with the planet, what followed as the Millennium Boom went bust was a mass extinction of the conduct employed to market real estate that was forged during the superheated years of the mid-2000s leading up to the boom.

The marketing of real estate must now re-evolve from scratch. Brokers and agents must gather and disseminate property information by way of a new set of rules-of-conduct for the post-Boom era of real estate sales.  Past conduct in marketing property has been corruptive for agents and brokers, deceptive to members of the public who seek to sell or enter into real estate ownership and destructive of any goodwill the real estate industry had previously developed.

But what will the new real estate paradigm look like – and how might agents operate successfully under it?

Birth of a new, optimistic real estate paradigm

It is too soon to know with any precision what the new real estate paradigm will look like. Though the dust of the Millennium Boom has mostly settled, it still clouds our complete perception of the future. The hustle over real estate owned (REO) inventory and continued speculation is temporarily confusing all parties involved. However, it is logical to conclude that the future will be driven by the same force that drives all progress: innovation.

Activities which may produce uncertain results – risks – must be undertaken in order to innovate. However, before anyone would be inclined to attempt an activity yielding uncertain results, they must first have a favorable attitude about the endeavor. Thus, innovation is the result of optimism. Without the lubricant of optimism, no risks would be taken to advance the industry beyond the stale limitations of the status quo.

Optimism, however, must be effectively harnessed to create actions yielding tangible results. To get a bigger piece of a more competitive pie, agents must evolve in their marketing techniques by performing a variety of innovative activities and monitoring which produce income.  Then they can continue performing the activities that are the most successful – and cease those that aren’t.

What will the new paradigm be like?

The end goal for brokers of all real estate transactions is the same in the post-Boom era as it was in pre-Boom times – to close escrow and earn a fee. However, the way agents achieve this end goal will be different under the evolving real estate paradigm.

Innovative brokers will turn agent optimism (not to mention buyer and seller optimism) into definitive action. The least risk-averse will act and likely gain the most. But how might all this best be accomplished, and what might the result look like?

As part of the developing real estate paradigm, brokerage offices with innovative brokers and management could grow beyond their pre-Boom size as more individuals join the industry and obtain licenses, and the most optimistic agents retain their licenses and remain active. With each additional agent employed under a broker, the brokerage office benefits from that agent’s experience and insight and all the personal contacts held by that agent, such as his friends, family and colleagues.

New brokerage operations are springing up and conducting business using technology to gain market share. They will present old timers with much competition as they vie in different ways to take a market share.

Alternatively, the size of the average brokerage office could shrink as brokers clean house, streamlining their offices by only employing the high-functioning agents who have figured out how to constantly generate income. After purging all the underperforming agents who entered the industry during the 2003-2007 binge period, brokers will then be able to reduce space, staff and capital demands, and allocate more time to each of the remaining agents in their employ.

The future will also likely see more compromise between brokerage offices, causing a resurgence of co-broker listings and referral fees in a better division of labor.

Greater broker oversight, increased efficiency

It’s impossible to predict the size of the average brokerage office by the employment of agents under the new paradigm. But it is clear that employing brokers must better organize themselves and become more efficient in the management of their office and agents if they are to provide greater oversight to prevent a repeat of the asymmetrical and corruptive practice of yesteryear’s “dumb agent” policies.

Increased accountability can be implemented through the administrative use of event-driven, intra-office reports which monitor an agent’s professional conduct. The first tuesday series of forms within the 500 to 548-1 numerical range are designed for a broker’s administrative use to keep a constant eye on productivity and enforce greater accountability by his agents. As an example, the Listing Information Report can be used to inquire about the status of a listing, the source of the listing, activity carried out on the listing, etc. [See first tuesday Form 522]

Brokers should also understand how to use and profit from new technologies which pertain to real estate, such as Redfin and online listing services. Real estate is an inherently touchy-feely industry and social networking has migrated to the digital realm. To best be able to network with clients within the community they serve, agents must harness the potential of new technologies and implement them into their daily practice. This is especially true for buyers and sellers in the 25-34 age range, who are increasingly reliant on new technologies to aggregate information and search for real estate. [For further commentary on the real estate application of new technologies, see the May 2010 first tuesday article, The internet – an untapped goldmine.]

All brokers in the business of hiring agents know what to do to make money – but most just don’t do it. Now brokers must put that knowledge into practice and do what is necessary to achieve an effective practice by aggressively implementing actions which produce income and establish a common behavior for their staff of agents.

At its core, the new real estate paradigm is all about better and different real estate services provided to the client, be he seller or buyer, landlord or tenant, lender or borrower.

Success and the new paradigm

Rarely in any type of enterprise is success immediate or the result of a single, radical action. Instead, success is attained over time by a series of small, calculated steps which collectively create a superior service, such as one provided by real estate licensees. What innovations will appear during the transition out of this recession and evolve to become the enduring standard? The survival instincts of agents and brokers, and the level of optimism they hold about the future, will drive the changes.

Here are some practical tips for assuring the future success of your office: 

1) Perform a thorough due diligence investigation when taking a listing on any property.  Do not fail to act until after the property is under contract to a buyer, or a Letter of Intent is entered into. [See first tuesday Form 185]

Before soliciting buyers, include the results of the due diligence investigation in the property’s marketing package to be presented to any buyer who requests additional information on the property (and if it is sensitive data, release it under a confidentiality agreement.

Voluntary transparency about a property’s many facets help buyers and their agents set the price so an offer can be submitted. It is also a required by law, and will, as a competitive matter, become the standard conduct as we evolve out of this crisis. By performing the investigations and delivering property information immediately upon first request from buyers and their agents, the listing agent increases the flow of information in negotiations (which start with the request), eliminates uncertainties, avoids claims of misrepresentation and avoids the asymmetry of information known to the seller and the listing agent but deliberately withheld from the prospective buyers until escrow is opened (a corruptive practice that flourished in the past).

2) Inform the buying public that mortgage loans are available.  A buyer must be ready, willing and able to purchase. Buyers are currently ready and willing, though many believe they’re unable to obtain a mortgage due to their anxieties brought about by the current economic recession and a return to fundamental lending practices by mortgage lenders. However, it is the business of lenders to lend, and willing buyers can locate mortgage financing so long as they have a steady income flow provided by employment and a two year history of paying their debts. [For a thorough study of this consumer sentiment, see the May 2010 first tuesday article, Homebuyers feel ready and willing to buy, but not financially able.]

3) Have your buyers obtain pre-approval letters from two or more lenders. Pre-approval letters are free for the asking and all questions are generally answered. Armed with the knowledge of how much money your buyer is eligible to borrow, the buyer’s agent will select qualifying properties in the price range set by the loan amount and the buyer’s down payment.

Also, with purchase-assist financing in place – akin to having money in the pocket – additional psychological motivation is supplied to buyers, prompting them to actually make an offer to buy a home. Thus, the idea of “affordability” is never an issue. [See first tuesday Form 320]

4) Affiliate with other industry innovators and service providers who seek change by improving the delivery of information. Get others to help you upgrade the way the business of marketing property is done and encourage others in your industry to change, collectively making more money for all involved. [See first tuesday Forms 205 and 519]

5) Reduce and eliminate the nonproductive and obstructive paperwork and personal conduct which clogged the system for processing real estate transactions during the Boom years. The reduction of redundancies constitutes real progress since fewer barriers to real estate ownership brings in more buyers and sellers.

6) Brokers who run an office should provide rewards and accolades to agents who close sales (an activity which generates income), not to agents who simply obtain listings (an activity which only has the potential of producing income). Brokers should try rewarding the listing agent with the best marketing package of the month, then watch the sales increase.

7) Avail yourself of the wealth of free information available from the planning department for your city or county, such as zoning maps, property improvement reports, permitted uses, neighborhood plans, etc. A story exists for every property within these departments.The knowledge obtained through this publicly supported resource fortifies the more superficial and generic data garnered from the multiple listing service (MLS) data.

8) Expand your social circle in an effort to enlarge your sphere of influence and exposure to potential clients. Become more engaged in the community you service and attend civic and large social events to develop contacts, thereby increasing your awareness about the needs of others. In turn, you will treat your clients more respectfully.

In addition to increasing your pool of contacts, increase your visibility. Arrange to set up kiosks in large public areas with lots of foot traffic, such as malls, airports, street fairs, etc. Solicit business by setting up brochure stands in business establishments displaying the properties you’ve listed.

9) Distinguish yourself by becoming well known as an expert in a particular component of real estate practice, for example, marketing packages, tax aspects knowledge, property management, private money lending, a specific type of property, etc. Be the go-to agent in your office for information relating to your particular area of expertise. Inform your colleagues (and possibly your broker) by sharing information.

10) Become flexible in your approach with others, not dogmatic and conservative or authoritarian. Do not limit yourself solely to one type of listing, buyer or property, but be willing to reach out in all directions until you settle into a pattern of success.  Concentrate on efforts that will produce closings and generate income as success brings wealth and ever more success.

11) Contact the police department, sheriff’s office or substation with jurisdiction over the properties you list. Find out about any criminal activity, police response time and prevention activities both public and private to better inform your clients about conditions surrounding the properties you list. [For more information concerning an agent’s use of a criminal security disclosure, see the December 2009 first tuesday article, Safety disclosures: crime and the prospective buyer.]

12) Don’t squander time involving yourself with other agents in non-productive social activities. Turn those conversations into questions seeking information on what they know about issues confronting them and yourself.  Fellow agents are not potential clients and are thus not a source of future earnings (though information on their listings might well be). And if you are better informed, they will not become your competition.  Leave the gratuitous socializing to the low-functioning agents who are content letting their time be wasted.

Dealing with sellers under the new paradigm

In the immediate present, brokers and agents looking forward to the new real estate paradigm must understand how to conduct themselves in a market of slowly rising interest rates in which we now find ourselves.

Over a period of several months to a year, the listing price of a property necessarily moves contrary to changes in mortgage rates, like opposing ends of a teeter-totter. Sellers can only expect to get no more and no less for their home than the amount of financing available to would-be buyers (31% of his gross income) plus the down payment saved. As interest rates rise, the portion of the buyer’s monthly payment applied to debt amortization declines, decreasing the amount of the loan available to the buyer. In this way, the value of a property is directly (but inversely) tied to interest rates. [For a further discussion regarding the relationship between the amount a buyer qualifies to borrower and the seller’s listing price expectations, see the May 2010 first tuesday article, Buyer pricing power.]

Brokers and agents must be able to convincingly explain to sellers the fundamental truth about the relationship between interest rates and the pricing of property so that the listing price of a home is set consistent with market realities – not inflated seller expectations based on their money illusions.

Without an anchor in this fundamental concept of price-and-rates relationship, a property listing during a period of rising interest rates will not likely sell at or near the listing price. Thus, the agent will not likely receive a fee for his failed effort to counsel his client on the adverse effect rising rates have on pricing of assets, such as a home. In this situation, the agent needs to consider refusing representation of unrealistic sellers. Instead, agents need to represent those who sincerely want to sell and are willing to listen and heed their agent’s advice on the current market value of the property involved.

Sellers, like buyers, must be bona fide. A bona fide seller is one who is actually prepared to sell his property and is not merely testing the receptiveness of the market to his price expectations. As a quick test to determine whether a seller has a bona fide motivation to sell, the seller should respond favorably to a request to pay for the requisite property disclosures and inspections at the time of the listing. Thus, the agent is able to provide full transparency in the marketing of the property. If the seller refuses, it is likely the seller’s motivation is limited to receiving a predetermined price – if some sucker of a buyer will pay it. Thus, the seller has no need to sell and the agent’s energies would be better spent with others on transactions that will ultimately produce a closing and with it a fee for the agent (and his broker).

An agent active in real estate transactions for more than two years is not a “gopher,” doing the running for a seller whose dictates are contrary to market conditions.  Agents are trained professionals who must be protective of their time, especially during the hyper-competitive conditions of a recessionary market.

For continued reading regarding the new real estate paradigm, see Part II of this article to be published in the June first tuesday journal online.