The Real Estate World Is A Changin':  Change Is Hard But So Is Going Out Of Business   April 20, 2009   By:  Stephen J. Nash Nash & Lodge, PLLP nash@nashandlodge.com   More Regulation, More Oversight Due to the real estate meltdown and the abuses that have taken place in real estate, the industry can expect to see new laws, regulations and more aggressive oversight.  These new laws, regulations and aggressive oversight will come from all corners – cities, counties, state and the federal government.  In the past few years, the Minnesota Department of Commerce's enforcement page has become overflowing with listings of agents, brokers, appraisers, lenders and title companies being sanctioned in enforcement actions and the severity of the sanctions have dramatically increased.  We have also seen numerous criminal prosecutions involving builders, real estate agents and brokers, title companies and appraisers.  The criminal prosecutions have been undertaken at all levels of government – the federal government, state and even at the county level.    The longer our real estate economy struggles and the more abuses that take place, the more rules, statutes and enforcement that will rain down upon the industry.  One Shop Stop Push Versus the Attack on Affiliate Relationships Every study that comes out seems to indicate that consumers favor the “One-Stop Shop” concept.  On the other hand, HUD and many states aggressively attack affiliate relationships alleging that they are as anti-consumer.  We are also now seeing the rise of private lawsuits that are attacking affiliate relationships.  Minnesota is the home of one such lawsuit (see, Grady v. Coldwell Banker Burnet).     Which concept will prevail?  It is impossible to predict.  Some argue that the affiliate relationships are harmful to the consumer.  Others argue that the affiliate relationship is beneficial to the consumer by making the transaction more convenient for them.  Some of the attacks on affiliate relationships are based on alleged violations of RESPA while others are based on a claim that they violate the fiduciary duty owed to the client (does an agent’s fiduciary duty require that the broker/agent find the best service for the least cost?). The battle is not just between the real estate community and consumers or the government, the battle is also an intra-industry battle.  While many in the industry have or would like to have affiliate relationships, they are also worried that the larger entities in the industry will use their affiliates to crush the competition.  Is Dual Agency Due For a Fall? There are rumblings around the country that dual agency should not be allowed.  Even in Minnesota there are people questioning whether dual agency should be permitted.  How big that group is or how effective they will be remains to be seen.  An attack on dual agency could come in three forms – through statutory changes, through a marketing campaign or through lawsuits.  This first would be a direct attempt to ban or limit dual agency, the second would be an attempt to persuade consumers to avoid dual agency and the third method would be to indirectly attack dual agency by bringing lawsuits which if successful would make it more difficult for agents to be engaged in dual agency without fear of being sued.                    An Industry Wide Reorganization The real estate industry is in the midst of a tremendous contraction.  Whether you are talking about the infrastructure or people, in order to survive the industry is essentially re-organizing.  Instead of having a number of offices that are relatively close together, we will see fewer offices with more people in that office.  We will see less staff that will have to be more efficient than in the past.  In other words, everyone will continue to lower their overhead. While it is necessary to lower overhead and many things that have and will be cut are not “core” services that are absolutely necessary, many of the cuts will cut into the core services.  Many other businesses have gone through this re-organization process and probably provide the map for the real estate community’s re-organization. Less Brick and Mortar As the industry contracts so will the need for the many offices that exist.  As people flee the business, there simply is not the need for some many offices.  It is often much more economical to have one large office rather than a number of smaller offices.  Many of the offices that sprung up during the real estate boom were created for convenience sake.  Do we really need offices that are ten minutes away from each other?  Does the client really care? Less People First, everyone in the industry is going to have to identify what is a core service that they are offering to their customers.  It is one thing to cut non-essential services but as soon as you cut into essential services you will start to lose clients.  Be careful when you are identifying essential services that you are evaluating your services through your client’s eyes and not yours.  For instance, having a receptionist to answer the phone is important to you but does the client really care as long as someone answers the phone? Second, you must identify what services you use that are essential to your business.  There are many services used by us that make life easier for us or help us provide essential services to clients but they are conveniences rather than essential.  A great receptionist will make your life much easier and help you provide services to your clients; however, can you provide the same service to your clients without a receptionist?  Can you answer your own phone?  Can you fax your own document?  Can you schedule your own showings?  I’m not advocating that everyone gets rid of their staff but we all have to seriously weigh the cost of how we provide a service against the inconvenience of providing that same service in a more inconvenient way. Third, employees are expensive so it is likely that companies will be exploring ways to reduce staff yet provide the service expected by their clients.  The consolidation of operations, the reduction of the number of agents and the use of technology will have to be used to reduce staffing without the reduction of quality service. Many industries have already gone through this process.  The airline industry today hardly resembles the airline industry of 10 years ago.  Many have gone through bankruptcy, laid-off workers, reduced salaries, replaced people with technology and consolidated their operations through mergers.  The automobile industry is going through a similar process right now. Less Flash, Less Convenience for the Industry We can’t eliminate or cutback on services that our customers expect without endangering our very existence but many services can be eliminated or cutback if they merely provided “flash” or simply made our job easier to do. The industry has invested a lot of resources into fancy websites, fancy buildings, flashy cars and flashy marketing.  While you need to market and need to present a certain image, you have to sit down and determine whether the expense strokes your ego or whether it is something you’re your clients or potential clients really care about?  Is there another way to do something that is just as effective without the cost?  There are also a multitude of services that the industry uses to make their job easier but do these services really provide a service to your customer or is the service really a benefit for you?  In other words, if there is another way to provide the same service for your client that is less expensive but results in more work for you, you will have to decide whether the cost is worth the convenience.     While it is difficult to eliminate services that make your life easier, it is necessary to do in order to survive in a battered real estate economy.  Of course, while cuts are necessary make sure that you are not cutting the services that are essential to your clients.  Again we can look to other industries for some guidance.  Industries that sell tickets (airlines, sporting events, concerts, etc.) have eliminated or greatly reduced the “people cost” of selling tickets by selling them online.  In many cases, consumers actually prefer to purchase online than the traditional methods.  Some fast food companies have centralized order taking so that when your order is taken, you are actually speaking to a person at a call center who then sends your order by computer to the fast food location you are at without you even knowing that the person who took your order was 700 miles away from you.    Of course, some functions simply cannot be replaced by technology or can result in disaster if not properly implemented.  While there are many examples of how call centers have saved money and still provided the service expected by customers there are many examples of call centers failing.  Everyone has experienced the frustration of calling a company who uses a call center located half way across the world and you can’t understand what they are saying and they can’t understand what you are saying.  But is that the failure of the system or a failure of how the system was implemented?  I’ve dealt with many people face-to-face who only provided frustration and I’ve dealt with many call centers where the people were friendly and incredibly helpful even though they were located thousands of miles away.  Unfortunately, the failures are obvious while the successes often go unnoticed because the customer didn’t even realize where the person was located who helped them.  Conclusion:  Change is Hard But So Going Out of Business  The bottom line is the companies who survive and prosper are going to be the companies who best adapt to the new economic realities of our business.  New companies will emerge.  New ways of doing business will be developed.  We can’t keep comparing everything to how the industry worked in 2006.  It is not 2006, the way the industry functioned in 2006 will not work today and it is unlikely that the industry will ever go back to the way it was in 2006.  While change can be hard, going out of business is more painful.                NOTICE The foregoing is not intended to constitute legal advice for any specific circumstance, but is intended to reflect broadly applicable principles, under Minnesota law, relevant to a typical situation. Each set of facts and each contract are, or can be unique; the unique facts and specific language of the contract may require a different legal analysis and may result in a different outcome. Before proceeding in reliance upon this or any other general description of law, consult with an attorney competent in the field of practice relevant to your situation. Copyright 2009 Nash & Lodge, PLLP