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Ready or not, the shift is here. Even though the Fed is trying to moderate rates as it slows the economy, many believe we will end up in a recession. This means that there needs to be a dramatic shift in the way we do real estate. Those who do not recognize this fact and make the necessary adjustments will be left out in the cold.
I don’t know about you, but I’m getting tired of those postcards hitting my mailbox from Realtors touting how many offers they received on their past few listings and how far over asking price the buyers were willing to go.
News flash: Those days are gone
In our area, the unprecedented seller’s market screeched to a halt the weekend of May 15, 2022. While we saw some flurries of activity in various neighborhoods for a short while after that date, the average days on market (DOM) has been growing steadily as buyers, alarmed by the rapid rise in interest rates, have not yet had time to soak in the fact that reality, going forward, is going to be quite different.
As a result, they are, for now, staying out of the market in hordes. In response, we are seeing some sellers pull their homes off the market while others are trying price reductions and other tactics to get buyers to bite.
Truth is, as we enter this new reality, the continued stream of postcards championing past successes is setting up both the agents sending them and the sellers receiving them for failure. Any seller reading the cards and thinking that they still have a chance to score like their neighbors did a few months back are in for a big surprise. Any agent using past successes in an overheated seller’s market as a measure of potential future results in a shift is, quite frankly, misrepresenting the facts.
In Gary Keller’s book Shift: How Top Real Estate Agents Tackle Tough Times, he writes that there are three types of agents who emerge during a shift.
The first group, the pessimists, tend to look around in fear at their collapsing prospects and conclude that a career in real estate might not be the best way forward. Consequently, one of the hallmarks of any downshift in a real estate market is a steady flow of real estate agents headed for the exits.
This is more than a bit ironic since we currently, as a result of the previous overheated market, have a record number of new agent wannabes going through the licensing process hoping to get a piece of the action. They are in for a bit of a surprise.
The second group are the optimists who either fail to understand what is actually happening in the market or believe that things will return in a few weeks to the way they were. They believe that if they just have the right attitude and keep doing what they have always done, they will be able to sail right on through.
The third group are the realists. These are the ones who study the data and recognize the shift for what it is. They roll up their sleeves, change their tactics and embrace the new reality. They understand that in the same way the market has significantly changed, they need to change as well to position themselves for success going forward.
I am not saying optimism is bad — in fact, it is critical. It must, however, be married to tactics that address the new realities, be coupled with tenacity to endure through the shift, and include increased activities to meet the new challenges.
Teddy Roosevelt, who was probably the most optimistic president ever, stated, “Believe you can and you’re halfway there.” The key word is “halfway.” Optimism is a crucial beginning but must be accompanied by grit, determination and a willingness to change.
An example of misplaced optimism would be the French during World War II. After seeing much of their country devastated in World War I, the French, eager to protect their borders, built the infamous Maginot Line an array of defenses that France built along its border with Germany in the 1930s, designed to prevent an invasion.
Built at a cost that possibly exceeded $9 billion in today’s dollars, the 280-mile-long line included dozens of fortresses, underground bunkers, minefields, and gun batteries.” William Allcorn, in his book The Maginot Line 1928–45, wrote, “The Maginot Line was a technological marvel, far and away the most sophisticated and complex set of fortifications built up to that time.”
Put succinctly, it was amazing for its day, and as the German army gathered strength to the east, the French were optimistic that the fortifications would keep them safe. Unfortunately, they had not counted on the development of fast-moving armored vehicles that literally maneuvered around the end of the line at lightning speed through what had been considered an impenetrable area, or new types of aircraft that could fly over the line with ease.
As a result of their belief that they were secure, they did nothing to actively protect their country. The result was the collapse of the French army, the capture of 500,000 French troops and the occupation of France by the Nazis.
France’s tactics, based on the wars of the past, produced a false optimism that failed to account for Germany’s technical advances and, as a result, produced one of the most epic failures of the 20th century. The lesson learned is simple: Optimism based on past experiences is not enough; there must be a willingness to learn and adapt tactics to meet the new emerging realities.
5 steps to take now
With this in mind, I highly recommend that everyone who wants to profit during this next phase in the real estate market do five critical things:
1. Read SHIFT: How Top Real Estate Agents Tackle Tough Times
SHIFT provides a step-by-step roadmap for reshaping your business to focus on and adapt to the new realities. It is replete with experiences garnered from top agents who have successfully navigated previous shifts and come out successfully on the other side. Although every shift is different, the fundamentals required to navigate one effectively are not.
2. Respond immediately
Local shifts often happen in a single day. Based on our previous experience with shifts, coupled with the fact that we were actively watching for it to happen, we knew immediately that the weekend of May 15 was it. No one attended any of our open houses, and all our listings came up empty at the offer deadline the next day.
We quickly compiled the data and then called all our sellers that afternoon. Although none of them were happy, we had the data to demonstrate what had happened. We explained that they could wait to make corrections a few weeks down the road, but also clarified that other agents were going to figure this out in that time and would be making corrections as well.
Our recommendation was to act immediately to beat changes we knew would soon be coming from others. They followed our advice and were all in escrow within a week. A speedy response is of the essence especially considering that many markets across the country have property values that have skyrocketed in the past couple of years. The penalty for waiting too long could be hundreds of thousands of dollars.
3. Slash expenditures
In markets like the one we have just been through, sales are high and, with the resulting income, agents tend to get fat and happy in their spending habits. A hallmark of a downward shift in a real estate market, in contrast, is a decrease in revenue.
It is a case of simple math: If fewer buyers are buying, that means there are fewer transactions, which translates to reduced commission income. For example, in our county, closed transactions in June 2022 were down a whopping 34 percent from June 2021.
We can expect this percentage to increase in the near term since the full effects of the shift are only beginning to be felt.
I have been taught to reduce expenditures by the same percentage that I believe my transaction count will be reduced. In other words, if I expect to see a 40 percent drop in closed transactions, I should proactively slash my expenses by a minimum of 40 percent and do so before I see a reduction in revenue.
Unfortunately, many agents do not track their expenses, do not know how to read a P & L, do not know their actual operating costs, do not know their profit in any given quarter, do not know where most of their leads come from and think they have had a good year if they have money in the bank on December 31.
These agents will have a tough time knowing exactly where to cut expenses when the time comes to start making some difficult choices. Since agents are purportedly running a business, they should practice basic business fundamentals, including hiring a bookkeeper and monitoring monthly financials.
Other agents, either operating out of false optimism or blissfully unaware of the necessity to cut expenses, will continue to spend huge sums on expensive lead generation methodologies with ever-decreasing effectiveness.
Ben Kinney, co-founder of PLACE, states, “You cannot expense your way out of a recession; you can only revenue your way out.”
In other words, you cannot keep spending money hoping that everything will turn out OK: you must, while cutting back on current expenses, at the same time develop cost-effective ways to generate more transactions that will lead to more revenue. As a benefit, since expenses have been slashed, the cost to produce transactions will be lower, and your profit per transaction will actually increase.
4. Double down on lead generation
So how do you develop more cost-effective lead generation to increase sales? While there are many lead generation methodologies, most teams have two or three sources that work well and a few others that may bring in a few transactions over the year.
Ironically, some of the most expensive lead gen methods result in the fewest actual leads. When entering a shift, you need to examine your lead sources to see which ones you can afford to continue and which are poor investments that must be cut.
There are two important keys here: increase your lead generation activities and offload any lead generation programs that are burning a lot of funds with little or no effect. In many ways, this is a call to get back to basics. Most successful agents and/or teams will confirm that a significant portion of their business comes from their database.
Ironically, the cost to effectively work a database is extremely low, as is door knocking and active prospecting. Unbelievably, an alarming number of agents do not have a cohesive database they are actively working.
For larger teams, the way forward also includes lead generation for agents to add to the team. Since many teams have fixed costs (such as administrative staff, facilities, etc.) that are more difficult to trim, adding agents to the team and training them effectively to be successful in the new reality can increase the overall revenue for the team.
5. Master the fundamentals
In an overheated seller’s market, it does not take a rocket scientist to sell a home. However, as the market turns, the need for real skill emerges. I saw a comment just yesterday from the leader of a large team who stated, “I’m beginning to realize that the agents on my team, now that we are confronted with a totally different market, do not actually know how to sell.”
The epic seller’s market that we have been experiencing actually began back in February of 2011. We have seen some minor dips along the way, but overall, it has consistently risen. Consequently, those agents who have been in the business for ten years or less have never seen a buyer’s market.
As mentioned above, it is time to get back to basics. Realtors need to hone their sales skills if they wish to be viable going forward. It means getting training, coaching, practicing scripts, doing the basic behaviors required to get in front of prospective clients and then having the skills required to close.
It also means working on lead management, follow up and nurturing — all of which require a good CRM (Customer Relationship Management software). I am always astonished at the number of agents who may have a CRM but do not actively use it.
I have long stated that Realtors will gladly do just about anything except the basic fundamentals they need to do to build a profitable business. This includes paying lead generation companies like Zillow thousands of dollars instead of knocking on doors, which in most cases is much more productive and costs substantially less.
Optimism is not the way forward. It is a great beginning, but in the end, hard work, fundamentals and finely honed sales skills will be needed to embrace the new reality and come out the better for it on the other end.
Carl Medford is CEO of The Medford Team.