DeLeon Realty’s new business model is the talk of the real estate community. We hear regular reports of our competitors’ office managers and other agents bringing us up at their sales meetings. That is very flattering, especially given that many of the best real estate agents in the Bay Area have gravitated towards Silicon Valley. Standing out amongst this esteemed group of professionals is truly noteworthy.
From what we hear, the refrain at these office meetings is often the same: “How can we convince clients to list with a traditional agent when the DeLeon team offers so much preparation assistance, staging, and marketing at no cost to the Seller?” Occasionally, we hope this question is put another way: “How can I, as an individual agent, compete against an integrated company of in-house interior designers, contractors, handymen, graphic artists, writers, attorneys, and an international marketing team, all of whom are available to clients as part of the listing?” (Generally, however, other agents don’t phrase it in a way so flattering to us.) Answering that question is admittedly difficult and outside the scope of this article.
However, I hear that there are also a lot of questions about exactly what we do and how we can do it. Rather than keeping it a mystery, we feel comfortable simply laying out our business model for the world to see. The current structure of the real estate brokerage industry, and the financial limitations facing even the most successful agents, make our model almost impossible to copy.
There are really three keys to the success of our approach: (1) hiring the best people to specialize in what they are passionate about; (2) aligning incentives in a better way; and (3) leveraging economies of scale.
Hiring the Best Specialists
The biggest flaw in the real estate industry in California is that agents are expected to handle a remarkably wide range of tasks. The typical transaction involves many tax and legal issues, interior design choices, home repairs and enhancements, graphic design decisions, marketing plan elements, and disclosure review. It is virtually impossible for one person to master all of these skills, especially given that many of these skills require extensive professional training and experience. I handled a higher volume of listings than any other agent or team in Silicon Valley last year (over $280 million of listings alone) yet all of that experience hasn’t given me close to the same artistic vision as our interior designers. On the other hand, my two law degrees and three bar admissions make me a better choice to draft a contract, negotiate a deal’s structure, review disclosures, or resolve a legal dispute favorably for my clients. I won’t even address my skill level with a hammer, but I have two licensed contractors and a handyman on staff to render my lack of handiness moot.
We also pay and treat our people very well because we understand they are essential to our success and our clients’ satisfaction. In addition to above-market salaries, all DeLeon Realty employees receive full health, dental, and life insurance, a 401(k) program with company matching, and well-deserved paid vacations. Those vacations are in addition to the company trips we take our employees and their significant others on during the slow season; last January, we all took a week-long cruise to Mexico, and we went to Tahoe the year before that. It is no wonder that we attract the best people in real estate.
Alignment of Incentives
Another flaw to the traditional model is the misalignment of incentives. On the Buyer’s side, it is hard to justify a system in which the Buyer’s agent is paid more if the Buyer overpays. Put another way, the better the Buyer’s agent is at negotiating a lower price for his or her client, the less the agent will get paid. That is why all DeLeon Buyer’s agents are area specialists who are paid a generous salary, not an occasional commission. In addition to reducing pushiness, this approach encourages collaboration.
Superficially, this problem is less obvious on the listing side. After all, a higher sales price will generate a higher commission. However, there is a latent flaw that is even worse. You see, almost all of the marketing expenses come directly out of the listing agent’s pocket—long before the agent gets a commission check. The relatively low incremental increase in the agent’s commission associated with a $100,000 increase in sales price makes the large marketing expenditure seem unwise to many agents. For example, if an agent were to spend the same $15,000-$25,000 that we spend on a typical listing, the agent might see an increase in the sales price from $2.4 million to $2.5 million or $2.6 million. Even assuming a $200,000 marginal increase, which is great for the Seller, the increase to the listing agent’s side of the commission would be $6,000 or less, of which 10% or more would have to be paid to the office to which the agent chooses to be affiliated. Thus, that $20,000 investment (and added time) results in a marginal loss.
Even the hope that a strong result will bring in more Sellers is muted by the public’s perception that the company, not the agent, is responsible for the result. At DeLeon Realty, all of the marketing expenses are paid by the company, and all future listings will benefit the company. Like the DeLeon Buyer’s agents, I am paid on salary, not commission, so my marketing spending isn’t coming out of my own pocket.
Economies of Scale
Our high volume helps our clients in innumerable ways. In addition to unparalleled market data, we get more bang for our marketing buck than anyone else. The sheer number of transactions we do each year enables us to do the transactions right. For example, in addition to bringing in a high-end production company to shoot narrated videos for all of our listings, we sent them out to spend days capturing and cataloging footage of various points of interest around Silicon Valley. Now, whenever I mention a horse trail in Los Altos Hills during one of our videos, we have “B-roll” of a couple riding horses along a Silicon Valley trail (see www.201mountainwood.com). The same is true when I mention the Village of Los Altos, a park in Palo Alto, or a skateboard park in Menlo Park. In fact, we probably have footage of over 400 distinct points of interest.
Because we have people doing only what they do best, they have more time to do it. One of my favorite comments after a sale closes is when Sellers say they enjoyed receiving so much personal attention.