Unless the technology makes buyers’ lives dramatically simpler, more convenient, more productive, less risky, or more fun and fashionable, it will not attract the masses no matter how many awards it wins…Value innovation is not the same as technology innovation.
–W.Chan Kim and Renée Mauborgne, Blue Ocean Strategy, page 120.
This is a column about legal technology, but sometimes legal innovation involves creating new business models that have little to do with technology. One such business model is called Lawyers Real Estate.
Peter Mericka is a Melbourne-based lawyer who is revolutionizing the sale of real estate in Australia. Mericka has adopted what is known as a “Blue Ocean Strategy” by simultaneously practising law and expanding into another industry, the real estate industry. He will sell your home, act as your lawyer to negotiate the agreement and do your conveyancing, all for a flat fee of AUD 4,400.
Blue Ocean Strategy: How to Create Uncontested Market Space and Make Competition Irrelevant is a book by W. Chan Kim and Renée Mauborgne. It describes how in “red oceans”, organizations such as law firms compete for a share of limited demand and prices are pushed ever lower. However, sometimes competitors enter “blue oceans” by creating an uncontested market space that makes the competition irrelevant. Canada’s own Cirque du Soleil, which reinvented the circus with intellectual sophistication, is a good example of a blue ocean strategy.
Mericka has decided to leave the “red ocean” of ever-static conveyancing fees and move into the blue ocean inhabited by handsome real estate fees. He sees real estate services as an industry that can be broken down into component parts and done more cheaply by players other than traditional real estate agents. For example, if you are selling a property, you can hire an appraiser to value it, a videographer or photographer to take the photographs, and a sign maker to make your sign (Australian real estate signs are typically billboards that feature large photos of the property). You can show the house yourself, because you are the person who can best answer questions about your property. Finally, to protect your legal interests, negotiate and draft the agreement of purchase and sale on your behalf, and ensure that you get legal title, you can have the benefit of a lawyer.
The Eliminate-Reduce-Raise-Create Grid is a concept that was introduced in Blue Ocean Strategy. It allows you to quickly compare innovative business models to traditional business models. If you look at the grid for Lawyers Real Estate (see below), you will notice some important differences. Lawyers Real Estate eliminates commissions and open houses, reduces advertising spend and the focus on agent name recognition, and purports to raise ethical standards by minimizing conflicts of interest. Lawyers Real Estate creates a one-stop shopping experience where a lawyer displaces the real estate agent entirely and also provides the legal advice and assistance required to take the sale from listing to closing.
The house is valued by an independent appraiser and then placed on the Australian equivalent of MLS. Interested buyers who see the listing on the Internet then approach the seller directly (Australia does not have many buyers’ agents and those who do exist are paid directly by the buyers). The seller takes the potential purchaser through the home at a mutually convenient time. There are no open houses (Mericka sees these as an opportunity for theft and agent self-promotion). A party wanting to make an offer is advised to get legal counsel. The buyer’s lawyer and Mericka then negotiate the terms of the purchase agreement.
Mericka believes that this approach raises ethical standards considerably by minimizing potential conflicts of interest:
- Lawyers Real Estate gets paid half of the fee when the property is listed for sale. The balance of the fee is paid only if the property is sold and further legal work (conveyancing) is required. When a realtor is paid by commission, the temptation is to get a sale at any price rather than at a price that is best for the vendor.
- Lawyers Real Estate is not paid by commission. Many listing contracts in Australia provide that an offer for a minimum stated price will trigger a commission. This may put pressure on the real estate agent to convince the vendor to sell for a low amount.
- The property is valued by an independent appraiser rather than by the selling agent, eliminating the temptation to manipulate the valuation too high (to win the listing) or too low (to get a quick sale).
Mericka never negotiates on behalf of purchasers when he represents the seller. Again, he highlights the absence of conflict of interest inherent in this approach. In Australia, the seller’s agent often assists the buyer to prepare the buyer’s offer, which can be problematic. He finds the Canadian system, where the buyer’s agent gets paid only if the deal goes through, makes more commission the more his or her client pays, and gets paid by the party that he or she is negotiating against, to be rife with conflicts of interest. “What strikes me about the Canadian system is that it facilitates collusion because it creates a situation where it is always in both agents’ interest to get a sale at any price,” he says.
Assisted by Australian rules that allow incorporated legal practices and access to non-lawyer capital, Mericka is franchising his operation across Australia to create what he believes is the world’s first law firm franchise.
With the recent changes to CREA rules that allow real estate agents to unbundles their services, the Canadian real estate market is more open to innovation than ever before. Canadian lawyers have dabbled in the sale of real estate thanks to various exemptions from real estate licensing requirements. However, Lawyers Real Estate provides a template for what we could achieve.