Lawyers Real Estate Pty Ltd: a Case Study of Blue Ocean Strategy
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.
Here is a 4 min video from TV show and some viewer responses.
We have a system here in Canada please go to http://www.propertyshop.ca and see details we can also get the property on mls through Best Value Real Estate Limited and it is based on the Scottish Model that Peter Maricka and propertyshop.ca is based on. For more info please contact me at mike@propertyshop.ca 519-372-0722 for more details
Peter Mericka, Lawyers Real Estate now being sued by Victorian Government, Consumer Affairs for alleged misleading and deceptive conduct. See the following articles for more details
So in a huge stroke of genius to cut out the middleman and save money both parties are going to fire their agents and hire their lawyers to work out the agreement for them. Please read this sentence again and again until you realize how ridiculous it sounds. How do lawyers get paid? What motivation does a lawyer have to execute a quick, simple deal? Have you ever even heard of a lawyer doing something quickly and simply? Lawyers are contract experts not experts at valuation and negotiation.
Are you going to trust your lawyer to work out the details of your purchase when they have never even been in the property? Is your lawyer going to call you when you’re off work or offer advice on the weekend when thats the only time the buyer/seller can get together? How is this approach better than working with your agent and having a ‘approval of buyers/sellers lawyer’ condition? Buyers and sellers have always had the option of nominating their lawyer to represent them under the current system but when you look at the logistics of working this way you will see why no one does.
[Interested buyers who see the listing on the Internet then approach the seller directly.]
What makes you so sure this is what everyone wants?
Do you think buyers want to go through a property with the seller hanging over their shoulder the whole time?
The seller knows one property -their own- where a realtor knows how the seller’s property stacks up against other alternatives and been through this process hundreds of times… whereas both buyer and seller will be working with much less experience.
How does the buyer get their questions answered? Directly from the seller? How likely are they to trust that information? What if they have concerns and need expert 3rd party information?
If you are an amateur how do you know who to call and who’s opinion to trust when it comes to property issues, title issues, zoning concerns funky comparables better yet how does the buyer get comparables? Hire an appraiser? What happens when each party’s ‘expert’ appraiser comes back with a different number? Are they going to do this for every property they have interest in? You do know it’s $400 a pop for an appraisal right? All kinds of hazards that are easy to glaze over when looking at this scenario from 10,000ft.
[The Seller gets he property 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).]
The seller is always the one to choose the price. They are the one signing the contract and the purchase contract. Listing agents provide sellers with the same data appraisers do but also much more. They can also take stock of the current active competition and even take their sellers through currently active property to price their home for whatever strategy the seller needs. Some need to sell quick, others need to know they aren’t leaving any money on the table. Real estate appraisals are far from an exact science and often aren’t as thorough to sellers because they don’t offer dialogue (you get a written report, no Q and A) and you cannot see how your home slots up against the current active competition. (DOM, price reductions, expired listings etc.)
[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.]
So in a huge stroke of genius to cut out the middleman and save money both parties are going to fire their agents and hire their lawyers to work out the agreement for them. Please read this sentance again and again until you realize how ridiculous it sounds. How do lawyers get paid? What motivation does a lawyer have to execute a quick, simple deal? Have you ever even heard of a lawyer doing something quickly and simply? Lawyers are contract experts not experts at valuation and negotiation. Are you going to trust your lawyer to work out the details of your purchase when they have never even been in the property? Is your lawyer going to call you when you’re off work or offer advice on the weekend when thats the only time the buyer/seller can get together? How is this approach better than working with your agent and having a ‘approval of buyers/sellers lawyer’ condition? Buyers and sellers have always had the option of nominating their lawyer to represent them under the current system but when you look at the logistics of working this way you will see why no one does.
[Mericka believes that this approach raises ethical standards considerably by minimizing potential conflicts of interest:]
What is in the best interests of the lawyer? Are you so sure the system you propose is free and clear of ethical issues? Is it truly cheaper and more efficient to have your lawyer ‘handle the paperwork’?
There is a great deal of resistance whenever disruptive technology or innovation threatens to spoil the comfortable status quo. Those who have invested heavily in the old ways, those who will be slow to adapt, and those who must answer for failing to protect consumers against the previous industry “owners” all stand to lose.
It is true that Lawyers Real Estate is facing a test case, brought in the Supreme Court of Victoria by the Director of Comsumer Affairs in an effort to have the Supreme Court declare that only a licensed real estate agent is permitted to provide the services offered by Lawyers Real Estate. It was inevitable that this should happen.
My view of the matter is that the anger and fear displayed in some of the comments above are testimony to the extent to which Lawyers Real Estate is perceived as a disrupter throught the implementation of its Blue Ocean strategy.