Jeff Brown Explains It For You: Why Agent-Centric Brokerage Sucks

Broker-Centric Brokerage of 1965…

Over at AGBeat, Jeff Brown — a real estate broker I know personally and have respected for years both for his knowledge and his utter fearlessness — gets into the weeds and explains why “agent-centric” brokerage model sucks. Well, to be fair, the actual title of his post is, “Why real estate’s agent-centric broker models are doomed” which on second thought isn’t any softer than “sucks”.

But he’s writing about the same phenomenon and threat that I wrote about in my Realogy Report (Premium Content): the threat of agent teams. He does so, however, with some hypothetical numbers and with historical perspective. Both are worth delving into; I urge you to read the whole thing.

There are a couple of points to be made from his post, so let’s go ahead and make them.

History, And Dangers Of Drawing Conclusions Therefrom

There is little question that Jeff is 100% on-point when it comes to the pre-REMAX days of broker-centric brokerage. I wasn’t in the industry back then, so I’m simply going to nod and take him at his word:

Commission splits in the BC model of yesteryear aren’t even believed by most modern day agents. Exclusive listings paid 20 percent of the listing side, while exclusive agency and open listings paid 15 and 10 percent respectively. The selling agent made 40 percent of the buyer side commission. There were variations of this, but the range of pay between companies was relatively narrow.

There is no debating these facts. Those were the numbers. Those were the splits. Period, end of story. However, there is a danger of drawing too strong a conclusion from historical data:

If looked at in terms of sales volume per agent, or GCI (gross commission income) if you will, the BC model requires significantly fewer agents than the Agent-Centric model requires. Adjusted for inflation, agents made more in terms of dollars than they do today at double or more the commission splits. For example, in a five year period from 1965 through 1969, just 25 to 30 full timers and eight to 12 part timers closed over 1,000 sides a year, every single year. I saw the last three in person, from the inside. The average full timer in that firm made more than twice the median household income. Twice.

1965 to 1969 is just a bit too far in the past to justify strong conclusions. I mean, we’re talking Mad Men days here. We’re talking LBJ and Great Society and Age of Aquarius here. Most importantly for real estate, the 60’s was the tail-end of the Industrial Age, rather than the beginning of the Information Age.

In the pre-computer age (nevermind the Internet), there can be little question that brokerages had marketing advantages unavailable to individual agents. In fact, in the pre-computer age, larger brokerages had advantages that smaller brokerages didn’t have in things like newspaper advertising rates, secretarial support, etc.

Consumer behavior in the mid to late 60’s was dramatically different than in the Information Age. The basis of lead generation was dramatically different then. Mobility patterns were different. Demographics were different. In fact, pretty much everything was different then.

I don’t think one can draw the conclusion that agent-centric models are doomed because in the 60’s, broker-centric models rocked the house. That would be like saying that web-only media operations are doomed because in the 60’s, print newspapers ruled the media roost.

The Team Leader and the Broker

Where Jeff is on much more solid footing for drawing of conclusions is in analyzing the return on risk for the agent team leader and the broker. In essence, he shows that the modern agent team leader makes substantially more in net income than the broker because of the peculiarities of the agent-centric model:

John [Broker] gets a taste of 530 closed sides. Debbie [Agent Team Leader] gets a taste of just 47 percent of the total business done by John’s brokerage, 250 sides, yet almost doubles his gross income. Since most of John’s agents are lucky to last a year or two, he’s constantly spending time and money to replace them.

Debbie’s people? She has an impressively long waiting list to be a BA on her team. Think about it. Sure, they work very hard, but they show up looking professional, grab that day’s buyer leads, show property – follow up with the help of support staff – and make six figures. Debbie’s operating expenses, as a percentage of GCI, are lower than John’s. Duh.

The numbers really get silly when the team is under the umbrella of a ’100% commission’ AC office. I personally know of a couple of highly successful team owners working under that system, and it’s almost like being given the key to the broker’s bank vault.

I think Jeff is exactly correct in this analysis. It forms part of the reason why I wrote in the Realogy Report that agent teams are the true threat to Realogy’s earnings — and by extension, the viability of all traditional brokerages going forward.

Even while agreeing with the analysis, however, I end up drawing a different conclusion than does Jeff.

Agent-Centric Model Is Hardly Doomed

You see, I believe that Jeff discounts the business risk, the business cost, and the business value of lead generation. He writes that the agent-centric model “violates the real life Risk vs. Reward reality” because the broker or the team leader takes on all of the risks, from litigation to overhead, while paying out far too much to the agent.

This is actually not supported by the data from Realogy. In the absence of any other data from any other major brokerage, I have to assume that Realogy’s experience is not substantially different from those of other major brokerages, such as Berkshire Hathaway HomeServices, Long & Foster, or Weichert. As I wrote in the report, in 2012, Realogy’s average effective agent split was 67.5%. That’s a far cry from the 80% or 90% split that Jeff imagines is the norm for agent-centric brokerages.

The reason is simple: he who has the leads calls the shots.

Jeff writes:

In one, you get paid 80% commission on every dollar you produce. The brokerage takes virtually all of the liability, pays all the major overhead, and provides you with a suitable office atmosphere in which to work. For the most part, you’re responsible for generating your own business. Not much, usually nothing, is handed to you in terms of business. You close business based upon your own efforts, or else you starve. Of course, you look at that $220,000 median price at three percent commission split 80/20 in your favor. Then, you say to yourself, “Self, there’s no way I won’t close less than 20 sides in a year. That’s $105,600 — I’m in!!” [Emphasis added]

Those are the surface facts. And in fact, those may be the still prevailing arrangement among the majority of agents and their brokers.

The true reality, however, appears to me to be that those agents who are not starving, those who are able to generate their own business, are the Debbies of Jeff’s scenarios. They are the agent team leaders. Y’know, the ones who are kicking the hell out of the John the Broker’s gross income?

The random onesie-twosie part-time agents are not on 80% effective splits, especially once one takes into account the brokerage overrides on “broker leads” that is common practice. They may actually be close to the 40/60 split that Jeff mentions was prevalent in the 60’s.

The transition to an Information Age economics of the 80’s, 90’s and the 00’s from the Industrial Age economics of the 60’s and the 70’s meant that brokers were able to offload substantially all of the cost and risk of lead generation to the agents. The growth of agent teams accelerates that trend, as agent teams often hire and pay for the very support staff that once upon a time, the broker would have provided. Litigation risk has been mitigated as most agent-centric brokerages offload the cost of E&O insurance to their agents, either directly as insurance fees, or indirectly as transaction fees.

In other words, as I’ve noted in the Report, the true reality is that the Agent Team is the broker-centric brokerage model of the 60’s reborn in the Information Age. The lead agent pays for, takes on the risk of, and reaps the value of lead generation. Debbie controls the leads, and therefore can dictate the terms to her Buyer Agents. John, the Broker, does not control the leads and therefore must live with what he can get… unless, like Realogy, he finds a way to gain some control over lead generation.

What is true, however, is that as Jeff notes, the 100% shops that do no lead generation at all and merely charge some sort of transaction fee or desk rental fee or some such are “doomed” as brokerage models. I think it is more logical to look at such companies not as real estate brokerages at all, but as shared office space companies, such as Regus or BusinessSuites or some such.

In any event, I think Jeff Brown is largely correct, and that we may agree far more than disagree, especially if we think of the agent team not as an agent and therefore subject to some “agent-centric” analysis, but as a brokerage-within-a-brokerage. I think that would go a long way towards understanding where contemporary brokerages are today.

-rsh

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