I mentioned blogging would be light because I’m at the annual Realtor Quest conference that the Toronto Real Estate Board puts on. It’s a truly wonderful world-class event, I think, and I’m not just saying that because I spoke there. 🙂
But I did want to take a few moments to jot down a quick post related to something that just about every presenter there (myself included) said. It came to me while watching a great panel discussion on the future of brokerage, moderated by Sherry Chris of Better Homes and Gardens. I believe it was Tami Bonell, CEO of Exit Realty, who made the point that no matter what kind of disruption comes, no matter how the business changes, good agents will always figure out a way to adapt because the desire of consumers to have a great professional in their corner when dealing with the most expensive purchase they are likely to make or the most valuable asset they’re likely to sell is rooted in our eternal need for human connection.
Most people in the industry, myself included, would agree. Great agents are real experts with years and years of experience, take fantastic care of you, provide expert advice, and just make your life easier throughout a stressful transaction. This much is all true.
But… there’s a problem with this that I thought worth exploring publicly with all of you. Here it is:
Great agents will always survive… but how does the brokerage make any money with them?
The Eternal Problem of Traditional Brokerage
I have said and written something like this time and again over the past few years: the problem of the real estate industry is largely the problem of broker profitability. That’s the reason why Realogy stock price has been hammered. That’s the reason why brokerages are trying things like Project Upstream. That’s the reason why some of the issues we deal with, such as off-MLS marketing, double-ending transactions, pressure on cooperation and compensation, etc. etc. exist.
At the root of that problem is a simple oddity of the real estate industry. As far as I know, this is the only industry in the world that I can think of where companies make less money from more productive people. It’s the exact opposite of just about every industry and business model I can think of.
A law firm wants their most productive lawyers to bill as many hours as possible, so that they can make the most money from that lawyer. Sure, the firm will compensate that lawyer handsomely, but the incentive of the firm is to have that lawyer do more and be more productive. Software companies make more money from their more productive superstar programmers. And so on it goes.
Productivity leads to greater compensation for the employee, of course, but the employer usually more than makes a return on that additional compensation.
It’s the exact opposite in real estate. Brokerages want their agents productive… but not too productive, where the agent starts demanding more in splits and bonuses and goodies…. You don’t want the one deal every two years agents, but you also don’t really want the 30 deals a year top producer… because that top producer will demand (and get!) extraordinary splits. If you don’t agree to that sweetheart deal, believe me, there’s a brokerage in your market who has been calling that agents for the past seven months who will.
What If Only Top Producers Survive?
The problem for the industry, for brokerage, should be obvious. Say some kind of disruptive technology comes about, or some kind of lawsuit or regulatory change decimates the ranks of real estate agents. Maybe it’s some kind of super Amazon of Housing; maybe it’s the delinking of commissions (as Moehrl v. NAR is seeking to do). Maybe it’s just a market crash. Whatever it is, we all agree that great agents will figure out a way to remain relevant, serve clients, and get paid on whatever business model comes to dominate.
This poses a major headache for the traditional broker. Now, every one of your agents (or let’s say more like 80-90% of your agents) are top producers who are heading up teams and pulling down 50 transactions a year, especially because the competition from marginal agents has disappeared. That’s wonderful for them, but for the brokerage? Ouch!
One of the oft-undiscussed facts about real estate brokerage is that they often bring on top producers as a loss leader to gain market share, gain visibility, which lets them recruit those mid-level agents who are doing deals, but not enough to be able to demand extreme splits. So what happens to that if only top producers remain standing?
Even the NextGen Brokers Aren’t Entirely Safe
As readers of my Red Dot on Next Generation Brokerage know, going down that road of transaction-fee based pseudo coworking space for real estate type of model is more resistant to the problem of split compression. But even these NextGen guys aren’t entirely immune to the problem. There comes a point of productivity where the agent might decide to hire an in-house broker to do the legally-required compliance work if that means saving $299 per transaction that his broker charges. Alternatively, those top producing agents who are doing enormous number of deals would also find sweetheart fee-only deals from competitors: “You’re paying $299 per transaction? Your broker is ripping you off! We only charge $99 per transaction!”
Ultimately, there is a race to the bottom in terms of price as brokerages compete to see who can make up in volume what they’ll lose in per-transaction revenue.
Yes, I can already hear the rejoinder: “Price only matters in the absence of value” and “It’s not about the fee, but about the culture at our company!” and so on. I get it. Some agents are going to be willing to pay a little more to get designer furniture and an in-house barista. Lifestyle matters. Culture matters. People matter.
It’s just that particular business strategy is… well… a bit fragile. It’s also difficult to replicate. There’s a real uniqueness to the particular combination of people that creates a culture. Everybody wants to be the New England Patriots or the Golden State Warriors… but you’re going to need a Tom Brady or a Steph Curry and a particular locker room culture to pull that off. That feels more like a wishlist than a strategy.
Brokerage Next, Next
So I’ll reiterate some of what I said at my presentation: start thinking beyond the next thing to the thing after the next thing. Disruption and chaos are coming; we all can feel it in our bones. But it helps to think about what happens after whatever adaptations are made. This is an example.
Disruption comes from some wizbang technology coupled to Wall Street capital! Well, the good agents will survive, adapt, and thrive. They always have and they always will. True.
But what comes after that adaptation, when the real estate industry goes from 1.3 million REALTORS to something more like 250,000 top producing super-agents?