I realize writing has been light because of travel, and because of Inman Connect that just finished last week. My apologies, but I hope to put some thoughts down before my next roadtrip.
Now, I didn’t attend any sessions because, well, #lobbycon for one and meeting after meeting for another. But what I’ve heard from friends was a bit mixed, which is normal for a large conference.
Having said that, I did hear one thing that ended up being the most interesting thing I heard all week. It was at an investor meeting put together by one of the largest investment banks in the world, and besides a couple of industry insiders, there was an agent there who runs a large and very profitable team. I’m not going into too much detail to protect the innocent and the guilty both. 🙂 But if you want to self-identify in the comments, please go ahead.
This top producing agent who owns and operates a large team confirmed so much of what I’ve been saying about the state of real estate brokerage today. But he went further.
Basically, he said that in the near future, every local market will be dominated by two teams in much the same way two companies dominate hardware (Home Depot, Lowes) and drugstores (CVS, Walgreens), etc. He actually said he got into an argument with the CEO of a large national franchise… because said CEO thought it wouldn’t be two teams, but three.
That is… interesting.
Let’s discuss it.
Operations, Systems, Efficiency, Market Share
The basic argument from this agent (let’s call him Agent Smith) is that his team is one of two in his local market — a large metropolitan area (think, NFL city) — that is actually operated like a real business.
All other team owners, he thought, were (in his words now) “morons who don’t know the first thing about running a business.” They were, in his view, good salespeople who decided to start a team and sucked at it.
A couple of figures he cited to back it up:
- Over $200 million in volume in 2019; double from 2018. He expects to double that in 2020.
- His agents are on a 35/65 split. That’s right — they get 35% of the commission.
- Rough math suggests $3.9 million in company dollar to his team.
- He generates (through his team) thousands of leads every month and the growth is accelerating, which lets him feed his team more, which then generates more leads, which then lets him hire more agents, etc. creating a virtuous network effect cycle.
- His brokerage has a cap on commission, so even if he were to double his production, his marginal costs are de minimis.
- If his brokerage did away with the cap on commissions, or tried to extract more money from him, or prevent him from running his business as he wanted (outside of legal compliance), he would simply find another brokerage.
Agent Smith thinks that he has the technology, the systems, the admin staff, the procedures, and the control over his team members to get more and more efficient. That means he will take more and more market share, because consumers might know an agent but in the end, consumers care about getting the most money in the shortest time, which his team can do better than anyone else in his market.
So, his conclusion was that eventually — and not in the distant future, but in the near future — there will only be two teams in his NFL City local market: his and his friend’s, because they’re both run properly and operated like a real business.
Now, you can dismiss Agent Smith as just another blowhard who talks a big game. You find them everywhere in real estate, from individual agents to team leaders to brokerage owners. It’s not like he came with his Income Statement so we can see for ourselves.
But there is something truly important here. It’s something I’ve discussed in the past, but it’s nice to see it confirmed by someone with actual boots on the ground.
Real Estate is a Zero Sum Game
In 2018, writing about RE/MAX, I pointed out that real estate is fundamentally a zero sum game:
Second, real estate is a zero-sum game. Here’s something I wrote back in 2015 on this issue:
Ever since Netscape introduced the general public to the Internet, and AOL made “email” somewhat mainstream, the business practices of real estate have completely changed. Remember, Zillow and Trulia weren’t even founded until 2006 or so; right in the middle of the Bubble inflating.
And yet, home sale numbers have remained right around 5M units; higher during the Bubble years, lower during the Crash years, but hovering right around that mark.
The point is this: There is absolutely nothing that the real estate industry does that affects the housing market.
Even if some brokerage somewhere were to come up with a novel new business model charging $5 flat fee to buy and sell homes, that doesn’t transform a guy on unemployment into a potential buyer. That kind of screwup requires the federal government working hand-in-hand with Wall Street.
Since only macroeconomic factors affect the housing market, anything within the industry itself means someone has to lose in order for someone else to win:
If an agent leverages technology, smart lead management, and topnotch service to increase production from selling 20 homes to 50 homes, then other agents in her market will be doing 30 fewer transactions. A broker making $100M more in revenues has to get that from somewhere — other brokers, from higher agent splits, somewhere. They don’t affect supply and demand; only macroeconomics does.
Similarly, if a vendor in the real estate industry becomes successful, that success must come from somewhere. It has to get a larger share of the Commission Pool, which necessarily means that someone else has to get a smaller share.
This fact of life — the zero sum game — makes the rest of RE/MAX’s earnings call all kinds of interesting… and problematic.
For Agent Smith to grow, someone else in his local market has to lose. He’s not creating demand; merely shifting who gets to represent those buyers. He doesn’t create supply (unless he has a sideline of new home construction); he merely shifts who gets to broker that supply.
We all know this. Sometimes we know it explicitly, but more often, we know it kind of deep in our hearts as we stay focused on the day to day. But every agent out there knows instinctively that when someone in her office landed a big listing, it’s another one she’s not going to get. When her friend is buying online leads or doing more sphere marketing or doing geographic farming and increasing his business by 30%, that’s 30% she’s not going to get.
No wonder competition can be so brutal in real estate.
It’s About The Relationship, Right?
What I found so interesting about Agent Smith’s take is that it goes directly counter to the prevailing assumption in the industry — dare we call it “conventional wisdom”? — that it doesn’t matter that teams are spending hundreds of thousands of dollars on online leads, that they’re blanketing neighborhoods with farming materials, or banging phones day in and day out using sophisticated auto-dialers to do so.
Because it’s all about the relationship.
See, the idea is that an agent can build such a strong relationship with a potential buyer or seller that when the time comes, that buyer or seller will choose her no matter what.
At just about every real estate conference you can attend (or at least, that I have attended), you can find someone on stage telling agents that they just need to build a strong relationship, to provide value, to remember birthdays, and so on. Because people want to do business with people they like.
That’s true. No doubt about that. All things being equal, or even slightly unequal, people prefer to do business with people they like.
But the key is “all things being equal.”
In high risk, high reward situations, people often prefer to do business with people they dislike but who will get results. Thousands of very successful lawyers, who are absolute pricks and proud of it, are proof. Nobody I know picks a surgeon based on how likable she is; it’s about successful outcomes.
(Now, there is a lot of evidence that bedside manners and likable personalities reduce malpractice lawsuits against physicians… but they were chosen because patients believed that they will cure them.)
I had an accountant back in the day who was one of the least pleasant people I’ve met. He was slovenly, always late, smelled bad, had the manners of a homeless man, and did not return phone calls or emails on a regular basis. We did not have a “relationship” if you will.
But he got double the tax refund of anybody else (I know, because he went back and refiled past returns). Yep, he was my tax guy until he retired.
Given how often real estate agents like to say that buying or selling a home is a family’s largest financial decision, that they ought not to go it alone, or even work with less-than-experienced agents, and given the plethora of research that shows that consumers do get stressed out during a transaction, why wouldn’t we classify real estate as one of the “high risk, high reward” situations where personality is nice to have, but results are what counts?
The Onesie Susies
One of the terms I’ve heard in the industry that is accurate if faintly offensive is “onesie Susies.” A broker I know used that phrase and I’ve heard it multiple times since.
A onesie Susie is an agent who gets into the business, and does one deal, usually with a family member. The “Susie” part comes from the fact that many such agents are part-timers who are usually women, usually a mom, and don’t have the time or the ability to take on a full-time job.
The vast majority of real estate agents in the United States are these “onesie Susies” who do one, maybe two, deals a year. We know this because in most MLSs, at least half of all subscribers do ZERO transactions a year. We know this because if you increase the number to two or fewer transaction in a year, most MLSs in the country are looking at 70+% of its members. We know this because Alex Rampell of Andreessen Horowitz did a study and found that the mode (the number most frequently appearing in a dataset) of transactions by real estate agents in Washington was zero.
Franchises, brokerages, and NAR spend millions of dollars in advertising trying to tell consumers that all of their agents are top producing experts in all things real estate. Here’s an example:
With 1.3 million members, half of whom do zero transactions a year, it’s impossible for “Who We R” to stand for “an expert you can trust.” A minority are, of course, but consumers are to believe that anybody with the R is that expert.
The structure of the real estate industry — especially in how commissions are structured and how cooperating compensation works — is built to kind of reinforce the idea that all licensed agents are the same. Consider: a brand new agent on her first deal ever will get paid the same 3% as will a 30-year veteran with an MBA and a Ph.D. in economics.
That narrative worked for decades. But the advent of the internet has begun to change things. The advent of teams has started to change things.
The trend has been obvious for years now within the industry. But Agent Smith is the first actual team owner to make such a bold prediction.
One of Three Things Can Happen
When you think about it, there are only three possibilities here.
One, Agent Smith is correct and the additional efficiency, productivity, capital, and control that the agent team has will eventually take most of the market share in the given area. Let’s say that his prediction of two dominant teams is hyperbole, but like most markets with commodity goods/services, you end up with one or two dominant companies, and a few tier-2 companies. The two big dogs compete on price and convenience, and have the money to market effectively. Everybody else either works for one of the big teams, or scrape by with scraps that the big guys don’t want. Think lawyers, bankers, accountants and even title companies.
Two, Agent Smith is dead wrong because real estate has such low barrier to entry, the consumers have no idea about differences in quality and service, and the structure of the industry inhibits price competition. So large teams will exist, and they will get market share, but eventually, they cap their growth to something in the 10-20% range and the rest of the industry continues as it does today. Think maid services, lawn care, and web design services.
Three, Agent Smith is partially correct: teams will exist, but there will be many competent teams who also have systems, processes, technology, staff, efficiencies and capital. Technology is cheap and getting cheaper by the day, and real estate is a “belly to belly” business and no amount of efficiency will overcome the human factor. So instead of two or three dominant teams, there will be thirty teams of varying sizes.
I can’t see any other options. The transaction is changing, information is everywhere, and technology continues its march. Enormous sums of capital are being deployed into real estate. Maybe it’s a failure of the imagination, but I can’t imagine a different outcome from the three above.
Teams uber alles.
The Structure of the Industry is in Flux
One of the more interesting conversations between Agent Smith and a bunch of hedge fund managers was about what the brokerage provides him and his mega team. His short answer: liability insurance. He said it was cheaper for him to push all legal problems and costs to his brokerage than to go buy his own E&O insurance and do his own compliance work.
I had heard that for years, of course, but investors were fascinated.
The two fundamental problems of brokerage — inverse relationship between agent productivity and broker profit, and the lack of control over consumer experience — do not exist for well-run agent teams. Granted, they’re all violating labor laws of the 50 states in various ways, but still, even that reckoning can’t hurt them too badly. 65% company dollar that Agent Team gets is approximately double Redfin’s gross margins. He can go W2 employee route without missing a beat.
The question, then, is this: once the well-run teams come of age and achieve dominance… do they need more than one brokerage to service them? A brokerage is just a liability shifting device for them; do they need more than one company to do that for them?
Will these teams leave the profit centers of mortgage, escrow and title to the brokerages in exchange for cheaper liability “insurance?” Or will they realize they’re leaving millions on the table?
What does a team-centric real estate industry mean for organized real estate? Associations and MLS’s operate on a very different model today. For example, MLS’s operate on the basis of “Participants” who must be brokerages. Do agent teams leave that alone and focus on selling real estate?
How big is the real TAM for real estate technology vendors in the future? Instead of 1.3 million REALTORS to sell to, vendors might have 1,300 large super teams to sell to, because they’re the only ones with any money to spend.
Zillow has already made it very clear that they view these super teams as their key partners. How long before everyone else makes the same move? And what does that do to the industry?
Disbrokeration Is Coming
Maybe we’re all infected by shiny object syndrome. Teams have been a development since sometime in the 90s. Gary Keller’s book, Millionaire Real Estate Agent, set forth the blueprint and hundreds of coaches, trainers, and gurus know how to teach becoming and running a team. It’s not exciting anymore. It doesn’t make the front page of Inman, or show up in Swanepoel Trends Report anymore, because teams are just a fact of life and they haven’t disrupted the industry that much… yet.
So we pay attention to venture capital, to Zillow, to Redfin, to new phenomena like eXp and Compass and whatever. We go to conferences to learn how to use Instagram for lead generation. But we may now be at the point of no return for traditional brokerages; I’ve been suggesting it for a while now, and now, there is more evidence that the people actually on the ground are acting and behaving that way.
But you know, change comes slowly, then suddenly. It’s not a slope, but a cliff.
The biggest disruptor in the next few years might not be who you think. It might be the super team come of age.
Don’t sleep on it because you’ve gotten used to it.