I have thought long about this topic. Having worked at a major national branded real estate brokerage in the past, I wanted to share what I perceive as the new market reality - the big brokerages are in trouble.
This simple truth is that in many cases, the large national or regional brokerage firms do not provide any additional value to a Realtor that works for them that the Realtor could not get through a smaller firm or through other means for lesser money. In many respects, the difference between the national and regional brokerage brands and smaller non-traditional brokerage models is simply in the cost structures they create - namely, that Realtors ‘rent’ space from the brokers through physical office locations.
This is important for consumers because I am here to tell you that the choice for your Realtor should not be about the brokerage name that they work for but about that individual Realtor and how you feel about them, their expertise, and ethic.
Virtual Brokerages Are Proving You Can Do the Business Without Physical Office Locations
More locally, I have seen a tendency by some of the local, large brokerage brands to go under. Why? Because the ‘popular’ brands tend to have physical office locations with expensive infrastructure. They have to. It’s part of their prior thinking - that you have to have physical offices to conduct the business of real estate. Have you ever seen a RE/MAX office being marketed that you realized was a virtual office environment? I haven’t seen one.
Virtual office brokerages are proving that the business of real estate in the Phoenix area can be done without the use of physical office locations. Most clients don’t need to come to the physical office locations to confer with their Realtors. They are busy and their time is valuable. If a dedicated meeting does need to take place, it can be done at an interim location or at the client’s home or even over the phone.
In some sense, there are only two types of brokerage models - those that maintain physical office environments and those that don’t. The cost structure for the offices and their associated Realtors extend from that fundamental difference.
Real Estate is Person-to-Person
The business of real estate is an person-to-person business. Home buyers and sellers are not going with the brokerage that stands behind the particular Realtor, but with the individual Realtor. In other words, consumers for real estate services are likely selecting the Realtor they use based on information or impressions gleaned from that particular Realtor without much regard for the brokerage they work for. I’ve heard that in the distant past (20 years ago), Realtors were mostly selected for the brokerage they worked for. That largely does not exist any longer.
- In my own case, in the 3 1/2 years of working for a national branded real estate company, only 1 client ever told me that my working for that national brand was a key driver in their selecting me.
Corporate Versus Local
I have seen firsthand what happens when you have a national real estate brokerage brand where there is a corporate entity and all local offices are independently owned. In this case, my perception has been that the corporate entity is only loosely tethered to the local offices in that the corporate entity appears more concerned for how it national brand or “brand equity” is ranked as opposed to what can be done to help Realtors at the local level perform better.
This is not necessarily true for every large nationally branded real estate brokerage. However, the risk exists that the professionals at the corporate level simply lose sight of how real estate is done at the local level and that the measures of success should be applied at the local level rather than at how well the national brand looks on television to viewers.
In addition, the money to pay for this corporate structure could be provided by broker licensing costs to have the brokerage brand as well as annual specialized dues to the corporate entity. All of this spells additional costs to the local Realtor and so value add must be attained for that cost.
Most Brokerages Are the Same and Offer Their Associates the Same Level of Support
The fact is that any Realtor can work at any brokerage and get the same level of support that they need either from the brokerage or from outside it. For instance, training is always a desired offering (though Realtors won’t pay an arm and a leg for it). However, the Realtor can easily get additional training from local real estate schools or specialized programs for certifications. If the office provides it, that is great too. But often this training is on topics that the Realtor may not be interested in and the selection will always be limited. And the fact is that the Realtor is indirectly paying for this with the brick and mortar brokerage firms.
The Broker-to-Agent Support Ratio at a Big Brokerage is Likely Much Less
A small brokerage firm is likely to have a stronger brokerage-to-agent ratio than the bigger brokerage offices. Why? Because the firm is smaller and likely has a lower cost structure than the big brokerages. A virtual office environment does not have the physical office and infrastructure cost that a big brokerage does. In fact, I have seen specific large brokerage firms that had multiple physical office satellites for its employees which further raises the costs of the operations. But coming back to the ratio, why is this important?
Every agent must work for a broker and when challenging issues or questions come up, the agent often relies on the broker for perspective and support. If the ratio is low, the agent will be waiting longer for a response than when the ratio is higher. As well, if the ratio is lower, meaning there are a lot of agents that a broker supports, that broker is likely to be bogged down in administration which would further impede their ability to support their agents effectively.
Another aspect which is interesting and ironic for the many of the larger brokerages is the concept of ‘competing broker.’ This means that the broker also practices the business of real estate in addition to their broker management duties. They are helping buyers and sellers too.
This is very common. However, one would expect that at the larger brokerages that the brokers would not be competing and would only support the agents working for them as the fees from the agents would pay the brokers’ salaries. However, this is often not the case. The brokers are working to represent clients while also supporting their agents.
The Big Brokerage Model Can’t Support the Buyer’s Agent Model Very Well
Imagine a team at a large brokerage that handles Real Estate Owned properties. This team farms out its buyer leads (from sign calls and other communications) to a Buyer’s Agent. Chances are that this buyer’s agent will pay a 25% referral fee for anything that comes about as a result of the lead. This will be in addition to the 20% minimum commission that is taken. Now, that Realtor may also have additional office fees that could go in the hundreds of dollars per month including additional Errors & Ommissions insurance charges of up to $45 per month.
Given that the large portion of activity in the market takes place below $200,000 and that what sellers (primarily lenders for foreclosed properties and short sales) are paying is lower today, the buyer’s agent is looking at a greatly reduced take-home commission for each transaction.
Here’s the analysis:
$200,000 property x 2.5% commission for the buyer’s agent = $5,000.
Less: 25% referral to the team or referrer = -$1,250
Less: 20% commission taken by broker = -$1,000
Less: Office fees for the month (not per transaction) = $250
Less: Errors & Ommissions insurance =$40 per month
Buyer’s Agent Gross Earnings = $2,460
Now complicate this with the fact that many of the transactions Realtors have been working on here in the Phoenix area have been well below $100,000. A $100,000 deal would leave the Buyer’s Agent with $1,230. That money would need to cover gas and other expenses and time associated with working with the client to find a property as well as getting them to successful close of escrow.
Though $2,460 might seem like a lot of money, a Realtor’s earnings have to be considered as spread over a lot of time and commissions don’t necessarily come every two weeks on the 15th and 31st! It’s the nature of the sales model.
As well, think about the expenses for office space and infrastructure and if your Realtor base is now making half as much per transaction. That means that the office takes in less. As a result, the brokerage becomes fragile and any sudden exit by a number of Realtors puts the firm in jeopardy.
A good indicator for Realtors when this is happening is when commission takes begin to take longer to pay out.
Realtors Are Faced with Two Realities in the Current Market
Because pricing has dropped so considerably, smart Realtors have realized two things. First, they will have to do more tranasctions to make up what they did the year before. Second, they will have to cut costs.
For the latter, one of the most expensive aspects of this business is what you pay in office-related and brokerage fees as well as commission splits. If a Realtor can find an option that reduces their monthly office expense and allows them to keep more of their commission checks but still get the same reasonable level of support when they need it, they will look to this more and more. And the truth is that these options exist for the Realtor looking to cut costs.
The Real Estate Franchise Model Disregards Location
The big brokerages are operating much like large companies in other industries whereby the rigidity to evolve and cut costs has created an expensive operating model that can’t improve efficiencies on its own. As a result, it begins to look for other similar operations that can be merged in the hopes of achieved economies of scale. So, then you see two large brokerage offices ‘merge’ (or more accurately, one collapses and the other takes in the agents). Of course, there is some loss of agents or ‘leakage’ here when this happens. And it certainly isn’t good for the corporate branding entity when one office collapses to the benefit of another.
Perhaps this competition amongst the brokerage offices is a result of the franchise model that they long since adopted. Think of it this way: Franchisers often don’t locate two franchises within the same geographic location if there is risk that the two franchises will take business away from each other. But in the big brokerage real estate model, despite two separately owned franchise offices that have separate physical office locations, their agents DO work the same geographic areas and so there is always cross-over and competition among the same brands. For instance, a Keller Williams office that operates in Ahwatukee will certainly have listings in Chandler and Gilbert where other Keller Williams offices are likely operated.
In my opinion, the franchise model as it relates to geography has become one of not focusing on the potential clients in the surrounding areas and how to best serve them, but rather a focus on attracting Realtors in the surrounding areas instead. The franchise offices are targeting Realtors in the area to have potentially work for them regardless of where the Realtors would service clients across the Valley. So, for the brokerage, the customer is really the local Realtor the broker wants to attract versus the actual local home buyer or home seller.
The point here is not so much to say that this is inherently wrong or not something that just evolved (for instance, no person’s sphere of influence is located just within the confines of the community they live in) but that there are diametrically opposed elements to this model - working at times for but certainly at times against the brokerages that operate this way.
Most Brokerages are about the Quantity of Realtors, Not the Quality of Realtors
Now, many of the large brokerages that have extensive national marketing campaigns would like you to believe that they have the best Realtors and that their brand is a premium brand for real estate services. Though I am sure these companies have much in the way of statistics to ‘prove’ their case, I am going to give you a Realtor’s-eye view of what I think.
Most large brokerages operate in the same way in terms of attracting as many Realtors as possible to work for them. The example is that I could choose to work at any brokerage I want to at any time - RE/MAX, Keller Williams, Realty Executives, First USA, etc.
These businesses have gotten away from the model of interviewing prospective Realtors for hire based on what they are looking for to complement the business to hiring anyone who enters the door. They look at the business as a numbers game - the more Realtors you have, the more closings you have, the more commissions you make, etc.
Given this, how can one expect that a national brand has any better people than another large brokerage if anyone and everyone could work there?
The only brokerages that truly bring a higher grade and quality of Realtor are those that are deliberately selective and diligent about the people they choose to hire. Those that look for an innate sense of integrity and professionalism in their Realtors are going to build the strongest teams in terms of how each client is served.
Not Just Leads, But Good Leads
One key measure by Realtors of the brokerages they work for is to what level they have received leads and closed business as a result of working for that brokerage. Many brokerages would like to tell you that they give leads and many do. But, it is critical to understand the quality and frequency of those leads. The key question is “How many leads does the brokerage expect to give each Realtor and how good are these leads?
- Having worked for a major brokerage with a major website placed in the top 5 for real estate, I can tell you that I received approximately 1 unsolicited lead each 1 1/2 months average. I can also tell you that not a single one of these leads ever panned out to anything significant.
I recently saw a brokerage office market itself from the same national branded brokerage as giving Realtors leads when they become part of the brokerage. If they are talking about the same leads that I was getting, they are doing prospective new hires a big disservice here.
In the end, the brokerage needs to show a ROI for the Realtors who sign on to them. It isn’t enough that the office simply provides support to you anymore. The question is, “Is the office actually delivering the Realtor added value for all the money spent in office fees and broker commissions?”
The Web is Changing Everything
The power of the internet with regards to real estate stands to change everything. This ties into the discussion on leads as the internet is proving to be a powerful tool to generate business. As such, even the smallest brokerage with a handful of employees with a focus on technology can build a web presence that is equivalent to a larger brokerage in terms of visibility.
The internet is where most people are going to look for a home and a Realtor. So, will larger brokerages be able to generate the content they need to be successful on the web or find themselves outdone by those that can? Will they look to help those particular Realtors who are strong on the web with additional enhancements, leverage, or expertise that can further strengthen their position?
Where the Big Brokerages Are Going to Have to Go
I hinted at this earlier. When can we expect to see the first “RE/MAX Virtual Office Model?” Will we? How does an operation that worked on the old model of physical office locations with associated training and support provided at that location evolve to a model where there is no physical office location and training is provided possibly by a local real estate school or training organization?
Attrition. I can think of a few brokerage offices that have collapsed in the last couple years where the Realtors mostly moved to another brokerage with the same brand. This is that ‘merge’ model I mentioned. This will likely need to continue. However, whether the receiving brokerage can scale effectively without degrading support is the question and challenge.
Here’s another idea. What about a ‘local-only’ real estate office. This would be one where the associated Realtors ONLY work that city or geographic area, moreso the city. The emphasis is on them promoting a ‘Specialists in Ahwatukee and ONLY Ahwatukee Realty Company.” On the surface, this would appear difficult to do as relationships carry over beyond this. However, if the Realtors selected lived and were established in the community, then the combination could be powerful.
I also have an idea for what I call the “New Real Estate Industry Model” but I will keep that one for a later time. It involves how the entire industry could move in the future.
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