25 August 2009

Will the Next Generation Brokerage Scrap Agents for Employees?

Nine years ago, my boss, along with four other company employees, jumped ship for a boatload of stock options from an Internet-based real estate firm that promised to dismantle “old economy” companies like ours and, quite simply, take over the real estate world as we knew it.

About a year later he and the others were out of work, their promises unfulfilled.  I kept going and growing at my stodgy old economy company as I would for many years afterwards.

During this time, countless threats to the very existence of our industry have garnered media and public attention, many with the promise of being that one “new” model that will change the game completely and wipe everyone else off the planet.

And, of course, before my time there were similar pronouncements.  I don’t need to list them as it doesn’t matter; this story is hardly unique to our industry.

Since no one model has been that all-encompassing game-changer, it’s easy to get complacent and fail to take seriously the next challenge, especially when there seem to be so many coming so often.  The fact is each new player has changed (and continues to change) the “traditional” players to some degree – some more than others – and each new one will as well.  There is adaption and evolution or there is death.

But which deserve the most attention?  Is there a true game-changer out there?

In my most recent post, a spirited discussion on a model whose idea is hardly new was brought up by our readers: the employee-based brokerage.  Some believe that the time is perfect for this model to be the game-changer that will knock the complacent traditionalists on their keisters.

I think this deserves exploration in our consideration of the “Next Generation Brokerage.”  For reasons discussed in my comments, I am not convinced that this model will overtake all others but I’ve been wrong before so I’d like to hand it off to you to argue both sides.  To get you started, here are three sets of questions and one survey to consider:

  • For brokers: do you believe employee-based models will change how you do business in the next five years?  Why or why not?
  • For agents: what would it take to get you to work as a salaried employee rather than as a commissioned independent-contractor?
  • For consumers: do you believe your buying or selling experience would be better, worse, or the same if you were served by employees rather than agents?  How so?

[poll id=”21″]

18 thoughts on “Will the Next Generation Brokerage Scrap Agents for Employees?

  1. I’ve been an agent for 35+ years as well as a manager and now a corporate trainer. I’ve long felt that the employee model was one that would work. The mix of managers who don’t manage and agents that take advantage of the ‘independent contractor’ status results in too many unproductive people who cannot or will not be held accountable. The success of coaching companies today is clear evidence that accountability works. We are using coaching for agents who are pre-screened to be sure they are ready for it – the results have been impressive.

  2. in my opinion, in an industry like ours where REALTORS are looked down upon and there is very little prestige involved, the main motivator is money. Of course there will be lazy people in all industries, but those are the ones that usually don’t achieve much.

    I started discussing this in your last post with Rob Hahn where salaries would give many peace of mind and would release the stress of trying to make it in a trying market – but it would also remove the motivation for the “out of the box thinking agent” to want to do things differently. I for one would not feel the need to work 24-7 if I was employed, and would not put forth 1/2 the effort I do in social media.

    I also would keep in mind the reason many of us go into real estate to begin with – it’s not having a “boss”, having our own business, having freedom and flexible schedules. I worked in Corporate America and so did my husband for many years and we were ready to let go of that “control factor” – as a salaried employee, you would have that back.

    Please don’t misconstrue this to mean it’s a bad idea, because it could be a good idea for the less ambitious agent, just not for those of us that are happy where we are.

  3. Nicolai,

    While I think there is some promise for the employee based real estate brokerage I don’t think it will be a game changer.

    I do think that the Refin model of employee agent with rebates will gain some traction and others like them.

    As Rob Haun has suggested in his latest post I think the Law Firm model has promise.

    The small independent brokerages will increase with top producing agents leaving for more control and higher splits.

    And those traditional brokerages that update and give agents a culture and reason to stay will have a place at the table.

    Finally the Keller Williams model will continue.

    I don’t see one game changer, but then folks inside an industry rarely do when one comes along.

    Thanks for the discussion.

  4. I think the idea of unbundling the sales process and employing specialists for each facet of the transaction is a compelling idea and a model for using employees instead of independent agents. The problem is that there are really two real estate industries out there; Great agents who transform people’s lives, and the rest. Almost all the criticism of the industry is focused on the rest, while great agents are doing incredible work and are appreciated by their clients for whom they provide amazing service.

    No two real estate transactions are the same, and especially today, no transactions are easy. Top performers have experience and insight that can help people navigate these troubled waters. I wouldnt want to face this market with only a customer service person and a call center representing me, its too complicated.

    As a company we are trying to combine the best of the traditional agent-delivered experience with compelling services delivered by the brokerage directly through technology and customer service employees to provide more consistent consumer experiences.

  5. Great comments all around, folks. @Matt, I couldn’t agree with you more. There are many, many great agents out there. Unfortunately, there are also far too many poor agents. I know this comment won’t be popular with some but it is my belief that, more than anything else, it has been the explosion of recruit-at-all-costs business models that have flooded our industry with underwhelming agents who are dragging everyone down. I also believe that many companies who may state otherwise have added to this problem by employing some of the same recruiting and retention tactics in reaction to these models, instead of sticking to quality.

    What are the supporting arguments for the employee-based model? From what I’ve heard from proponents so far, this model will be better than the independent-contractor model when it comes to customer satisfaction and brand promise and will more successfully weed out unproductive agents.

    Why can that not be the result from a disciplined independent-contractor model? There are “traditional” firms that are pulling this off. You could argue that you can’t “control” an independent contractor. True. But you motivate through your hiring and firing practices. I think the whole talk about the employee-model helps focus us in on the behaviors and problems in our current world that we could all do without. I’m not convinced that we need a new model to change for the better.

    I’d much rather have ten great agents who did it right than 50 mediocre agents. Even if the total transactions were fewer with the great agents, I GUARANTEE you would have happier clients, happier agents, and make more money over the long term. I’ve met with literally hundreds of broker-owners over the years and analyzed financials from over a thousand companies, and have yet to encounter a successful operation that has a preponderance of mediocre, low-producing agents.

    Now here’s where I tie it back to office sizes: smaller space allows you to concentrate only on your most promising agents. Sure, they’ll get higher splits on the business they generate but they’ll warrant it. Use the money you’re saving on rent and apply it to generating new business which you can then get more favorable splits on to keep your totals in line. This total package is hardly a “next generation brokerage” but I think it’s central to what’s needed.

    As @Ines pointed out before, there’s no reason both models can’t exist as each has its appeal. I have to admit, I’m kind of intrigued with the idea of a combined effort. But I don’t see why the benefits of the employee-model that I’ve read so far can not be achieved with an independent-contractor model.

  6. I personally don’t believe that the employee model will be a game changer. Zip Realty started out more of an employee model where they offered a small salary and benefits. They have since gone away from providing this and now focus on their low cost physical overhead and plow their money into internet leads. Having been an owner/broker I like some of what Zip does, but have also disagreed with Pat in conversation about some of their approach.

    If you look in the Chicago MLS, Redfin with just a couple of agents is averaging $10mm in sales per person for the year compared to $2mm with Zip Realty.

    On the comments above about having professional producing agents people need to look to themselves about how they run their company. When I took over Aspen Sotheby’s we let go of 50% of the agents and raised our sales volume by 30%.

    If you want to look at a traditional company with the fortitude to manage this way for the long term, look down the hill from me in Denver, CO at Kentwood.

    Waiting list of agents and average production of $10mm per person.

  7. Let’s strip down to the basics: why do we want to explore the possibility of the employee model?
    1. Ownership and better control of the process and agents
    2. Operational efficiencies

    With Independent Contractors we don’t really have any concrete authority. Whether we’re talking about new, experienced, or high impact agents at best we can control through personality. But to the employee alternatives above (and here’s my cynical side coming through) if our sales people are not heavily commission driven many will lose motivation and there’s less incentive for newer agents to ramp up quicker. That’s just human nature.

    So why can’t our industry do what insurance and headhunters and other distributors have done for years: have a class of “Statutory Employees” who are on Draw.

    Essentially the agents would be employees but get a loan from the company rather than a salary. The company gets reimbursed from commissions earned.

    The company benefits from the higher quality and potential of agents who can afford to enter and stay in the business full time. The company also has better control over those agents and their production, and companies will be more likely to be leaner and cut free the unproductive agents or move them to a referral company: no one wants to lay out money they know they won’t get back. And Agents will be very aware during slow periods that they are borrowing money not earning it which will give some an extra push during traditionally slow periods.

    Managers become more motivated to develop people because they would be responsible for recapturing that draw; it’s on their shoulders to recoup the money.

    The agents benefit (particularly newer ones who don’t have steady sales yet) because the draw evens out their cash flow during the slow months and as mentioned above, potential agents thinking about a serious career in real estate will be more likely to take that leap. Experienced agents just get a little more security.

    Of course there is some risk to the broker from breakage, but in some cases with the right management an effective long term system could be constructed.

  8. Nicolai –

    The full response probably needs more than this comment, but… I think employee models are a gamechanger and I think they do represent the future of the industry.

    The main reason I believe this is that with any sort of a I/C model where a split of commission occurs, and the Agent is viewed as as business development resource (rather than as a transaction resource), there is a significant misalingment of incentives between the Agent and the Broker. It becomes a zero sum game of “You Win, I Lose”.

    The only way I can see to align the interests of the “agent” and the “owner” is to put the focus of revenue generation back on the shoulders of the “ownership” while using employees (who are compensated of course) to perform most of the transaction.

    Agent behavior is 100% rational given the current incentives. Broker behavior (over-recruiting, churn and burn, etc.) are also 100% rational given the current incentives.

    Of all of the “models” out there, the only one where those conflicting interests can be harmonized is an employee-based model.


    1. Hi Jeff –

      Can you expand on this? Though you’ll also likely repeat it on my post going up soonish. 🙂

      I just don’t see how in the zero-sum world of broker/agent splits, the interests are not in conflict….


      1. Hi Rob,

        I’m sorry but I don’t understand your comment above…

        “I just don’t see how in the zero-sum world of broker/agent splits, the interests are not in conflict….”

        I would be happy to expand if I could only get my tiny brain in gear, can you help?

  9. Hi,
    I am an agent in a management position in a Swiss based real estate company. We are working on an employee model and it works fine. There are a few of us working on sales and others in back office only.
    I totally agree with Ines, that the main motivator is money, but on the other hand, if you are an employee, social security and a quite safe financial back ground are motivators too.
    Without a doubt, the employee system wouldn’t fit all those who like to become multi millionaires even you can become a very well paid employee as well, but no comparison to the big players in the game like in the US. Than you would have to found your own business and go all the long way by yourself, unless you have a family office behind you.
    Working in real estate as an employee doesn’t mean you can’t work on your own. It’s even very welcome to work somehow independent to seal the deals, but you always can use the knowledge of your whole office without the fear of another agent stealing the client. The overall question is what’s your own goal you want to achieve? The big money or a satisfying work life with a good earn of money? Being an employee doesn’t mean you will never get rich on a health level, it really depends on your contract and salary structure you agreed on.
    Maybe the biggest difference is in the service you can offer. As an employee, you have a 5 day work week (in our case) where you focus on the service to your clients. Weekend is weekend, usually, but if you are a real estate sales employee (also with the right contract where you get a split on the commission) you will also spend time on your weekend to service your clients in any given way possible.
    Another advantage of an employee model is that you don’t see that many housewives turned into agents who believe to make a deal only because they are known in the neighbourhood and therefore can do a deal once a year. In our company, all sales people have a profound knowledge of the business and no one is doing this just to fight its tediousness. I believe a smaller brokerage with a good team of employees can be more productive than a company with dozens of agents who do a deal once a time.
    I can understand when you don’t like this idea of an employee based business if you are a hard working and successful agent, but I see many advantages also for the brokerages with lower splitting as the biggest.
    Since real estate is also very service orientated – I think it’s a battle between different business systems where we are in Europe traditionally more social thinking than in the US and now both systems mix up quite a bit because of all the globalisation and clients looking for real estate world wide. It is interesting to see where this goes.

  10. I see this concept continuing to morph. One of the more traditional approaches to the “employee” business model has been the mega producer who has a paid employee team of agents that does much, if not most of the work that a commissioned agent does. We have also seen the larger companies employing agents to work up desks and relocation leads as well as employ “transaction managers”. Finally, web lead programs have brought the employee concept more out into the mainstream. Many larger companies “employ” agents to handle all leads both on the phone and on the Web. The handling of web leads by commission agents or employee agents has been a hotly debated issue at conferences for several years.

    These same two business models have been dueling in the loan industry for a much longer period. Banks commonly “employed” and mortgage brokers often worked on commission. Each model has totally annihilated the other model from time to time and I believe most Realtors would have an opinion of what makes one better over the other depending on their client profile.

    I suspect that there is no optimum business model rather it depends on the personality of the talent pool at any point in time and whether there is an expanding or contracting market. Some agents are truly self starters and independent in which case the commission model can work best. Others need to be led.

    One additional complicating factor is that the management style for each type of business model is usually quite different. I have observed several situations that would make a great case study where a bank acquires a mortgage broker and then sets both business models into competition with each other.

    One final question: As a consumer, do you prefer to eat where the majority of the server’s income is based on tips or salary?

  11. Jim, your question is well taken. When making decisions about business models, we must always keep in mind the persona of real estate agents. They are, in fact, highly independent, entrepreneurial and self determined. It could very well be that strong agents would therefore find a “salary” to be creating a glass ceiling on their earning power.


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