14 August 2009

The Status Quo is Not an Option

In the coming weeks, you will be reading a lot about our specific ideas on the Next Generation Brokerage.  It’s important to explain why we believe this is necessary.  In our view, this comes down to a matter of necessity.  Simply put, the status quo is not an option.  The numbers won’t fly.

Every brokerage has four basic revenue drivers:

  1. The number of homes sold (with each sale having two “sides”),
  2. The average price of the sales,
  3. The brokerage’s take after the agents’ commission splits (“percent retained”),
  4. The amount (in percentage) received per transaction (“average broker commission rate” or ABCR).

While times were good earlier this decade, the average broker was making a solid living while, for the most part, three of their four drivers were headed in the wrong direction.  For the vast majority of brokerages, only average sales price, the driver they had least control over, was increasing.  Despite a market that was churning out more sides, the number of agents and brokerages in the marketplace increased dramatically so that the pie was split ever more; because of this, most brokerages were barely able to keep sides steady during the upswing.  At the same time, competitive and consumer pressures were driving percent retained and ABCR down.  But price kept saving the day so the good times rolled.

Sides were the first to fall in the correction, but price increases kept sales volume (the combined impact of multiplying sides with average sales price) propped up, so very few noticed.  When price turned, the average broker’s P&L very quickly fell apart.  This is because the other revenue drivers weren’t balancing the equation.  Percent retained and ABCR didn’t reverse course as the market turned; these drivers have been either flat or only modestly better since market peak.

Since the shift, the average broker has cut and cut but there simply hasn’t been enough to eliminate to offset the revenue crash and get to profitability.

Let’s look ahead now.

According to Fannie Mae, we should expect sales volume to bottom out this year, improve only marginally next year, and grow at an increasing rate from 2011 through 2013.  Overall, FNMA is projecting that sales volume in 2013 will be 33{0a8e414e4f0423ce9f97e7209435b0fa449e6cffaf599cce0c556757c159a30c} better than 2008 levels.

Wait a second – that sounds wonderful!  We’ll be back to good times, right?

Not necessarily.  In fact, without fundamental changes, we believe there’s a good chance that, despite improved price and sides, the return to profitability for most brokers will be at best delayed for many years after the market improves and at worst always beyond reach.

In order to answer why we believe this, we have to go back to our revenue drivers and predict how they might fare (these are, of course, hypothetical projections and are not to be misconstrued as representing the views of our parent company, Realogy Corporation).  By assuming FNMA is right (NAR‘s predictions are a bit too optimistic for my tastes), we’ve addressed two of the four drivers.  But what about percent retained and ABCR?

Let history guide us.  While the market was good, percent retained declined steadily (according to a REAL Trends survey, from 2004 to 2008 percent retained decreased from 27.8{0a8e414e4f0423ce9f97e7209435b0fa449e6cffaf599cce0c556757c159a30c} to 25.7{0a8e414e4f0423ce9f97e7209435b0fa449e6cffaf599cce0c556757c159a30c}, or an average of 0.5{0a8e414e4f0423ce9f97e7209435b0fa449e6cffaf599cce0c556757c159a30c} per year).  Even when the market turned, this didn’t improve as some might have expected; it merely held its ground.  ABCR, on the other hand, has actually improved marginally over the same time period (from 2.54{0a8e414e4f0423ce9f97e7209435b0fa449e6cffaf599cce0c556757c159a30c} per side to 2.61{0a8e414e4f0423ce9f97e7209435b0fa449e6cffaf599cce0c556757c159a30c}, according to REAL Trends), but much of this improvement has likely been skewed by the high level of recent foreclosure sales.  Most brokers would tell you that ABCR on non-distressed properties has not improved during the downturn.

So it seems logical to assume then that when sales volume improves (likely next year) and foreclosures return to normal levels (perhaps a couple years away), ABCR should do no better than remain flat while percent retained will break from its holding pattern and continue along its historical trend line.

Working that into our figures, if percent retained continues to drop at the 0.5{0a8e414e4f0423ce9f97e7209435b0fa449e6cffaf599cce0c556757c159a30c} per year rate we’ve recently experienced, then the average percent retained in 2013 would be 23.2{0a8e414e4f0423ce9f97e7209435b0fa449e6cffaf599cce0c556757c159a30c} (or 10{0a8e414e4f0423ce9f97e7209435b0fa449e6cffaf599cce0c556757c159a30c} worse then 2008).

If these assumptions are right (and some would argue that they’re in fact optimistic) then the average broker will have lost a third of the gains the market will have provided.  Keep in mind that we’re assuming ABCR will hold steady, despite the likely unrelenting pressures from competitive models both known and unknown.

A one-third drop may be bearable, but that’s not all there is to it.  To take it to the final step and predict the bottom line impact, we need to take into account operating expenses (rent, payroll, marketing, supplies, etc.).  Assuming the model doesn’t change, expenses remain the same and we simply apply an inflationary index of 3{0a8e414e4f0423ce9f97e7209435b0fa449e6cffaf599cce0c556757c159a30c} per year and compound that over the same time period.  That alone wipes out half the sales volume gains!

Since very few brokers are making money now, the combined impact of these two factors (erosion in percent retained and inflation) would very likely eliminate most of the predicted improvements in the market, thereby preventing a return to profitability.  And, to repeat, this assumes that ABCR holds steady.

Does this view seem plausible?  We think so.  In fact, it’s not too hard to envision less pleasant outcomes that would make this analysis seem hopeful.

We believe there’s support to argue that the model as it exists today simply must change, that the average broker can not just wait this market out.  The status quo is not an option.

Looking ahead, then, we must address each of the basic revenue drivers as well as new revenue streams and take a good hard look at the existing expense structure.  Nothing should go unchallenged when thinking up the new model.

As you read our posts on this topic, think about how the proposed idea improves either one of the revenue drivers or operating expenses (or, in some cases, both).  Specifically, consider how it fits into the financial keys to the Next Generation Brokerage, which I believe will be:

  1. Maintaining ABCR by constantly updating and improving the value proposition to consumers,
  2. Increasing average agent productivity,
  3. Increasing percent retained through brokerage-generated business,
  4. Generating a far higher output per square foot of office space.

Let the ideas flow.

View Nicolai Kolding’s Inman Presentation: New Real Estate Math: How to Slash, Burn, and Rebuild Your P&L

36 thoughts on “The Status Quo is Not an Option

  1. Good article Nic. I would guess that many marginal brokers will be caught in this squeeze and relocate to other industries. That would drain some of the dilutive interests within the market place and allow quality shops to regain market share. Now would be the time to make sure that your brokerage house has the top talent within their markets and is embracing technology (internet, data collection and presentation, etc.) so that customers feel they are getting something other than a broker who open the lock box for them.

  2. Truly excellent analysis. I’m curious about #4
    “Generating a far higher output per square foot of office space.”

    Do you see brokerages eliminating office space in favor or smaller service centers? My visits to offices these days seems more like a scene out of High Plains Drifter, tumbleweed and all. Agents are pretty much mobile warriors with a wireless tether to their home based hubs. It seems to me that the first thing to drive up output per sf would be drive down the number of SF on the balance sheet.

  3. @Brian – This is absolutely the time for quality shops to pick up share as many elect (or are forced) to exit the market. And only those that think “consumer first” will thrive in my view.

    @Mike – Thank you. As to space, I don’t think there’s a universal model that will fit all, but I do think much smaller spaces are a necessity. If you look above at the bottom of this post you’ll see a .pdf from the Inman Connect Conference, where I recommend a goal of 50 square feet per agent. Brokers can either reduce space to get to that point or attract quality talent to fill to a more efficient capacity. By that measure, the whole idea of cube farms in an office will be a thing of the past (I hope).

    You can also see some floorplans proposed on this blog a year ago on this very topic (http://tinyurl.com/botf-designs). This discussion is far from over.

  4. Great Blog Nic.
    It will be very interesting to see how the industry responds as the market begins to return. I am really curious to how NAR will respond. Your comments about their enternally optimistic views are right on target. NAR’s comments about housing are as realistic as the Tabacco Industry’s on the dangers of smoking!

  5. Nicolai –

    All I can say is… Preach On Brotha!

    I feel like I’ve been saying this for months and months, and finally, someone with a real voice and real data (probably?) steps up and articulates it.

    I’ll have more thoughts over on Notorious, but wanted to just say thanks for this.


  6. Nicolai,
    As Rob said, I too have been talking about this for months. But I think you’re one of the first at a large brokerage to mention this:
    “Increasing percent retained through brokerage-generated business”
    This is the number 1 item I discuss with potential brokers interested in signing up with us. We’ve been calling this the push back toward a broker centric model.

    What really intrigues me though is: how does a nationwide brand like BHG / Realogy do that? How do you push average commission splits down when yours are already lower than an independent?

  7. Nicolai,

    I know that the big boys in San Diego have been slashing real estate space right and left I think that must be what has happened across the country. Prudent move on everyones part and what Rob Hahn’s been saying for some time.

    Along with Eric, I wonder how a national brand will push average commission splits down any further, without loosing good agents? It is really the last option to return to profitability.

    1. @Eric & @Jeff –
      re: #3. If the consumer (in this specific case, the sales agent) doesn’t see value, then increasing the “price” (by decreasing the split) is a serious risk. I feel that many brokers have competed with other brokers (for agents) solely on price (splits) not value. What also amazes me is how many have exactly the same split arrangement regardless of whether or not the agent generated the business or the brokerage.
      I think a more efficient model (and one that can benefit all three players – the broker, the agent, and the consumer) is one in which the “house”-generated transactions are on one split schedule (obviously one which is less aggressive, in order to compensate the broker for the very real expenses involved) while the agent continues to leverage their network and resources, and receives a more aggressive split for those transactions. I believe, if coordinated openly, this can work in a way that doesn’t lead to competition for the same client.
      But I also believe that isolating the issue to just splits is a mistake. The “brokerage of the future”, in whichever form it evolves, will not just be about space or splits or leads or marketing or websites. It will be about all of this and more. So the overall value proposition needs to address all of these issues simultaneously.
      Finally – there is one simple and (I think) logical way to keep splits more stable which can be adopted by many different models. We’ve discussed this here before: commission plan indexing.

  8. Okay, so… as I go into my own post, I have a few questions.

    1. You talk a quite a bit about space/leasing costs. We briefly discussed this at Inman, but… you got any numbers on what the average Occupancy costs are for a broker as a percentage of GCI? The last number I saw from RealTrends was single-digit % (like 6% maybe?)

    2. Do you have any figures as to whether such reduction in Occupancy Cost drops straight to the bottomline with no impact on productivity? There are some opinions that “work-at-home” agents are simply not as productive as agents that work in the office.

    3. Do you have any figures on whether shared Marketing results in higher productivity? Specifically, I’m interested in whether sharing Marketing — typically a core competency of brokers/agents — has no impact on topline revenues but a significant impact on bottomline P&L. Instinct tells me that such a thing should absolutely impinge on topline revenues.

    4. Related to #3… does Realogy have any plans to consolidate Marketing departments amongst its four residential brands in a “quasi-merger”?

    5. And… the KEY question/issue — Your recommendation #3 is “increasing % retained through brokerage-generated business”. This, of course, is not free. So have you looked at any models/examples of what the cost of generating such broker-centric business is as compared to the revenues from such? I’d have to do some thinking, run some numbers, etc. but I’d LOVE to get my hands on some data against which to do manipulations and theories…

    More later via blog. 🙂

    Thanks again!


    1. @Rob – I truly wish I had all of the cold, hard data you’re asking for but in many cases it’s just not available. BUT, I will answer as best I can all of your questions.
      #1 – I had a REAL Trends whitepaper from a few months back that puts it at about 20-25% of company dollar. Given the company dollar average of 25.7%, it would put it in the 5-6% GCI range. Now I think I know where you’ll go with this – “Why are we paying so much attention to something that represents only 5-6% of the P&L?!” Because I believe that it can be cut in half (or more) and would instantly and permanently improve every broker’s ROR by 300 to 400 basis points.
      #2 – I don’t know of any figures and I’d question any out there because there are always so many other factors working into the equation that you can’t isolate this one piece. That stated, I agree with you that the single biggest challenge to the reduced-office-size (not office-less) movement is agent productivity. I believe we can overcome this if we re-train ourselves as an industry on how we communicate with and train our people, just as other businesses have. Technology and culture are converging here to effectively “talk” to people in whole new ways. I do believe that monster offices with row after row of cubes are choking us and we must figure out a new way.
      #3 – As much as I like to poke fun at marketing (all in jest, all in jest), believe me I realize there are top-line (and bottom-line) benefits when it’s done right. By shared “marketing” I’m using a fairly broad definition – this could, for example, include web development and IT functions. It could also take into account bidding. The point is – can brokers leverage their collective size better when coordinating certain core functions? I think so – and you could look pretty far and wide for “partners” in this so you don’t have to help a competitor. I think too many are fighting a bunch of little battles on their own.
      #4 – In the purest sense, no. Funds, projects, and strategy need to remain brand-distinct (the marketing teams here are so proud of what they’ve created they practically dye their hair brand colors). But we do share services in tangential areas (web maintenance, events marketing, etc.).
      #5 – I think I answered some of this in my response to Eric & Jeffrey. I, too, would love data here but what I’ve gotten tends to be isolated to a particular broker or product and not a statistically reliable study. Here I think we need to broaden our view of what broker-generated business is and could be. We often limit ourselves to thinking this must mean that the broker signs on with a “lead-generation” platform and then doles that (often disappointing) business out. As potential “owners” of neighborhood-specific information, brokers (and agents) have a tremendous opportunity to capture (and convert) traffic to their various websites, blogs, etc. In our view, those that create great content that isn’t only about specific listings will win in this game.

  9. Nicolai –

    Thank you so much for taking the time to answer our questions in a public forum.

    It is really refreshing to see those in positions of power and influence to participate in these open forums. I have given Sherry high praise, which I now extend to you and others in your organization.

    To give you some background I was involved in a very large brokerage in Southern California. Being a branch manager I oversaw 175 agents in a high end community. The Company has over 1700 agents during the time I was there.

    Over the last few years as our market had shifted from high appreciation to none it became evident to that old model would not survive this shift.

    The brokerages have been guilty of paying agents higher and higher splits, offering market allowances, and other perks. Recruitment became the “savior” or my and other brokerages in the area benefiting the agents with higher and higher splits and other incentives. I was under constant pressure to hire anyone that would walk through the door – regardless of their ethics or business practices.

    Small companies came along and offered even higher splits and or ownership. In our market Agents have come to believe that a 90% split was the norm.

    Now I know what it costs to run a real estate Company. Many real estate agents don’t have a clue of lease rates, employee salaries and benefits, management, marketing budgets, and brick and mortar. They will find out – but they have already made the change.

    I guess everyone is questioning what the “Broker of the Future” will look like – what they will offer to overcome the “overpaying of agents”. My point is for big brokerages to survive they most become profitable. They must offer something more than money.

    Like stated earlier, most large companies that are still standing have cut space as much as possible, cut back on management, and any expenses including marketing.

    So the final battle in my mind is that Brokers ability to offer something of value for the agent to stay. This will be the battle will they will live or die.

    Many top agents are questioning why they stay at a large company, and many have left to start there own companies. Our agent population has become much more fragmented as many have made that choice and many more will when the Brokerages try to “roll back” their splits.

    So Nicolai, I think large brokers are between a rock and a hard space – I have no doubt to survive things will change and it will be interesting to see how things shake out.

    Take a hard look at the Redfin model with rebates to Sellers and Buyers and using high volume agents. Take a look at all the Top agents now able to compete with 100% splits and low overhead. Your argument and advantages will have to be compelling.

    And don’t misunderstand me, while I am very small broker now, I have nothing against the big brokerages – I believe that they add stability and a “standard of care” that the little guy does not.

    Looking forward to the ongoing discussion, am I am sure Rob will have more for us on his post. Rock On.

  10. Nice post. There is clearly one defined critical area which is improve and increase the value proposition offered to both sellers and buyers. Brokers and agents in all sizes and brands continue to struggle with this conversation with the public. You are right, websites and open houses will not do it. My travels put me inside many different real estate firms and true and authentic “differentiation” is still hard to find.

    Quality education and training still remains a low priority for too many firms. Recruiting still dominates the culture of the real estate office. Rather than increasing and committing to skill set of the associates, the theme of each day is, “lets recruit”. This is a major factor in overall Broker and agent lack of productivity. Too many people are hired into an environment where the expectation to succeed is not delivered right. When the career starts off like that, most are doomed for failure.

    Hopefully Brokers will invest in their current full time, fully committed, fully capable associates who see their role with the public at such a high standard that “quality” will be more than just a word, but the foundation of all activities of the day.

    Scott Einbinder

  11. The question of splits is a great one – if the brokerage of the future intends to attract talent and focus on quality of agents rather than quality, split reduction becomes an oxymoron. For an agent that doesn’t see the value proposition of a brokerage to begin with and then needs to make less money, talk about a job for that brokerage to show value.
    Then the question becomes, what kind of agent does that brokerage need to succeed? Is it the top producing, technically inclined agent, or is it the newer agent that shows promise, who can benefit from a brokerage’s value proposition.

    #4 to me is a no-brainer – all I need is a good looking conference room and a place to plug in my laptop when I visit my office (once or twice per week).

  12. Ines, Good points – I think most successful agents are looking for some place to land once in a while, have internet access, and a good conference room to meet with Clients. Most have decided that the major Brokers don’t bring any value – there to collect commission split and franchise fee.

    Maybe the solution for the large brokerages is to attract that younger agent, that has not experienced the easier money days and wants to fit in somewhere. It seems to me that this is part of Keller Williams success – most have a similar attitude and are looking for more than just a Company.

    I left the large brokerages because I was tried of having services slammed down my throat, the constant office meetings/company is better than everyone else, and the low to no consideration for bringing in new or existing agents. I also don’t like the “top producer” attitude that is so common amounts those that wish to be #1.

    Again, look to the Redfin model and make it a bit more possible for an newer agent to make a decent living – that is perhaps the future of the large brokerage.

    1. Some great comments – thank you Scott and Ines for adding to this and to Jeffrey for your contributions.

      The similar themes that all three of you bring up concern (a) quality of agents and (b) training of agents, especially those new to the business.

      The questions I have for all of you (and anyone else who wants to jump in):

      -what defines a “quality agent?” Is it a minimum number of transactions per year? If so, how many? (For reference, right now there are over 1.2 million agents competing for +/- 5 million transactions – therefore about 10 million transaction “sides”)

      -Do you believe an employee-based model (as Redfin uses) is going to be more prevalent in the industry’s future? What are the upsides? Downsides? Do you think there can be a successful combination of salary and commissions (similar to the model used in the UK, Australia, and some other countries)?

      I’m especially curious about how the employee-based models are faring in these tougher times. The advantage of the “traditional” brokerage is that it has about 80% variable costs (+/- 75% of GCI for commissions to agents, +/- 5% for marketing), with the rest in occupancy (+/- 5%), salary (+/- 10%), and G&A (+/- 5%). A higher fixed-cost model obviously has a tougher time when revenues fall. Redfin doesn’t publish their financials and the last public analysis they did of their business that I’m aware of was for calendar year 2007.

      As Jeffrey points out, the conundrum for the employee-based model is how to afford to train and hold onto less-productive newer agents who may have high upside.

      -Finally, there seems to be agreement on the need for reduced physical space. So who is it that is holding this movement up???

  13. Hey Nicolai –

    Some answers to your questions.

    1. I believe the “quality agent” is defined by a good NPS score. (NPS = Net Promoter Score; I have a post on it on the 7DS website: http://www.7dsassociates.com/renps) I think NPS indicates both present reality as well as future earnings for agents and brokers, so that’s the one I’d go with.

    2. I think I’m on record as saying that some sort of an employee-based model is the future, perhaps with a ‘partnership’ based approach for the top producing rainmakers. Because while traditional models have, as you point out, around 80% in variable costs, any business that is staring at 80% (or more like 90% these days — see Jeffrey’s comment) cost of sales is not in a healthy situation.

    The real upside, though, of an employee model is that the Company can really drive productivity, customer satisfaction, and brand promise discipline. When you’re paying someone, your incentive is to make CERTAIN that they are productive and making your brand shine. Brokers today have very little incentive to drive productivity (roughly 5-10% of the GCI actually :P) from its agents, nevermind having them provide excellent customer service.

    Redfin turned a profit in this market because of its obsession with customer satisfaction. It is no coincidence in my mind that they are the only “brokerage” that is heavily using NPS to measure its service, its agents, and its operations.

    Traditional brokers can’t really enforce this sort of discipline, nor is it really incentivized to do so.

    The conundrum for the employee-based operations isn’t training and holding on to less-productive newbies, in my view. The real conundrum is TAKING OVER LEAD GENERATION, including CRM efforts. Again, see Redfin; its agents don’t really do lead-gen; Redfin handles that. Once they get into the Listings side more heavily (I’d say prob 2010/2011 timeframe), we’ll see whether technology really makes a difference to sellers.

    3. Finally, on the space issue… there is an alternative viewpoint that I wrote about on Notorious a while back. Some brokers really think that work-from-home agents are less productive. So saving (+/- 5%) from occupancy costs, to suffer 5-10% productivity on a per-agent basis might not be good math, depending on the operation.

    Freakin’ love this thread; I wanna marry it, but my wife would complain.


  14. I have so much to say about this… but it’s 1 am. So I will part to the lands of the sandman with a couple of shots before I go.

    Profitability is not a bad thing, unless it compromises the culture that your company is built upon

    Space – you do realize that there are companies who built these offices years ago right? This supports an agent population of like a maximum of 100. Seriously… where are all of your support people? Front desk of 1? Really? Really? Are we outsourcing all of this offshore?

    Space pt. 2 – where I understand that there are those that don’t comply to this – does anyone realize that most agents that do business spend time in the office on a regular basis? Coaching, support, team environment, etc… all of this is generated IN the office. Also not one of the sketches has a training facility at all, or even moveable walls to create one.

    Splits – All i can say is that you’d better have a ton of value there for the agent.

    Again, I think that there are some brilliant things being talked about here by some of my favorite folks. However – this isn’t math… and there has to be psychology as well as derivatives involved in this argument.

    Talk more tomorrow.


    1. Matt – without profits, what’s the point? You’re not going to have a company for long if you have a lousy culture – that’s a given and I’m not discounting culture in any way (quite the contrary). But I believe profitability has to be more than “not a bad thing” – it’s what differentiates a business from a charity. In a twist, I feel reminded of what was talked about during the dot-com bubble when everyone forgot that businesses need to eventually make money and that’s not something to be bashful of. Soulless greed is certainly a different story.
      The point of my post is that I personally don’t see how the current model can work, given how most owners are losing money now and what I see into the future concerns me (and I’m no better a prognosticator than the next person). How can any owner keep a business if the demands are all of: big office, high splits, and every tool and service available?
      I’m thrilled that you looked at our drawings of proposed new office layouts (woohoo, people are following the links!). And you’re right on – one person alone is too little support in most cases. I focused on single-office firms but the question of office support was left out and needs to be considered. For multi-office firms, I envision a “hub and spoke” with a centralized admin location. Works for some, not for all. Formal training, I think, can be at an off-site facility.
      I would love, love, love if you would add a drawing of what you believe is needed (you can email it my way and I’ll post).

  15. Nicolai –

    Like everyone else I am enjoying this thread – good stuff everyone. Good to see such great minds as Mattt Dollinger, Rob Haun, Ines, and others debate the issue at hand.

    To answer your question what make a good real estate agent these general principles would apply.

    Sales ability (From an advisor perspective)
    Market Knowledge
    Put Clients needs before there own
    Communication skills & understanding of body language
    Experience – does not come overnight, takes time
    Productive enough to understand the transaction flow

    Employee based?

    I believe that NRT tried that in the past and failed. Now that the market and business has changed it may be time to reconsider. As Rob has stated having an employee would give a Company control over that salespersons actions and results – something they don’t have much of with the independent contractor status.

    How many times do we see the “top producer” that starts to believe their own buzz. While there are many excellent top agents we also have many that have drank the cool aid and become very lazy, not Client orientated, and are doing to many transactions to protect their Client and Company.

    I have seen them with Clients with cell phone pressed to head – never having a moment to focus on the person in front of them – never wanting to miss that next opportunity.

    A company that can come up with a model that is profitable (more than 1 month ie: Refin) may be able to make sure a difference in the consumer’s mind that branding would become relevant. Training, education, client feedback, and company culture could be managed to provide a powerful force in our industry.

    Those new salespeople coming into the industry that hope to make a decent living, over the elusive $400,000 per year independent contractor model will be attracted to some reliable source of income. Of course to be successful those agents must produce or be let go for production, ethics violations, or bad Client service.

    I am not saying the whole industry will go this way, but a major brokerages that does this correctly will have a big impact – quality, knowledge, and professionalism would go up for everyone to compete with the alternative model.

    The big challenge for employee based salespeople will be the shake out of the traditional brokerage fee vs. the rebate type fee of some alternative models. If in fact the alternative models become the norm it will be difficult to support a fully trained employee based sales force and make any kind of profit.

    On the other side of the questions is what to do about the “show ponies” of the organization. Right now the “top producers” are brining in the majority of the business.

    Counterproductive to the health of the brokerages they are working in, they managed to suck up any newer agents that have potential. This takes a promising young agent from at 50% split to a 90%+ split under the “top producer”. The company has lost all of that potential income and talent – while the agent gains from production and the training (hiring) the Company did.

    It is hard to stop this process because the loss of these “top producing” agents right now would be devastating.

    So what would you do to keep these top agents loyal? Right now any adjustment in commission splits, marketing allowances, office space, perks, status, or not allowing team building will send them packing.

    The be successful to move from an older model to a newer model you must bridge this gap. Perhaps a partial ownership interest, profit sharing, or as Rob suggested a law firm model would work?

    I do know that for any future brokerage to be successful they will need to be more transparent to their agents. No back room shady deals hiring this agent at a higher split or bigger marketing allowance than the next. Consideration of bringing in the right agents into the Company that will embrace the culture, not try to break it.


    1. The employee vs. I/C model has got my mind spinning, but I still can’t work through some challenges I see.

      -it’s impossible for me to imagine any existing company of any size transitioning to this. The temporary (which could still last many years) period of carrying both salaries and commissions would result in massive losses (assuming the existing commission-based agents go along). So there’s a huge counter-model against this.

      -but let’s say a well-heeled company with a stomach for heavy, early losses comes along with an employee-based model and a great lead-gen system set on taking over the globe. As Jeff points out, what happens when their employee-agents succeed and build client bases? How high can the salary go? Why stay when the alternative is right there? It takes a ton of faith to accept a partnership position (law firm model) or stock. I dunno.

      -for that matter, can the employee-based model penetrate well beyond first-time buyers? We know that most customers relate more to their agent not their agency. If they had a good experience but that employee-agent got “poached” by a commission-based broker, can the new model company buck the trend and keep the customer?

      I dunno. I’m not seeing it, guys.

      1. Well, if the employee-based model is the one that makes sense and is more efficient/effective, then an existing company of any size really has one of two choices:

        1. Make the transition
        2. Go out of business, as the employee-model rapes and pillages your clientbase.

        What is impeding your analysis, Nicolai, is this:

        “what happens when their employee-agents succeed and build client bases?”

        An employee-based company does not enable its employees to build client bases; those clients are not the agent/employee’s clients, but the broker/company’s clients. Compare it to Goldman Sachs — the clients belong to the firm (maybe to the partner/managing director who brought the business in). An associate put on a deal is valuable, performs a service, etc. but isn’t exactly handed the client over.

        The goal for such a brokerage is always to maintain and control the customer relationship, which means dividing up the agent’s function into multiple people, and really minimizing the importance of a particular person. I don’t know if that will work or not, of course, but that would be the blueprint.


        1. Rob, and coming from an agent in the trenches – you know how much $ we pay out of our pocket in marketing for our listings? It would be interesting to see how an employee-based model covers all those marketing expenses ……still not convinced.

          1. Ines – Not trying to be argumentative, believe me 🙂 I just have NO data to analyze anything. So…

            What % of GCI do you spend on marketing? Can you look through your past few transactions and work that out for me? If it’s “I spent $35K total, and earned $80K in GCI over the past 10 transactions” that’ll at least give me something to go on. (That is, incidentally, 43.75% of GCI spent on marketing.)


          2. Rob,
            It used to be 25% of our GCI on marketing – but we have been spending between 35% and 40% in the last 3 years (and hope that will come down). That’s taking into consideration all our marketing (from web to print) but not the time we put into it…..which if I am realistic, why would I even invest the time into social media under an employee-based model.

          3. So at a minimum, is it fair to say that if the broker agreed to take on ALL of your marketing costs, you’d take a 60/40 split? Maybe a 65/35 split? Since that would exactly equal your take-home, right?

            So as long as the broker can leverage whatever economies of scale to do marketing for you at less than 35-40% of GCI, he makes money on the spread. So that’s a win-win for both of you.

            Getting a bit more extreme, on an employee basis, the broker can pay you a salary equal to or less than 65% of GCI, and make out exactly the same as today since he’ll be taking on the marketing costs, right?

            And you’ll do social media because you’re being paid to do social media — like any other employee of any company. 🙂 Or maybe _you_ won’t be, but someone will be, as he’s getting paid to do just that. See, e.g., Rudy @ Trulia.


          4. If an only if that salary adjusts according to the economy and market conditions – as I said…..our magic number was 25%. The broker would also need to prove that they will do the quality marketing I do for each one of my properties and would expose those listings the same way I currently do and would put the time it takes to achieve that level of marketing.

            As for SM – if I’m on salary, then they would need to pay for those hours (no more 3 AM nights if I’m on salary). It takes away the “I own my own business” mentality and the amount of time and effort I would need to put into it since there is not reward model

  16. This post is pure meat and potatoes. No hot sauce needed. And the comments are bread pudding, so good you almost forget you just ate. With posts like this, and esp your work on market phases, I volunteer to nominate you for whatever award that brainy (but practical) RE bloggers should hope to win. This is really, really good stuff. Seriously.

  17. Here’s a thought about what defines a quality agent. The best broker is one that can scrutinize their agents and be able to see their fortes while at the same time helping them with their weak points. Can only speak for myself when I say that having an architecture background helps me with a lot in real estate, but if my broker would have helped me with actual “selling and marketing”, it would have made a huge difference in the beginning of my RE career.

    So a quality agent is not defined by their production, but by their potential.

    As for the different models – I do think there is room for everything – do I believe that a particular model will take over? not a chance – it’s what makes this industry priceless, the fact that client A wants to do it themselves and client B doesn’t even want to touch it with a 10′ stick. Same goes with Realtor A who wants a sure thing and Realtor B who is willing to risk that for more $$

    Funny enough – I’ve designed a number of real estate offices – the most successful ones with a hub of common desks on the center where the space can second as a conference room – perimeter reserved for producers, managers, staff and private conference rooms.

  18. Nicolai –

    To answer your recent post regarding you not seeing the employee model brokerage is because you are a traditional independent contractor brokerage. As you mentioned one model cannot convert to the other. Trying to have both in one house won’t work.

    I don’t think you can see it due to your perspective.

    Redfin started with this premise, now they have opted to add independent contractors.

    What keeps them from being really successful (profitable) is their ability to attract agents because there model gives so much commission away, the agent has to jet all over the place to make a living. Last time I checked they only had two agents covering San Diego and Orange County – that is a huge market. While these agents do a fantastic job for what they do and the Client is delighted with the rebate check – I don’t think it is a sustainable model without OPM.

    Now consider another new brand enters into the marketplace that does not deeply discount their services – but uses reasonably paid employees vs. independent contractors with a culture and control to get their message to the consumer.

    If this broker where very selective in their hiring practice, there are many experienced “independent agents” that would jump at the chance of a regular paycheck, rather than start unemployed every day. These agents would have to be production closing 20 to 30 transactions – but would be focused only on serving the client, not marketing, not prospecting, or followup.

    And while I agree with you on the client liking the agent that they used previously used, look at the studies that show how poorly these agents stay in touch. Many clients would use the agent they used before, but they can’t even remember a name or phone number. Or had any contact from them in the last 7 years.

    A model with an excellent client followup programs, consumer rebates, and control over culture and feedback could be effective. Like Ines states above there are many different future models that are possible – the one common thread is to be profitable.

    I totally think that someone from outside the industry will get this right and shift things even more. We are in a time of great change, and from my perspective we have only begun that change.

  19. Wow I have a lot to comment about this but I’ll highlight my key points. I am a 33 yr old agent with 8 yrs’ experience in the business. I’ve really taken to the internet as a means for conducting business outside of the realm of the office!

    I’ve wondered for 3 years now when this question will be confronted. The split I pay to the office could be restructured so the overhead is not imposed upon us agents who don’t wish to utilize the office space and a monthly rental fee for using the space on occassion to meet clients would be nice.

    I would agree to pay for the administrative staff because they are the vital organs and they, at this time, require an office space- though I’m sure in some cities they could even operate from home in a truly virtual business.

    I crave an office where I’m surrounded by mobilely operating agents and where the benefits of technology are maximized, but I suppose for now this is what I use to differentiate myself! I’ll stop with this though I could go on. Maybe there will be a day when I run my own office this way. I love being on the cutting edge.

    1. Good morning. In response to your question, the ideas are flowing and I don’t have time to edit, please accept this as is:

      To be honest, I posted a blog about this very question you ask so I’ll leave the link here: http://activerain.com/blogsview/1200126/attracting-generation-y-agents

      I did leave out a few things, however. One of the main drivers to work for this brokerage for me is the access I have to BHGRE and what comes with that, hope that our real estate model will be changed and that I will be a part of that. I will no longer sit at a meeting feeling like much of what I say needs a one hour training, nor will I feel like I must hold back what I’d like to share because it will be misunderstood.

      The training, the access, I can’t stress enough the weight I hold in having access to you people at BHG. It is who I can relate with during times when I feel I’m at the cutting edge of the change but don’t have anyone locally to share it with (unless I go an hour away to the larger cities, Concord, Nashua).

      The most important things in a brokerage for me are the understanding and acceptance of my use of technology, the ability to do as much work as I can online from anywhere I’d like, the time flexibility as I have children and right now this flexibility allows me to run a full time career in real-time, but on my time. I have to be supermom, it’s just my standard.

      I’m not saying where I am is perfect. If I were to head my own office the design would be greatly different, but for now, for here, the draw to my brokerage firm is mainly access to the agents and listings here and to BHGRE, flexibility, technology and acceptance of my experimentation with social media marketing.

      There is a draw for me to go to a company down the road with younger agents, more teamwork approach, more money offered, but less functionalities to their website (they’ve got the basics and it ranks high in search engines but their branding is smaller). They also do not have an office design that seems to be as functional for the brokerage of the future model. No one has that around here, at least the way I envision it.

      We have a one stop shop, very helpful. Loan officer is downstairs, insurance too, title company at my reach, etc. A huge “keeper” for me with my clients.

      I am fortunate enough to have health insurance through my husband though to attract agents of my generation, agents with families and young children, insurance would be a huge benefit and if taking a salaried pay style is an option for those agents, many would take it. Commission could be an added incentive and a minimal stipend (for the w-2 agent ) could be offered.

      Teamwork… I’d like to see a model with a team approach in my future. I’d like to operate with like-minded techie agents with a combined speciality niche to attract multiple clients, but the team approach allows for working life combined with the need for family time. I personally don’t work enough to earn what I want to earn, but that’s because I have taken the family centered value in my life and put it first. I was Rookie of the Year my first yr in RE (before kids) but if I was working in a team, I could really excel with the support of others, with proper systems in place, and with day and evening shifts to accomodate all of our needs.

      There is administrative personel for our office (as BHG The Masiello Group has approx 30 offices) which is excellent for reducing the amount of time the agents has to take away from seeing clients and selling property. I wouldn’t want to do my own administrative tasks.

      I also have access to several listings and several long time agents here at my office. This “access” is beneficial because I can tap into other’s expertise (somewhat, though the knowledge sharing is not maximized) and I can access all of our company’s listings online. Another strong reason for not moving to a smaller office.

      I posted another blog recently about the shift in my role as an agent with my first time buyer clients. I don’t have to sit in the office and scan through listings anymore with them. This is prehistoric with this generation. My role has shifted entirely but not become eliminated. http://activerain.com/blogsview/1179191/finding-new-blood

      I’m not interested in regular Ts. am meetings. Though info sharing is important, they are a waste of my time and I have to pop $20 for childcare every week extra for this time. If we used a virtual system for delivering meeting-type information and met maybe once/month, or if I could attend by skype or in a similar manner this would help. More real-time communication online on some sort of bulletin or intranet location could eliminate the time lapse (1 week) between meetings for getting info out to use. Discussions could even be held online.

      I now have to get on with my day. I always start with my social media tasks and then move onto emails and calls. I find the way I carry out my days have changed completely since social media hs entered the picture.

      Picture an office of the future, think “Back to the Future” (the movie) where a drop down enlarged screen appears and our computer projects to this screen as we speak with our clients sipping coffee from the couch, children are playing closeby. We write up a contract and the lender comes in as questions arise. At the roundtable, they sign and the rest is work online. The office functions as a drop off place for hardcopies or for exchanging tangible items and information, but so much can be done online. The presence of an office provides ambiance and culture and is pleasant to go to.

      Have a good one…

  20. Last time I checked they only had two agents covering San Diego and Orange County – that is a huge market. While these agents do a fantastic job for what they do and the Client is delighted with the rebate check – I don't think it is a sustainable model without OPM.

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