The New Real Estate Model – Part 1: Disbrokeration

by Sean Purcell

Real Estate Renaissance Man

Author website

Ch-Ch-Ch-Changes
The Real Estate industry is going through some pretty rapid changes lately. We have everything from Apple’s iPhone to Zillow’s Zestimates. There is a lot of conflict too. Your local Board of Realtors is most likely still trying to throw a fence around listing information, while a wired world questions the nature and even purpose of a real estate agent. The RE.net is creating opportunities and shifting the nature of the game. The world is 2.0 and it communicates differently. A 2.0 world markets differently and rewards differently too. Throw in the most destructive credit crunch since the Great Depression and you have a recipe for… WHAT? Only one sure answer: change. But the question is this: change into what? What does the future of the real estate industry look like? Will there be agents? Will there be brokers? Will there be a real estate industry? This is the first of a three-part series that will attempt to answer some of these questions.

Back in March I wrote a post on Disbrokeration and the coming changes in the real estate industry. I suggested that Brokers, more than agents, were going to see their positions and their livelihood challenged. I still believe that to be true. In part two of this series I will run through the first evolution I saw for our industry: The Super Team. Not an uncommon idea, the Super Team already exists and the refinement of it is discussed in many areas. Mike Farmer has written about it in great fashion. I will discuss why it may work for some, but in general it simply does not solve enough problems. Worse yet, it adds new ones. In the final installment, part three, I suggest a new model for the real estate industry. A model that is easily copied, well developed and most suited to solving the issues in our industry. But first, we must understand why the current model will not last.

Disbrokeration: The End of the Current Model
The existing Broker model is actually a pretty old one, found in almost any industry that is focused around the act or process of sales. From large Wall Street securities firms to small water purifier companies going door to door, we see the same basic structure: a principal surrounded by representatives. It goes back to the earliest days of retail. One person has an idea, a store, or a product/service that they wish to sell: a shoe store for example. They can only see so many prospects at one time or in one day so to increase overall sales, the principal brings others on-board. For a reduction in profits per pair of shoes sold, the principal hopes to see a lot more shoes sold. In this sense a store clerk, a stock broker and a real estate agent all serve the same purpose: help sell something that belongs to someone else in return for a piece of the profits in wages or commission. (Important Note: to sell something that belongs to someone else in real estate has nothing to do with who owns a piece of property. Agents are selling a listing or purchasing service that belongs to the broker. The broker is the store owner and the agents are the clerks. They help the broker sell more shoes by assisting clients in finding the proper style and fit.)

This made good sense for a long time and even worked as an incentive within the industry: work hard as an agent and eventually, if you have the desire and the money and the wherewithal, you will create or purchase your own real estate shop.  You are then the Broker and you hire agents to represent you in dealing with clients who wish to buy or sell a home.  In many ways it was a grand retirement plan.  New agents counted on the Broker for everything from an office to phones; from training to accounting and from organization to guidance.  In return the broker kept a hefty portion of the commission.  It was rare for an agent to even reach 50% as it was the Broker who had taken all the risk, fronted all the bills and established him or herself as successful enough to own a brokerage in the first place.

Over time, the real estate industry expanded and grew, as any living organism will. Under the pressure of this growth, weaknesses are exposed and even exploited. The industry grew a very strong lobby and laws began to benefit the principals even more. Licensing standards were put in place, protection and confidence of the consumer being the objective. But the bar to entry was set so low as to be beyond meaningless. Some have argued it merely gives consumers a false sense of confidence. Tax laws were changed to minimize the cost of bringing a new agent on board. This may have made more sense at a time when there were substantial costs involved in hiring on a new agent, but times change. The internet has given agents unfettered access to buyers, sellers and available inventory.  The fluid nature of the business dictates that agents brand themselves now, making the need for a big name obsolete.  Pricing structures and commission splits have driven training out of the picture at most of the brokerages.  Few agents receive anything for free and those that do are likely “loss leaders”: top producing agents there not to make the brokerage money (quite the contrary), but rather serve as a beacon for recruitment and a marketing tool for the rest of the agents.  Most Brokers now engage the business philosophy of the lowest common denominator (also known as “putting butts in seats”). Thanks to the tax laws, the brokerage looks to profit on the one or two deals a new agent might stumble across from family and friends before the revolving door swings another agent through.  I am not judging this.  As long as everyone knows up front what they are getting it is a legitimate model of business… just not a very good one.

The Problem Defined
With the changes in tax laws and the power shift brought about by the internet, we have ended up with a very different kind of shoe store. The owner now hires as many clerks as possible (which is made easier by the low standards to entry) and puts them on the floor right away (which is not a liability due to the beneficial tax laws). The clerks want the lion’s share of the profits so the owner forsakes any type of training or mentoring. Why take the time and expense to move someone from apprentice to journeyman to master when the expectation is two to three sales of shoes to family and friends, followed by a quick exit and the next batch of shoe salesmen coming through? Of course, if the store is physically large enough or the brokerage has enough desks, the principal can just keep hiring without letting others go – why risk losing an extra sale they may trip over? In the end one finds three distinct levels within the store: those that have found true success through self-education, luck or experience from a previous job, those that are in the midst of their revolving door spin and finally, in those larger firms, those who “used to make a lot of good sales” (their family/friend stage) and are now filling seats, known simply as “water cooler whiners”.

The result is a number of detrimental outcomes:

• the knowledge and training possessed by the average agent is lower
• the collective wisdom of the industry is necessarily reduced
• professional standards are lowered, as is professionalism itself
• inclusion of the “water cooler whiners” in statistical studies lowers the perception of aptitude and success within the industry

The current brokerage system has devolved from a shoe store in which the principal hired on new representatives, trained them to know shoes as well as he did and increased profits by sharing profits and increasing revenue; to a shoe store that is overcrowded with underperforming reps. A store where the principal’s primary focus is making sure the lights come on, the plants are watered and there are enough desks to accommodate available butts

Next time: Super Teams: A Solution for the Few