The Real Estate Brokerage Is About To Change
Why The Change Is Coming
Change to real estate brokerage has been coming for a long time. The truth is that the business is so archaic that it took until the mid 2000s for widespread adoption of websites. Many agents still have difficulty using the most basic tools: email, instant messaging, scanning, etc. Most have not even embraced the best Realtor marketing tool to come around in a long time: online social media sites like Twitter, Facebook, MySpace, and more.
The reason behind this? The Independent Contractor Agreement . Almost all agents in the United States are paid as independent contractors. This offers much flexibility and reduced costs to the brokerage. The company need not pay the agent anything unless they make a sale. The company also avoids paying employment taxes such as FICA and unemployment.
But why does the independent contractor agreement cause a lag in the adoption of tools in the real estate industry? One word: Accountability. While the law offers brokers many advantages to paying their agents via an independent contractor agreement, the same agreement does not allow brokers to tell their agents how to do business as long as it operates within the facets of the agreement. Therefore, if an agent is not selling, the broker has only two options send their license back to the state real estate commission or let the agent continue to work. The broker can’t come down on the agent for not producing or tell them they have to pick up the phone and make calls, or do x form of advertising.
This lack of accountability has allowed agents to become stagnant and stay within the confines of which they are comfortable. (Imagine a Who Moved My Cheese scenario.) As short sales and foreclosures loom large on the market, agents should have been picking up the phones. They should have been talking regularly to every person facing foreclosure in their market offering assistance and their services to sell using a short or regular sale. But, this rarely happened. Why do 5% of agents do 95% of the transactions in real estate? Becuase they are the ones that learn how to implement new tools and roll with the changes. They can get themselves up in the morning and work without being told what to do. They embrace the independent contractor agreement and work as if they truly own their own business.
But these successful agents are also sometimes the least profitable for companies. Why? The brokerage must agree to provide tools and resources such as free postage for mailings and free printing. This coupled with most brokerages offering a graduated commission system that pays the highest producers the most money per deal makes these agents a great source of long term revenue, but some of the least profitable.
A little discussed fact is that these agents are wined and dined to ensure they stay on so that the brokerage can make their income on the agents that are less productive. By having the productive agents get the phones ringing, the agents that they make significantly more on per transaction stay happy because they are spoon fed transactions via phone calls off signs in yards and other advertisements. (Just as an example on a $200,000 real estate transaction, a broker would make only about $550 minus expenses on the productive agents but potentially as much as $2700 on the lesser agents.)
So why will change come? Few people realize that brokerages on average make just a 3% profit on gross revenues. As a smart investor, why would I not take my funds and invest them in municipal, tax free bonds, earning 6% with little to no risk? The main reason this occurs is due to the lack of accountability.
This status quo that has existed for too long in real estate is going to shift. And the shift is coming faster than people had previously anticipated due to the trouble in the market. This shift will bring about accountability, which will in turn foster profitability.
Brokerages will shift towards one of a few different scenarios (We believe there will be a dramatic shift in the next 5 years):
- Big brokerage will move to a salary based model. All agents will be paid a base salary plus benefits along with a small bonus for each transaction closed. (This will be the focus of Part 2 – The Salary Based Realtor) Key To This Topic: The barrier to entry is huge compared to the current system.
- Small, regional companies will emerge as power players and the value of a big brand is decimated. The agents with the highest successes rates will flock to their own companies where they can make even more. (This will be the focus of Part 3 – The Boutique Independent Realtor.) Key To This Topic: Agents dispell value in the brand name and instead flock to regional operations.
- The Internet will replace the Realtor. There are companies already beginning to push models where the Buyer and Seller do much of the work themselves online, and a brokerage company just facilitates the paperwork in exchange for a small fee. (This will be the focus of Part 4 – Death of a Realtor) Key To This Topic: If change doesn’t happen to one of the above fast enough, consumers will change the game themselves as they see less and less value in a Realtor’s service.
Please stay tuned for our multi-part series on this change.