Join the Collaboration Project for "Optimizing the Broker Business Model"

Thanks for the invite Ray.

The real estate sales industry, like many other businesses in the pre-Internet, pre-Google, pre-Craigslist, pre-Facebook, etc., world, based its business model on "scarcity." Big box brokerages got fatter by locking real estate through listing contracts and by controlling information. These brokerages charged as much as the market will bear.

Some agents can stay in denial on things, such as, Zillow's Zestimate is incorrect. It may be incorrect for right now but it will get better with time. Appraisers are no better anyway. The way appraisers were used by banks to dictiate what banks wanted to see in appraisals is not hidden from anyone.

If I were to believe NAR, the Realtor network is inflating prices by 26% in order to generate their 6% commission, to be distributed 4 ways. Sellers are the biggest beneficiaries of the Realtor network, but a few vocal agent-hating sellers are "screwing it up" for the rest of the sellers who know the benefits of the Realtor network. Isn't it ironic that sellers are revolting against the commission structure? Maybe that has to do with the NAR spin that sellers pay commission.

Even brilliant economist Steven Levitt argued the wrong side of the argument in his much quoted book Freakonomics that listing agents sold their own houses for 3% higher than the houses they sold for their clients. Who the heck cares. They got you 20% more than what you could have recieved, Mr. or Ms. seller!!!

Most agents, especially the buyer agents I know, bust their rear ends to make every dollar they make. So where is the problem? The problem is with the brokerage model. The "big-box" brokerages are NOT needed anymore. RIP "big-box" real estate brokerages. Botique agencies, which leverage the Internet and split the cost savings with agents and clients, will do very well.

Why do many agents join brokerages?

- Can't afford to keep the lights on for a brick and morter office.
- Expects, and sometimes gets, training.
- Expects, and sometimes gets, leads. Actually she needs to do floor duty to get those leads.
- Just does not want to be bothered with the overall responsibility.

We need to empower the sales agent. The two-tier licensing model should be changed to one-tier licensing model. Everyone gets the education and testing to become a broker. The inexperienced salesperson then works under a broker and then is allowed to go off on his own.

Most leads are coming from the Internet, services like listingbook eliminate the need to show houses unless the buyer is ready, and showingtime.com eliminates much of the paperwork and seller interaction. I am sure that other agents are using software to optimize their days.

The bottomline is that agents don't need brokers anymore. When every agent is a broker, the commission does not need to be split 4 ways, and agents don't need to pay desk fees, royalties, junk fees, etc., to brokers. This will allow commission to naturally go down without reducing agent/broker's take home income.

In the Google/Criagslist world, we need to charge as little as the market will bear by running lean (one-person?) shops operating on the Web. Agent's take-home either stays the same or gets better, seller humbly walks to the bank instead of laughing all the way to the bank, and the buyer is not stuck with 26% inflation he could have lived without.

Some agents will never want to be brokers. For them there could always be a broker to sponsor their license.

Thanks for the invite as well Ray and I look forward to seeing and hearing great things.

A major shift needs to happen in the real estate and mortgage industry due to the fact that the real estate is NOT about buyers, sellers, agents and banks.

It is about:

1. Buyers and

2. Financiers.

The real estate industry is different from any other high ticket item industry in that sellers, except for new construction, are rarely responsible for anything after the checks are cashed. However, the whole industry is sellers, agents and banks driven.

Banks and agents interfere with the transaction to make money.

Both seller and buyer agents make money when the transaction happens. What if the transaction is not in the best interest of the buyer or the seller? Since agents make money only when the transaction happens, a sizable number of buyers or sellers could be buying or selling when they shouldn't.

Case in point. The market is too high. It is in the best interest of the seller to sell, but is it in the best interest of the buyer to buy? A true advisor to the buyer would advise the buyer to abstain from buying, but if he is working with a buyer agent, that agent will "help" him buy at the detriment of his financial interest. NAR would harp in the background, "Houses have doubled in values every 10 years"...NOT if the buyer bought a property at $350,000 in 2006 and was foreclosed or quit claimed at $55,000 in 2009. It could go back to $100,000-$200,000 in 2019, but not to $700,000.

Banks "are not in the real estate business" therefore they have lending rules which only make sense to the most desperate or naive among us.

Banks represent financiers which could be individual investors, insurance companies, retirement funds, soverign funds, etc.

The financier which was represented by the bank got jipped because he is now sitting on a $300,000 loss. The financier, if involved in the transaction more directly, would not have made decisions which were made by the bank to collect its fee.

Again, it is the buyer and the financier who are the primary parties to real estate transactions. With the help of the Internet, the gap between the two will reduce and the banks' and real estate agents' roles will either diminish or massively get transformed.

My upcoming book talks about such transformation to eliminiate booms and busts in real estate.

Marty, thanks for the detailed post to help further the conversation.

Home-seekers don't HAVE TO buy all the times. They can rent until market comes down. The need for the real estate agent to make a living which only happens when a closing occurs forces the buyer and seller agent to "help" the home-seeker buy a house instead of advising him to rent.

A $350,000 house brings $6,300 in a buyer agent's pocket at 60%-40% split between the agent and the broker. A $2,000 rental hardly brings $600 in rental agent's pocket.

Also, isn't it ironic that banks would lend at 100% LTV to anyone who could fog a mirror when prices are at $350,000 but would require 20% down with first born as collatoral when the prices are at $55,000?

Here is the kicker. If you go to http://realestate.yahoo.com/calculators/rent_vs_own.html and try to enter a negative number in the "Annual appreciation rate" field, it would not allow that.

The whole "advice" space is screwed from the bottom up.

Home-Seeker: Help!!! I am trapped and can't get out. :)

Ray, the short answer is that more agents need to become brokers and setup on-line shops. That will accomplish at least three things:

1. Educate agents more thoroughly.
2. Allow them to make more money with fewer transactions.
3. Make them more accountable to the clients.

I shied away from becoming a broker for a long time, but it seems like a necessity now.

Hi Ray,

Thanks for the invitation to join the Optimizers.  I feel that a grass roots effort to refocus upon and strengthen our standards is long overdue.  As Realtors we assume so many roles and duties that it staggers the imagination, and places a great deal of responsiblity (legally, morally, and financially) upon each and every one of us.  The challenges we face now and over the next several years are pivotal to the direction our own profession will take into the future.

Please let me know how I can help to facilitate your goals and mission.

Regards,

Chuck Webb

Ray..thanks for the invite. I'm sure we'll all learn different points of view and pick up ideas from various member experiences. After almost 30 yrs in this biz I remain frustrated by the mediocrity of the folks that populate our industry, brokers and agents alike including agents within my own firm. It's like falling into a vat of molasses and you can't extricate yourself to save your life... kinda like a nightmare that you can't wake up from. In my sales life before real estate I was used to "if you don't cut the mustard, you're fired." In real estate it's like "ah gee, maybe you'll figure it out one of these days... hang in there and muddy the water and embarrass the rest us as long as you'd like."

As I see the problem from my tiny corner of the world, real estate brokerages are in a never-ending battle for raw numbers causing a downward spiral in quality and its evil twin, production. All brokers, me included, had the delusion that by raw force of intellect or personality we could help those who were not cut out for sales by showing them the ropes and giving a hand in paving the road. Rarely does that cockamamie idea materialize. So here we all are watching what has become an overall embarrassing sales force muddle along taking the few that are real warriors along for the bumpy ride.

Personally, I'm at wit's end to even begin to change my own firm's 137 agents' sales stats, much less someone elses. Most of us cried Uncle years ago and simply are willing to let it be and overcome the shortcomings of our own making with raw numbers of mediocrity.

For what its worth, my market is small with 129 firms employing 1500 agents in 2 closely knit counties. However, its large enough to be a decent statistical sampling repeated over and over throughout the country. 90% of those 1500 couldn't sell carnal knowledge on a troop train on credit yet somehow continue to wear some kind of real estate badge sporting year-end 1099s that would embarrass a McDonald's employee. It's clear to me that the vast majority of agents have other sources of household incomes or else most would be on food stamps. Therein lies the problem that will forever color the quality of agents in general. As a result we will forever rank in the minds of the general public as a bunch of slugs. How that can change I don't have a clue short of trashing the entire industry and starting over from scratch.  

Don Bush

Thank you for the invite.

I hope this is a start of many great changes in the future!

Ruben Garmyn

"90% of those 1500 couldn't sell carnal knowledge on a troop train on credit..."

That's a great one Don, and could be used as the yardstick to deny renewal applications for Realtors. :)

Hi Don,

Could you tell us how you really feel?  Just kidding!

I've been in the business for over 23 years.  

I know for me, I recently converted my 11 year old independent firm to a RE/MAX franchise.  I know the critics will say that it's the same ole, same ole because I will have to load up on mediocre agents to pay the desk fees I need to be profitable.

I don't see that being the case.  Even agents with other income don't like watching their checks float out each month if nothing is coming in, and they don't stay with the firm.  In my opinion, as long as brokers allow agents to affiliate with them when the agent has no "skin in the game", our industry will always be filled with mediocre (or worse) agents.

On the other hand, part of me says that every agent should get a chance.  One thing I love about the real estate business is that anyone with drive, integrity, congeniality and ingenuity can be a successful entrepreneur.  It doesn't take an MBA, or a couple hundred grand in start up costs to be a superstar.  Is it worth the mediocrity to allow success to be in reach of others?  Maybe so for a short period of time and under watchful supervision.

Lastly, I have to ask myself what is the definition of mediocrity?  Steady "plodders" are highly desirable for an owner of a real estate firm.  An agent that is honest and thorough, but never has breakthrough years, just steady income, is a great asset.

Thanks again to Ray for the invite.

I think we are stuck. Every firm on planet earth has tried and tried again to offer up new and improved training programs for their agents. Yet at the end of the day the same old pitiful sales stats exist. (Of course I speak only for metro Atlanta, your mileage may vary). That tells us that none are effective which only begs the question, why?  Not being the brightest bulb on the tree I don't know the answer but I suspect that it's because you can't impart the qualities that must exist to be a true sales warrior. I've about decided its in the DNA and you either have it or you don't. Sure, there are rare exceptions to the rule but for statistical purposes you have to go with the usual and probable. So where does that leave us? In the same old vat of molasses we've always been waist deep in.  

Maybe agents will finally figure out that brokers have become obsolete. There's very little value given in return for the fees or split. (again, I only speak about my little corner of the world) People do business with people, not companies. Given that's an absolute why are agents willing to pay a big slice of their income in exchange for the privilege of hanging their license on our walls other than they haven't gotten their broker's license yet? It's all part of the smoke and mirrors that is real estate. Perhaps if you're new and don't know your butt from 3rd base there's some benefit until you figure it out but that's the only reason I can think of. For anywhere from $15,000/yr up to 50% of an agent's income being paid to a broker is beyond insanity. Yet I happily take my piece from all of my agents hoping they won't figure it out anytime soon.  

As long as the industry (in collusion with NAR) keeps the rank and file under the ether mask things will progress as they always have with little change b/c it's not in the best financial interest of brokers to support a change. We're all happy as pigs in mud to keep things as they are. As transparent as this all is to those of us that see things as they really are there's plenty to worry about if agents come to their senses. When/if that happens we can all close up shop or go back to being one or two man shows.  

As the 2nd largest independent in Ga I'm low hanging fruit for the franchise salesmen and I get an earful every month. Yada, yada, nationally recognized name, yada, superior sales system, yada, support pi R squared. All that for only 8% of my entire staff's income + $25K sign up. Since the agmt is usually a 10 yr marriage we're talking several million dollars being sent to Uncle Guido in NJ if you buy into that pabulum. I can assure you that for the several million dollars they want over a 10 yr period I can buy a lot of stuff that is by far more entertaining, more profitable, and that has a better historical sales record than anything the franchisors are selling. But as along as there are comatose brokers littering the real estate landscape who really do believe monkeys can fly the big box boys will continue to be successful and we'll have business as usual. It's folly to believe that the force of multi-million dollar mega-marketing campaigns, superior franchise sales depts, and starry eyed brokers searching for easy success will lead to anything other than the same old same old. I wish the indicators of the future were different and we could shake the mediocrity of our industry but I simply can't see that light at the end of the real estate tunnel. So we'll muddle along, offering up alternative ideas that, on average, will never leave the launching pad.

Incidentally, it is because of the mediocrity of the industry my firm refuses to be a part of NAR whose membership has redefined the word itself.

Don Bush

Ray, Thank you for the invite as well.  I plan right now is to focus on the pros and cons of being a sole proprietor.  I personally think Realtors need to have the freedom to follow their passions, niches and develop their own brands.  I look forward to the discussions about company branding versus agent branding etc.

Hey Ray,

sorry - been busy - can't keep up with this stuff when we have contracts all over the place...

Comment for your post though, and don't take this the wrong way, your list is great... but - and there is a but as I see it.

Keep in mind that I am a geek, software engineering geek that is.
The big downfall I see - and have been seeing since we started building web sites in the '90s... Is that there is always a focus on the technology, what is the latest greatest whizbang thing out there...

What I would like everyone to keep in mind is this - and I am sure Ray will sing to the praise of this: Technology is a tool, it adds to your marketing portfolio. It is NOT the end all, it doesn't matter how many PDA's someone has, if you don't do scheduling...

How many leads do you get from a web site? How about sign calls? Are those leads vastly different? Yes, what's important here?  How many you can CONVERT.

So, let's talk about conversion as well Ray, that is where the rubber meets the road if you ask me, and that is where we get some serious issues. Anytime we turn an online lead into an open escrow in 10 days or less, I am going to consider that a good lead.

So, what do we need to master in addition to technology? APPOINTMENTS - you HAVE to won your appointments, Don't make a phone call without asking and don't answer the phone without asking for it.

So there - I'll come back and read the remainder later ( Got some appointments to go on), maybe this is a thread of it's own in here?

Terkel

Love the invitation and I enjoy reading everyone's response.  Brand, no brand, independent co-dependent models.  They all work for the working class. 

I'll pitch in my two cents worth when possible.  I've been with the largest brand, independent and now own a relatively new brand.  Corporate models all have the franchise in a box theory of success.  I too agree with Dave R.'s blog.  It's about the in-house training that grows the individuals business.  Being in business for yourself/by yourself fits the ego maniacs and/or know it alls.  Being in business for yourself and not by yourself fits the collaborative team players.  Been there, done that for both models.  Tired of working by myelf.

Again, thanks for the invite.

frank

Thanks, Terkel. 

I think you summed it up pretty well, and I think you touched on the reason that REALTORS are surviving.  The internet is advanced enough that if the human element wasn't needed, we would be out of business.  Forsalebyowner.com, homesforsale.com, etc., would put us under.  But it hasn't happened.  I believe it is because at the end of the day, people still want to deal with a salesperson, and secondly, as a whole the public isn't nearly as techno savvy as a lot of people would like to believe, nor do they want to be.

Technology is one more tool in the toolbox of communication.  The agent must be able to courteously, professionally and competently convert the contact generated by technology into a consummated transaction.  After all, a seller wouldn't list a property for sale, and a buyer wouldn't contact a real estate agent if both parties didn't want to complete a real estate transaction!  The only question is when, and from whom.

My 2 cents (again, so I guess that adds up to 4 cents),

Marty

Ray - Some basics from me - 1.  Bricks and mortar - limited. 2. Training - Sales, technology. 3. Lead generation. 4. Recruiting a new generation of agents. 5. Compensation models. Fred