Big Firm, Little Firm. What's the Difference in Real Estate Firms?

I was having coffee with my regular group of guys at Starbucks recently and thought about what each of them do for a living; all very successful investment managers, chemical brokers, management consultants and the like. None of them, however, work for a big company. They each own their own boutique business.

Maybe it was the caffeine, but my brain went into overdrive. Why is it, I thought, that so many successful service providers are small firms being run by highly-experienced people, yet real estate is dominated by large firms?

To find the answer, we have to look back a few decades. Back to when Welcome Back Kotter was still playing on the television. Big real estate firms often run on an outdated business model dating back to the 1970′s. Understand the model, and you’ll understand why the big brokerages do the things they do.

First, brokerage offices exist to make money. It is one of the functions of the managing broker to recruit agents to work in the office. Most agents start out splitting their commissions on a 50/50 basis with the office. The problem is that these agents usually don’t sell very much, so the office doesn’t realize much income from their efforts. The solution? Bring on lots more agents. Stack ‘em to the rafters. Now the managing broker has a new problem. Providing office space and support staff for these agents gets expensive. So now we have lots of inexperienced agents who don’t bring in much income and high overhead. I’m not saying it happens everywhere, but you can see how this situation could lead to standards being compromised in order to generate cash flow. As my friend, Michael McClure, the President & CEO of Professional One real estate, so aptly phrased it in an article he wrote about the subject, “Brokers have almost no clue what their agents are doing out in the field. Because of the hyper-transient nature of real estate, easily 95% of the job is done outside the walls of the brokerage.” He goes on to say that because of this, it is almost impossible for the typical broker to monitor whether the agents in his or her office are providing a level of service and expertise that is consistent with the standards of the company. In most cases, it becomes very difficult for brokers to change bad behavior because they don’t know about it until its too late.

So what does the big firm do next? Advertise. They spend lots of money to branding and promoting the company and very little promoting the agents who are their revenue source. They each claim to be the leader or to have the best people in hopes of gaining new listings or buyers. They join international networks with fancy names. But does this really help you, the buyer or seller? Does it sell your home faster or get you better terms on your next home purchase? In short, no. The only thing that matters about the sign hanging in front of your house is the name of the agent. Period. That agents’ knowledge, and what they are willing to do to market and sell your home, is all that matters.

The truth is, the real estate industry is changing. Thompson Realty in Phoenix, Arizona is a great example. Run by the charismatic Jay Thompson, the firm has no brick-and-mortar offices. Each agent works from their home – or wherever they feel they can work best. Some of the most innovative real estate firms in America that are getting lots media attention are small firms.  Thomas Friedman illustrated in his best-selling book, The World is Flat, technology has been a tremendous enabler. Small, boutique real estate firms have the same, if not better, technology as the big firms. Cloud computing has made it even easier for agents to access and forward reams of data from the main “office” computer on an iPad. Programs like SureDocs allow agents to complete and sign contracts in the field without ever touching a piece of paper. Company-wide CRM (Customer Relationship Management) software enables agents to access clients’ records from a computer anywhere in the World. From my perspective – and many others – these tools add more value to the process of selling a clients house than fancy offices and layers of management do. And without the burden of high overhead, these smaller, more nimble firms can focus on placing their clients interests ahead of the siren call of cash flow.