Business Marketing
Big box broker lays off thousands, puts best producers on salary plus commission
Rethinking the impossible
People talk about raising the bar all the time and many, including myself, have placed that responsibility mostly on real estate brokers, and associations. The truth is, brokers are challenged with technological advances, shifting consumer demands, economical constraints, and growing pressure to provide more services and lower commission splits.
This seems like the normal challenges of any business in a modern economy, but the broker’s challenge has always been greater in that there is a leak in the model. The leak stems from the fact that their salesmen aren’t employees, they’re contracted labor. Ultimately, this means that many of the demands a normal employer would place on their employees, a broker cannot require without risk of qualifying the contractor as an employee, thus requiring the broker to provide benefits to the employee. This is obviously simplified, but that’s basically how it breaks down.
Loyalty between brokers and agents
Any Realtor in any city shows up to work when they feel like it, leaves when they feel like it, and can pretty much do what they feel like, including bailing on broker A for broker B at the drop of a hat. The loyalty factor seems low for brokers in general, in that there seems to be a broker in the wings ready to accept the influx agent to their team.
What’s the incentive to train or develop any agent when the loyalty factor is so low? And with an inability to place typical employer to employee demands on the agent, the writing is on the wall that brokers continue to be doormats. One agent I know has had three brokers in the past year, yet still there was a willing broker ready to sign them up.
The broker advantage
It’s not like the broker doesn’t have certain advantages, obviously they escape the need to present the contractor with the typical benefits an employee would receive, they don’t have to provide salary for under achievers, the door swings both ways and the loyalty factor to the contractor can remain low unless they’re a top producer.
The consumer disadvantage
What’s unfortunate about all of this is the consumer isn’t really left with much choice in the market place. If you pull the curtain back on this scene and consumers see the truth that there really isn’t much difference from brand to brand, the so-called real estate industry has a credibility problem.
The credibility problem is in the endorsement of the agent or the broker in either direction, neither really have a value proposition. The broker is not known for having the best agents in the business, nor are the agents with the best broker in the business, after all, the broker is expendable, right? So if you’re both expendable to the other, then ultimately your brands and services are expendable to consumer.
Folks can talk until they’re blue in the face about raising the bar, and it probably feels great to yell into the wind, but until someone patches the expendability issues between these two parasites, creating a true need for a symbiotic relationship, we will always have credibility issues with consumers.
One possible solution
One thought is the salary plus commission model that Redfin has in play. If you remove the discount from their model, and view solely their play in customer care and client care, you see that the model can work, they’re profitable and just turned five years old. The flexibility of the salary plus commission model allows the brokerage to expand and contract based on market conditions market to market, and in up periods, commissions expand with the market keeping salaried commissioned sales teams solidly in tact, as well as retracting allows the model to downsize just as any business would in a down cycle from market to market. Dead weight is shed off for the highest producing and strongest team players.
The value proposition within this model is brand loyalty from within, with team members working the phones and doing the business of the brokerage in shifts, executing proven sales systems with set expectations by the team managers.
Redfin is certainly not the first to look at this model, but they’re certainly the first to execute it, and they did it by raising capital. Their funding is what allows them to carry the costs that consumers do not understand is the value of the traditional broker. In a salary model, consumers would very quickly learn the value of the broker as they would now pay for this risk to be carried by the broker as a part of their service. Suddenly, the value of the commission in play is as plain as day in black and white. Certain states would have problems right up front as laws have been put in play to stop disintermediation of tradition, but these laws could quickly be reversed if the value for consumers is solidified by doing so.
How boutique brokerages would fare
Another added upside to this model is you would quickly see small boutique brokerages either fly or fail. Two things are in play, the top one percent of agents would certainly need a new broker as their business models depend on their ability to be independent, however, their income will not be enough to sustain a boutique as most top producers pay very little to hang their license anywhere.
The National Association of Realtors’ role
There has been some debate that turning to this model would begin to disintermediate the National Association of Realtors (NAR) from the membership at large and return it to a broker only club, but we suspect it would actually create newer and more exciting opportunities for NAR in terms of value to members.
Ultimately, turning freelance real estate professionals known as Realtors into productive salary plus commission employees satisfies a lot of what’s wrong with the so-called industry, but also creates new challenges and a new frontier. Until the broker and the agent see a real value in the other, you really cannot ever expect consumers to experience it.
Layoffs and a new value?
If a big box broker shifted to this model in the next five minutes, the first thing that would happen would be major layoffs of dead weight, keeping the brightest and best talent in house. A value would immediately be placed on the individuals left at the big box in terms of that base salary, and Monday morning, at 8am the brightest would show up for work ready to meet sales goals and expectations.
Business Marketing
Amazon attracts advertisers from Facebook after Apple privacy alterations
(MARKETING) After Apple’s privacy features unveil, Amazon adapts by taking a unique approach to targeting, disrupting revenue for the ad giant Facebook.
As a de facto search engine of its own persuasion, Amazon has been poaching ad revenue from Google for some time. However, disrupting the revenue stream from their most recent victim – Facebook – is going to turn some heads.
According to Bloomberg, Apple’s recent privacy additions to products such as iPhones are largely responsible for the shift in ad spending. While platforms like Facebook and Instagram were originally goldmines for advertisers, these privacy features prevent tracking for targeting – a crucial aspect in any marketing campaign.
Internet privacy has been featured heavily in tech conversations for the last several years, and with Chrome phasing out third-party cookies, along with Safari and Firefox introducing roughly analogous policies, social media advertising is bound to become less useful as tracking strategies struggle to keep up with the aforementioned changes.
However, Amazon’s wide user base and separate categorization from social media companies makes it a clear alternative to the Facebook family, which is perhaps why Facebook advertisers are starting to jump ship in an effort to preserve their profits.
This is the premise behind the decision to reduce the Facebook ad spending of Vanity Planet by 22%, a home spa vendor, while facilitating a transition to Amazon. “We have inventory…and the biggest place we are growing is Amazon,” says Alex Dastmalchi, the entrepreneur who runs Vanity Planet.
That gap will only widen with Apple’s new privacy features. Bloomberg reports that when asked in June if they would consent to having their internet activity tracked, only one in four iPhone users did so; this makes it substantially harder for the ad campaigns unique to Facebook to target prospective buyers.
It also means that Amazon, having demonstrated a profound effectiveness in targeting individuals both pre- and post-purchase, stands to gain more than its fair share of sellers flocking to promote their products.
Jens Nicolaysen, co-founder of Shinesty (an eccentric underwear company), affirms the value that Amazon holds for sellers while acknowledging that it isn’t a perfect substitute for social media. While Nicolaysen laments the loss of the somewhat random introduction charm inherent on Instagram, he also believes in the power of brand loyalty, especially on a platform as high-profile as Amazon. “The bigger you are, the more you lose by not having any presence on Amazon,” he explains.
As privacy restrictions continue to ramp up in the coming months, it will be interesting to see how social media advertising evolves to keep up with this trend; it seems naive to assume that Amazon will replace Facebook’s ads entirely, tracking or no tracking.
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Mytitleguy
April 9, 2011 at 4:50 pm
I liked your article, certainly interesting. I can see how allowing top producers to be employees would work. Systemizing the sales responsibilities of agents, where there currently is none could be a great thing for the agent, the broker and the consumer. I agree, there is a lot of, as you call it, “dead weight” in The industry, a by product of low barriers to entry and very little training required. I don’t see how it would restore any credibility with the consumer though. I was in the title industry for 10 years. One of the things I quickly realized that most agents and brokers choose to ignore is, most consumers – 97% could care less about brand A or Brand B. They want a product, the product is not the agent or the broker – the product is the house. It’s why a brand new agent sitting a multi million dollar listing open can sell it – most consumers will choose the 1st agent they come across when they identify a home that fits their needs (loyalty is out The window) the agent is in most cases, is a means to an end.
The days of agents and brokers controlling access to information are over, the info the consumer wants is now on the Internet, it’s one of the reasons most consumers do not differentiate between agents. I think the employee model may be a good thing as I believe we will see more pressure and more competitors In the information space. NAR has been able to hold off a lot of the competitors that want to release all listing information and make it public, but they won’t be able to do it forever. Ultimately, Consumers want transparency and value. In this new reality, the most technology embracing agents and brokers will succeed, what’s amazing is (from my experience) most of the brokerages and agents I have seen are still fighting this new reality. Adapt or Die. Period. Great post.
Benn Rosales
April 9, 2011 at 6:49 pm
“I don’t see how it would restore any credibility with the consumer though.”
Right, not for the industry, but for that particular brand, it would based on it’s reputation.
Mytitleguy
April 9, 2011 at 9:05 pm
I see. Do you think consumers care about the brand though?
Ken Montville
April 9, 2011 at 6:14 pm
All very interesting and all very shouting into the wind, as you say.
Even in other professions (industries?) that have a salary plus commission model in place, loyalty from either “employee” or “employer” is at a minimum.
Further, this discourages the entrepreneurial (can we say “Ayn Randian”) motivation of the top producers. It would encourage Brokers to reduce services to their agents (independent contractors/entrepreneurs) and race to the lowest cost possible to increase their profit as much as they can at the expense of a supportive work environment for their “employees”.
On another note: I have often wondered how a fee for service model would work with the consumer. After decades of working with a commission based system, what would be a good critical mass of real estate professionals be to change consumer behavior.
You may think that Redfin is the bee’s knees and cat’s pajamas. I’m not so sure.
Benn Rosales
April 9, 2011 at 6:37 pm
Hi Ken,
“Even in other professions (industries?) that have a salary plus commission model in place, loyalty from either “employee” or “employer” is at a minimum.”
Do you have these statistics for the companies you’re referencing? Please be specific. I’ll rebut with Zappos as my key example to give you a head start at the bar you need to set.
Further, this discourages the entrepreneurial (can we say “Ayn Randian”) motivation of the top producers.
Of course it doesn’t, hang it with a broker that caters to non-profits. Become a broker, or face being valued. This brokerage model simply competes on volume.
“You may think that Redfin is the bee’s knees and cat’s pajamas. I’m not so sure.”
All I have is their showcase of loyal consumers, ratings and reviews of their staffs, their exact model in black and white, and their policies in the public eye.
It’s easy to sit around and debunk things, hell, even I can poke holes in things that are actually tangible, much less a concept. I knew the resistance before ever writing this piece. Now what I need from you is not to attempt to flippantly insult me, but to actually give specifics based on a business concept, not fear and tradition.
Ken Montville
April 11, 2011 at 7:50 am
Benn,
I’m not a statistician. Never have been. Never will be. I know you like Redfin for all the reasons you mentioned. I’m not really sure it’s something that will be attractive to others outside the narrow demographic of young, hip, affluent and technically savvy 20 and 30 somethings. That’s fine.
I’ll work with the moderate income, blue collar, middle aged home owners that realized equity in their home and savings in the bank were worthy values. Oh, and they don’t mid exhibiting their verbal skills.
I wasn’t insulting you any more than you insult Realtors, real estate agents and Brokers that don’t adhere to your personal vision of a technological future where people simply buy and sell real estate through “Wowie Zowie” tech tools.
RE: Loyalty in the workplace. Sure. Zappos is a wonderful company (I’ve read the book). But you only need to look through the Fortune 500 or virtually any other business index to tick off a list of companies where management is most concerned with bottom line profitability at whatever cost…including overseas outsourcing and zero loyalty to their employees.
Why does the next generation have prospects of multiple careers during their working life? Boredom? ADD? Or just plan lack of loyalty?
Loyalty is a personal value much like integrity and commitment (among others). It is instilled in children by their parents and nurtured by society. When it becomes obvious that loyalty breaks down in the work place, it breaks down everywhere (look at the divorce rate). This is more of philosophical discussion, though, and probably not relevant to the Brokerage of the Future.
Bruce Lemieux
April 9, 2011 at 6:53 pm
Ken – I also think that a fee for service model may be a piece to the puzzle. When I discuss commissions with a seller, I acknowledge that it’s a lot of money. A big part of that discussion is that 100% of my time and money is at risk. If the home doesn’t sell, I get nada. Instead, what if the seller shared in the risk? Pay a meaningful and non-refundable upfront fee, and then receive a smaller commission-based fee at settlement? The seller shares the risk, and ultimately pays less. This I could live with.
For buyers… I just don’t see them paying a fee when they can get it for free.
Bruce Lemieux
April 9, 2011 at 6:42 pm
I’ve been thinking a lot about compensation models lately. I agree that that the traditional commission-only/independent-contractor is the primary reason there is such a low bar of excellence in our profession.
Getting to a salary + commission bonus would provide financial incentive to produce, give the agent the benefit of a predictable minimum salary, plus give the broker the leverage to implement real value-added standards to elevate the consumer experience — and develop a differentiating brand. Seems like a good thing.
Still – a couple of key challenges:
– What’s the right mix of salary vs commission? The more emphasis on commission, the stronger incentive to produce – very important to attract talent (and have a profitable business). Yet, if salary is too low, the agent loses a meaningful, predictable income.
– The broker must be more like an employer: real training, evaluations, career development, daily management, etc. All great things for the consumer, but not things brokers are accustom to doing. Brokers currently: 1. recruit, 2. deal with issues, 3. motivate/fluff-up agents. This isn’t the right skill set to manage employees.
I agree that Redfin is one to watch. There’s a lot they are doing that I admire. However, I’m not convinced their formula is quite right. IMO, I think they hurt themselves by giving 50% back to buyers. They aren’t selling value, but they are selling cheap. As a result, I would think they attract more do-it-yourself, don’t-expect-much-service types. I guess that’s more a critique of their business model, not their compensation model.
I keep waiting for Rob Hahn’s thoughts on this topic.
Benn Rosales
April 9, 2011 at 6:51 pm
Love the thinking here – right, I actually think full service works under their model, and they’re underpriced, but hell, every market is different, who knows if it would even be the same pricing strategy from market to market?
Benn Rosales
April 9, 2011 at 7:17 pm
PS your #1 point is a real challenge in say Unionized states as it would be incredibly expensive to operate there, however, you could vary the model.
Also, if I were the broker in this position, I would base salary/commission on the department, skill level, and need. Obviously, I want the best doing what the best should be doing and equalized pay just like any business model.
Jonathan Benya
April 9, 2011 at 6:50 pm
I’m missing something here. What good reason do I have to adopt this model, from a personal standpoint? A good agent should excel in any pay structure, so why have the Broker making more money off of me? This benefits a mid-range agent (3-12 deals/yr), but a lousy agent would just end up with a pink slip (probably not a bad thng, I admit), and a top producer would be angry they were making so much less. You may as well say so long to entrepreneurship in the industry.
Benn Rosales
April 9, 2011 at 7:07 pm
Well, if you’re in the top 1% I congratulate you, the broker would in fact be making more off of you, until they took your market share and you applied for a job, or the 1% guy can out race using his entrepreneurial skill.
This is pure capitalism, so just reverse everything you said. (playing devils advocate) Why do I care, I’m a broker who wants to be a value to consumers and employees, I’ll provide them a marketing department to send their listings, and a sales team to generate leads, and internet marketing team to handle digital sc and deals to handle and close, and I’ll pay them competitive salaries and varied splits to reward them, and probably a bonus too.
Bruce Lemieux
April 9, 2011 at 7:31 pm
The thing I love about this business is that it’s perfectly suited for an entrepreneur — be smart, work hard, do the right things and you can built a fantastic business.
Looking at the industry, however, how can the profession be elevated? Neither NAR nor our local boards will lead the way. If it happens, it will come from new business models and the brands that represent them. The current commission/split model doesn’t lend itself to creation of new, valu- added brands. The broker must control more of the process (IMO) to create an experience that truly resonates with consumers.
Going back to Redfin. I just looked at their stats for buyer sides in MRIS (Metro DC). 15 agents have 154 contracts in 2011 with over $80M in volume. Even with 2 new agents (I assume), this is an avg of 10 contracts/$5.4M each and we’re only 1/4 into 2011 (its actually higher since I can’t see contingent contracts). That’s phenomenal production. And if 1/2 of the commission volume went back to buyers, this is a clear value-add to the consumer.
Now I don’t think that a brokerage needs to sell ‘cheap’ to differentiate themselves like Redfin. But, this their model – which depends on a mix of salary + commission (I assume it’s not all salary) – clearly has traction. Like Redfin, I think a salary/commission model will truly allow a brand to differentiate itself from everyone else. And in doing so, raise the perception of professionalism in our industry.
Kevin "Troll" Tomlinson
April 9, 2011 at 7:39 pm
I read it all. Kind of made my hair hurt. Nothing is gonna change.
All this theorizing hurts my brain.
Is @ardelld the president of Redfin?
Bruce Lemieux
April 9, 2011 at 7:48 pm
Yeah, you’re right. Enough procrastinating. Back to work.
Ken Montville
April 11, 2011 at 8:04 am
Kevin,
I love the “troll” part!
You’re right. Nothing is going to change that much. Not necessarily because of the way Brokers behave or change. More likely it would be a difficult and long path to get consumer behavior and expectations to change.
The first time I told a Seller their CMA was $50 (or more) would be the last time I heard from them. If I asked the Seller for $3000 up front to cover marketing, a lot of them would say “bye-bye”.
Then there are the “intangibles” – my time to negotiate terms of the Seller’s behalf, time to negotiate inspection items, time to meet the appraiser, time to interact with the mortgage and title companies. I have to pay my own mortgage, insurance, taxes, food, etc. Do I get to charge a little more to take my wife to the movies? A play? On vacation?
If my “fee for service” was roughly equivalent to the percentage I charge now, would the consumer care or notice?
You are soooo right. This whole discussion is %^#&
Fred Romano
April 9, 2011 at 9:41 pm
So why would any serious “top producer” want to go on salary plus commission? I would think they’d be happy making lots of money as an independent contractor and would most likely make a lot less money in this hypothetical scenario.
Also, if Redfin was that great they would be in more markets, but they are not. I think their model is seriously flawed and the only reason they are open is because of their discounts. I can not see a “full service” Redfin style model with no discounts working! – Fred
Benn Rosales
April 10, 2011 at 8:47 am
In a capitalist and competitive world (devils advocate here) as a broker, why in the hell would I care what happens to the top producer? I want what they got, right?
As for Redfin, it doesn’t matter if their model is exact, because most companies operate under the model I’m describing. It’s hard to imagine a paradigm shift away from needing 1,500 ‘agents’ in a single market when truly you really only need 5 and an office staff to handle the paper. Spread that from say 10 markets in central texas and you’re only salaried plus commission for 50 executives, and the rest are locally centralized hourly phone banks, a media department, marketing department, training and hr.
You would no longer have a talent leak, you’re desired because you own market share, and the best rises and the least crumbles.
That’s one answer, I got like 50 different ways I can go with this.
Jordan Gilbreath
April 10, 2011 at 8:23 am
Thought provoking!! I’m all for it. I’m a team player in the office, I meet my desk cost, I’m ethical, & I work hard for my clients–put me on salary! I deserve it. 🙂
Benn Rosales
April 10, 2011 at 9:14 am
Marlow Harris doesn’t agree with me and opines her usual anti-redfin spin, but I’ve never said redfin was priced correctly, only that smaller can produce volume transactions in a corporate environment. She sites no evidence or proof that it takes 1,500 agents in a single market to produce volume, nor does she address the eternal leak the traditional broker has in terms of talent. She never addresses that only 20 percent of a given market of agents produce, the other 80% are dead weight, a training expense, and a waste of focus. Hire them and put them on the phone to execute systems at 10 bucks an hour and they’d be doing better than they are now. Floundering conference going wannabe’s. It’s exactly the 20% that you’re competing for and you can’t do that wasting your time with mediocrity.
Love you Marlow.
Fred Romano
April 10, 2011 at 10:27 am
So Benn, what defines “talent”? I mean it’s not rocket science to work with sellers and buyers. Anyone can do it, and do it great. It’s all about customer service and having a great personality. IMO Houses sell themselves when shown in their best light and priced right.
Benn Rosales
April 10, 2011 at 1:14 pm
It costs money to train and develop people, it’s better to provide a ladder than an escape hatch. From the moment you hire, the broker in this scenario now has control of who/what he/she hires, where in the past, the agent believes they’re the value, and they are, but now it’s the things they’re actually talented at. Not all closers are amazing marketers or photographers, so why not just hire them to do what they do best.
Again, your model handles volume with small company. You’re not spinning your wheels being all things to all people.
Fred Romano
April 10, 2011 at 4:40 pm
I see what you mean now!
Bruce Lemieux
April 10, 2011 at 4:21 pm
Fred – saying “it’s not rocket science” and “anyone can do it” says you don’t understand the business. If houses really sold themselves, this industry would not exist. The Zillows, FSBOs and flat-fee listing models would have taken over long ago.
BawldGuy
April 10, 2011 at 11:47 am
Not being Devil’s Advocate, as some opine that on this subject I am the Devil. 🙂
So tell me, how much salary are you gonna pay Russell Shaw? Or me? Or anyone else who produces superior results? This model simply cannot afford the top producer as it’s defined. They can only pay those they think might become one. Even then, they’ll look at Russ or many others and wonder if, when they made their decision to become an employee, they were drunk.
How much will they pay an agent used to making six figures monthly? The answer is (drum roll please) not a dime — they can’t afford to pay the salary of a truly top producer. The only way this works is if somehow top producers are forced into it.
Of course, that doesn’t begin to address the second tier of agent, the one who consistently makes $20-50,000 a month. Hell, that’s barely what real top producers pay in expenses. What are brokers gonna pay them? Again, if you’re a Dallas or Austin agent, making that kinda money, you’re gonna laugh any broker proposing employee status out of your office. It’d become a favorite story for happy hours.
Tell me where I’m wrong, I can take it. 🙂
Benn Rosales
April 10, 2011 at 12:43 pm
Show me yours or Russells business plan, and I’ll tell you. 🙂
Benn Rosales
April 10, 2011 at 12:55 pm
PS are you selling houses now? If not, then you wouldn’t fit into this scenario at all.
Russell however is perfect proof it doesn’t take 1500 agents to dominate a market. However, if TP A is spending 1/2 million a year just in advertising, and another quarter million in general expenses to make a million in personal income, then technically, his annual salary with commission would be worth $200k or so, however, what I’m suggesting here is a big box is now competing on his same overhead if not better because as you and I both know, you and Russell technically couldn’t exist in the same market as there is only so much 20% to go around.
Bruce Lemieux
April 10, 2011 at 4:11 pm
Russell or others with very high production wouldn’t take a salary. They are really CEO’s/owners in their own business, aren’t they? It would be interesting to know how he compensates his sales team members (not marketing or admin). Are listing specialists and/or buyer agents purely commission-based, salaried, or a hybrid. How does he keep *his* ‘top producers’? If he pays salaries, does he enforce standards, min. hours worked, training, etc.?
Benn Rosales
April 10, 2011 at 5:34 pm
Bruce, he would probably answer a direct question from you by email, he gladly gives away his playbook. if you click ag index on the side, find his name in the contributors list- his info is there, or Google him haha
Fred Glick
April 10, 2011 at 3:28 pm
Dude, what are you smoking.
I have been fighting, suing and negotiating with the Federal Reserve of the United States because this is wha they forced on mortgage brokers.
And, we have already seen mortgage people forced to give higher rates, ripping off their clients and wholesalers going out of business.
The flip side should be for every business, everyone on commission. If you don’t perform, you don’t earn.
Benn Rosales
April 10, 2011 at 5:21 pm
Um, I’m smoking capitalism, and the concept of the Broker actually operating a business, not a stable.
Susan Milner
April 10, 2011 at 4:13 pm
I see a lot of ‘top producers’ are upset or curious how they’d make money. I see two options for them. 1) open their own brokerage and work for themselves – hire or not hire additional agents as they like or 2) I don’t know – go work doing something else? As a broker I don’t make as much money off of a top producer as I do a mid-level agent anyway. The top producers go to a high split office and demand the world. Most of them end up costing the company when they look at their actual #s but they keep them for maybe 1) whole office figures (EGO) or 2) recruitment tool for other agents (they think if one agent can produce that then it is the company) 3) they are dumb. I don’t know if I would adapt the salary based model but it would clean out the industry I think…..interesting dialog here….
BawldGuy
April 11, 2011 at 1:31 pm
Benn — I’ve listed/sold nothing BUT houses/2-4 units for the last several decades.
As for Russell, if he, as I suspect, closed about 700 sides in 2010, that’s roughly 2.5-3.1 Mil in GSI.
Let’s assume there’s a company opting for your approach. They’ll not have either the Shaws or those just below him in production, working for them. That means, as somebody wisely said earlier here, that they’d be hiring pretty much the lower-middle to ‘almost really good’ agents. Almost elite agents, even in Texas/Arizona, make $10-15,000 monthly. In markets like San Diego they make much, much more. To be able to hire that level of quality, how much salary are they gonna pay ’em?
Meanwhile, many of the brokers trying to implement this approach will also be endeavoring to attract listings based on price. They’ll be paying salaries plus commission to relatively less than elite agents, who’re more security oriented than their gladiator brethren, who’ll be slaughtering them in the free market arena — where only results matter. This is no different than most of the crappy results produced by discount brokerages. They only succeed in markets where a C- eighth grader could sell a house. (2000-2005) During normal to buyers’ markets they suck like Dysons. In fact, I’ll go further. Have the so-called ‘list for $250-500′ brokerages show their batting averages, listings/closed sales. They’re jokes. If they produced results more than 10-20% of the time, full service top producers would already be extinct. The only folks succeeding with that approach is the brokerage owner — not their clients. More power to ’em, it’s a free market, but their results are embarrassing.
Then there’s the capitalization of such a venture. It would be massive. And in the end it would fail. Nothing trumps results, which is why they won’t succeed.
Kevin Lisota
April 12, 2011 at 1:40 am
We employ the exact compensation model that you describe. Our agents are employees paid a salary plus a bonus. Our pay is consistently above market average, and we are able to reduce the volatility and intra-office competition so prevalent in our business, while providing upside when things are good.
Why do we want our agents as employees? It aligns the incentives of the brokerage and the agents, plus it ensures quality standards and teamwork. If a brokerage and its agents sell lots of homes, everyone benefits, and when things slow down, cuts need to be made.
Virtually the entire real estate industry is built on a model where brokerages make easy money off desk fees and commission splits from “dead weight agents” who close a handful of deals a year. What did brokerages do in this massive downturn where transaction volumes (and associated revenue) declined 30%, 40%, 50% or more? They went out and recruited like mad! They do this because there is no downside risk to them adding more agents. It is a system that encourages the accumulation of dead weight. I sat in a seminar last summer with the CEO of a major east coast brokerage franchisor. He tried to get his brokerages to shed their non-producing agents, but they resisted because they “liked having them around and might close a deal or two this year.” That is just bad business, and other industries simply don’t operate this way.
As a brokerage, we have picked the hardest business model possible, taking on much of the risk of market volatility. When things are slow, there is a payroll to be made. When things are booming, we have to weigh whether our sales pipeline can support more employees. Our brokerage could make more money by simply stacking independent contractors one on top of the other and charging them fees, and there are days when our bank account wishes we were structured that way. However, we have chosen this path to ensure that we provide a consistent, quality experience from every single agent on the team, which is something that the vast majority of brokerages cannot provide in their current structure.
Bruce Lemieux
April 12, 2011 at 11:15 am
Kevin – great site. If having employees ultimately allows you to provide superior service, why cut your revenue by half for buying and listing? Like Redfin, your primary value-add to a consumer is lower cost — not results/service. If you convinced consumers you offered a better product, couldn’t you do just as well by offering only offer 25% reductions?
I’m curious if you believe that your compensation model is simply a better way to run a brokerage — discount or not.
Kevin Lisota
April 12, 2011 at 2:49 pm
The compensation model in my mind is unrelated to what we charge for our services. Rebate or not, I like the idea of having a cohesive team of agents who all work from the same play book. I also have no desire to carry more agents than are absolutely necessary to serve our current transaction volumes.
I would disagree with our primary value add, and all of our customers would disagree with you as well. It is all about the results and service. Lower cost is not our primary differentiator, simply a benefit of using us.
We do charge less than a typical brokerage, but that comes from a belief that a full 6% in our market is not reflective of the effort needed to buy or sell. In lower-priced markets, it doesn’t make sense, but when average home prices climb over $500k, the commissions become eye-popping.