Agent-centric broker models are set up to lose and fail
Last October, I entered my 44th year as a licensed real estate agent, the last 36 of which have been as the designated broker and owner of the family’s real estate investment firm. I’m second generation. The date on my first license was barely 60 days past my 18th birthday. I aspired to be merely wet behind the ears. In those years – BA-C (Before Agent-Centric) – more business was done by less people in terms of transaction quantity than is dreamed of these days.
I was blessed (unknowingly) with the rarest of opportunities, starting from below the ground up in a hugely productive real estate company, family owned – read: Dad – and run on the Broker-Centric model. Below, the two models are defined through the lens of my experience on the inside of both.
Broker-Centric (BC) model defined
There are many factors, but the main thing is that the broker is in charge in every sense of the word. They produce the bulk of the leads, pay for them, and in many cases, design their in-house distribution. They pay for office space, and the various machines/computers necessary to do business. They don’t charge agents for much, if anything. They take virtually all of the financial risk and liability.
Commission splits in the BC model of yesteryear aren’t even believed by most modern day agents. Exclusive listings paid 20 percent of the listing side, while exclusive agency and open listings paid 15 and 10 percent respectively. The selling agent made 40 percent of the buyer side commission. There were variations of this, but the range of pay between companies was relatively narrow.
If looked at in terms of sales volume per agent, or GCI (gross commission income) if you will, the BC model requires significantly fewer agents than the Agent-Centric model requires. Adjusted for inflation, agents made more in terms of dollars than they do today at double or more the commission splits. For example, in a five year period from 1965 through 1969, just 25 to 30 full timers and eight to 12 part timers closed over 1,000 sides a year, every single year. I saw the last three in person, from the inside. The average full timer in that firm made more than twice the median household income. Twice.
Agent-Centric (AC) model defined
The AC model is, in my experience the perfect business model. That is, if you prefer the tail waggin’ the dog. It’s based upon the idea that all agents know what they’re doing and will use the time available efficiently and profitably, to their own benefit. Lead generation is typically left up to the agent.
The commission splits are typically 50 to 100 percent higher than agents toiling in a BC-based brokerage. It often requires two to five agents to equal the GCI produced by agents working under the BC model. There are exceptions, but most broker/owners employing the AC model use the mud on the wall principle. They pray that hiring the max number of agents they can house will produce the the bottom line profit they require to keep the doors open.
Brokers in the AC model often rely on newbie agents who begin with a 50 percent commission to make up for the more highly paid ‘experienced’ agents. Typically these rookies will do two or three deals in their first 6-12 months, then disappear, only to be replaced with the next rookie.
The irony of real estate teams working for an AC model firm
Note: There are kinda sorta hybrid models out there, the ones with various profit sharing and other agent-participant type models. Some are highly successful, but can’t (at least by me) be categorized as either BC or AC. I’ll leave thoughts on those outliers for others who are more informed about those models than I.
I have to believe that there are hundreds of brokerages out there who are more than a bit perplexed not only by the success of the teams they employ, but the bottom lines of the team owners. If, for example, we use the team model I ran for years, agents made a maximum of 50 percent commission split. Let’s compare that to John Doe Real Estate, a traditional company operating on the AC model, with around 50 agents. However, of those 50 agents, 10 of them, including Debbie, belong to a team owned by Debbie. Four are buyer-agents (BA), some are support staff, T/A, tech guy, team ‘manager’, etc. Debbie is a listing demon. This year, she’ll list 100 homes. Her team will close 250 sides. Fully 91 of her listings will sell and close escrow. The median price per closed side was $200,000.
The remaining 40 agents working for John’s firm closed another 280 sides, with all sides computed at three commission as a constant.
His agents make 80-90% commission splits. We’ll use an average of 80% if only to give John a fighting chance against Debbie (laugh track would be perfect here). Also, we’ll allow the median price on John’s other agent sales to be $220,000 a side, 10% higher than Debbie’s team. Let’s compare the two:
Outlining Debbie’s year:
On her 250 closed sides, here’s how Debbie did. She’s at a 90% commission split from John due to her phenomenal production.
So, 159 closed buyer sides at $200,000 median price = $954,000 GCI for the brokerage. $858,600 is Debbie’s ‘team’s’ share. Her BAs pocketed $429,300, which is an average income of six figures per BA.
Then, take 91 closed listing sides at $200,000 median price = $546,000 GCI for the brokerage. $491,400 is Debbie’s share. Debbie does all the listing and none of the selling. Furthermore, she doesn’t take referral fees from her own BAs when she gives them her own buyers.
Debbie’s take for the year after her team’s commissions are paid, comes out to $920,700. That’s before overhead of support staff, marketing, etc.
Outlining John’s year:
First, his take from Debbie’s efforts amounts to $95,400 from her buyer side transactions. Her closed listing sides netted him another $54,600. Total harvested from Debbie’s team = $150,000. But how about his other 40 agents? How did he do with them? Don’t forget, his other agents’ median closed side price was $220,000 – 10 percent higher than Debbie’s.
They closed 280 total sides. That’s a GCI of $1,848,000. John’s take from that GCI was $369,600.
Add to that his share of Debbie’s production – $150,000 – and John’s grand total comes to $519,600.
I want to tip this as much to John’s side of the table as possible, so we’re gonna assume he’s not part of a franchise operation. Therefore, he doesn’t have to shell out a percentage of every closed side to the franchise big guys. He does, however, pay for office space and the usual expenses that come with that. He has a marketing budget. With an office of 50 agents, he has a pretty sizable phone system and support staff – neither of which is free. Even if his operating expenses are the same percentage as Debbie’s (clearly a stretch to make a point) he grossed just a bit over 56 percent of what Debbie did.
The practical side
John gets a taste of 530 closed sides. Debbie gets a taste of just 47 percent of the total business done by John’s brokerage, 250 sides, yet almost doubles his gross income. Since most of John’s agents are lucky to last a year or two, he’s constantly spending time and money to replace them.
Debbie’s people? She has an impressively long waiting list to be a BA on her team. Think about it. Sure, they work very hard, but they show up looking professional, grab that day’s buyer leads, show property – follow up with the help of support staff – and make six figures. Debbie’s operating expenses, as a percentage of GCI, are lower than John’s. Duh.
The numbers really get silly when the team is under the umbrella of a ‘100% commission’ AC office. I personally know of a couple of highly successful team owners working under that system, and it’s almost like being given the key to the broker’s bank vault.
What brokerages have done for 25 years
Does this explain some of what brokerages have been doing for 25 years? Though many have been called brilliant for their forays into related vendor ownership like title, lending, escrow, etc., they did that in self defense, for Heaven’s sake. If they hadn’t done that, most would have already been face down in the water, completely forgotten.
Then, there’s the 100% commission approach. I love this one, as it’s really the brokers conceding victory to the poor caliber of agents they’ve been hiring and overpaying for the last several decades. Is it any wonder they’re failing right and left with a model that promotes the hiring of woefully unqualified, unproductive agents who will be paid roughly the same as highly qualified and productive agents? As Dad loved to ask at this point, “What genius did the math on this one?” Indeed. At least when every agent is paying the broker/owner a monthly fee for their existence, the broker makes something.
The AC model is a loser from day one
The AC model is a loser from day one and always has been. I suspect it will continue to be so. But there’s another major reason, aside from the math, that doomed the AC model before it started – the AC model violates the real life Risk vs. Reward reality.
I’ll give you a choice of two ways to go as a new agent.
- In one, you get paid 80% commission on every dollar you produce. The brokerage takes virtually all of the liability, pays all the major overhead, and provides you with a suitable office atmosphere in which to work. For the most part, you’re responsible for generating your own business. Not much, usually nothing, is handed to you in terms of business. You close business based upon your own efforts, or else you starve. Of course, you look at that $220,000 median price at three percent commission split 80/20 in your favor. Then, you say to yourself, “Self, there’s no way I won’t close less than 20 sides in a year. That’s $105,600 — I’m in!!”
- In the other scenario, you get paid 40 to 50 percent commission. You must follow strictly written protocols, do the same thing every day, be a BA, and make just 50% commission. The thing is that your buddy down the hall, the one who works as one of Debbie’s BAs, made that much and wasn’t expected to generate any business whatsoever on his own. Hmm. What to do?
Then there’s the disturbing fact that the typical agent makes only $30-something thousand per year on their own. But you’re not like those agents, right? No-sirree-Bob, you’re three times that good. Since these brokers are willing to take virtually all of the business risk, yet pay me at least 80% commission, why wouldn’t I wanna go for it? I get the best of both worlds — extraordinary pay without the commensurate risk.
And there’s the rub.
Gravity wins every time it is challenged
When we jump off a very high place without a parachute, we’re gonna die. Gravity eventually wins every time it is challenged. The same with the physics of economics. Whenever the market produces a business model challenging the laws of risk/reward, it’s as doomed to a bad ending as the guy jumping off the cliff’s edge thinking he can flap his arms and fly.
Brokers and team owners/leaders are the ones taking the risks. They should be the ones reaping the lion’s share of the profits. When brokers as a group thought they could ignore the undefeated law of risk/reward, it was akin to jumping off the cliff while flapping their arms.
Most agents simply can’t generate enough real estate business to matter. That’s not my opinion, it’s my experience since 1969.
Wanna know how feeble the typical real estate agent is? In one of California’s best years since the end of WWII, I think it was 1977, the state’s turnover rate for real estate agents was more than 2/3. If that’s not a convincing indictment of the newly installed AC model, nothing is. If you had a pulse back then, you printed $100 bills. Yet two of every three agents were either out of the business or with another broker, hoping against hope that the change of address – and not them – would make the difference.
Once and for all, let’s run from the AC model. That one change in our industry would do more to restore the public’s faith in what we do than anything else I can think of. When the vast majority of real estate agents simply don’t produce the results for which the public hires them, it’s time to reject the model creating that reality.
How top performers work smarter, not harder
(EDITORIAL) People at the top of their game work less, but with more focus – learn how to replicate their good habits to get ahead.
Practice, practice and more practice will get you to be more competent in what you do, but working smarter isn’t always about competency, at least in business. Productivity expert, Morten T. Hansen’s studies indicate that multitasking is detrimental to working smarter. But it’s only half of the problem.
Hansen discovered that the top performers did not try to do thousands of things at a time. He’s not the only one.
Earl Miller, an MIT neuroscientist outlines why humans cannot multitask. As he puts it, “our brains… delude us into thinking we can do more.” But this is an illusion. When we interrupt the creative process, it takes time to get refocused to be creative and innovative. It’s better to focus on one project for a set amount of time, take a break, then get started on another project.
Hansen also found in his research that the top performers focused on fewer goals. He recommends cutting everything in the day that isn’t producing value. As a small business owner, you have to look at which tasks bring in the most profit. This might mean that you outsource the bookkeeping that takes you hours or give up being on a committee at the Chamber of Commerce that is taking too much time away from your business.
Taking on less work will help you work smarter, but Hansen found that it goes hand-in-hand with obsessing over what you do have to do.
When you have fewer burning fires, you can dedicate your time to these tasks to create quality work. According to Hansen, this one thing took middle performers at the 50th percentile and put them into the 75th percentile. When someone is competent in writing reports, for example, and can focus their energy into that, the work is much better.
Top performers also take breaks to rest their brains. One of my favorite analogies is the one where a lumberjack is given a stack of wood that needs to be cut down. He starts with a sharp ax, but over time, as the ax gets dull it becomes harder to chop the wood. By taking a break and sharpening the ax, more gets accomplished with less effort.
Your brain is like that ax. It works great when you first get to work. You’re excited to get started. In a couple of hours, your brain needs a break. Go outside and take a walk. Get away from your desk. Do something different for 15 minutes. When you come back, you should feel like you have a second jolt of energy to take on tasks until you break for lunch. Science backs the need for breaks during the day.
By taking breaks, obsessing over what you have to do, and laser focusing on fewer goals, you’ll be outperforming your competitors (and even coworkers). Work smarter, not harder.
The real key to working smarter, not harder
(EDITORIAL) We’ve all heard that we should be working harder, not smarter, but how does one go about doing that aside from a bunch of apps?
I know you’ve heard the phrase, “work smarter, not harder,” but what does that mean exactly? How do you work smarter?
A new book by Morten T. Hansen attempts to answer the question. “Great at Work: How Top Performers Do Less, Work Better, and Achieve More” was released at the end of January. Hansen found 7 different behaviors outside of education levels, age and number of hours worked. I’d like to take a look at a couple of the things he recommends. Read the book if you want to know more.
Let’s continue on by addressing the 10,000 Hour Theory of Expertise. Under this principle, it’s thought that if you spend 10,000 hours in deliberate practice of a skill, you’ll become world-class in any field. The Beatles are thought to have used this theory to become one of the greatest bands in history. But it’s not just about practicing until your fingers bleed or you can’t stay awake any longer, it’s really about pushing yourself in an area.
Although it has been argued that this theory doesn’t necessarily apply in business or professions, there’s something to be said about deliberate practice.
When it comes to working smarter, no, you don’t need to spend 10,000 hours in the workplace to get better at your job. But you can put some of the principles of the theory in action:
- Pick a skill that you need to develop. There’s no way you can work on every skill at the same time. Just choose one to focus on for three months, or six months. Review your performance now. Have a benchmark of where you want to take that skill.
- Carve out time to work on that skill. Spend 15 minutes a day doing something that helps you get better. You know the old joke? How do you get to Carnegie Hall? “Practice.” You’re going to have to find ways to practice.
- Work on specific elements of a skill. Typically, the skills we want to improve involve a lot of smaller things. Take a good presentation. You need connect with people, have a good outline and learn to have diction and tons of other things. Work on one thing at a time. ?I used to have a real problem with looking at people when I was giving a presentation. For quite a few months, I made it a priority to be conscious of making eye contact. No matter who I was talking to, the cashier, a patron at the center where I volunteer and even my neighbors. It’s much easier now for me.
- Get feedback. You may believe you’re making progress, but others may have a different vantage point. Find a couple of good mentors who can really evaluate your performance and offer constructive criticism.
Repeat until your skill-set grows.
To get better, you need challenge and practice. Believe me, you’re going to make some mistakes along the way. Get up, dust yourself off and keep practicing.
Competence in a particular area goes a long way toward working smarter.
But wait, there’s more – the discussion continues in part two of this series, keep reading!
How I pitched the CEO of Reddit onstage at SXSW with no notice
(EDITORIAL) This is the story of how luck, networking, preparation and being at the right place at the right time got me onstage at SXSW with no notice, to pitch Steve Huffman, the CEO of Reddit and co-founder of Hipmunk.
After graduating from Austin’s Capital Factory accelerator earlier this year, Shep, my travel tech startup was in need of our first office. The team had grown to more than seven people, and while coffee shops had sufficed for product meetings when there were only four of us, we’d started getting dirty looks when we began putting tables together and colonizing entire corners. We looked at dedicated offices, office shares, and coworking spaces like WeWork. When it came down to it, at this phase, Capital Factory was the right choice for our company.
We’d already raised our seed round with Capital Factory with several of their partners as major investors, so we decided that, as a startup in Austin, we had to be where the press, investors, and partners were most likely to show up. Past visitors to Capital Factory have included Barack Obama, Apple CEO, Tim Cooke, Microsoft CEO, Satya Nadella, and many more. We knew that we might be able to get a space for less, but the community, education, and flow of people through the space optimizes our startup for serendipity.
Fast forward to this year’s SXSW and I was meeting with team members on the fifth floor when I received a text telling me that Steve Huffman, the CEO of Reddit and co-founder of travel startup Hipmunk, was downstairs and he had just said that creating a travel tech startup is the most difficult thing he’s ever done.
“The CEO of Reddit is talking right now and saying that doing a travel startup is the hardest thing he’s [e]ver done. You should tweet at him.” said the first text. “Baer just told him about Shep,” came the next one, referencing Josh Baer, the founder of Capital Factory, who was conducting the interview downstairs.
So, being in the right place (or at least four floors above) at the right time, I rushed downstairs and made eye contact with Josh before taking a seat in the back of the room. I planned to wait until after the talk and fight the crowd to introduce myself as the person Josh had mentioned and hand Steve a business card.
SXSW had other plans for me.
“So, we only have about three more minutes, and because SXSW is all about doing things on the fly and taking opportunity as it finds you, I’m going to ask Daniel Senyard from Shep, who’s just joined us, to come up and pitch Steve for 90 seconds,” said Josh from the stage before getting up and giving me his seat. I proceeded to tell Steve how Shep allows smaller businesses to set up and track travel policies and team spending on travel websites like Orbitz, Expedia, and Southwest through a free browser extension. My hands were shaking, but I got it all out in about the right amount of time, and he immediately responded by saying, “I love the Premise.”
Steve asked some questions about customers (closed Beta) and target market (companies that spend less than $1M in annual travel) before enquiring whether Shep had to have relationships with online travel agencies (OTAs) like Expedia and Orbitz or Meta Searches like Kayak. I said no, but that through our strategic investors, I’d spoken to many of them.
“I’m trying to grill you, but I honestly think they would love this,” he said, stating how OTAs and other travel sites lose lots of bookings when companies grow and move from letting their team book on their favorite websites and instead mandate bookings be made on enterprise booking tools like Concur or AmEx Travel. Now Steve knows this world better than almost anyone, having co-founded an OTA that was actually acquired by the very company he says OTAs lose business to, Concur!
After a few more comments, I thanked him and took the opportunity to slip him a business card before heading back to my seat.
Now, to some, this may seem like pure luck but these moments of serendipity take years to create.
While there are several factors at play, it all essentially boils down to just showing up every time. As Josh said to me afterward, “Luck is when preparation meets opportunity,” and I’ve been preparing and pitching non-stop (albeit within three different businesses) for seven years. Over those seven years and three companies, I’ve slowly built up a vast network of connected people who will text me when my name is mentioned and will invite me onstage when they see an opportunity.
While I didn’t nail it, I didn’t flub my pitch because I’ve rehearsed various forms and lengths of pitches in mirrors, while driving, and to every family member that can stand it. I’ve taken my bumps and done my reps while probably pitching 200 times. I even won a contest and was sent over to Oslo to represent Texas at Oslo Innovation Week back in 2015. But even after pitching at every chance I’m given, I still get nervous, and my hands are still a little shaky while writing this, an hour after it all happened.
It was an amazing opportunity, and I’m very thankful to Henry for texting me, Josh for inviting me onstage, and John and Henry for recording the whole thing. While cool moments like this are certainly highlights, it’s just a step towards building brand recognition for our solution. Now I need to follow up and see if I can get Steve to join our advisory board…
Also read “Why your being the ‘Uber of’ or ‘Netflix of’ is bad for your business” by Daniel Senyard.
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