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.
The strong case for Texas being technology’s next frontier
(EDITORIAL) Everyone loves Tacos and tech in Austin, but Texas has far more to offer – here’s how the various cities will create the next mecca for the tech world.
Despite what the movies have told you, Texas is not the place you think it is. Sure, we’ve got cowboys, brisket, and a lot of BBQ, but the Lone Star State is much, much more than clichés. Over the last few decades, Texas has been gaining steam as one of the premier places to live in the country.
While yes, people love a good chicken fried steak or are always looking for an excuse to sneak over to their favorite grocery store, HEB, Texans aren’t sitting idly by when it comes to tech – they’re grabbing the industry by the horns.
Thanks to the state’s business-friendly tax breaks, a year-round predominantly warm weather climate, and a strong state culture, the popularity of Texas makes a lot of sense: Houston, which was once considered a third tier city is about to overthrow Chicago as the third largest in the nation, while also being lauded as our most diverse city.
Let’s repeat it, for all the people in the back: Houston, Texas is more diverse than Los Angeles, or New York.
Affordable neighborhoods are popping up across Houston, which are attracting immigrants from every culture looking for their slice of the American Dream. Houston is seeing explosive growth and a cultural shift away from being a town built on strictly fossil fuels, but now, startups, tech, and umbrella industries are finding their niche in the state’s biggest urban area. Only New York is home to more public companies.
Houston’s medical sector ranks with some of the top care in the world. And with those elite doctors, come the innovative pharmaceutical and medical companies, and the tech that supports them.
When you look at the top twenty metro areas to live right now in the country, four of those cities are in Texas. While some of those reasons are affordability and the signature Texas heat, the state is seeing new residents thanks also to a healthy job market. Since 2010, Texas has added 12.6% more residents, double lapping California’s growth of 6.1%.
Texas’ workforce is bigger than 46 states in the union total population and has doubled in job growth, productivity, and new deals are being struck daily. Texas’ impact on the tech sector is indisputable: Texas has exported more technology than California, again.
Deep in the heart
Startup culture is alive and well in Austin, but while some of our startups are finally beginning to draw VC attention away from Silicon Valley, we know how to slug it out in the land of the bootstrapped beginnings. If your company can thrive in Austin, with so many talented people, and a lot of great ideas, you can make it anywhere (sorry New York, for stealing your platitude).
Austin is still a developing story. As enterprises are opening offices in the capital city, this is helping VCs along the coasts see Austin’s potential as a hub of ideas. The city is still behind the bay area for risk-taking ventures, but given the current climate of investors, there’s a sea change happening.
Giants like Apple, Atlassian, Oracle, Dell, Amazon, Samsung, Facebook, and Google are all occupying space in buildings across the Austin skyline. Enterprise companies are investing heavily into the Austin market, and there are zero signs of a slow down. If you need further proof, just look at the traffic on any of the city’s major highways during rush hour.
Dallas is making a hard play at attracting the top-tiered companies as well. When Amazon head honcho Jeff Bezos announced put out a call for bids for Amazon’s HQ2, many cities made a play for the site, but now that the final cities have been chosen, both Austin and Dallas both stand to score the shopping monolith.
South Texas joins the party
San Antonio is quietly building a case for a burgeoning tech scene, too. It’s not quite there yet on the enterprise or startup level, but the city is widely known for one thing – cybersecurity. Outside of Washington D.C., San Antonio is known as “Cyber Security City USA” to folks in the black hat scene.
San Antonio logged the most substantial growth of all of the Texas cities, adding over 250,000 new residents in 2017 alone. Thanks to a robust military presence, San Antonio is quietly attracting more and more security-minded firms, a feat that’s unique in comparison to what the rest of the state is offering. Military-friendly banking institution USAA is headquartered in San Antonio, as is grocery chain HEB, and Whataburger, with all three companies investing heavily into user experience and mobile applications (aka technology).
If Amazon decides on HQ2 in either Dallas or Austin, that will signal a 200,000+ person addition to the state’s population and economy. That’s a lifetime investment into either city, wherever Bezos, and his board chooses. Coupling that possibility with the already strong presence of Southwest Airlines, Texas Instruments, and just about every major gas corporation, it’s easy to see why these moves are a huge deal. For the latter, it’s also important to note that every sector is bolstering their websites, their social media footprint, everything that can be done on a laptop is happening – one new job at a time.
As the tech scene develops and changes from a strong west coast-driven model, Texas is benefiting from the change. Many Californians are moving to Texas, which is an article to itself, but one thing remains: the Texas economy has never been stronger, and it’s only improving. The story of tech in Texas is a continual work in progress.
We’re not going to overtake California next year, but we’re making a stand, and people are noticing. If the current economic growth is an indicator, the famous Dairy Queen saying is potent with it’s accuracy: “That’s What I Like About Texas.”
How to turn your complaint mindset into constructive actions
(EDITORIAL) Everybody knows someone who complains too much. While being open is important for mental health, constant bellyaching is not.
Everybody knows someone who complains too much. While being open is important for mental health, constant bellyaching is not, so here are a few tips on turning your complaints into constructive actions.
It’s important to understand the difference between “complaining” and “addressing.” Talking about problems which mandate discussion, bringing up issues slated to cause larger issues down the line, and letting your boss know that you have the sniffles all fall into the latter category due to necessity; complaining is volitional, self-serving, and completely unnecessary in most contexts.
Complaining also puts you in an excessively bad mood, which may prevent you from acknowledging all the reasons you have not to complain.
Another point to keep in mind is that complaining occasionally (and briefly) isn’t usually cause for ostracization. Constant or extensive complaining, however, can lead others to view you as a largely negative, self-centered person — you know, the kind of person literally no one actively seeks out — which is why you should focus more on redirecting that negative energy rather than using it to remind your barista why they gave up their dream of becoming a therapist.
Complaining stems from two main sources: the need to be validated—for example, for others to know what you’re going through—and the need to be comforted. Addressing a chronic complaint mindset, then, is largely about validating and comforting yourself. This is a simple solution which nevertheless can take years to manifest properly, but you can start by doing a couple of things differently.
“Focus on the positive” is perhaps the hokiest advice you’ll get from anyone, but it works. In virtually any situation, you can find a positive aspect—be it an eventual outcome or an auxiliary side-effect—on which you can concentrate. Think about the positive enough, and you’ll talk yourself out of complaining before you’ve even started.
It’s also good to remember that no one, no matter how much they care about you, can handle constant negativity. If you find yourself constantly hitting people with bad news or tragic personal updates, try mixing up the dialogue with some positive stuff. That’s not to say that you can’t be honest with people—friends, family, and colleagues all deserve to know what’s going on in your life—but make sure that you aren’t oversaturating your listeners with sadness.
Lastly, keep your complaining off of social media. It’s all too easy to post a long Facebook rant about being served cold pizza (no one likes cold pizza on day one), but this just results in your loding a complaint reaching a larger number of people than vocalization ever could. If you have to complain about something in earnest, avoid doing it anywhere on the Internet—your future self will thank you.
Being honest about how you feel is never a bad thing, but constant negativity will bring down you and everyone around you. If you can avoid a complaint mindset as a general rule, you’ll one day find that you have significantly less to complain about.
How to encourage your childrens’ entrepreneurship
(EDITORIAL) To encourage entrepreneurship for our children, we focus on providing them with direct evidence that they can do and be anything they want (excepting the six year old, who currently wants to be a cat).
When I walk in the door most days, the routine’s predictable. Drop my briefcase, check the mail, and by this point I’ve received an invitation to go to my daughters’ store. What’s for sale invariably changes from day-to-day — sometimes it’s a pet store, or a bespoke clothier, or a coffee shop — but I’m always amazed at the level of thinking about multiple aspects of business ownership that they put into their play.
For example, I’m typically offered coupons and combination deals on whatever my purchases might be, which means that we get to have rich conversations about the purpose of such incentives and how they affect both customer perception of their brand and their profit margin.
Now, as they’re both under ten years old, many of these conversations don’t cause their games to stop for an introductory economics lesson, but I want them to keep these discussions in mind as their play expands. The world in which they’re growing up is a very different place from that which their parents did, and the possibilities they can embrace literally did not exist a generation ago.
So, too, the challenges that they’ll face. While the number of career fields and the jobs within them that are fully accessible to women are growing exponentially, the globalization of the economy and the shift towards a gig workforce means that they’ll have to compete against not only the remnants of outdated gender expectations, but also considerably larger numbers of people to do so, and with less stability in their career paths once they arrive.
To encourage the entrepreneurial spirit within our girls we, like many parents, focus on providing them with direct evidence that they can do and be anything they want (excepting the six year old, who currently wants to be a cat).
It’s been well said that what one can see, one can be. A 2012 MIT report found that in Indian villages where women held positions of responsibility and authority in local government, levels of aspiration and access to education rose by 25 percent and 4 percent, respectively. The amount of hours they had to devote to completing domestic chores dropped by nearly 25 percent.
It’s important to us to have our daughters see successful women in all walks of life to let them know that they are limited only in their passions and imagination, and should never settle for anything that they don’t want.
It’s also important for us to show them examples of young entrepreneurship whenever possible as well. In a 2015 analysis of Federal Reserve Bank data, the Wall Street Journal found that the percentage of adults under the age of 30 who had ownership stakes in private companies had fallen 70 per cent over the past 24 years. This illustrates the myth of the swashbuckling 20-something entrepreneur, along with the underlying challenges to business ownership.
By being realists about the challenges as well as idealistic about the possibilities, we want to keep alive the spirit that makes them excited to open a combination fish store and haberdashery in their playroom today, with the anticipation of changing the world through their professional passions tomorrow.
The strong case for Texas being technology’s next frontier
Skilled workers can live in any city they wish and still get work [study]
Slack video messaging tool for the ultra lazy (or productive) person
Use the ‘Blemish Effect’ to skyrocket your sales
How to turn your complaint mindset into constructive actions
Yell ‘Marco,’ this app makes your phone yell ‘Polo’
7 Facebook groups that all entrepreneurs should join
Ten podcasts that every business owner should hear
How you can be a positive point of change in the service industry
Instagram re-posting can get your company into deep trouble
Amy’s Ice Cream founder on Austin’s business risks and rewards #WhyAustin
Turns out a lot of people are in between introverted and extroverted
P. Terry’s founder on the booming economy in Austin #WhyAustin
Ladies and gentlemen, the U.S. National Anthem
Indeed President, Chris Hyams tells us #WhyAustin [video]
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