It’s obvious that the real estate industry is changing. And it’s changing more rapidly than ever before. But where is it going? And where does it need to go?
I touched upon things such as Barrier To Entry, Oversight and Enforcement in part one and Technology and Marketing in part two of this three part series. In part three, we deal with the brokerage firm business model.
Past and Current
The current brokerage firm business model has been around since the 1970’s. It’s focus is on,
- high commission splits
- tons of junk fees
- brick-and-mortar offices
- branding the brokerage, not the agent
- little support or supervision
- little to no real sales, business or technology training
- having a large number of agents regardless of quality
Despite changes to the real estate industry and the way business is conducted, brokerage firms are doing whatever they can to hold on to their old ways of doing business.
There’s a problem with that philosophy…it’s not working anymore.
Ashfaq Munshi from Inman said it well:
“Quit what doesn’t work and start reinventing things that do.
Seth Godin covers this practice extensively in his book, “The Dip,” and nowhere can it be more appropriately applied than to today’s brokerage model, which is running full steam on yesterday’s expense engine. Brokers are struggling to stay on top of their business, as the cost of maintaining failing operations add insult to the injury of the declining economy and stagnant housing market. Many brokers are in need of a new direction to help them through the remainder of this housing recession.”
Brokerages gouging agents for every penny possible in the form of commission splits, desk fees, processing fees, “communication” fees, “consortium” fees and other junk fees are over. Brokerages that force their agents to charge consumer transaction fees, on top of commissions to support top and middle heavy company structures are dinosaurs and will become extinct.
The future brokerage involves a flat “per transaction” fee only. It also involves ownership opportunities in the brokerage itself (and I’m not talking about multi-level marketing). Future brokerages will have very few, if any offices at all, with agents working out of their home office.
Costs are not the only reason why things must change. Consumers are focusing more on what the individual agent has to offer, not which brokerage firm they’re with. Consumers are looking for individual real estate experts more so today than ever before. This is why to be truly successful, brokerage firms must shift their focus from just having the greatest number of agents to having the highest quality and type of agents. Here are some of the benefits of focusing on quality versus quantity:
- High quality agents will most likely have a higher than average number of transactions.
- High quality agents will be less likely to quit real estate in the near to mid-term future despite a weak real estate market.
- Having high quality agents be a part of the brokerage will lead to more high quality agents joining the brokerage firm (birds of a feather…)
- Whether the individual agent is a real estate expert is much more important to consumers than whether the brokerage firm’s office has “X” amount of agents or how many signs in the ground the brokerage firm office has as a whole.
- The word on the street will be that your brokerage firm focuses on high quality agents and higher level of service than competitors. This will be heard and noticed by consumers as well as new potentially high quality agents coming into the business.
- High quality agents tend to spend little time in the office and many work from home reducing your overhead and need for office space.
- High quality agents tend to be less of a liability and cost to a brokerage firm.
Notice that I also said “type” of agents. What I mean by that is that being a “top producer” does not make you a high quality agent. Being a “top producer” just means that your sales volume is high. Being a high quality agent means that you have more production than the average agent plus you’re ethical, involved in your community, continuously educating yourself, helping others and you’re not just a “hard sell” salesperson, etc.
The future brokerage model consists of “co-opetition” versus competition amongst their agents and brokers. It has a heavy focus on relevant and up-to-date training. It holds the agent to a higher standard. It’s focus is on high quality agents, not top producers. And it has zero tolerance for those who are unethical.
Marc Davison of 1000Watt Blog summed it up extremely well in one of the best posts I’ve ever read regarding the future of brokerage firms.
What’s it called?
“White Label Brokerage” – and it’s a paradigm shift in real estate brokerage. It has an agent-centric versus broker-centric focus and a fee structure that does not interfere with an agent’s business focus. It allows agents to brand themselves, the team to brand their team, and the small brokerage office brand their own company name.
It’s not about the big broker and the brokerage firm’s name and ego. It’s about the agents that do all the work and deserve the recognition. After all…without the agents, there would be no brokerage firm.
Agents who are or intend to be the best professionals in the industry will recognize the financial advantages of this new model as well as the freedom and control it will give them. The freedom that the current brokerage model refuses to embrace is the basis of the future “White Label Brokerage” model.
Someone once told me, “Business has room for both ego and income, but the more you have of one, the less you can have of the other.” Brokerage firms of the future will be focused on branding and truly supporting their agents (income) rather than branding themselves (ego) and gouging them for junk fees while offering them crappy training and little support.
The problem with a self-policing industry: you have to be a narc
Ethics violations in the real estate industry can make or break a Realtor’s career, depending on the severity, so it would stand to reason that all would be mindful of the rules, but there are always individuals in the field that act as if the Code of Ethics is irrelevant.
An animated discussion on ethics training
“Does anyone else find it ironic that NAR – the trade association for Realtors – has to mandate that members take an ethics class every four years?” An agent who attended one of my company’s broker opens yesterday posed that question to the wine and cheese grazing attendees. Of course, that opened up an animated discussion on the value of etchics training and the lack of enforcement when the rules are violated.
One agent volunteered that the guy sitting next to her in her last ethics class played games on his cell phone and then cheated during the test at the end of the class. Seriously, dude? You cannot even pay attention long enough to pass what should be the easiest test you’ll ever have to take in your career? Perhaps he was just seeing how far he could push it by cheating during an ethics test, to see if anyone else around him caught the extreme irony there. None of the other agents around him – including the agent he cheated off – turned him in and the instructor didn’t notice.
This same agent later called one of my sellers and tried to convince him to break a listing contract with me, because he had a “guaranteed buyer” in the wings. The seller was an attorney, and this bozo tried to get me cut out of the deal, offering the seller a reduced fee to dump me. The seller held firm and directed the agent to call me, then the seller called to let me know about the conversation.
“But you know if you file something the other agent will know.”
It gets better. After the deal closed, I requested paperwork from our local Board of Realtors to file an ethics complaint. The person in charge said, “But you know if you file something the other agent will know.” Gee. Really? I asked her to send the paperwork over anyway.
I called the seller/attorney and asked him to repeat the conversation to me, because I was documenting it to file a complaint. He turned wishy washy on me at that point and his story changed from “The other agent tried to get me to dump you as the listing agent to cut you out” to “Well he really only asked a few questions and I told him to call you. He probably didn’t mean any harm by it.” So there goes my star witness, who doesn’t want to rock the boat.
I didn’t file the complaint. I resorted to the “turn the blind eye but never trust the sleazeball again” path. And that is what happens to almost all ethics issues I hear about / see in person.
That’s what happens when you have a self-policing group of “professionals” who would rather not “narc” on a fellow agent. After all you’re probably going to end up on the other side of a deal from this guy some day, right? The guy in my example has sold two of my houses since that run-in. Why tick him off by filing a complaint and going through all that hassle? If he stops bringing buyers to my properties then my sellers ultimately lose, right?
Boiling down the CoE
The NAR Code of Ethics takes up pages and pages of tiny print, and it runs each year in their trade magazine (I think it’s the January issue). Does anybody read that? Probably not many. I’d argue none of us ever should have to read it again. Simply follow this advice instead. The thousands of words in the Code boil down to one thing: Do unto other agents, and consumers, and clients, what you would have them do unto you. It’s the Golden Rule. Simple. Well, obviously not, for many agents and brokers.
The sad part is the agent in my example had no clue how close I was to filing that compaint, and if he did know he’d probably scratch his head and wonder why his actions were “wrong.” Making us take a one-day class every few years won’t “make” the unethical agents suddenly operate ethically. Most of them just don’t get it.
Ethics hearings in private a disservice to consumers?
Fight Club and real estate
For those of you that saw the movie ‘Fight Club’ you’ll remember that Rule #1 is “You do not talk about fight club,” followed closely by Rule #2, “You DO NOT talk about fight club.” Which, believe it or not, brings me to today’s topic: The Real Estate Code of Ethics and Arbitration. Article 17 obligates Realtors to resolve
fights disputes with another Realtor through arbitration (not litigation). Arbitration is conducted at the local board level, and I am not aware of a local board that doesn’t require arbitration to be confidential.
I respect that public internecine warfare amongst Realtors isn’t in the interest of our industry, and doesn’t belong in the public spotlight. I’m not here to advocate the collective airing of our dirty laundry. That said, I wonder if our collective agreement to keep our concerns confidential can inadvertently harm the consumer and ultimately makes all of us look a little shoddier?
To find the first arbitration guidelines created by NAR and distributed as a set of suggested rules for boards to follow, we have to travel all the way back in time to 1929. NAR’s first Code of Ethics & Arbitration Manual wasn’t created until 1973, and it credited a 1965 California Association of Realtors version as its model.
I can think of two instances in the past year where I was so appalled by the conduct of a fellow Realtor that I went to the trouble to inquire about how to lodge a Code of Ethics complaint with my local board. After weighing the time required to make a competent complaint and comparing it with the best case outcome (a closed-to-the-public hearing in which they were found to have violated the code of ethics), I decided not to pursue a complaint in both cases. My association’s bylaws (and probably yours) give it the power to discipline any member based on the results of a Code of Ethics hearing, “provided that the discipline imposed is consistent with the discipline authorized by the Professional Standards Committee of the National Association of REALTORS® as set forth in the Code of Ethics and Arbitration Manual of the National Association.”
“Sanctioning Guidelines” – (Appendix VII of Part 4 of the 2011 manual for the very curious), guides member boards to impose disciplinary consequences that are progressive and fair, taking all considerations into account. Sample first-time disciplinary actions include suggestions of a letter of warning, a fine (amounts range from $200 to $5,000 depending on the severity of the violation), and attendance at relevant education sessions. Not to sound defeatist, but a confidential letter of warning and a fine of around $200 doesn’t seem like an outcome worth investing much of my time in.
Practicing in the internet era
Given that we live and work in the internet era, and review sites like Yelp abound, it seems a bit odd to me that a local board might know of an agent with problem behavior that is documented yet choose to make that information unavailable to consumers. My understanding is that the results of a code of ethics hearing are confidential with disclosure authorized in a few situations, none of which deal with informing the public.
Many of my fellow colleagues feel that the best response to a bad agent is to be patient and give them enough time to work themselves out of business. I can respect and understand their hands-off approach. But what about the damage that individual does to our industry as a whole? While we whisper, warn in confidence and know amongst ourselves how awful they are, the public doesn’t get the benefit of our perspective. Deprived of it, they turn to consumer review sites like Yelp.
How do you think we, as an industry, can help consumers in their quest to find a trustworthy agent?
Realtors, we really need to get over ourselves already
Real estate now vs. 1987
In Real Estate, some things are always changing, like financing, education, laws, rules and technology. The two that will always remain constant, as long as they are within the law, are following our clients’ directions, and working with their best interests in mind. I’m not sure we always follow through with this, though.
Some of us knowingly take over priced listings. Some of us take listings that are out of our area of expertise. Some of us won’t show short sales or REOs. Some of us won’t show homes with low co-op splits. Some of us don’t have Supra/e-Keys, and miss out on those listings entirely.
Putting our interests first
When these things occur we are putting our own interests first, not our clients’. We may think that by having as many listings as possible is a good thing, that’s what we’re taught after all, isn’t it? It may not matter that some are overpriced, eventually, whether one month or four months down the line, the price will be reduced. It’s just a matter of time and money, for our clients, after all. The same can be said when we take listings outside our area of expertise, just to add on to our inventory. If we don’t know what we’re doing, on a short sale listing, for example, it will only cost our clients a lot of time and money. A lot.
By eliminating certain houses our clients see, that may already fit their criteria, we’re taking away their choices. Distressed sales account for close to 40% of the market. This is probably higher in some local markets. There is no legitimate way to ignore roughly 1/3 of the homes being sold. Co-op fees are often a touchy subject, especially when they are, not “enough.” If everyone utilized a Buyer Broker Agreement that stipulated what their fee was, the issue would take care of itself. Not being able to access listings with the use of Supra/e-Keys is a choice. Choosing not purchase one will mean agents will not be able to access Fannie Mae (and eventually, probably additional Gov REO homes) along with the listings that are already using them.
Our priorities versus theirs
We totally need to get over ourselves already. We are not bigger than our clients. Our priorities are not more important than theirs when it comes to the actual listing and selling of homes.
Recently, my awesome parents dug through a few boxes and rounded up one of my first art projects. About 25 years ago I did the poster featured above about my Mom, and her Real Estate career. It was for an Open House (no pun, honest!!!) for the elementary school where I attended first grade. It was just, what she did according to me way back then. Things are way more complicated now, than when I was six. There’s a heck of a lot more paperwork for one. But the same basic principle still applies.
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