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Here, There Be Monsters

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Yarr, matey!
Yarr, matey!

First day, first session of RE Blog World, and Mariana Wagner is giving a great talk on taking someone from a random click to a closed customer. The talk itself is really solid, and Marianna is an engaging, conversational speaker. The session is being videotaped, so I’m sure RE Blog World will be posting it up.

But her talk is spurring a thought for me — something I’ve been churning over in my head.

Mariana presented some great “real data” from three weeks of her own operations, her own blog, her own website. The numbers are quite amazing. 154 signups, 66 with real email and phone numbers, etc. leading to twelve contracts (8 in contract, 3 closed, and 1 in negotiation).

Here’s what I’m wondering about:

Mariana is co-owner of the #1 Team in Colorado Springs. She has other “team members”. What does she need them for?

According to Jeff Wheeler, President and COO of Coldwell Banker United (the #1 affiliate of the entire Coldwell Banker network), it is important to keep history of the brokerage industry in mind. As a 20+ year veteran of the industry, he’s seen it all. In his view, before the 80’s, the industry was “broker-centric” — agents were simply workers for the broker. In the 80’s into the late 90’s, with the advent of RE/MAX’s direct-to-agent model, the industry became “agent-centric”. We are today living with the residue of the “agent-centric” industry model, under serious pressure from the new model that is arising: “web-centric” brokerage.

Jeff’s view is that in the current model of the industry, the broker hires agents to bring in leads. Hence, the focus on things like “sphere of influence” and “agent teams”.

But when lead generation happens from the web… what is the value of the agent?

Mariana in a Q&A said that they get 100% of their leads from the website and the blog. Not one lead walks in, not one lead comes from an agent they employ.  So her employees are really doing the transaction itself.  There is value in that, of course, but it isn’t the same value as agents command in an agent-centric model.

The rubber meets the road when we start thinking about the business side of things.

Consider that today, the average brokerage has profit margins in the neighborhood of 3%.  For every dollar they bring in, they end up with 3 cents in profit.  For that, the broker has to take on all of the liability, all of the real estate costs, and all of the technology costs.  That, frankly, is an unattractive business to be in.

In contrast, the average franchise model has profit margins north of 60%.

Why is that?

In my mind, the issue turns on agent splits.  I really can’t see a way for a broker to make a profit on an agent who has a 90/10 split.  Maybe someone will show me the books of a brokerage who is making a profit on that, but I’m not seeing it.

In an agent-centric model, it is the agent who is responsible for business development — for bringing in the leads, bringing in the business.  A broker has quite a bit of incentive in compensating a large salesforce of agents who go out and bring in new business.  It may be that the 90/10 split ends up paying for all of the marketing that the broker would have had to do otherwise.

All of this is now changing with the impact of the web on the industry.  Now, brokers (at least the smart ones who pay attention to things like profit margins) have every incentive to figure out ways to raise that paltry 3% to something more attractive.  Maybe they’ll never get to the 60% margins of pure franchise plays.  But maybe they can get to 10%.

That 7% margin, for a major brokerage that is doing $2-3 billion transaction value, translating to perhaps $60 million in GCI, means $4.2m in additional profits.  Ladies and gentlemen… that’s real incentive.

This is why I believe we are headed towards a “web-centric” model of real estate.  Mariana’s team practice is pointing the way to what the future of brokerage looks like.  Lead generation comes off of the web assets — those web assets require professional management by a small group of professionals who may or may not be licensed realtors.  The leads then get passed to the agents who are simply service providers who do the transaction itself.  The relationship is held at the broker level, through the web.  The value of the agent to the broker is no longer as a source of business, but as a transaction service provider.

And here there be monsters.  We are entering uncharted waters.

What does the overhead for a “web-centric” brokerage look like?  What sort of capital investments must a ‘web-centric’ brokerage make, as compared to the current ‘agent-centric’ model?  What sort of ongoing costs do these brokerages have?

If the agent is a transaction service provider, what is the value of that to a broker?  What, then, will be the resulting agent splits?  Do we start to see the rise of salaried agents who may not be able to bring in business if their lives depended on it, but can work with clients with superior service?

I certainly don’t know.  And prognostication is fun.  But this is an exciting time to be in real estate and technology, because nothing is known.

Here there be monsters, matey.  Yarrr.

-rsh

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Rob Hahn
Managing Partner of 7DS Associates, and the grand poobah of this here blog. Once called "a revolutionary in a really nice suit", people often wonder what I do for a living because I have the temerity to not talk about my clients and my work for clients. Suffice to say that I do strategy work for some of the largest organizations and companies in real estate, as well as some of the smallest startups and agent teams, but usually only on projects that interest me with big implications for reforming this wonderful, crazy, lovable yet frustrating real estate industry of ours.

15 COMMENTS

  1. Excellent post, as usual. It was an honor being on the stage at the same time as Mariana!

    Your point about a “web-centric” phase is intriguing. Since the vast majority of this sort of innovation is coming from the agent/team level, and not the broker or franchise level, you have to wonder how this will play out.

    Perhaps the Mariana Wagner teams of the world will venture out as their own broker-owners and hire agents simply to consummate the deals that they bring in from their effective web presence. Then, in an odd twist, the power will be back in the hands of the brokers — I mean, those brokers who do rain-making on behalf of their agents.

  2. Excellent post, as usual. It was an honor being on the stage at the same time as Mariana!

    Your point about a “web-centric” phase is intriguing. Since the vast majority of this sort of innovation is coming from the agent/team level, and not the broker or franchise level, you have to wonder how this will play out.

    Perhaps the Mariana Wagner teams of the world will venture out as their own broker-owners and hire agents simply to consummate the deals that they bring in from their effective web presence. Then, in an odd twist, the power will be back in the hands of the brokers — I mean, those brokers who do rain-making on behalf of their agents.

  3. First, thank you very much for the kind words, both Rob and Kevin. I am happy that I had the opportunity to share what I do with others, like you.

    Rob – You bring up some very interesting points. I am certain that the web will continue changing all aspects of what we call the “business of real estate” and it will be interesting to see the effects on Broker-to-Agent-to-Broker relationships.

    However, I do not think that the web is the be all end all for lead generation. Traditional methods are still valid, and will continue to be valid. Furthermore, there are agents who are predominantly powerful lead generators, and others who “may not be able to bring in business if their lives depended on it” but there will always be a draw to real estate by agents who “do it all” … A full transition to a web-centric brokerage could never accommodate those kinds of people, so I think there will always be room for the types of brokerages we have now – maybe just LESS of them.

    BTW … It was awesome to meet you at REBW. 🙂

  4. First, thank you very much for the kind words, both Rob and Kevin. I am happy that I had the opportunity to share what I do with others, like you.

    Rob – You bring up some very interesting points. I am certain that the web will continue changing all aspects of what we call the “business of real estate” and it will be interesting to see the effects on Broker-to-Agent-to-Broker relationships.

    However, I do not think that the web is the be all end all for lead generation. Traditional methods are still valid, and will continue to be valid. Furthermore, there are agents who are predominantly powerful lead generators, and others who “may not be able to bring in business if their lives depended on it” but there will always be a draw to real estate by agents who “do it all” … A full transition to a web-centric brokerage could never accommodate those kinds of people, so I think there will always be room for the types of brokerages we have now – maybe just LESS of them.

    BTW … It was awesome to meet you at REBW. 🙂

  5. Hello Rob,

    Interesting comments and maybe the financials of some of the sites like ziprealty and realestate of IAC may provide the some insight into the models you are discussing.

    If I remember in Q1 & 2 of both companies had continued increases in # of transactions & closing while the rest of the traditional RE bombed. They were not profitable due to expansion but it does show that they have the potential.

  6. Hello Rob,

    Interesting comments and maybe the financials of some of the sites like ziprealty and realestate of IAC may provide the some insight into the models you are discussing.

    If I remember in Q1 & 2 of both companies had continued increases in # of transactions & closing while the rest of the traditional RE bombed. They were not profitable due to expansion but it does show that they have the potential.

  7. @Mariana,

    It was so great to meet you at REBW as well. I do believe “Rojo” will remain something of an inside joke for those of us who were there. But what happens in Vegas….

    Your session was also one of the highlights, so it’s great to continue the conversation here. My questions/thoughts on this:

    However, I do not think that the web is the be all end all for lead generation. Traditional methods are still valid, and will continue to be valid. Furthermore, there are agents who are predominantly powerful lead generators, and others who “may not be able to bring in business if their lives depended on it” but there will always be a draw to real estate by agents who “do it all” … A full transition to a web-centric brokerage could never accommodate those kinds of people, so I think there will always be room for the types of brokerages we have now – maybe just LESS of them.

    I think the real question your model raises, frankly, is not on whether the “power lead generators” will not be necessary. Nor is it whether the “traditional brokerage” will cease to exist.

    I think the real question is whether your model allows brokers to make more money.

    In other words, the web forces a shift in the value relationship between brokers and agents. The effects of that, none of us knows — hence, “here there be monsters”.

    On that, I think Kevin is probably right. What none of us knows, of course, is whether current agents who are making a very good living on these 90/10 splits and such will go along with the changes. If not, what will they do?

    -rsh

  8. @Mariana,

    It was so great to meet you at REBW as well. I do believe “Rojo” will remain something of an inside joke for those of us who were there. But what happens in Vegas….

    Your session was also one of the highlights, so it’s great to continue the conversation here. My questions/thoughts on this:

    However, I do not think that the web is the be all end all for lead generation. Traditional methods are still valid, and will continue to be valid. Furthermore, there are agents who are predominantly powerful lead generators, and others who “may not be able to bring in business if their lives depended on it” but there will always be a draw to real estate by agents who “do it all” … A full transition to a web-centric brokerage could never accommodate those kinds of people, so I think there will always be room for the types of brokerages we have now – maybe just LESS of them.

    I think the real question your model raises, frankly, is not on whether the “power lead generators” will not be necessary. Nor is it whether the “traditional brokerage” will cease to exist.

    I think the real question is whether your model allows brokers to make more money.

    In other words, the web forces a shift in the value relationship between brokers and agents. The effects of that, none of us knows — hence, “here there be monsters”.

    On that, I think Kevin is probably right. What none of us knows, of course, is whether current agents who are making a very good living on these 90/10 splits and such will go along with the changes. If not, what will they do?

    -rsh

  9. Great points, Rob.

    We generate all of the business for our agents via Internet marketing and leave very little room for the broker to make money on our production.

    I actually started our real estate company a few years ago and then sold it to the current broker so that we could focus on closing transactions vs being broke brokers.

    @Mariana – Thank you again for the insight about your commission structure and lead / transaction model.

  10. Great points, Rob.

    We generate all of the business for our agents via Internet marketing and leave very little room for the broker to make money on our production.

    I actually started our real estate company a few years ago and then sold it to the current broker so that we could focus on closing transactions vs being broke brokers.

    @Mariana – Thank you again for the insight about your commission structure and lead / transaction model.

  11. @Mark,

    Thanks for your insight.

    I find it entirely amusing that you transferred the burden (and the cost) to the broker, while you reap the benefits of the lead-gen via a “web-centric” model. 🙂

    So are you part of an agent team? If you are, how are your sub-agents compensated?

    -rsh

  12. @Mark,

    Thanks for your insight.

    I find it entirely amusing that you transferred the burden (and the cost) to the broker, while you reap the benefits of the lead-gen via a “web-centric” model. 🙂

    So are you part of an agent team? If you are, how are your sub-agents compensated?

    -rsh

Comments are closed.