Not sure about some of this.
The average return for a real estate firm is 3%. ROI? ROA? ROE? Return on Revenue is what I believe you are talking about… so…
How are you going to make a return on T-Bill which is an ROI, when you have no income… hence the 3% is better than the 2.66% of the T-bill.
The amount of outside investment many agents bring to the table is not financial, but rather time. It is that asset upon which the broker makes the 3%. Additionally, those agents do bring $ to the table which is money upon which the firm can leverage and make profits when they have no skin in the game.
This is a similar quandry that franchisors would have if they looked at the revenue of the franchisees as their own.
The firm is not starting with a 26% split, they are starting with 100% of something they rarely helped earn.

>So if a broker wants to improve profitability, seems to me that he has no choice but to invest in technology to make his agents more productive…

Let me try approaching this from a different angle. Just maybe the broker shouldn’t see his job as making the agent more “successful.” Maybe our (bad word coming) paradigm should be shifting, and we should consider it the agent’s job to become more successful. The new model would involve very low, very fixed overhead costs. Provide the bare-bones basics — a conference facility, a cost-recovery copier, computer connections (not computers) and minimum staffing. More agents will not mean a bigger office, because the office will be treated as a convenience stop. The real work has always been done in the field and, thanks to technology, the paperwork can be done from any place with an active Internet connection.

Broker-provided training would be limited to periodic (not weekly, but quarterly) briefings on rules, contracts and risk management issues. No place to meet? Try a Go-to meeting. The broker has oversight responsibilities, but how about going paperless, finally? Contracts can be reviewed and approved on-line. (We do it.) The broker would provide information on tools at the agent’s disposal, but they would not be obligated to give them the stuff — their web sites, voice mail privileges, free company yard signs and free installation, pretty collateral materials, etc. The agents would then be forced to treat their business like a business. They would either figure it out and succeed, or they would fail. Many would in fact fail absent the support of the sponsoring enabler, and those are precisely the agents who should. What the broker will be left with is a team of competent independent contractors who cost them far less even when you consider the diminished splits. This would translate to higher profits.

In short, make the agent responsible — for the costs of doing business and for his success. The broker can and should be a resource, but for information. I believe the result will be that the ones capable of success will be more invested in the process and more inclined to “figure it out.”

Oh, and off subject but, since we are visiting my little Utopia, I want this broker of the future to have the courage to not only preach but enforce ethics and good business practice. Start considering that the agent’s license is hung at the broker’s pleasure, not the other way around. I believe the future of our industry depends on having minimum performance standards.

That was a long stream of consciousness. Hopefully it won’t look like Sanskrit when I stop to reread.

I was busy on my soapbox when Keith was commenting. Keith, you raise excellent points.

@Keith -

Excellent points. I am confusing terms, it seems.

3% is the profit margin, so I’m going to have to assume that’s net income vs. gross revenues (GCI). So for every $1 of GCI, the firm ends up with a 3 cent profit.

It is unknown what that represents in terms of return on assets, or return on investment. I do know that most real estate brokerages have very little in terms of hard assets. In a brokerage M&A, I do know that the price paid mostly reflects pendings and goodwill.

So not an exact comparison.

Nonetheless, the larger point remains. If 8.5% or so profit margin is the average for American business, then what motivates someone to go into brokerage business for 3%?

-rsh

I will definitely chime in later. Right now I’m off to take a listing from a client that found us from the blog.

You know, that hi-tech piece of free software that sets me back $20/month for hosting (and yes, the time involved. And yes, time is money). Assuming the listing sells, it will pay for roughly 487 months of hosting. So unless I blog past the age of 88, my hosting is covered. That’s a pretty good ROI….

I will definitely chime in later. Right now I’m off to take a listing from a client that found us from the blog.

You know, that hi-tech piece of free software that sets me back $20/month for hosting (and yes, the time involved. And yes, time is money). Assuming the listing sells, it will pay for roughly 487 months of hosting. So unless I blog past the age of 88, my hosting is covered. That’s a pretty good ROI….

@Kris -

Oh, your comment looked nothing like Sanskrit. Made all kinds of sense in many respects.

I do wonder, however, how you reconcile these two:

What the broker will be left with is a team of competent independent contractors who cost them far less even when you consider the diminished splits. This would translate to higher profits.

and:

Oh, and off subject but, since we are visiting my little Utopia, I want this broker of the future to have the courage to not only preach but enforce ethics and good business practice. Start considering that the agent’s license is hung at the broker’s pleasure, not the other way around.

If you’re not giving me squat, then why do you have the right or authority to order me around? What you consider ethical might not be what I consider ethical, and since all you’re giving me (as the broker) is quarterly briefings on rules and access to a bunch of stuff I pay for out of my pocket… why exactly do I need you at all? Is a brokerage license that hard to get?

And, take whatever split the agent is on today. Say it’s 90/10. Now, if you, the broker, reduce the scope of services you offer, is it really reasonable to think that the agent won’t ask for a reduction in payment to the broker? It’s this incentive piece that I’m having trouble with.

-rsh

PS: Emphasis in the quote is mine.

Rob – You mention in another post that there are two types of brokers – Big Brokers and low-cost, low-service brokers. That’s incorrect.

Low-cost does not equal low-service. I know plenty of business owners that spend 1/2 to 1/4 as much as their competitors and still blow away their competition in total revenue and profit margins. In fact, these “low-cost” businesses (some RE and some other industries) are the ones thriving and growing while competitors are struggling and/or going out of business. Why? Because they’re more efficient.

(And I’m not talking just about technology when I say “efficient”)

As for Big Brokers, the are many that offer crappy service to their agents and as well as have crappy agents in their office. Money nor technology can turn crap into gold.

You will see the Big Brokers in shambles just like the Big 3 are. The efficient, forward thinking and faster reacting smaller guys will lead the way into the future much like Toyota entered the US market years ago and is now the big dog on the block making more profits than any of the Big 3 will ever see.

You say that have you have economics on your side. I have respect for economists and those savvy with numbers so I do take into account what you’re saying.
But numbers can be manipulated to back-up any argument and economists are just prediction makers, many of whom (even the most respected) are incorrect.

Speaking of which…not sure where you got those numbers from. The team I worked on which was basically run like a borkerage firm within a brokerage firm made WAY more than 3 percent NET profits.

For a brokerage firm to have only 3 percent profit margins means that they have no clue what they’re doing and/or they’re running their mortgage payments, car payments, medical, dental, AMEX, MC, VISA, etc through the business and may even have their spouse, kids, cousings, etc on the payroll (trust me, it happens ALL the time).

There’s more, but I’ll save it for another day…gotta go provide “low-cost”, “low-service” to my extremely happy clients who hired me after finding my “low-cost” blog on a “low-cost” internet search engine called “Google”. This is after they fired their “high-service” Big Broker agent who didn’t know how to write a real estate offer correctly and cost them their Earnest Money Deposit ($5000.00) because of it.

P.S. My gramar and speling should and wood be better butt I’m trying to keep my costs low so I never applied to collage

P.S. My gramar and speling should and wood be better butt I’m trying to keep my costs low so I never applied to collage

Rob -

Great analysis and discussion. Put yourself in a brokers shoes who basically agrees with this analysis, but who’s productive agents cap out at a split of 100% (graduated to — this is the case in most markets I’m familiar with… West Coast).

What is their incentive to invest in productivity enhancing technology when their is an economic dis-incentive to do so (each additional transaction from a ‘top producer’ adds cost, but not profit).

These are folks who ‘get it’, but are struggling figuring out how to get from here-to-there within an existing enterprise (vs starting a-fresh ala Redfin).

The logical path seems to be:

1. invest in productivity enhancing technology now
2. prove the value to the agents first
3. agent count decreases
4. per agent productivity increases
5. raise fees / splits to agents less than their increase in value but more than enough to make up the investment (both parties increase profit)

If you put step #5 first you loose your agents based on price (haven’t proved the value-add yet).

If you do these steps in order, you go broke before you get to #5 (especially given the capitalization of most brokers operations and the current market).

Ideas?

@Danilo -

Thanks for the comment, brotha — kollage or not, you got the goods buddy. So let me debate witcha!

Low-cost does not equal low-service. I know plenty of business owners that spend 1/2 to 1/4 as much as their competitors and still blow away their competition in total revenue and profit margins. In fact, these “low-cost” businesses (some RE and some other industries) are the ones thriving and growing while competitors are struggling and/or going out of business. Why? Because they’re more efficient.

Let me maybe explain where I’m coming from, because in my book, low-cost necessarily equals low-service.

In commercial, most of the firms are what I’d call high-cost, high-service. Their agents get all manner of goods and services as part of their employment/affiliation: a private office, CoStar (which can be hundreds per month), access to full-blown printshop, mapping department for custom site analytics, research department, and so forth. The desk costs for these agents are really quite high, but their splits are also quite favorable (CBRE is typically at 50/50 apparently, and even top producers are often only at 70/30 type of splits).

This is not to say that the Big Brokers are providing the right services; I’m certain that many of them truly suck, and offer crap at a high cost (to the agent).

So the first point of confusion is that you evidently thought the “low-cost, low-service” was describing the service by the AGENT to the CUSTOMER. Not at all. You, Jay, Kris — I would use one of you guys before any of the “Big Broker” agents, because I know your services are valuable. I was describing what the BROKER provides to the AGENT; the AGENT in turn could provide extraordinary service at very high commission rates to the CUSTOMER. But the BROKER is still providing “low-cost, low-services” to the AGENT.

So really, the question is, Danilo, what do you pay your broker for his services? Whether that’s a desk-fee model, or a high-split model, if what YOU are paying the broker is low-cost, then the broker simply cannot provide a high level of services to you.

For example, he could not give you a private office, your own graphic designer, a dedicated webmaster, etc. just for Danilo unless the desk-fee you’re paying or the split you’re paying pays for all of those support services, and then some.

And the models Kris advocates — low desk-fees, maybe 100% splits, no interference, no BS tools — is the epitome of “low-cost, low-services” brokerage model.

By way of contrast, Stacey Harmon (@sharmon) used to work at the top brokerage in San Diego area that was very much a “high-cost, high-services” model, where the broker offered just a ton of services (like custom graphic design, beautiful office space, etc.) to his agents, but at very low splits. Those agents found it worthwhile to stay with this broker, because the value of the services the broker offered was more than what he was charging them (by way of splits, fees, etc.).

Now… when I say economics is on my side, it has nothing to do with predictions, and everything to do with incentives.

If I am receiving $10,000 worth of services from my broker, and paying him $10,000 in fees/splits every year, we’re at equilibrium. He’s happy and I’m happy.

If he then changes things so he’s only offering me $5,000 worth of services… then there is no way I’m going to keep paying him $10,000 in fees/splits. I’ll ask him to reduce my fees/splits to be about $5,000. That’s basic economics.

By the same token, if he wants to offer me $20,000 worth of services, because he believes that will really help drive my business and get him more money, I have to agree to more in fees/splits so that he can recover $20,000 from me. If I think what he’s offering me is worth the extra $10K, then I’d agree; if I do not, then I’ll find another broker. That too is basic economics.

My question is: Which path leads to higher productivity? The low-cost, low-services brokerage model where the broker offers the agent next-to-nothing? Or the high-cost, high-services model where the broker offers the agent everything he needs to succeed, but takes a much bigger chunk of the pie?

My thought is that the latter does, simply because higher dollars invested into technology yields productivity gains over the long-haul that outstrips just about every other factor affecting productivity. If I, the broker, raise my fees by a collective $50,000 a year, I might even lose some agents; but if I reinvest that $50K a year into technology that improves agent productivity, then I should recover that $50K and then some in additional revenue and profit.

-rsh

@Danilo -

Thanks for the comment, brotha — kollage or not, you got the goods buddy. So let me debate witcha!

Low-cost does not equal low-service. I know plenty of business owners that spend 1/2 to 1/4 as much as their competitors and still blow away their competition in total revenue and profit margins. In fact, these “low-cost” businesses (some RE and some other industries) are the ones thriving and growing while competitors are struggling and/or going out of business. Why? Because they’re more efficient.

Let me maybe explain where I’m coming from, because in my book, low-cost necessarily equals low-service.

In commercial, most of the firms are what I’d call high-cost, high-service. Their agents get all manner of goods and services as part of their employment/affiliation: a private office, CoStar (which can be hundreds per month), access to full-blown printshop, mapping department for custom site analytics, research department, and so forth. The desk costs for these agents are really quite high, but their splits are also quite favorable (CBRE is typically at 50/50 apparently, and even top producers are often only at 70/30 type of splits).

This is not to say that the Big Brokers are providing the right services; I’m certain that many of them truly suck, and offer crap at a high cost (to the agent).

So the first point of confusion is that you evidently thought the “low-cost, low-service” was describing the service by the AGENT to the CUSTOMER. Not at all. You, Jay, Kris — I would use one of you guys before any of the “Big Broker” agents, because I know your services are valuable. I was describing what the BROKER provides to the AGENT; the AGENT in turn could provide extraordinary service at very high commission rates to the CUSTOMER. But the BROKER is still providing “low-cost, low-services” to the AGENT.

So really, the question is, Danilo, what do you pay your broker for his services? Whether that’s a desk-fee model, or a high-split model, if what YOU are paying the broker is low-cost, then the broker simply cannot provide a high level of services to you.

For example, he could not give you a private office, your own graphic designer, a dedicated webmaster, etc. just for Danilo unless the desk-fee you’re paying or the split you’re paying pays for all of those support services, and then some.

And the models Kris advocates — low desk-fees, maybe 100% splits, no interference, no BS tools — is the epitome of “low-cost, low-services” brokerage model.

By way of contrast, Stacey Harmon (@sharmon) used to work at the top brokerage in San Diego area that was very much a “high-cost, high-services” model, where the broker offered just a ton of services (like custom graphic design, beautiful office space, etc.) to his agents, but at very low splits. Those agents found it worthwhile to stay with this broker, because the value of the services the broker offered was more than what he was charging them (by way of splits, fees, etc.).

Now… when I say economics is on my side, it has nothing to do with predictions, and everything to do with incentives.

If I am receiving $10,000 worth of services from my broker, and paying him $10,000 in fees/splits every year, we’re at equilibrium. He’s happy and I’m happy.

If he then changes things so he’s only offering me $5,000 worth of services… then there is no way I’m going to keep paying him $10,000 in fees/splits. I’ll ask him to reduce my fees/splits to be about $5,000. That’s basic economics.

By the same token, if he wants to offer me $20,000 worth of services, because he believes that will really help drive my business and get him more money, I have to agree to more in fees/splits so that he can recover $20,000 from me. If I think what he’s offering me is worth the extra $10K, then I’d agree; if I do not, then I’ll find another broker. That too is basic economics.

My question is: Which path leads to higher productivity? The low-cost, low-services brokerage model where the broker offers the agent next-to-nothing? Or the high-cost, high-services model where the broker offers the agent everything he needs to succeed, but takes a much bigger chunk of the pie?

My thought is that the latter does, simply because higher dollars invested into technology yields productivity gains over the long-haul that outstrips just about every other factor affecting productivity. If I, the broker, raise my fees by a collective $50,000 a year, I might even lose some agents; but if I reinvest that $50K a year into technology that improves agent productivity, then I should recover that $50K and then some in additional revenue and profit.

-rsh

@Michael -

I happen to agree with your steps, completely. The broker has to prove value-add before he can start moving off of the 100% splits into something where he’ll make more profits.

Which is precisely why I believe Big Brokerage, and only Big Brokerage, can take this path. You have to have some capital to pull this off. You have to have some ability to weather the short-term loss for long-term gain.

3% profit margin is terrible, but if your annual GCI is $300M, 3% is still $9M a year. The broker has to reinvest a huge chunk of that into technology, raise productivity, and then start easing out the agents who won’t or can’t get with the new program.

And as it happens, I know that at least ONE major brokerage (top 50 in the country) is doing precisely this over the next three years because its leader is a visionary who sees exactly what he has to do. He’s already easing out the unprofitable agents, and recruiting young, promising agents who would thrive with adequate support and technology. And he’s prepared to reinvest 100% of his profits for the next three years into technology. And believe me, that is not chump change given the company.

So… like any capital investment, I think the steps are:

1. Invest
2. Deploy & Prove Value (not necessarily to the Agent, but to the Broker)
3. Cut everyone who can’t get with the program, while replacing them with people who can, at a higher rate of productivity
4. Dominate

And that 4th step is important. If you’re of any size, and you’re at 8% profit margins while your competitors are sitting at 4% margins, you can outspend them every single year in every aspect of operations from marketing to recruiting, because you earn more from every company dollar than they do. If that doesn’t lead to dominance, nothing will.

-rsh

r-
All good points, but I think we are speaking from different frames of reference. You are thinking like a Fortune 500 CEO, while I am coming at this as a working girl. What makes the “low cost/low service” model work for me is that I am still an agent. In fact, I have to be. If I ever make the transition to a purely managerial role, I had better have the critical mass of warm, productive bodies to support it. To replace my working-girl income would require about twenty crack agents hitting on all cylinders. If I want to buy a home in Bill Gates’ neighborhood, that would be a different story entirely.

So I’ll try this again from my frame of reference.

>If you’re not giving me squat, then why do you have the right or authority to order me around? What you consider ethical might not be what I consider ethical, and since all you’re giving me (as the broker) is quarterly briefings on rules and access to a bunch of stuff I pay for out of my pocket… why exactly do I need you at all? Is a brokerage license that hard to get?

Let’s start with the last point first. No, a brokers license is not hard to get, so get one. The reality is that a lot of agents don’t want the administrative and liability headaches that come with running a company of any size. So, 10% with a reasonable cap is a fair trade-off. I am giving you more than squat. You are compensating me for the time, costs and risks of the monkey I have taken off your back.

Why do I have the authority to order you around? If by ordering you around you mean demanding minimum performance standards (and I am not talking about units), more brokers should have been ordering their agents around for the past decade. In what other industry is it OK for people to show up and hang out when it is clear they lack the capacity to succeed? The open door policy where one’s ability to find their way to the office with a license and a note pinned to their collar contributed to the consumer’s current confidence crisis. Further, in what other industry would the company be so willing to look the other way while the “top producers” are out stomping on the Code of Ethics just because they a bringing in buckets of company dollar? It’s an irresponsible and short-sided house of cards that had to fall.

So back to the “What are you giving me?” question. This is a way of thinking that has to change is a sea of 1099ers. I did not walk into my first office screaming “make me successful.” Rather, it was always up to me. The broker provided an environment in which I could do business, the entity if you will, but whether I ended up with the big gold plaque or I retired an enormous personal debt center and failure was never considered my broker’s responsibility. Those who look at their business in this way will succeed; those who show up expecting to be spoon-fed success will fail. So, ideologically, I think the low cost/low service model is a healthy Darwinistic alternative.

Stepping off my soapbox oh-so-briefly, here is a little trip down memory lane and maybe a glimpse into what went wrong. At the peak of the market, my broker was compensated over $220,000 by ME in one year, and I was not laying on the zero key there. I can pretty much guarantee my corner office and all of the administrative trappings did not cost that. Last year, it wasn’t that much, but it was “much,” trust me. In the meantime, during the glory days, the broker was stuffing their roster with as many licensed bodies as they could. Remember the game where people would don velcro suits and be hurled against a wall? (Maybe not, but it was funny. Trust me.) That was the hiring practice in a nutshell. Throw as many people up against your actuarial table wall as possible, and a few might stick. More people, more offices, expand, expand, expand. Home buyers weren’t the only ones caught up in the greed game; brokers were too. True, other models are out there — ReMax, Keller Williams — and we are starting to see more acknowledging that limits on the takings are in order. The key, though, is spending less and spending it wisely. I try not to spend money on lost causes; as a broker, it is counter intuitive to think that more is always better. More is just more, and it costs more.

Finally (I promise), I do see a place for the higher service/higher split model. And the five steps you outline are on target. The problem is, the house-cleaning I am seeing at the big brokerages is starting at the bottom of the list. It’s a panic mentality when, in fact, there will always be a demand for high service as long as the barriers to entry remain so low, as long as anyone can be credentialed without being qualified. Big brokerages are very good at training, and newer agents will always need that place to start. And many experienced agents will find the big family to be a comfy, lower stress alternative.

One footnote (guess I wasn’t finished after all). I understand the “invest in technology” argument, but this seems a little like running a “patio furniture and mattress” store. (We have a few of those in my town.) Or, put another way, it is the approach that Redfin took, and we see how that is turning out. Redfin has invested gazillions in their technology, and many of my clients use their site. As a technology company, they rock. As a real estate brokerage, they have had their challenges. I have more than enough technology at my disposal to meet my needs. Let the guys who do this and nothing else do it. In other words, outsource. This is efficient. Sure the broker needs to promote the brand, but they don’t need to reinvent the Internet to achieve great brand association. So, if you are talking about investing in technology simply as a way to bring value and business to the agent, that ship has sailed. I don’t need my broker for that. Maybe I just need him to be knowledgeable about my choices and point me in the right direction.

A lot of words. Sorry.

Kris -

First of all, thank you so much for taking the time and effort to engage with me on this. I’m well aware of the fact that you could be spending this time making money for yourself, so I salute you for your generosity.

Now then, let’s delve into things a bit:

>What makes the “low cost/low service” model work for me is that I am still an agent.

True — I see the value of the “LC/LS” model for some agents who are self-sufficient, and driven.

But even for you, let me ask you this.

Suppose I were to offer you a suite of tools that will dramatically increase your business, or increase your profitability (maybe you go from selling $500K homes to selling $5M homes). If my tools are able to increase your revenues from $250k a year to $500K a year, wouldn’t you gladly give me a higher split? Say from 90/10 to 70/30? 70% of $500K is $350K; 90% of $250K is $225K. Even on a 50/50 split, you end up making more money, if the technology gets you more money.

I’m thinking that you’d gladly make that deal.

So the whole LC/LS model is the result, IMHO, of failure on the part of brokers to provide adequate value. Yard signs and newspaper ads aren’t going to do it anymore. Even having just a website isn’t going to cut it. Brokers need to provide more value, create higher productivity, or they will be replaced by those who do.

I completely, 100% agree with you, Danilo, Jay, and all the others who point to “bad agents” as one of the biggest problems. See my latest post re: brand discipline for example. However, I’m arguing that the “bad agent” problem is a direct result of brokers failing to provide value, and failing to understand exactly what it is that they do, and deciding to take the easy way of “just let ‘em do what they want, as long as they pay me a desk fee”.

The vicious cycle is that once agents have a LC/LS model, the brokers who want to provide a ton of support, create productivity, and so on, simply do not have the revenues to support such a thing. Which is why I believe only the Big Brokers, who have billions in sales, hundreds of millions in GCI and company dollar, will be able to withstand the pain of needing to make significant investments, while the industry changes.

>At the peak of the market, my broker was compensated over $220,000 by ME in one year, and I was not laying on the zero key there. I can pretty much guarantee my corner office and all of the administrative trappings did not cost that.

Here’s the thing. A friend of mine works at Goldman Sachs on the equity desk. Five years ago, he made over $250 MILLION for Goldman Sachs dealing in Asian equities. He got a very nice, very fat bonus, but let me assure you that he did not take home anything even close to 50% of the revenue generated.

Why not? Because he knew, and Goldman Sachs knew, that as talented as he might be at trading, without the MASSIVE investments made by Goldman over decades into things like trading systems, up-to-the-minute market data, a huge network of financing, legal structures, researchers, and so on and so forth, my friend wouldn’t have made $10 trading stocks, nevermind $250m.

The trouble with brokerage is precisely that they are not Goldman Sachs. They haven’t made the investments over the years necessary to provide the kinds of systems, technology, support, research, and whatever else that agents need to generate sales and revenues. Then they wonder why productive agents want 100% splits and to be left alone.

Finally, the crux of the issue:

>I have more than enough technology at my disposal to meet my needs. Let the guys who do this and nothing else do it. In other words, outsource. This is efficient. Sure the broker needs to promote the brand, but they don’t need to reinvent the Internet to achieve great brand association. So, if you are talking about investing in technology simply as a way to bring value and business to the agent, that ship has sailed. I don’t need my broker for that.

It is efficient. I mean, I work at a company to which many big brokers have outsourced data collection, cleanup, and aggregation. Where it makes sense, I say outsource away.

The difference is when a technology (or technology system) is actually core to the value proposition. Brokers may not need to be data experts; they might not need to know how to code search algorithms. But they do need to own and build and invest in systems that are directly related to CUSTOMER RELATIONSHIPS, because that lies at the heart of their value in the entire real estate lifecycle.

Furthermore, there’s a difference between outsourcing to a vendor and outsourcing to a customer-facing operation. If I go to Escalate and buy their ecommerce platform and implement that on my website, then I’ve outsourced development, but own my own ecommerce operation. If, on the other hand, I just go to Amazon.com and set up a Amazon Marketplace account, then I’ve ceded my entire ecommerce operation to Amazon. My products will only strengthen Amazon.com. That isn’t “outsourcing”; that’s surrendering.

-rsh

Rob -

Kris just made me aware of this great discussion so I apologize that I’m a bit late to the game. I tried reading all of the previous “stuff” here but my head semi-exploded so I am writing this with only the remaining half.

Obviously, a lot of thought and analysis has gone into your thesis as well as the comments. With my half-head I only wish to add a couple of thoughts:

There is a place in the market for at least two, if not more, models. They can be and are different and not necessarily driven strictly by business school standards. For example, our model can be summed up by the business theory of JWTPTBAHSLO (Just Want To Pay The Bills And Have Some Left Over). We make a “return” on every transaction we close. For every transaction one of our agents closes the return is increased, since their cost is minimal.

However, we are not really a low service brokerage. Why? Because while we do not provide a variety of technical tools directly to our agents at our cost, we provide the opportunity for them to use the very best technology at the moment by knowing it ourselves (well, Kris, anyway), showing them what is available and how to use it. THEY pay for and use Transaction Point, Doc U Sign, etc, etc., etc. And guess what? Next week there will be something else that is better than what we just showed them.

This is one of the greatest challenges for the large brokerages with hundreds of agents in numerous offices. They feel like they must provide all this techno-stuff to attract agents and to promote to clients. No matter how much they invest (time and $$) in technology, by the time they have evaluated it, had management meetings to discuss it, figure out how to integrate it into their backbone infrastructure and then finally deploy it only to have to spend the next two or three months trying to teach their agents how to use it, it is already yesterday’s news. Add the revolving door nature of the big brokerage with agents constantly being hired and leaving and, well, you get the idea. Technologically speaking, Kris has always been about 12 months ahead of everything our last big brokerage deployed. That’s one of the reasons we realized we didn’t need them. And that’s why big brokerages shouldn’t even try to keep up with technology. There are at least 3 or 4 third-party sites (probably more)that are much better than the best big brokerage website. They just keep falling behind. Once they realize that, they could save a lot of money and spend more time evaluating agents and trying to attract those who understand and know how to apply technology that’s already out there and who are able to adjust quickly to the inevitable changes that are coming. Whew!!

Just a quick comment regarding the “return” assumptions I skimmed above (remember with just half of my head), but I apologize if someone has already hit on this point – The big brokerage return, be it 3%, 5%, or whatever considers the net AFTER paying all of the overhead, including the salaries of their executive management team. Not just office managers and admin. people, but the corporate dudes including, but not limited to, the CEO, COO, President, numerous Vice Presidents, the in-house General Counsel, the Tech guy/girl (CTO?), and more. At our last big brokerage company I have to believe this nut was in the many $$millions. So, the theoretical 3% profit, or return is after paying those big boys (and girls) salaries, benefits, and bonuses. “Profit” can be eaten up quickly in this manner and unless you know each brokerage’s corporate overhead it will be difficult to make an apples to apples comparison.

Last note (Finally, sorry) – When we left to create our own little independent brokerage Kris wrote about it on Inman. There were many positive comments, all in fact, except one. That one negative comment came from the local owner of a national franchise office in our core market whom we know. He said we didn’t have a chance, that we would fail, because we didn’t have the “Big Brand” name and all of the associated advantages and that we would be crushed by costs. I thought about his comment and could not come up with one thing he or other big brokerages could provide me with that I couldn’t do better myself (and for less cost). We have our humble little office and our cost structure is actually less then our last big brokerage (even at our 90% split there), we are using technology that they haven’t even heard of yet, much less deployed. But the most gratifying validation of our move was as a result of a recent interview we gave to the San Diego Daily Transcript (one of our local business papers) about just this subject – the move from a large brokerage to becoming a smaller independent brokerage. The reporter wanted to take a picture of one of our “for sale” signs and we gave her an address. When there she happened to run into our client who was leaving her home and asked her what she thought about our move. Her answer: “I don’t hire the brokerage, I hire the agent.” Nirvana!

Steve -

As I’ve mentioned in my response to Kris, first and foremost, THANK YOU. I know your time can be spent doing more remunerative things than comment on a blog, and I can’t tell you how much I appreciate it.

I think the first place we should begin is in agreeing that Big Brokerage needs to get its act together. But honestly, that particular problem is not something only brokers face. Every large company I have been part of has the same problem. It’s just what happens when you go from 10 people to 100 then to 1,000 and so forth.

There is no doubt that an enterprise with 3,500 agents cannot move with the same speed and nimbleness than a brokerage with 35 agents can. And the 35 person brokerage cannot move as quickly as a 5 agent brokerage can.

Having said that, it is important to recognize that while Big Brokerage may not be as nimble as independents, they have one major advantage: they can go Big. They can tackle big investments into truly cutting edge, custom technology that sets them apart. Microsoft and even Google no longer has to be all about innovation and nimbleness; they can just buy out (or muscle out) companies that are.

I have little doubt that Kris is 12 months ahead of Big Brokerage. But then, Kris can’t deploy fully integrated CRM with a team of database marketers. Big Brokerage can (and should). Someday, some technology company will come along and offer that level of power to independents, and make a fortune. That has always been the story of technology. But by that time, Big Brokerage needs to have moved onto the next productivity enhancing technology.

The key thing here is that Big Brokerage may have already lost the battle for best website — although, if those third party companies can’t achieve profitability, then they may not be around long enough to win the war. They cannot let that happen to core technology: CRM, document production, transaction management, client retention, etc. If they do, then given the structure of our industry, they will become irrelevant. For too many agents, and too many consumers, they already are. (FWIW, I happen to believe that even on the website front, the Big Brokerages can’t really be said to have lost the battle as much as they simply haven’t started to fight. Some of the best websites in our industry belong to Big Brokerages.)

With respect to the profit margin, yes, that is excluding salaries and overhead. But every dollar paid to the CEO is a dollar that can’t be reinvested into the business. So from this standpoint, my essential point remains: brokers have to somehow get from 3% to 10% profit margins in order to have a sustainable business. Unless the reason why the margins are at 3% is because of heavy investment into technology… every other expense is basically mortgaging the future of the business.

Finally, I loved the story about your client talking to your local business paper. That exemplifies on the one hand what makes you guys successful.

At the same time, if you were the local owner of a national franchise, or the CEO of the national franchise… wouldn’t you think that your client’s comments are a wakeup call? “I don’t hire the brokerage, I hire the agent” is precisely a symptom of failure on the part of Big Brokerage. You almost never hear that when it comes to investment advisors or bankers. In fact, I don’t think it’s too much of a stretch to say that having consumers say, “I hire the brokerage, I don’t hire the agent” is the whole raison d’etre of brokerage/brands in the first place.

-rsh

“In fact, I don’t think it’s too much of a stretch to say that having consumers say, “I hire the brokerage, I don’t hire the agent” is the whole raison d’etre of brokerage/brands in the first place.”

Until the agent is an employee and not a 1099er, this is a pipe dream. A trader at Goldman Sachs is an employee of the firm and represents a standard of performance represented by the brand. The low bar to entry, 50 sets of state regulation make our business unique. Although given the financial crisis, perhaps 50 sets of regulation may be less corruptible than the Federal Securities regime.

With this real estate cycle we will see a big shake out. The big vs little debate may be rendered moot as politicians throw blame and rewrite regulations. I doubt however, that the states will cede sovereignty to the Feds without a fight. Big real estate has lobbying (bribe) money, the little guys can dance on the head of a pin.

This conflict is mythic. We know that David won. We also know that all 300 did not survive the Hot Gates (I have to keep Greek out of this), nor did the Light Brigade. While we all like to be the underdog, the money is on the money.

I wish all a prosperous 2009.

Rob, I’m way late on this but a couple of things anyway:

1. One factor that wasn’t mentioned in changing profitability (at least not in the main post) was the impact of company-generated leads. If a company invests in developing unemcumbered leads from its website, outreach to highly targeted markets, etc. and charges, say, a 20% referral fee to the agent after qualifying that business, it changes the effective split and adds value to the agent who doesn’t have to prospect for that NEW business.

2. Brokers are seeing more profitabilty from related businesses (mortgage, title, insurance) than brokerage…kind of like making money on the film rather than the Polaroid camera. Oops, bad analogy…are they still in business?? Yet agents sometimes refuse to use those company services because they don’t want the broker making more money…how silly is that if it helps invest in things like more company leads? Great article in Jan 09 Real Estate (RIS Media) magazine about why agents need to re-think this and see the value.

Lastly, not all tools provided by brokers are a waste…that implies that agents are so smart they don’t need any help. I hear brokers bemoaning the fact that if agents used some of those tools, they would become more productive. Given that the average annual transaction count is something like 7 or 8 per agent, just adding 2 a year would be significant.

This whole broker versus agent thing is needs to go away, along with the sentiment that the agent does everything and the broker adds no value. As critical as the agent is (he/she IS the brand and the consumer’s touchpoint), the broker’s risk versus reward in the current model – as you point out, Rob -is something most agents wouldn’t tolerate.

We’re all in this together. A great (and short read) book, Silos, Politics & Turf Wars shows how focusing on a common goal…how both the company and the agent can add value to the CONSUMER in this case….is win-win in the long run. –pjoc