First, here’s the good news. Over the past eighteen months, the mainstream of our industry has come to grips with the fact that revenues from the traditional provider-centric brokerage business model can no longer support its overhead.
The not-so-good news is that an unfortunate number of brokers still seem to think that minor adjustments to this wheezing old model will bring it new life.
Industry-wide experience is proving this not to be the case. It’s become clear that simply adjusting the existing business model, while a positive interim step, will not overcome its systemic dysfunctions. Brokerages must explore new ways to reformulate the human and business interaction between principals and service providers. In short, we must get all the industry players on the same team.
These observations are not a criticism of either set of actors in this drama, for indeed these conflicts have always been part of free enterprise. Why? Because conflict exists wherever humans compete for attention, power and control.
You can find it in countries, families, monarchies, courtships, mergers, and consolidations. It is at once the most destructive, and the most constructive, force in the universe.
But, it’s time to rethink and restructure both the underlying philosophy and the operating realities of the Broker/Agent relationship. This introspection should be as nonjudgmental and honest as possible. Forget trying to allocate blame for it’s not about “who” is wrong. It’s about “what” is wrong.
There are powerful forces afoot in this industry from the technology and information sectors. And, unless the actors in this real-life drama can reach a more productive and mutually beneficial arrangement, these outside forces will combine to create a third, even more powerful, sphere of influence that will resolve the crisis, unfortunately in a way that will not benefit either side.
From the agent’s viewpoint, it’s time to shed the “light of truth” on the true economics of the traditional model. The widespread illusion that brokers are making anywhere near reasonable profits on the backs of labor just will not stand up to any rational accounting ratio.
Their companion fantasy that meaningful real estate services can be provided without broker support, or that there is some low cost alternative that will be acceptable to today’s contemporary consumer, likewise will not stand the test of time or marketing.
This discussion is all about the cost of doing business and the fact that someone must pay the overhead. The recent decline in commission rates nationwide is clear evidence that the consumer is not volunteering to shoulder this load.
Likewise, from the broker perspective some rethinking may also be appropriate. After nearly six years of record sales, many brokerages look more like they are the survivors emerging from a down market cycle.
As hard as brokers have worked over the past two years to build viable ancillary services and cross sell platforms, the hard fact is the percentage of ancillary business “captured” from the total transactions passing through their books remains unacceptably low.
Some industry players still seriously doubt that revitalization of the brokerage business model will require expansion and enhancement of the brokerage service menu. It is hard to see how this position could be taken in light of what has happened over the past few years. It is even more difficult to imagine given the fact remains that there is no feasible model in sight. However, even for those who believe that remarginalization is a critical step into the future, it is certainly not clear that any such process can ultimately succeed without agent support and participation. The answer to both sides of this issue undoubtedly lies in the creation of a new and more creative agent-brokerage partnership.
This project should be the industry’s number one priority over the next year. Nothing less than the best intellectual, creative and innovative resources should be brought to bear. A starting point given the unproductive condition of the traditional relationship, it may fashioning this new relationship more on respect and results and less on raw market power.
The history of our American economy is resplendent with conflicts and challenges precisely like this. But, a careful study of these events discloses an all-too-common result.
The homework need not start from scratch. There are several business models out there right now that merit careful examination.
For example, the Keller Williams organization seems to have hit upon an Agent/Broker relationship that appeals to an impressive chunk of X’er generation agents. While its “cultural side” may require the traditionalist to make a leap of faith, its business side is successfully addressing a number of points that have become dysfunctional in the traditional business model.
In ancillary services, mortgage products have been seen as a prime avenue for brokers seeking to enhance the firm’s profitability. Based on capture rates, the theory that the service provider should not participate in this revenue stream has not proven to be productive.
In response to this dilemma, a company called L & G Mortgagebanc in Scottsdale, AZ is now in the marketplace with a RESPA-compliant product that provides both agents and brokers a revenue stream from both initial and “re-fi” mortgage transactions. Better yet, the net yield to the brokerage is apparently very competitive with in-house programs and apparently prompts a dramatic increase in the capture rate.
So, it’s time to move this dialogue to its next level. This may not be an issue of competitiveness, but rather one of sheer survival. For today’s real estate industry participants the question may not be who will win, because all may lose.
Those who reject even the idea of an open, honest industry-wide discussion, should keep the many lessons learned over the past fifty years of the free enterprise experience firmly in the back of their minds.
Besides, this discussion has to be more stimulating than talking about mold.
