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Why The Traditional Real Estate Model Is Fading Away

Kris Berg and Brian Brady inspired me to add my eye witness experience to the subject of the traditional real estate company business model. Their recent posts on the subject were excellent as usual.

I’ve seen real estate from the inside since 1967. I was able to follow the owner of the most successful agency in San Diego at will. He answered any question I ever asked as fully and candidly as he could. It was an amazing learning experience for a teenager. Four straight years this guy closed more than 1,000 sides a year. And he did it with a maximum of 28 full timers and usually less than a dozen part timers.

If he did that now, he’d be making over $15Mil a year in gross commissions before paying his team. Oh yeah, his team. This broker never made less than 40% on any transaction. If you as one of his agents listed a home exclusively you were paid 20% of the listing side of the deal. If you sold the property you made 40% of the selling side. Back in those days a large minority of the listings weren’t exclusive right. Many were either open listings or what we called ‘agency’ listings back then. Opens only received 10% of the listing side, exclusive agency listings got 15%.

This meant that much of the time this broker made 45-50% of the gross commission. Today an average agent at a ‘commission split’ office makes 70-80% of the office’s commission. And the so called top producers are paid 90%. Is it a mystery that the desk rental model came into being? At least if they could hire enough bodies the broker/owners could, by sheer numbers, turn a profit. In some cities I’ve seen operations using this ‘desk rental’ model that employed literally hundreds of agents.

Just how the large firms clinging to the traditional model stay in business is a mystery to me. They’re operating with even higher expenses per square foot than brokers did 30 years ago, and getting a much smaller slice of the pie to boot. For awhile they stalled the inevitable by buying into their own escrows, lenders, and title companies. Since their model is doomed to failure, this only bought them a little time.

By the way, that broker, the one who brought me into his inner circle? The 1,000+ annual sides he closed annually were really 500+ double ends! He also owned the escrow through which they were processed. He received $50 for packaging FHA and VA loans, which accounted for 95% of the loans back then. And finally, he received absolutely legal kickbacks from the title company because of the volume he produced.

He wasn’t a member of the local Board of Realtors or their MLS either. That, shall we say, irritated them. You see, his company had more homes listed under $20K at any one time than the entire MLS. In San Diego these days that would be like having most of the listings under $500K. He was asked to join the local Board of Realtors all the time. The catch of course was that if he consented to join the Board, he had to join the MLS. And if he joined the MLS they would force him to split commissions with them 50/50. He said he’d join the Board but not the MLS, since he had already proven he didn’t need them, they needed him. (Of course, this was a truth better left unsaid, since it was so clearly the case.)

They ended up asking him to join three separate times. By the third time our guy was at the end of his patience, and told them they would accept him into the Board, AND the MLS. Furthermore, he would split 90/10 in his favor, and they would accept that. They knew they were headed towards the DOJ if they continued, so they relented.

A few years later he closed all but one of his offices, and scheduled a 12:15 tee time for the next 20 years. His profit margins have never been duplicated by any office of at least his size since. Why did he walk away? He was old school to a fault. He saw the first franchises on the horizon and said he’d never be a part of one, and that he’d not be able to compete for long against the kind of money they’d be throwing around.

He was dead on.

In the next 10 years Red Carpet and Century 21 did exactly what he’d predicted. In that same decade he lowered his handicap from 19 to 6. Not bad for a guy who couldn’t hit farther than 210 yards off the tee with a force five hurricane behind him. :)

He once told me that if I decided to own my own brokerage I’d fail if I used his model. He said that back in 1971! He said the only way to succeed would be to create synergy between partners, no hired agents. The alternative would be to simply be a one horse or family operation. Of course that was before I made the transition to the investment side of the business. When he saw me do that, he just smiled, raised his Jack on the rocks, and winked. “Even better” he said.

We had many talks when I was still young and knew everything. :) After each of these sessions I’d come away thinking how much he really understood, and how little most in the business understood. It was scary. Looking back I think the most salient piece of wisdom he passed on was an observation he once made comparing his operation and what he thought he saw coming.

He said the agents he hired were the best he could find. He wouldn’t accept second best. (His judgment was uncanny, as more than a dozen moderate to large brokerages were started by agents who had spent at least three years working under him.) His prediction was that because management was beginning to give agents an ever-expanding share of the pie, they’d be forced to ‘dumb down’ there agent pool with less than excellent people. This would allow them to pay them much less, which would increase their bottom line.

He said the combination of the emerging franchise model and what he saw as the coming dependence upon inferior agents is what caused him to work on his golf handicap permanently. He said any time a business model is even partially based on the use of inferior people, he wanted nothing to do with it. He actually called it evil. His generation believed the pursuit of excellence was its own reward.

Purposefully courting mediocrity was anathema to him.

Since then I’ve seen his predictions come true one after another. He built his business through the pursuit of excellence. He won at everything he tried. And he just couldn’t understand building a real estate company on a foundation of mediocrity. So he retired — at 42.

And the only thing that ever beat him was Jack — on the rocks. Dad never understood Jack wasn’t his friend.

Related posts:
  • Is Your Broker Profitable?- Traditional Brokerage
  • Is Your Broker Profitable? – “Rent-A-Broker” Shops
  • Violent Change in Store for Real Estate Agents

  • 23 comments

    23 Comments so far

    1. Kris Berg February 26th, 2007 12:34 pm

      Bravo! I see you are feeling better. :)

      You touched on the answer to the big brokerages staying in business – It’s the ancillary services. Agents get a whole lot of pressure to use in-house title, escrow, lenders, etc… When I started in real estate, the brokers strongly encouraged association with their “partners” but rarely gave us grief when we chose to align with a vendor that (gasp) provided better rates or service or both. Now, the pressure is getting more intense.

      Loved the post, Jeff.

    2. Jeff Brown February 26th, 2007 1:44 pm

      It’s great to be back in the saddle again.

      >You touched on the answer to the big brokerages staying in business – It’s the ancillary services.

      What I’ve never understood is why their ‘partners’ are usually so worthless to their agents.

      Glad you liked the post.

    3. Brian Brady February 26th, 2007 3:28 pm

      Jeff:
      I heard the oral tradition of the legend and am pleased to see the written version. It’s all so incredible to see his feats in writing.

      He was correct in his prognostication; that’s why he took his chips off the table.

      Kris:

      The ancillary services is the ONLY way the traditional brokerages can survive. The post I had planned for the summary deals with the breach of fiduciary relationship with an agent’s client by “pushing” a more expensive ancillary service.

    4. Jeff Brown February 26th, 2007 3:39 pm

      Brian – All that production and he ran everything from one checkbook – no bookkeeper!

      What I still don’t get is why these goliaths don’t change their model. Instead they just buy more bailing buckets.

      The older I get the more incredible his story becomes. The vision thing was second nature to him.

    5. Jim Gatos February 26th, 2007 3:41 pm

      Sorry, but I have to disagree with all of you here. I am in one of those “traditional” offices. and we have the market share for our area. We have the largest office in terms of agent productivity and units sold; we are encouraged to use our “ancillary” services; to which I refer almost everyone I can to our in-house mortgage office. The results? Happy clients who shop around but statistically wind up using our “ancillary” mortgage company, and a smooth process. We provide the absolute best service possible, our numbers and results speak for themselves. Also, I don’t get magged and harassed by mortgage officers anymore, they know they can’t get our business, and why not? Our own customers and clients go shopping around and they agree we have the best! Do we get ALL the business as an office? Of course not! But our in house mortgage company has a 30+% capture rate. We don’t get kickbacks as agents, BUT we do get happy clients and smooth sales. If I have a question, the answer is a door away.

      Seriously, the only Model that has survived and thrived for over 100 years is the full service brokerage model.

    6. Jeff Brown February 26th, 2007 3:58 pm

      Jim – I gather you disagree with my comments on the quality of the ancillary services. You may well be an exception to the rule. But still it’s an exception.

      The bigger point I was making is that your company wouldn’t be above ground today as a ‘traditional’ model if it wasn’t for the additional income. They’d be bankrupt.

      Prudential California is a prime example. They’re huge with offices from the Mexican border to the northern most areas of Southern California. Yet to survive they had to do what your owners did.

      Also, because they’re a franchise, they’re working on a 94? dollar to start. One of their most prolific offices in the east part of San Diego county has lost a bunch of agents in the last year or so to the local Keller-Williams office. The decision almost invariably directly related to the difference in business model.

      BTW, I went to your blog, and it rocks.

    7. ardell dellaloggia February 26th, 2007 7:25 pm

      Interesting comment on the Gatos Blog. I like it, but they seem to do everything we are told not to do, like advertising listings.

      Just goes to show that there is room for many differing opinions when it comes to what a blog “should” be.

    8. Arlingtgon Virginia Condos -- Jay February 26th, 2007 7:54 pm

      Thank goodness for the internet and how smalldogs can compete now with the big dogz! In fact the smalldogs have some significant advantages if they are well ranked and hiring other aggressive realtors who work according to methods used by today’s buyers to find a home. Read my article on “Truth vs. Bullcrap About Selling Your Home” which was mostly based on various Inman & Rismedia articles I’ve been compiling. Todays realtors and forward will be fewer in number and able to do more transactions as a result of superior lead generation and management. Many of us will become online brokers and hire employees that we offer leads to versus the brick and mortar companies that usually provide next to nothing in terms of leads to work with.

      jay

    9. Jeff Brown February 26th, 2007 7:56 pm

      Ardell – First everyone wants to know if you skinned the cat. How comes later. :)

    10. Jeff Brown February 26th, 2007 8:02 pm

      Jay – The bottom line is that regardless of how leads are generated, or spread out, the compensation model isn’t what’s been used since the ’70′s. Sounds like you’re kickin’ butts and takin’ names Jay.

    11. Russell Shaw February 26th, 2007 9:46 pm

      Magnificant post!

    12. Greg Swann February 26th, 2007 10:47 pm

      Russell, Cathleen and I were talking about this last week, in a planning session for the forthcoming Sales Success podcast. We were far afield, whch is normal. I mentioned having seen an agent walking out of HomeSmart’s office with a handful of pre-printed envelopes. Russell was nodding wisely, leading me to the point. Where is the margin in 100% shops? It’s in everything. You can’t have anything from the broker without the broker taking a pound of flesh…

    13. Lee Trice February 27th, 2007 6:35 am

      Jeff,

      All I can say is BRAVO.

      This is why blogging is so relevant today. I will never read anything this insightful in traditional media.

      Lee

    14. Jeff Brown February 27th, 2007 9:32 am

      Russ – Thank you!

      Greg – I’ve seen it. Sometimes it’s just funny. :)

      Lee – Thank you so much for your kind words. The traditional media would have to do their job to be insightful about our business. Most of them just want to be scary.

    15. Jim Gatos February 27th, 2007 6:30 pm

      Hey Jeff, Thanks for your kind words..

      I honestly believe you’re correct in saying my company HAS to provide mortgage services to make profit. Once, a couple of years ago, one of the office managers told me my company HAS to provide the extra stuff, so I agree. I happen to think my company has their act together very well. In the end, I suppose, if everyone is happy, clients, customers, agents, mortgage officers, and the company, is happy, and make a profit, without shortchanging the public, then that is what matters in the end.

      Studying different business models in real estate is sort of a “sideline” hobby to me. My company seems to have succeeded in a business model that is profitable AND Successful. In terms of mortgage services, it helps when that aspect is handled very honorably, and I have seen cases where a mortgage officer from CBRB told a buyer, yes, they can do the mortgage, but in all honesty, the debt ratios are so high, the buyer may be better of waiting or not buying. Now, if the buyer wants to, they can either get the mortgage, go to another mortgage company, or forget it. Honest disclosure is the key here.

      The interesting thing is here that my company’s support services has completely dominated the market and the “quality” of agents in our area. I left CBRB for two years and went elsewhere for 2 years, having returned in March of last year. When I was away, my perception of where I was gave me a feeling that I was surrounded by “under trained” agents, and of course, that opens up a whole slew of different concerns. Our commission system isn’t 100%, but sometimes that is not the only concern. It is a complicated and sometimes hard to obtain “sliding scale” system. I can honestly say and without prejudice that we have among the most professional and most successful agents in our area. That is something I personally know our competition can’t, or won’t, understand. Their ancilliary services, for the most part, are not as orgainzed as ours, IMHO, and in some cases, they failed, and in a couple, failed MISERABLY.

      No matter what the “model” is, there will be a flaw found. In our area, I’ve seen “Models” fail miserably where they may succeed elsewhere. That’s the beauty of free competition.

      As for my blog, when I first started it, I did it without researching what a “correct” blog would be. My wife and I post our listings. So far, no one’s complained and it certainly helps with searches from Google and other search sites. What can I say? Our clients see it as one more outlet, and the public doesn’t seem to mind. The name of the game is to sell our listings, isn’t it? For us, this is working out fine.

      Perhaps we are the “exception”. However, I can tell you, New England itself may be just a “different” type of sales enviroment. Who knows? I haven’t made one sale yet due to our blog, but our blog seems to be a good “resource” area for our clients and the general public.
      Big or Small dog is not my question here. I just haven’t seen or had one single “online” transaction yet. Maybe I am having a “visionary” problem, but I see my blog (with my wife) as an “RSS” version of the idea of sending out monthly mailings to your soi, and also a way for the general public to see and “feel” me as a person and potential realtor. If I happen to come across as someone who doesn’t and won’t ridiculously overprice listings, that’s fine. They won’t sell anyway.

      BTW, I Love Bloodhound Blog! I think the quality of the posts and the people in it are all a cut above. Bloodhound Blog has become a great resource and I applaud everyone here, in spite of my sometimes “crisp” writing style (usually because I’m in a hurry!) LOL..

      Jim

    16. Jeff Brown February 27th, 2007 6:50 pm

      Jim – Thanks for your thoughtful comment.

      I think my core problem with your firm’s ‘model’ isn’t that they ‘had’ to offer the other services or die, though it’s true enough. It’s that they’ve morphed into a lead generating machine for their main business which ISN’T real estate brokerage.

      Now of course that’s not how either you or your clients look at it – understandable. But ask yourself: Would the ancillary businesses be successful if all the company’s agents weren’t feeding it? Maybe, but probably not. They think they’re in the real estate brokerage business. When in reality they don’t make enough profit to keep the doors open, no matter how many high quality agents they employ.

      Simply put, the agents are lead generators for the real money making side of the company. What if your firm went to the dark side and joined ReMax or Keller-Williams. Would they make a ‘stand-alone’ profit on the brokerage side? My guess, and I think you may agree, they would.

      I’d love to hear what you think about that.

      And your blogging approach. In the end the cat is either skinned or not. Nobody asks how you skinned it until they know if you skinned it or not. Sounds to me like it’s working for you.

      You might try to more aggressively gain synergy between your website and the blog.

    17. Timothy Schwartz February 27th, 2007 8:17 pm

      I just found this blog from a post or comment Brian Brady made on Active Rain.
      I think it is well written and I find it interesting.

      In the previous comment Jeff mentions synergy between your blog and web site. Would you be so kind to elaborate on that?

    18. Jeff Brown February 27th, 2007 8:31 pm

      Timothy – Your website generates leads for sales and listings. Your blog for the most part doesn’t. The website is a monologue, while your blog is a conversation. Using each one to promote the other will enhance both.

      On the blog you demonstrate through solid content what you do and what you know. Because the two approaches are so different, they can compliment each other. My blog creates more traffic at my website and vice versa.

      Really though, I’m not the guy. People like Liz Strauss at successfulblog.com and Seth Godin are the people you should be reading. They’re both pure 24 carat gold.

      Good luck.

    19. Jim Gatos February 27th, 2007 9:48 pm

      Well, Jeff, It’s midnight where I am so I will be quick. Need to get some sleep.

      I can’t answer for profitability for my firm. I can say we are Number 1 in New England. I think we beat number 2 by a 3 to 1 ratio. If they went to RE/MAX or KW, I don’t know. I can’t answer. Probably..

      I will add more tommorow. Now I need some shuteye . LOL

      Jim

    20. Sandy March 4th, 2007 12:00 pm

      Was going to comment, then my comment got too long. So I made it a post over at Active Rain.

      http://activerain.com/blogsview/52615/On-competitive-advantage-in

      The gist? Ultimately, it’s all about competitive advantage. When competitive advantage no longer lies in hiring large numbers of mediocre agents, the business will change. And our industry is not the first to experience this–there is much to be learned by looking at other industries facing the same issues.

    21. Eric August 25th, 2007 8:58 am

      Jeff,

      I remember just getting out of school, fresh in my head, danced the dangers of comingling with lenders or title companies and facing harsh penalties.

      Then you get into the real world and wonder why there’s a lender or title agent in every office.

      I think that while blogging may not provide leads in the traditional sense, you can go from “untrusted” to “trusted” status in record time, which may provide BETTER leads, if fewer.

      Just like Brian’s done with MySpace.. if you create a space where clients can log on and read more about who you are, you can have them sold before you even meet them.

      The traditional model may work for the older generation, but personally, I’m really enjoying the RE.net so far. Then again, I think I classify as a “whippersnapper” to some here :)

    22. Jeff Brown August 25th, 2007 11:01 am

      Yeah, there’s nothing like the real world to demonstrate the difference between what the powers that be want us to believe, and what we see with our own lyin’ eyes. :)

      You make excellent points about the social networks. They are obviously having more impact than most thought they would, including me.

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