Why The Traditional Real Estate Model Is Fading Away

by Jeff Brown

Real Estate Investments Broker

Author website

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.