A Peek Inside One Real Estate Brokerage Model

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Disclosure: I need to be careful here and not get myself sued or slapped with a Code of Ethics violation. Hence the complete lack of individual and company names. Any exchanges that have taken place via email, Facebook, or smoke signal have been paraphrased. What follows is simply my thoughts on a prevalent real estate brokerage model. I’m not singling out anyone, so please don’t ask. Trust me when I say there are a LOT of real estate brokerages that utilize a business model similar to what I’m about to discuss. There are countless variations, but you’ll get the gist of it…

Also, let me make it perfectly clear from the get-go that Thompson’s Realty does not subscribe to this particular brokerage model.

The Hire Anyone With a License and a Pulse Model of Real Estate Brokerage

I was approached yesterday by someone I have never heard of. They are a multi-state “virtual” real estate brokerage considering expansion into Arizona. They were looking for help in “driving their name” within the area.

Why they were asking me, the owner of a small independent real estate brokerage, to help them increase their name recognition is beyond me. So I expressed my confusion to them. After all, why would I want to drive clients and real estate agents away from my brokerage and toward some other brokerage? That just does not compute. It’s been awhile since I was in college, but I’m pretty sure in Business 101 the professor said something about not handing your business over to someone else. Or maybe they didn’t say that outright because basic common sense would dictate that it is a bad idea to send your clients, potential customers and employees to a direct competitor.

Their response to my, “I’m completely confused” email made these points:

  • We are a virtual brokerage. (So? As are we. What this has to do with anything, I have no idea.)
  • We aren’t interested in clients.
  • We’re in the agent hiring business.
  • Our model isn’t based on agent production.

So what we have here is what I not-so-fondly refer to is the brokerage model of hiring anyone with a real estate sales license and a pulse. If you have a license and can fog a mirror, you can work there.

Sadly, this is nothing new. It’s been around for ages. Brokerages charge their agents monthly fees, regardless of whether they sell a home or not. In fact, I’ve had brokers that run their business like this tell me, “I prefer it if my agents don’t sell anything. It reduces my liability.”

Think about that.

A real estate brokerage that isn’t interested in clients, and doesn’t care about the productivity of their agents. In fact, they may prefer if their agent never sells anything.

If you are a real estate agent, why in the world would you want to hang your license there?

If you are a home buyer or seller, why in the world would you chose an agent from that brokerage? If you are currently using an agent, DOES your agent work for a brokerage like this — a brokerage that isn’t interested in you? Do you even know whether they do or not?

It boggles the mind. (Well, at least my mind.)

I understand the model. The math is simple. In this most recent exchange, the aspiring brokerage has a commission plan that charges their agents a flat fee of $200 per month. That’s $200/month whether they do five transactions, or zero.

$200/month times 100 agents = $20,000/month = $240,000 annually. Sure, there are some expenses, but as this is a virtual brokerage, they don’t have the single biggest expense traditional brokerages incur — office space and its associated overhead.

Hire 500 agents and you can gross a cool $1.2 million a year.

All without having an agent help a single home buyer or seller…

I understand it, I just don’t get it.

Maybe the reason it works, and is so prevalent, is that real estate buyers and sellers aren’t even aware of the practice. Or maybe they are aware and they just don’t care.

Not being aware makes sense. Real estate brokerage practices are often shrouded in mystery (maybe when a business person readily admits that they don’t care about clients, they would rather people not know that?). Not caring though, makes no sense. I’m firmly on the record saying that consumers pick agents, not brokerages. It is the agent that matters most to the home buyer or seller.

But the brokerage still plays a role in the real estate transaction. They (should) play a huge role in hiring good agents. One would think the typical home buyer / seller would rather have a good agent working in a good support system. That’s not to say that there aren’t some terrific agents found in License and a Pulse brokerages. Of course there are.

Which begs the question, why would an agent work in a brokerage that doesn’t care about clients, or their agents productivity. Why work in a brokerage that, “is in the agent hiring business”?

I suppose if one needs zero broker support, then all that matters to the agent is low out of pocket expense. But that only works if you place no value in working with a group of like-minded professionals and finding that can actually help improve your business.That works until consumers come to realize that maybe their agents brokerage affiliation does make a difference.

I’m just not sure that day will ever come.

Raising the Bar

I’m a member of a very active Facebook group that consists of real estate brokers and agents who would like to “raise the bar” in real estate. There are a lot of discussions in that group about licensing requirements, broker / agent actions and expectations, and other things that could be done within the real estate industrial complex to raise the bar in real estate. To change public perception of real estate agents. To ensure professionalism within our industry.

Sure, it’s stupidly simple to get a real estate license. If you live in Arizona, you can pay a “real estate school” for 90 hours of classes (some have 10 day licensing courses), take a couple of relatively┬ásimple exams, write more checks to Realtor associations, MLS’s, brokerages and the like and start a real estate career. Yep, 10 days and several hundred dollars from now you too can sell someone a home. In and of itself, the absurdly simple licensing requirements place “the bar” pretty damn low.

But raising the bar is going to take a whole heck of a lot more than making getting a license harder. It’s not easy, at all, to get a license to practice law or medicine. Or be a CPA. Of that, there is little debate.

My contention however is that the reason doctors, lawyers and CPA’s are considered professionals is not just because those licenses are difficult to obtain.

It’s what is done with those licenses that sets the bar. It’s what is done inside law firms, and hospitals, and accounting firms and offices that set the bar in those professions.

How many professional firms are out there that for all practical purposes proclaim in public that they aren’t interested in clients and don’t care if the doctors, lawyers and CPAs do any business? Is there a hospital out there that wants less liability and prefers if their doctors don’t see patients?

I think not. And if there was, I sure would want to know about them so I could ensure I never used their services.

If the bar is to be raised in real estate, it has to start with the brokers. Stop hiring anyone with a license and a pulse. Get out of the “agent hiring business.” Hire good, professional, ethical agents. There are plenty of agents out there that fit that criteria.

Sadly, I can’t see this happening in my lifetime. Hopefully I’m wrong, but I see no indication that I am.

 

Photo Credit: brykmantra on Flickr. CC Licensed.

 

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About the Author
Jay Thompson

I'm a real estate broker in Phoenix, Arizona and the publisher of the Phoenix Real Estate Guy blog. I tend to drive too fast and scream at the University of Texas and Denver Broncos football teams. My two kids are smarter than most adults I know and my wife is simply amazing.

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  1. Susan Milner says:

    Were they from Florida, Jay? We have many, many of these brokerages here…sad really.

  2. Max says:

    Jay, I call it a “dead souls” business model. I’ll take “money for nothing and chicks for free” any time of the day as a rock star \m/, but this… doesn’t deserve anyone’s attention.

    • Jay Thompson says:

      I think it deserves the consumers attention Max…

      • Max says:

        that was a poorly worded statement… I meant it didn’t deserve the attention of agents looking for a new brokerage. But I agree with raising the standards and weeding out the “smoke and mirrors” companies that giving this industry a bade name.

  3. BawldGuy says:

    Jay — The problem isn’t that you don’t understand the model. It’s that you do understand it.

    Me too.

  4. Rob McCance says:

    Great article and solid concepts.

    Some day I may start a Brokerage and I will offer my agents something all agents need: actual real leads, in good quantities.

    In return, all my agents will need to be true professionals…possibly with college degrees as a minimum prerequisite, just like most if not all professional occupations.

    Some may not like that, but it will be my brokerage and I can run it as I see fit.

    :)

    • Chris says:

      So if i don’t have a college degree and easily hit 10 million worth of transactions yearly, you would turn me away? Making that a prerequisite is a little silly. First question should be, “Why do you have a college degree and are settling for real estate.”

    • Jay Thompson says:

      “but it will be my brokerage and I can run it as I see fit.” – therein lies the beauty of owning your own brokerage.

      I’ll avoid entering the college degree debate. Many of our agents have degrees (including some with Masters and PhD’s) some don’t. Outside our brokerage, I’ve seen non-degree’d agents that are brilliant, and those with degrees that can’t tie their shoes. And vice-versa.

  5. Austin says:

    I know a few brokerages like that around here. They are structured with a team building model where they make money off of each others business instead of concentrating on client relations and actually doing a “good job”. I think the point is to get as many non-producing agents as you possibly can under you, hope they sell at least 1 house a year and then take 40% of their commission when they do.

  6. Rachel LaMar says:

    Jay,

    This is an excellent post, and very well written. I hope that one day our profession will take itself more seriously, and that in turn it will make our profession stronger, smarter and more respected.

  7. Kevin Lisota says:

    Loved the article Jay and couldn’t agree more. I actually think you are being kind by mentioning the “pure fee-based” models, as the problem is much more insidious and common. Even brokerages that do care about transactions are HUGELY motivated to hire mediocre agents that close 4-5 deals/year. That way they collect their desk fees and no one ever reaches their annual cap, so they get their split on every deal. This is way more profitable than a small team of top producers. I took this on on my blog a couple years back:
    http://blog.findwell.com/real-estate-industry/real-estate-agents-care-about-selling-homes-but-their-brokerages-do-not/

    For our own brokerage, we’ve chosen the hardest (some would say foolish) path of aligning our own compensation with the performance of our agents. Our agents are full-time employees paid a salary plus a bonus based on individual and team production. If we sell a bunch of houses, the agents and the brokerage do well. If we do not, both suffer.

    Because our agents are employees, we have to be choosy about who we hire. And because there is a salary component to this, we can only hire when the transaction volume dictates. It seems like Business 101 to operate this way, but it is not even close to the norm in our industry, and it surprises me. I can’t think of any other industries out there who are so freely able to hire/grow their “employee” base when sales volume doesn’t allow it.

    I could go on further and talk about the “growth strategies” of big names in the business which involve nothing more than signing up more brokerages to their brand and then laying claim to “growing share,” when all they are doing is re-branding existing folks in the business.

  8. I agree with the overall weakness of so many brokerage models, but the situation is perpetuated by some many home buyers and sellers who hire under qualified agents – and then are either surprised that their work is inferior or don’t even realize that they are getting short changed.

  9. shawn says:

    This industry too hard to regulate… because everyone is self-employed and its all willing agent, willing buyer, willing seller negotiating among themself.

    anyway, even want to regulate also pretty difficult.. because some flexibility is required sometime for the transaction to be done..

  10. Mark Caley says:

    There is a simple fact in sales: more salespeople equals more sales, which is why almost all companies/organizations are constantly trying to expand. Sales is a separate issue from education requirements. Considering that a home is the largest purchase people make the education requirements to be a real estate agent should be (considerably) higher than they are. One reason they are not is because real estate is a sales job (if you think it’s not go ask a Realtor who has no clients/prospects) and few people want to enter sales (poll college grads about how many want a sales job). The brokerage model outlined in this article is a good example of why higher barriers to entry to the real estate profession should be implemented. One other thing: the abundant availability of online training, tools, etc. has devalued the broker in the agent’s eyes and also is a reason for this type business model.

  11. Jennifer says:

    Great post— I agree with some of the concepts you have shared. Glad I found your blog

  12. John says:

    Great post and so true. I see emails almost everyday from these brokerages trying to recruit agents, as all they care about is the number of agents they have. What’s the Facebook group you mentioned in the post, I’d be interested in joining?

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