The Real Estate Brokerage Is About To Change
The Salary Based Realtor
Real estate brokerage is a very interesting market due to the domination of the independent contractor agreement. One of the biggest problems with independent contractors is that in general they are allowed to spew any brand message they would like regardless of what the company does. So if the company brands itself as regal and the top-notch choice for service, but then the message isn’t carried through the agents, the brand is tarnished. A sentiment of mistrust is created in the consumer’s brain. -The brokerage has little to no recourse (other than sending their license back to the real estate commission) for an agent that violates the rules of their brand.
Think about all the ways that the regal brand is tarnished each day:
- An agent sends out black and white postcards with skewed graphics and designed using clip art
- A client phones their agent to see a home, they get no response for 8,12,24 hours (as agents are taking other part and full time jobs this is becoming common)
- To save money an agent builds their website using free online tools from their hosting vendor, their website comes out looking “templately” and scattered
- A person trolling around the web finds a great real estate brokerage website to search homes, finds one they like and submits a request for information or showing that goes un-responded to for days
- A client starts working with an agent that clearly has no idea what they are doing (due to being a new agent with no training or an agent that hasn’t written an offer in a while)
The next challenge with the independent contractor model is the lack of profitability. Brokers average a profit of just around 3% (that number will obviously be down this year). But from the previous post why would investors put their money in a company that gets them a worse return than investing in low risk, tax free municipal bonds? Due to the nature of the INDEPENDENT contractor, they have all the rights and power in the organization. If they want to leave to take their sales somewhere else, they can at anytime. This makes the broker usually cave to their whims. Do they want their mailings paid for? Their website? A billboard?
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These expenses, and the high commission splits that large producing agents demand (90% in many cases), mean that the more an agent does, the less profitable they become. Brokerages rely on these agents for volume to bring in deals to the less producing agents that are sometimes 5-6x more profitable for the company.
So, what’s the solution to these issues?
Salary Based Realtors
When a Realtor becomes salaried, the value of the agent as a brand is diminished. I’m going to call this the Goldman-Sachs effect. When someone decides they want to place their investment account at Goldman-Sachs they rarely do it because of a specific person that works there. Prospective clients call Goldman because of their sterling reputation and top not brand. Do you see advertisements for Joe Smith at Goldman? No. Now you might get a phone call from a junior broker at Goldman trying to get your business, but they aren’t going to talk about what that broker can do for you, they are going to talk about the research and storied history that Goldman brings to the table to assist the client in reaching their goals.
But why does Goldman have the reputation it does (even after the financial services mess in the past year)? Branding. They have branded themselves as the leader both directly and indirectly. If you see advertisements and their logo, you think regal and sterling. And they carry that message through everything they do.
Goldman also has the ability to tell their workers what to do and how to do it. They are employees, not independent contractors. Managers can tell their employees to pick up the phone and call individuals, they can expect that if they give them a lead it will be worked according to Goldman’s strict policies. Their salespeople can not go advertise on their own, they can’t post their own ratings on their personal websites.
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Their sales managers are trained to get the cream out of their sales people. And training is no longer something you do for Continuing Education credit to keep your license, but something mandated by your employer. 12 hours every two years? What about 10-20x that. If you are a broker, can you imagine having a staff of all GRIs? Or having one person on your staff highly educated on short sales. Or maybe another person that used to work in the REO business that can go procure hundreds of listings? Consider the respect these highly trained agents would command.
Think of the benefits of being a salaried Realtor for the agent:
- True career orientation with potential for advancement
- Guaranteed income
- Company car
- Structured work environment
- Benefits such as health care and 401k
- More solid work schedule
- No self employment tax
So what are the pitfalls of a salary based Realtor to the brokerage?
- Clients want to look at a home when they are available, which is generally outside normal business hours. Solution: Have teams with varying hours. Instead of having a client work with 1 person they can work with a team that’s available to show to them M-F 9am-9pm
- Since they are employees, the broker is open to more liabilities. Solution: Many brokers are automatically included on law suits not the agent and are therefore already open to law suits. Instead of having Errors and Omissions insurance for each agent they would have it for the company. Theoretically if the company was employee based, there would be stricter policies on how things were handled thus yielding an average reduction in E&O insurance.
- There would be a vast increase in expenses due to employment taxes, company cars and gas, etc. Solution: Some major expenses would be lower. Think about the huge offices that many brokers have to house hundreds of agents. That would no longer be necessary. The other increased expenses should be more than offset by the increase in profits. Consider the income stream when 100% of gross revenues stay with the company instead of being split.
One key issue here though is that small underfunded companies are not going to be able to participate in this model. Without having a book of business to get off the ground with, it’s going to be difficult to fund a correct start up. Therefore it’s up to the large nationwide recognized brands to make a move such as this. Companies that doing a test market of 10 agents and $300,000 in salaries and maybe an additional $200,000 in expenses for one year isn’t even going to be a blip on their radar. But they can then find out if the model proves successful. Do they make more than the standard 3% many brokers make? However, this model could give rise to independent brokerages that receive large amounts of investment money to be able to execute on this or a similar plan.
Or maybe it’s up to a venture capital fund that sees the potential here to fund someone to take on this project. It would not even be very difficult to open up 3-5 offices in major cities around the country and recruit the top talent.
The next logical question: who would make the best salaried agents? We’ll save that for another blog post.
