Real Estate’s Broken Business Model
Ever wondered how real estate really works?
Here are some insights based upon my 34 years in real estate:
The typical real estate broker needs to have bodies in the office to create the appearance of largesse, success, and to, well, look like they are really in business.
So . . . the broker hires anyone with a pulse and puts them on a 50/50 commission split, based upon the theory that more bodies = greater agent sphere of influence = more commission dollars.
Then they encourage those new agents to list everything they can, at any price, so they can put up more signs and make the broker’s company look really, really successful and visible.
And, they run impressive print ads or publish their own real estate tabloid to impress sellers ~ so they can get more listings and put up more signs, so they can run more print ads and get more listings and put up more signs ~ while ignoring the fact that 77% of all homebuyers use the internet to find their next home. Some companies even go so far as to charge their agents advertising fees to subsidize those ads that only serve to glorify the broker’s image.
Bear in mind that in a bricks and mortar office world, having the space to house those bodies = higher fixed expenses that do not go away in a market downturn.
Then, the broker sometimes charges those agents “desk fees” (for the privilege of being there), “sign fees”, “transaction management fees”, “seller transaction fees”, etc.
Some of those fees, especially “seller transaction fees”, may get passed on to unquestioning sellers who agree to pay several hundred more dollars on top of a commission.
Then, some brokers place their agents’ listings on their national franchise’s website and treat any incoming leads for those listings as “relocation leads” and charge the unsuspecting agent a referral fee for leads on their own listings!
Get the picture?
The agents become cash cows for their brokers.
What a concept ~ hire a herd, milk them, and hope they return to the barn every night.
Works great in a hot market; not working very well in today’s slowing market.
What’s missing here?
Well, perhaps it’s the fact that most new agents coming into real estate are clueless about how real estate really works.
There is the illusion that taking a few courses to pass the licensing exam is all that is required to become successful in real estate, but nothing could be further from the truth.
Those courses prepare new agents to pass the licensing exam; not for the real world.
And, brokers usually don’t provide adequate training in the real world aspects of real estate to ensure their agents’ success.
So . . . these new agents go to the office, sit at their desk, drink coffee, look at some homes, and wonder why there’s too much month at the end of the money.
Gee ~ real estate isn’t anywhere near as much fun as my broker told me it would be and my Lexus lease payment is due next week!
The end result is that up to 84% of all new real estate licensees fail before their first license renewal and brokers must endlessly stay on the recruiting treadmill to keep their doors open.
The hapless broker can only hope that the agent’s mother, brother, or one of their friends will buy or sell a home before the agents fails.
Some way to run a business, isn’t it?
You’d think those same brokers could figure out that they have set themselves up for failure in a market downturn when their agents fail to make sales and generate commission income.
Worse yet, these struggling, untrained agents inflict themselves upon a public that doesn’t know the difference between a good agent and a bad agent.
That’s because the public sees all real estate agents as one and the same ~ a commodity to be obtained at the lowest possible cost because they think all agents provide the same level of service.
Finally, the real estate profession relies upon a compensation system that is fatally flawed.
Why are real estate fees based upon a percentage of the value of the property?
Does it really take 8X more effort for an agent to sell a $800,000 home as a $100,000 home?
Is it realistic that the commission on that $800,000 home may be $48,000 vs. $6,000 for the $100,000 home?
Trust me, it’s almost certain that selling the typical $100,000 home will be a lot tougher than the $800,000 home!
The problem is that, under a percentage-based fee system, agents have to go for the big score because they only get paid at closing instead of getting paid for the effort they expend on each seller or buyer they work with.
There’s also a problem with the concept of the buyer’s agent sharing a commission paid by the seller.
Buyer agents are supposed to represent their buyers, but they are dependent upon the seller for their compensation.
Finally, there’s the thorny issue of dual agency (aka “double-dipping” or “double-enders”).
Dual agency was surely the origin of the saying “every home sold by a real estate agent is a two-story home ~ the story they tell the seller and the story they tell the buyer”.
Does it really make sense that a real estate agent will earn twice as much when they sell their own listing?
Not to mention the inherent conflict of interest for all concerned.
No wonder attorneys love to sue real estate agents when something goes awry in a dual-agency transaction.
And we wonder why we in real estate are not viewed as respected professionals???
Yeah, I know ~ those are the problems.
Stay tuned for future postings with proposed solutions.
I have some ideas.
October 26th, 2006 Posted in Inside Real Estate |
Print
| No Comments »
