Real Estate’s Independent Contractor Model Broken

I would bet that most consumers of real estate services don’t realize that realtors in traditional brokerages are not really employees of their brokerages, but rather independent contractors. Basically it’s a cottage industry, with all its inherent flaws. I can only speculate as to why it evolved that way and I certainly don’t understand why this model persists today. Perhaps it made sense before the Internet. Return with us now to those thrilling days of yesteryear. All listing information is kept on non-searchable listing sheets of paper. Everything that can be known about a neighborhood or a property is in some agent’s head. And the only way to find an agent is through traditional media or personal relationships. In such a world the agent has all the power and the broker merely serves an administrative function.

Whatever the rationale for the model, it no longer works and I don’t think it ever worked that well. Let me count the many ways.

Fundamentally, this model is based upon the concept, still largely true today, that the agent brings in all the business. Consequently, the brokerage views the agent as a third party distribution channel. And since the marginal cost of hiring an agent is near zero the brokerages “hire” as many of these distributors as possible. If an agent only closes one deal this year for Aunt Margaret that’s one more deal that the brokerage gets. So the brokerage is going to hire agents without regard to their abilities. The more the merrier.

However, this situation is exacerbated by the fact that with independent contractors there are no performance standards – not even supervision – except with regard to statutory paperwork requirements. Of course, the broker is available to help the real estate agent – but only if requested. The agents come and go as they please. And the only time a real estate agent gets their contract terminated is when it becomes apparent that the agent is a huge embarrassment for the brokerage or when they represent a significant legal risk for the brokerage.

So you wonder why the real estate industry has so many bad agents? This is why. The irony in all of this is that the traditional brokerages spend a ton of money advertising their “brand” but there is no brand except in the mythical world of advertising. How can you have a brand when you will hire anyone who can fog a mirror? The agent that is working for brand A today worked for brand B yesterday. The only reason they moved is because they didn’t like their managing broker or they got a better commission split at the new place. Or maybe they also fell for the pictures in those very expensive newspaper ads of elegantly dressed buyers and sellers that represent huge commissions.

With the advent of the Internet this traditional model has become even more flawed because more and more people today are choosing agents and brokerages based upon business models and value propositions as opposed to relationships. It’s getting harder and harder for real estate agents to generate business using traditional techniques such as direct mail, wine and cheese parties, and pumpkin dropoffs. And effectively leveraging the Internet requires skills way beyond the capabilities of the vast majority of real estate agents. As I pointed out in a recent post, the vast majority of  real estate agents are starving in this market. Consequently, real estate agents are losing their power over the brokerages and are in need of more support that their brokerages can’t provide.

In summary,  the independent contractor model just isn’t working for the consumer or most realtors. Yet, are realtors willing to change? For decades real estate has been a lifestyle business, where people escape from the confines of the corporate world and pursue the American dream of working for yourself and setting your own hours (possibly another reason the independent contractor model persists). Are realtors the type of people who can make the switch to employee status in exchange for business success?

Gary Lucido

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13 Comments
Victor

Gary, What do you think will be the effect of the upcoming Real Estate Broker law, requiring all Agents to get their brokers license, and brokers to receive further education to become a “managing broker?”

In you understanding of the new law, will there be a different employment or agency agreement between broker and managing broker? Or will the relationship be the same as it currently is, though with different names and increased education?

Gary Lucido

Basically, they’ve raised the bar for what used to be called agents and brokers and changed the titles. I think it’s a good thing. The barriers to entry are way too low. This might weed out some of the bottom feeders who give us all a bad name. I’m actually amazed at how much critical information was left out of the original training.

Unfortunately, they can’t train/test for customer service skills nor market knowledge.

Victor

Thanks for your response. Unfortunately they can’t gain experience from an exam either. The Illinois brokers test is surprisingly easy (at least when I took it). I hope you are right that it will weed out the bottom feeders (esp. my mother in law).

cheers,
v

Bill Fulton

Down here in Orlando many real estate aents, includin myself, have oped to join low cost agencies where a small monthly fee is paid as well as a transaction fee. Other than that we keep 100% of the commissions. But you are right, the agents have to market themselves and web marketing is unique. And most agents down here are starving also.

Randy Whiting

With all sorts of people out there changing one thing about the status quo and calling it a “new spin” I really enjoyed reading about your business model which is authentically a breath of fresh air. You’re right that managing brokers are not taking enough ownership of those who represent them more than any amount of marketing they do on the internet or in print; the Agent. Quality control among agents is sub standard and with the rapidly changing regulations surrounding real estate it seems to be only getting worse. I had an agent the other day that argued with me til he was blue in the face that the tax credit was not a refund but a reduction of taxable income. He actually called his mortgage person in front of me and had to leave with his tail between his legs. This is a full time agent who has been in the business for years. Besides that I read and write a lot in the blog world and am shocked at the false information that these “guru’s” give out to unsuspecting buyers on a blog site who are getting even worse information from the agent they have. Not to analogize with a stigmatized industry, but if you look at the car sales business, the salespeople are in most cases 100% commission (no base), and the added draw is that they are employees so they still receive benefits. To an agent that is doing well enough to live but not afford insurance, this would be a huge plus. Many agents are doing well, but not well enough to afford insurance or to get themselves looked at by a physician or a dentist which adds a lot of stress and risk to a person’s life. It gets to a point where you can smell the desperation on them, and that sent is not attractive to clients. I give you kudos for not only implementing this business model but spreading the word. There are enough boutique shops out there that could adapt this model and maybe even change the way this business is run eventually. Best of luck!

Patti Gray Whann

Hi!
I am a broker and owner of a real estate business. i opened up 2 years ago in upstate New York. I am a small boutique business. I spent 4 years with Century 21. Otherwise I was a social worker for 17 years. Perfect match, this is a people business. I agree that this model is broken and the government has no more money and that we are going to see that agents are no longer independent contractors. I am in the building business as well and they just put in our New York State budget 1 week ago that General Contractors will not be able to hire IC on the job. Everyone will need to be an employee..They have run out of money with workers comp and unemployment. they need to reach out and stop the bleeding with IC’s. Brokers have always skirted this law..When NAR comes out in print saying we have nothing to worry about is criminal. We all need to pay attention to what is happening.

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Metroman

The saying is ” 80% of the business is done by 20% of the people. Another saying is “the cream comes to the top” and both are true in addition to “when the going gets tough the Tough get going.” So quit crying, the business in not for everyone.

Gary Lucido

No one is crying about the fact that the business is tough for agents – except those agents. What the consumer is crying about is the fact that there are a ton of crappy agents in the business. It’s not enough that the cream rises to the top because the consumer isn’t in a very good position to determine what is cream.

Barry Rose

The reason the business model is as is is because of NAR. All real estate agents are statutory independent contractors under the Internal Revenue Code for federal tax purposes. How do you think that happened? NAR is controlled by the large firms and Brokers who want the status quo. There are cracks developing, but not legally as of yet. Individual state associations of REALTORS® also support the status quo. Keller Williams, for example, (and perhaps others) treat listings as belonging to the agents and not the Broker, yet does persisit with the Independent Contractor model because it is a fact under federal tax law. Why don’t you suggest to NAR that they support an effort to change the law under the IRS first, then we can attack who owns what at the state levels.

Gary Lucido

There is a lot of truth in what you say. It is obviously advantageous that real estate agents are not treated as employees for tax purposes. However, that doesn’t prevent brokers from treating their agents as employees from an operational standpoint. That’s what we do.

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