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Our main blog has been moved to chicagonow.com/getting-real
but we occasionally post articles here as well.

Real Estate’s Independent Contractor Model Broken

March 8th, 2010 by Gary Lucido

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?

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