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Articles for ‘Agents’

Real Estate’s Independent Contractor Model Broken

Monday, 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?

Most Realtors Starving In This Real Estate Market

Saturday, February 27th, 2010 by Gary Lucido

As I pointed out in a recent post, 1,000 realtors left the real estate business in Chicago last year. I can attest to how poorly most real estate agents are doing in this market because I periodically look up the sales statistics for agents that I know and most of the time their numbers are pretty low. So, finally, just the other day I decided to try to quantify realtor performance in the Chicago market. I pulled data on the last 12 month’s closings by realtor in the entire area covered by our MLS system, which is a huge area covering all the surrounding suburbs. I then ranked the real estate agents by the dollar value of their closings.

Distribution Of Realtor Earnings In Chicago AreaThe bottom line is that of the almost 25,000 real estate agents with recorded residential sales in the last 12 months only 3,189 agents exceeded $3 MM in sales. If we make the simplifying assumption that those agents earned 50% (their split) of a 3% commission on average then close to 22,000 agents earned less than $45,000 last year – and that is before expenses. At the national level median expenses for realtors were $5,810 in 2008. When you factor in that this is not a cheap area to live in you can see that these agents are struggling. Furthermore, as you might expect, a minority of the agents closed most of the deals.

Now this analysis comes with a whole bunch of caveats:

  • I emphasized above that this focuses on agents that had recorded sales. If an agent never closed a deal in the last 12 months then they are excluded from this analysis because I have no way to know who they are. But I suspect there are quite a few who did nothing in the last 12 months.
  • Assuming that these agents earned 50% of 3% on average is a very big assumption. Many agents earn quite a bit more than 50% but on the other hand the commissions might be a bit less than 3% – e.g. typical cooperating commissions are 2.5% but could be as low as 2%.
  • Many of the agents that are included in this analysis might actually make most of their income from commercial real estate and maybe they just did one or two residential deals in the last year.
  • Many of the included agents might be part timers
  • There may be quite a few agents that are excluded because they have no recorded sales in this time period but they might actually be quite profitably employed as members of a celebrity realtor‘s team, where the celebrity realtor takes all the credit for their business (this is a common practice).
  • There may be a few agents that are included above who are members of a celebrity realtor’s team but one or two transactions appear under their name for one reason or another.
  • As you start to get into the really high numbers – even as low as $16 MM – you start to run into the celebrity realtors who have teams working for them, some of which do a lot of developer work. So it’s not like the #1 realtor did $171 MM of closings all by himself.

Nevertheless, I believe that this data is directionally correct as it is consistent with data provided by the National Association of Realtors. In their 2009 member profile they show that on a national basis 62% of realtors had gross income of under $50,000 in 2008, with a median gross income of $36,700. After taxes and expenses those numbers drop to 64% earning under $35,000, with a median net income of $23,200. And those numbers are all for 2008. You can bet that 2009’s numbers are going to be a bit worse.

2009 Took Its Toll On The Real Estate Industry

Friday, February 19th, 2010 by Gary Lucido

I guess it’s no surprise that 2009 was a tough year for the real estate industry but I’ve just run across some information that gives us a pretty good idea of just how bad it was. After losing 4,000 agents in 2008, the Chicago area lost another 1,000 agents in 2009. That’s a 7.6% decline on top of last year’s 25% drop, bringing the total down to 12,054 as of early February. I guess these agents ran through all their relatives and friends – or they’re no longer on speaking terms with them.

Meanwhile, business hasn’t  been good for the brokerages either. Realogy, which is probably the largest brokerage organization, just reported a loss of $262 MM on revenue of $3.9 B. In case you didn’t know (most people don’t), Realogy is the parent organization of the following brokerages:

  • Coldwell Banker
  • Century 21
  • ERA
  • Better Homes & Gardens Real Estate
  • Sotheby’s International Realty (and you thought they were high end)
  • NRT

How do you charge outrageous commissions and still lose money? For starters, it doesn’t help if you have a huge overhead and spend a lot of money on advertising of questionable value. However, the biggest issue is that Realogy was taken private in 2007 by Apollo Management, a private equity investment firm. As with most private equity deals this one was heavily leveraged and today Realogy still has around $6.7 B of debt from that deal. Oh…and they have negative equity – close to $1 B worth – which is appropriate given that most of their former clients also have negative equity. Things got so bad last fall that Realogy was on the brink of bankruptcy when Carl Icahn stepped in at the last minute and saved them.

BTW, I find Realogy’s so-called strategy interesting. Either they’re not too bright in having all these brokerages that compete with one another or they’re smart enough to realize that there really isn’t any real competition between them. What do you think?

Anyway, Realogy’s woes are symptomatic of the entire real estate industry. RealTrends and Bloomberg recently reported that the dollar value of real estate commissions dropped by 6.2% last year. So, that’s about in line with the decline in the number of real estate agents in Chicago, which makes sense.

But what does all this mean for you? I’m afraid not much. There are still more real estate agents than there is productive work for them (much more on that topic in upcoming posts). And even if Realogy closed the doors on all their brokerages I maintain that it would have zero impact on the real estate industry because all those realtors would simply get new business cards with a different broker’s name on them. At least that’s the way it works with the independent contractor model (more on this some day soon also).

Realtors Loath To Discount Commissions

Saturday, December 12th, 2009 by Gary Lucido

That’s basically the headline of one of the articles in the weekly email that I got from the National Association of Realtors (NAR) on Friday morning. Well, the headline certainly doesn’t apply to this realtor!

The very short article references a recent LA Times article that features quotes from realtors like “You’d be foolish to give part of your salary away. I’m worth what I get paid” and “[realtors are] really digging in their heels because they aren’t selling as many homes.” Hmmm. First of all, if the realtor works the low end of the real estate market they are worth what they get paid but in Chicago there are an awful lot of realtors collecting pretty fat commission checks from $500K+ real estate transactions. As for realtors not selling as many homes these days…well, that’s not the customer’s problem now, is it? All that means is that there are still too many real estate agents out there.

Given the tone of the NAR article and the fact that it was only 158 words I couldn’t help but wondering if it was nothing more than a blatant attempt at price signaling – i.e. “don’t cut your commissions”. The original LA Times article, at 1547 words, conveyed a much different tone which I summarize as follows:

  • Some real estate brokers are willing to discount their commissions but you have to ask – well, not always :)
  • Agents are reluctant to discount their commissions because in this market they have to work a lot harder to close a deal
  • Some discount brokers may underprice a house in order to get a quick sale
  • In a related article the author points out that a discount broker may overprice a house in order to have a listing to attract buyers
  • There are several special situations in which you might be able to get a discount – e.g. when the listing agent acts as a dual agent or when the broker is independent of a national chain (these chains usually take 8% of all commissions)

On the whole it’s a much more balanced picture than that presented in the short NAR article. The only peculiar thing I noticed was that in one article the author cautions about discount brokers overpricing a house and then in another article cautions about them underpricing a house. The truth of the matter is that any realtor, discount or not, can either intentionally or unintentionally overprice or underprice a house. I would not assume that it’s more likely to happen with a discount broker.

One last point: there were two glaring omissions in the LA Times article. First, there was no mention of service level. Many discount brokers offer a discount because they provide a lower level of service. Consumers should always find out how the realtor can afford to offer a discount real estate commission. Second, there was no discussion of the buy side, where buyers can get rebates of the seller paid commission from their agents. Let’s face it, for every seller there is a buyer (eventually we hope), so you can’t ignore this half of the equation and the savings can be just as substantial.

You’d be foolish to give part of your salary away. I’m worth what I get paid

Illinois Legislature Rewrites Real Estate Act

Friday, November 6th, 2009 by Gary Lucido

Last week the Illinois Senate passed a bill to substantially rewrite the Real Estate Act of 2000. The bill now goes to the governor for signature. Here are some of the highlights of the bill:

They’re changing the terminology of the industry. Currently, a Salesperson is what most people think of as a regular agent and Broker is the person that the Salesperson works for. Of course, the public thinks of everyone as a broker because, well, they broker deals. So they’re changing the terminology to match popular usage. The new terms will be Broker and Managing Broker. Probably a good idea since realtors aren’t supposed to be selling anything when they are working for a buyer (yeah, you heard me right).

They’re increasing the course work required in order to become either a broker or a managing broker. The broker requirement is going up from 45 classroom hours to 90 hours, while the managing broker requirement is going up from 120 hours to 165 hours. 15 of these hours have to be situational (not exactly sure what they have in mind here but with any luck it will include how to answer your phone, how to return phone calls, and how to use email). In addition, they are increasing the ongoing educational requirements for both licenses.

The increase in coursework is definitely a good idea because, let’s face it, there are a lot of Bozos running around as real estate agents. If nothing else this should clear the ranks out a bit, pushing some of the marginal players over the edge. You would be surprised at how much is missing from the current curriculum that we have had to figure out on our own. For example:

  • How to handle a short sale
  • How to find and pull up public records
  • How to determine zoning
  • Where to find the building codes
  • How to find out what the development plans are for adjoining properties
  • All the documents required for a closing
  • Typical inspection issues to look out for
  • How to use the MLS effectively

Of course, there’s no guarantee that they will apply the additional course hours to this practical stuff.

In addition to a host of consumer protection initiatives, another new requirement is that a broker will have to be licensed for at least 2 years before becoming a managing broker. The cynical part of me thinks that this is an attempt to restrict competition but I guess it makes sense – for the average person. However, given that the job is not exactly rocket science, I know of at least a couple of people who were able to move quickly into this role, without a lot of time in the trenches, and became more effective than most overnight.

This new law takes effect December 31, 2009 but existing licensees have until April 30, 2012 to comply with the new requirements. So, there’s still plenty of damage that can be done in the meantime.



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