It’s happening. Real estate brokerages are collapsing, at least the traditional real estate brokerages. They are beginning to close the doors on the worn out business model that has been dying a slow and painful death, as I wrote back in 2010 in my book, The New World of Marketing for Real Estate Agents. Watch the next 12 to 24 months, and you’ll see this play out like a slow motion train wreck. Let me unpack this scenario which is unfolding right before our eyes.
The traditional real estate brokerage from the past was heavy laden with expensive buildings and overhead and advertising. Remember the huge franchise office buildings, all the office infrastructure, their costly traditional advertising with print newspapers and magazines, T.V. and radio ads, mass mailing of letters in snail mail, and even bill boards? All this sounds like some kind of distant piece of history, but we only have to reach back into the 90s and the 80s to recall these archaic brokerage models.
Many of today’s brokerages still hang onto most of the old ways. Their use of technology and the Internet has only supplemented their traditional bricks and mortar brokerage, not supplanted it.
Along with these archaic methods, the traditional brokerage kept a major percentage of the agents’ fees, but required all the agents to go generate their own leads and business. If the owner/broker could fill a building with 20 to 50 agents, he could generate an income that would make him a millionaire in 10 years.
There is a surprise in all this history. The surprise is that the traditional bricks and mortar brokerage has lasted this long! When I wrote almost 13 years ago in 2010 that they are dying a slow and painful death, I didn’t think it would be so agonizingly slow. For an industry expert who has been in the business for over four decades like me, it’s rather uncomfortable to watch this slow train wreck happening.
But there are several understandable reasons they have not been able to adapt to the changing climate. If you’ve been a successful long term entrepreneur yourself, you know that businesses and entire industries are slow to respond to changes in consumer preferences. Even when big successful businesses know consumers are taking a different path into the future, their huge business model is built on a proven profit center based on the old way of doing things. The big real estate franchises cannot adapt quickly, like a boutique brokerage, and if they did, they might break their model. After all, they have a massive infrastructure of fixed and variable costs they cannot terminate overnight. They have long term franchise agreements with all their franchise offices, and those contracts cannot simply be breached or changed. The corporate offices have shelves of three-ring binders with operating procedures, forms, and checklists. It would take years to slowly adapt all that their business models are built upon. To adapt a nationwide business model to changing consumer preferences would be like trying to turn the Titanic quickly to avoid an iceberg. They cannot do it.
If the big real estate franchises had forward looking leadership that was motivated to adapt, it would have been possible to adapt over a period of 10 years, but the original founders of the big franchises were already very wealthy and revered in their companies. They became too old to re-build their companies. Most of them just retired on their own island in the Caribbean or they are dead now. Unfortunately, for those who took over, it seems they think it is better to ride the momentum of a huge snow ball down the mountain rather than try to change its course. It appears they can’t see very far down the mountain, because there is a “Cliffhanger” type precipice and a roaring river at the bottom of the valley.
Disruptive Changes Happen
On the consumer side of life, people got tired of worn out sales pitches, stupid print advertisements, junk mail, and cold calls. And then came the Internet and computers, and since 1994 we were off to the races with advanced technologies and new ways to communicate to the masses inexpensively. People learned they can search for homes on the Internet without talking to an agent, and they can view the home and learn all about it from the comfort of their home on their laptop.
The Death Knell of Traditional Brokerage: Real estate agents no longer held the keys to the castle. Buyers didn’t need to go to a real estate broker’s office any more to view listings. They could do everything on the Internet and on their cell phones. They could even sign an offer digitally without leaving their own home. This was disruptive to the traditional brokerage model, and Realtors hated these changes.
Along the way the traditional bricks and mortar real estate brokerage found itself on a slow and painful death march. I wrote this in 2010, and a few times since, but we are seeing what I would call a tipping point in which the obvious is now reaching out to slap us in the face. Many are waking up to this new reality, but they only wake up when they suddenly aren’t making the big money anymore. Real estate commissions are drying up like Lake Mead or the Great Salt Lake in Utah.
Over the past decade locally in my real estate market we saw many agents begin to abandon the sinking Titanic by exiting the bricks and mortar brokerages and hanging their licenses with a national company that offers agents 100% of their commissions with a transaction fee of a couple of hundred dollars. Since so many agents were already working out of their home offices, it made sense for them to transfer their licenses. The ships they abandoned lost big commission splits, and over the past five years more agents abandoned ship as they got no value out of staying with a big brokerage that did nothing for them but keep 20% to 50% of their commissions.
In my market a tipping point was just reached when a leading traditional brokerage just sold out to a national brokerage that offers agents 100% of their commissions with a fee per transaction. If the traditional brokerage model is a big ship, it’s been taking on water for a long time, and it’s starting to tilt to one side. This does not bode well for the remaining traditional brokers.
Why? First, more agents in the traditional offices are going to realize at some point that they could be earning 100% of their commissions instead of 80% or even less. In a declining market when commissions are few and far between, agents (called brokers in Washington state) are going to be forced to make a financial change or go out of business entirely.
Second, there’s another big looming dilemma staring all these brokers in the face, both the traditional brokers and all the independent agents who go out to join a 100% brokerage. None of them are adapting their business models to anticipate and deal with the new consumer and seller preferences that will soon be forced on them.
I’m talking about these ridiculously high 5%, 6%, and 7% real estate commissions. Sellers are recognizing that in this day and age when buyers find their own homes on the Internet, and when listing agents do almost nothing except post a listing in the MLS, 5% or more is way too much. Listing agents used to earn their commissions, but not any more.
Just as agents are no longer willing to pay a huge chunk of their commissions to a brokerage, home sellers are no longer comfortable paying huge commissions to a listing brokerage. Discount and flat fee brokerages are exploding around the country.
The traditional brokerage is caught between a rock and the proverbial hard place, and it will inevitably lead to closing the doors or bankruptcy or dramatic changes in the business model without all the expensive overhead. More than that, the new model, which most brokers still don’t comprehend, will require a new approach to customer service, and new and efficient ways to use advanced technologies and the Internet. The mindset of the traditional broker/owner is unprepared for all of these changes.
The bottom line of the traditional brokerage model, and its achilles heal, is that it is focused on getting listings, listings, and more listings, and everything they do is bent on protecting their commissions–big fat commissions. Of course, they do all of this claiming that their clients are at the center of the Universe. I rebut that argument thoroughly and explain all this in my book, The Seven Myths of Selling Your Home.
The Best Brokerages Are Small Boutique Models
Where The Best Buyer’s Agents and The Best Listing Agents Perform Their Magic
I developed a new way to connect with buyers and provide them with all the resources they needed, and I did this 15 years ago. It became one of the most successful real estate models for a buyer’s agent in the country, and it became the number one business model in my market for 7 consecutive years for an individual broker. My boutique model truly put clients at the center of the Universe, gave them incredible resources totally free that they could find nowhere else, reduced unnecessary overhead, eliminated ineffective advertising, and used technology and the Internet to meet consumers where they were–on their laptops in their homes. And get ready for this: my boutique brokerage maximized net commissions to the point that for every home I sold, other Realtors in traditional offices had to sell 3 to 5 homes to earn the same total commissions. All this may sound like the obvious to you, but Realtors are generally not trained to develop a business model that will help them adapt. Let’s just say it out loud: “Realtors are not good at business development.” Most wear horse blinders and just go to work every day doing the same things over and over again. In a hot market any broker with a heartbeat can make money.
Flat Fee Listing Service
I recently developed a new business model for home sellers, and the advantages for home sellers over the traditional model is dramatic. For those in Washington State who are interested, you can learn more about this new approach for home sellers at Flat Fee Listing Service.
My prediction for my local real estate industry? Lots of brokers will put their licenses on inactive status while others will just quit the business forever. Broker/owners who have buildings will lose most of their brokers and their income will peter out to less than their expenses, so they will eventually close their doors. Some who own their building will try to find another commercial tenant. Others will sell their buildings. Many who are retirement age will likely just close out their businesses entirely and give up, saying “it’s time to retire.” Who wants to retire? I love what I do. I would agree that it’s time to retire the traditional bricks and mortar brokerage model. It’s no longer good for buyers or sellers.
All of this isn’t going to happen overnight, but it will happen sooner than most brokers realize. It is undeniable that the traditional brokerage with massive overhead and buildings and fixed costs are not going to be able to navigate the treacherous waters ahead. Everything is changing, and buyers and sellers are demanding change. The real estate brokerages that will survive and thrive are the boutiques like my own brokerage.
In the 2008-2011 recession, the NAR (National Association of Realtors) lost about 300,000 members nationwide. Get ready for a larger slaughter this time around. The perfect storm is on the horizon. I predict they’ll lose 500,000 members over the next 24 months. Meanwhile, buyers know how to use the Internet to find their homes, and they know how to track down a good buyer’s agent. And home sellers will be doing their research online to find other options, like a flat fee listing broker who can actually do a good job for them for a reasonable commission.
Note: I was in real estate in the mid-1970s when the big franchises were getting started and expanding. I watched RE/Max, Century 21, Better Homes & Gardens, Sotheby’s, Coldwell Banker, and Keller Williams grow across the country. I observed their successes and their failures. These are the traditional brokerages, and while they would all argue they’ve been adapting, I fear it is too little, too late for them. The entire real estate industry is changing dramatically. In the next two to three years, I believe we will see many of the titans of the industry collapse under their own weight. The traditional real estate brokerage is dying.
Last Updated on October 11, 2022 by Chuck Marunde