It should be noted, this commentary has nothing to do with the way the Real Estate Industry works for clients. We could all probably come up with a list of ways things could be better but, overall, the industry does well by the consumer, in my opinion.
This post speaks to the large part of industry selling hope and supposed “lead generation” tools to agents, not the actual business of Real Estate transitions between Sellers and Buyers. However, we do have to keep in mind, the “best agents” are mostly defined, within the industry, as the best lead generators, not those that do the best job for clients.
I have been a real estate agent for about 3 years now, and my impression is the entire industry internally operates as butch of hucksters, selling hope to new agents, in much the same way as Multiple Level Marketing companies.
There is a statistic, often cited, that 95% of all real estate transactions are completed by just 5% of agents. The reason for this, in my opinion, is the vast majority of the industry works like Avon and Amway, where while 5% at the top are getting rich, the other 95% is paying out of their pockets to keep the industry going. It is not just about brokerages reducing risk, or covering costs, it is about a business model that makes money from selling nothing more than hope.
It is the 95% with no or low sales that are paying to keep the Associations running. If 95% of members walked, the Associations would collapse. Moreover, it is said membership is voluntary, but it really is not in may cases. If the brokerage is a member, and all the major ones are, then all their agents must be members as well, or the broker is charged a nonmember fee for each. The broker then requires the agents to become members. For many individual agents, there is no choice.
It is also the 95% with no or low sales, but paying high fees, that make the MLS companies lucrative. Do you want a website? The MLS will charge you an additional monthly fee just for the right to access their raw feed… the software to process the feeds costs more from a 3rd party… with requirements that basically have you advertising competitors. So, the top 5% get free advertising paid for by the 95%.
Some brokers will claim to pay 100% commissions, but are milking new agents, and the rest of the 95%, for things like monthly office and desk fees. Who benefits? The brokers and the 5% at the top. These companies, because they don’t split the commission with agents, shift how they make money from the “top producers” to those that can least afford it, and those trying to get off the ground.
Some brokerages will even nickle and dime agents, wanting agents to pay for everything from “brokerage generated” leads to making copies of paperwork. If they could find a way to charge an agent for breathing the air in the office, they would.
In my state, the law requires that all agent advertising be co-branded with the broker’s information in equal prominence. The result is that the 95% are providing the brokerages with millions and millions of dollars of free advertising. The 95% can basically kiss goodbye many of the leads from their own advertising and marketing.
Why the brokerage information should be on advertising makes sense. on the surface. By law, brokers are suppose to be providing oversight, and the brokerage is the first place clients need to go to if they have an issue. In reality, agents are typically paying 100% of their advertising costs, and since the advertising gets co-branded with equal prominence, the brokerage is getting a major benefit for free… and I would bet dollars to donuts that agent advertising generates more inquires to the brokerage, than direct leads to the individual agent. The brokerage can then sell those leads to agents as “broker generated.”
What makes it even more apparent that the 95% are being set up to be fleeced is that it is relatively cheap to go to school, and cheap to get your licence. Real Estate Schools spit out a ton of new agents every year, who then only realize the real cost of being Real Estate agent after they start working. Even if each and every new agent had the innate ability to be successful, there is just not enough business to go around. The industry has therefore found ways to generate revenue from people have little to no chance of succeeding.
Just like with Avon and Amway, all you have to do, in most cases, is just show up and say you want to work and you are “hired.” There is no screening. There is no interview process. Most brokers, especially among the major companies, will sign on as many agents as they can, knowing most will fail, but in the meantime they get free advertising and free labor… and if they make a couple transactions before they drop out, that is just gravy.
Most brokerages make little to no investment in new agents. Agents are told they are “business owners” and need to invest in themselves. Brokers sell the idea agents need to pay for leads, training and mentoring that will eventually lead to more referral and repeat business. Brokers have little to nothing to lose, and most risk is shifted to agents, but everything to gain.
Examples of Fleecing
Brokers will tell agents, who have ambitions of becoming part of the Top 5%, that they should volunteer for phone duty. In exchange for working for free, as the office receptionist, an agent gets all the leads on their shift. This is always described as doing the work required to be successful, but it is just really working for free.
You will spend even more time chasing leads that don’t qualify, or just want you to be a door opener, than actually being productive. However, if you do get a good lead that generates a sale, the brokerage still benefits more than you. Calculate the time and cost working phones for that one sale, chasing bad phone leads and opening doors, plus then the actual productive time and costs with your good one, and feel lucky is you pull off minimum wage.
Open Houses are another good example. The top agents in the office are so busy, they can’t possibly sit for all the open houses they need to schedule (read the sarcasm). You will be told, they are helping you by allowing you to volunteer to host their Open House. “This is a great opportunity to collect leads and find buyers,” is what will be said… almost word for word. The dirty little secrete of the industry is that, while Sellers expect them, Open Houses have become one of the least productive ways marketing a property or generating Buyer leads. They benefit the brokerages, because they invest nothing, not the agents.
They will then tell you, for you to have a successful Open House, you need to send out mailers, do online promotion, walk the neighborhood handing out flyers, buy and put up Open House signs, buy snacks and giveaways, and do it all with your own money. Think about this… They will try to convince you, and probably will, spending your own money, to promote another agent’s property, is for your own good.
Coaches are another spectacular invention to bleed agents of their money. The role of a coach is to provide training, accountability, and motivation. If Real Estate Agents were actual employees, this would be the responsibility of the employer. An employer pays salaries, benefits, and taxes on employees. They have a vested interest in an employee’s success, because they are paying for this person to just take up space otherwise. In the Real Estate world, if an individual agent wants training, accountability, and motivation, they need to pay for it.
The change that needs to happen… IMHO
My first idea was that new agents should be required to complete a two year apprenticeship. The new agent would have an “apprentice licence,” until they have completed some real world experience. This would require a new agent being paired with an experienced agent. The new agent would basically work for the experienced agent, doing much of the grunt work and gaining real experience.
The mentor would be motivated to get the new agent working because they would be required to split their commissions, but get the benefit of owning the leads generated by their apprentice. There are a hand full of teams that look to be doing this, but I believe it should be an industry standard. I think this is the best solution, but probably has the least probability of actually ever happening.
This leaves agents as employees. If Real Estate agents had to be actual employees, rather than most being Independent Contractors, we would see an immediate reform of the industry. What it would mean to be a qualified agent would immediately be redefined. What it would mean to be a good agent would immediately be redefined. Most of all, the bottom 95% of agents would not be paying to support the industry, without getting much in return. If brokerages were actually responsible for their agents, we would see better training, and better oversight.
Both options would mean fewer agents, but fewer agents, who are highly qualified, is a good thing. I know it is a hard number to track because of the high rate of turnover, but in my area, the number of agents that exist versus the number of homes on the market is close to 1 for 1. If this often repeated statistic is true, that roughly 5%, then the average agent in the Top 5% is doing really well, and the typical agent in the remaining 95% is losing money.
The Real Estate industry lives, at least in part, off the “failure” of the bottom 95% of agents. It is part of their business model. Moreover, there just simply not enough business for as many agents as there are. If it is true 95% of business is completed by only 5% of agents, I would like to see the stat for the Top 10%… I would bet it is close to 99% of business. This means a very large percentage of licensees could be eliminated from the industry without any negative impact to Buyers or Sellers.
The Real Estate Schools keep pumping out new agents. The typical brokerage will bring on a new, untested agent into their organization without anything close to resembling an interview process, leave agents to simply fend for themselves, and then attempt to sell them the basic and essential tools to be productive. Most brokerages really have no vested interest in their agents’ success, until the agent actually becomes successful.
Just like Avon and Amway, the Real Estate industry thrives on selling hope to people wanting to work, but in reality, most will fail. Under the current business model, of many brokerages, they bleed these agents of their money by selling them they idea if they just spend more, their lead generation will be more successful. It is that failure the industry relies on to pay for and keep afloat. just about every aspect of itself… the Associations, the MLSes, and even the brokerages… and it is all done with little to no investment in individual agents.
If brokerages had to give employee status, pay at least a draw, provide benefits, and pay employment taxes, I think the industry would be much better off for it. Yes, there would have fewer agents, but in my opinion that is one of the benefits.