The Traditional Real Estate Brokerage

Let’s take a look at the traditional real estate brokerage.  Nothing stays the same, but this past few years has seen more dramatic changes in the way business is done across America than in perhaps the past three decades.  Granted, many of these changes have been the result of developments over many years, but it is in these past couple of years that we are seeing the impact.  The real estate industry is right in the middle of these cataclysmic changes.  We have had a tidal wave slowly building, and this past year we have finally seen the surface of its power to change the real estate business  forever.

eMarketer, an independent research company, estimates that almost two-thirds of U.S. adults claim to go online every day.  A Pew Research study dated September, 2009, has 43% of all Americans over the age of 65 using the Internet, 77% of those between the ages of 50 and 65, and 83% of those from 18 to 29.  Anyone who ignores the Internet in their future business will do so at their own peril.1

According to comScore Americans conducted 13.9 billion Internet searches in September of 2009.  On a global scale, in July of 2009, there were 113 billion Internet searches.  The total global Internet audience (age 15 and older from home and work computers) surpassed 1 billion visitors in December 2008, based on data from the comScore World Metrix audience measurement service.2

Are people actually doing business on the Internet?  Absolutely.  In November and December of 2009, Americans spent over $22 billion online.  Sucharita Mulpuru, a Principal Analyst at Forrester Research, estimates “Non-travel online retail revenues will top the quarter-trillion-dollar mark by 2011.”

You and I are living in the midst of amazing historical changes in America.  Yes, there are many bad things we could dwell on, politically and economically, but in the business world entrepreneurs have never had a more fertile opportunity to respond to consumer preferences, the driving force and engine of these changes.  And this is especially true in the real estate industry where billions of dollars change hands every year.

The future of real estate brokerage and how consumers (buyers and sellers) use brokerage services is so different than the traditional brokerage, one cannot really use the term “bridge the gap” from the traditional brokerage to the new model.  When we think of bridging a gap, we think of merely changing or adjusting what was to what will be.  But some gaps cannot be bridged.  They must be leaped.

When Costco, Walmart, Home Depot, or Starbucks moves into a new community, they never take over a prior business building with some remodeling work.  You’ve never seen Costco move into an old abandoned building that once housed a Safeway store.  Walmart never takes over a K-Mart after they put it out of business.

These successful national multi-billion dollar businesses did not try to bridge the gap from the old to the new.  They built their business models and their infrastructure from an entirely new paradigm.  In order to implement their new processes created to meet consumer demand, they built a whole new business model with the consumer at the center, and everything they created was an outgrowth of that focus.

To implement their new business models, they had to build from scratch new physical plants, customer relationship management systems, relationships with manufacturers and wholesalers, inventory management, transportation systems, and employee training.  In short, they had to re-invent the wheel in their respective industries.  Their success has been nothing short of stunning, and consumers absolutely love these businesses.  In fact, these new business models have been so successful, each of these companies are facing challenges any business would love to have—they are so big and successful, they must now enter a new phase of business to re-invent their futures again.

And so it is with real estate brokerage.  The old business model cannot simply morph into the new with a little house cleaning and remodeling at the old brick-and-mortar.  To understand why there is a new brokerage model on the horizon, its important to understand what’s not working so well with the traditional model, and then we’ll look at how the new model solves those problems and offers much more to meet consumer demands and preferences.  It also offers real estate agents a much more promising future while doing more for their own clients.

The traditional real estate brokerage model going back 30 years has operated with certain assumptions and general practices.  The traditional brokerage looks like this:

1.It has a beautiful large brick-and-mortar building with massive overhead.
2.It has many agents with the top producers having their own offices around the outside of the building with windows.
3.The majority of agents have cubicles in the center.
4.The brokers take 50% of the agents’ commissions, although competition has been pushing this split up for agents.  This is one of the reasons brokers’ profits are disappearing.
5.In addition to the broker’s share of the commission, brokers also charge a variety of fees to their agents, including corporate management fees, franchise fees, transaction fees, advertising fees, copy machine fees, long distance telephone call charges, and technology or Internet service fees.
6.The agents have many subscription fees, fixed and variable expenses, as do brokers.
7.The brokers typically use traditional media advertising, including expensive print newspapers and magazines and even billboards, all very expensive advertising.
8.Running the brokerage is a business in itself, and as such it has its own profit model, which means that a brokerage makes money from its agents.  This pits the interests of the brokerage against the interests of the agents and against the interests of the clients.  In other words, for a traditional brokerage, the center of the Universe is the brokerage itself, not the agents or the clients.  Brokers can deny this until they’re blue in the face, but look to the substance, not the appearance.  (A broker’s major investment and hope of future retirement is actually in the brick-and-mortar building, which you and the agents are paying for.  That’s worked pretty nicely for decades, but not anymore.)
9.The vast majority of agents around the country have been complaining about the same short comings of brokerages for decades,3 which primarily includes these complaints:  the broker keeps too much of their commissions; has too many nickel and dime charges; does not do all the promised training and mentoring; does not create an exciting and motivational environment for agents; does not spend much money, if any, on helping individual agents develop business by getting more listings and more buyers;  does not provide cutting edge teaching for future business development; does not provide the technology and training necessary; does not provide integrated customer relationship management systems; and does not provide help with software and hardware to bridge the gap to the Internet.

Not only do agents get the short end of the bargain, but ultimately consumers are not best served anymore with the traditional brokerage model.  The rest of this book proves this point.

So with all the shortcomings of the traditional real estate brokerage, what does the brokerage of the future look like?  How would we really put consumers at the center and create a business model in which agents could thrive and make more money at the same time?

Read the snapshot of the Real Estate Brokerage of the Future.