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Opinion: It’s still all about relationships in real estate

No matter what your brokerage business model, your welfare is based on the housing sales environment, not your tech platform.

As of this week, most major publicly held national real estate organizations have reported their fourth quarter and full-year 2022 results. There were a few surprises.

Everyone in this group saw earnings (and EBITDA) decline from 2021. Most saw drastic declines in both revenues and earnings (EBITDA) in the fourth quarter of 2022 — more drastic than the full-year results.  Which means that their full year results for 2023 are likely to be any better the market shrinks from 5 million existing home sales in 2022 to, perhaps, 4.3 million in 2023.

Subject to the whims of the housing market

The truth is, whether these firms are real estate franchises, brokerage firms, home-buying firms or real estate “tech” firms, their entire welfare is based on the housing sales environment. Sales go up, and their results get better. Sales go down and their results go down. Basically, their entire fortunes are based on the health of housing sales, despite what their leadership says or what some Wall Street speculators think.

This means they are in the same boat as all regular, privately owned brokerage firms – and also mortgage, title and other housing sales-related businesses. Every segment of the housing business saw a decline in 2022 earnings and will likely see them again in 2023. 

The more things change, the more they stay the same

Big picture, while technology has certainly played a bigger role in our industry over the past 40 years, it really hasn’t changed the foundation of the brokerage nearly as much as the application of capital. 

Most buyers and sellers use various web sites to examine homes for sales and comparable sales information, but over 90% of them still turn to an agent to execute the purchase or sale of a home.

Agents, and now teams, still overwhelmingly choose to align with a ‘known’ brokerage rather than have their own stand-alone brokerage. Brokerage firms still compete to recruit and retain agents and teams with a variety of services and financial incentives, just like they have for all of modern times. 

Brokerage firms and agents still spend significant money on advertising their services and listings as they always have, but have redirected that spending away from newspapers, for instance, to online portals, SEO, SEM, Facebook, and other channels. 

Capital and referrals are at the core

In our 2011 book “Game Plan,” we wrote about how the existing national real estate firms had used capital and referrals as a core of their offerings in building their networks. Such firms as Coldwell Banker and Prudential did so through their relocation management arms, for instance, and financing provided to their affiliates to grow. Firms such as RE/MAX and Keller Williams used attractive commission splits (financial incentives) to grow their networks.

Now we see firms like eXp and Compass using financial incentives and arrangements to build their businesses. Teams have grown exponentially using their ability to generate clients and customers to their businesses.

What role does tech play in the evolution of the brokerage industry?

Stated plainly — there is little evidence at the brokerage level that the billions spent on all the various technology offerings (i.e., CRM, transaction management, apps, web sites, etc.) has created a return that is measurable in any meaningful way. 

We have not seen data that shows that a brokerage with more tech, or fancier tech, has seen an increase in the number of agents recruited or retained, nor have we seen any increase in agent productivity over the last 5-10-20 years. 

While digital forms and signature systems and transaction management have aided brokerage firms in reducing office space and resulting headcount, we don’t see data confirming that this has boosted brokerage financial performance or growth.

Big tech impacts at team level

However, at the agent and team level it has had a measurable impact. The number of teams, and the average production of teams, have soared over the past five years. Much of this is due to their use of online marketing channels and the strong use of CRM tools. 

Their per-person productivity is two to three times higher than the average per-person productivity at leading brokerage firms. This is where technology has had the largest payoff in the residential brokerage business.

It’s still about relationships

What appears to be new is not actually new. Even after all this time — with the new entrants and the abundance of technology — at the consumer level, it is still about the relationship between an agent and a client.

Even after all of the new capital that has entered the business, it is still mostly about the relationship between the brokerage and agent. Yes, an important part of this is the financial relationship, but it’s not the only part.

After all, if it were always and only about the money, most brokerage firms would be out of business because there have always been low-cost brokerage firms. 

From our examination of all available data, client and customer lead generation are one of the most valuable services a brokerage or team can provide to agents. But with nearly two-thirds of all housing customers choosing an agent because of a relationship, lead generation is still a minor part of the business as a whole.

As far as the 2022 financial results of the large publicly held real estate organizations, they reflect that whether they like it or not, their success rests upon the same fundamentals as everyone else who operates in this industry.

Steve Murray is a senior advisor to RealTrends and a partner with brokerage consulting firm RTC Consulting.

This column does not necessarily reflect the opinion of RealTrends’ editorial department and its owners.

To contact the author of this story:
Steve Murray at smurray@realtrends.com

To contact the editor responsible for this story:
Tracey Velt at tracey@hwmedia.com

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