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REAL Trends Newsletter | THE BROKERAGE INDUSTRY COMPETITION

May 4, 2018 12:00:23 PM

NOTHING LIKE IT IN OUR COLLECTIVE MEMORY

Is it a race to the bottom?

We’ve seen the RE/MAX wave crash on the shores of brokerage 35 years ago. We saw the crash of Merrill Lynch and Sears and the Savings and Loans in that same period. We felt the emergence of Keller Williams 20 years ago and how it changed the economics of brokerage.

But, what this feels like is not a storm surge but a Category 5 hurricane blowing ashore. On the one side is online real estate brokerage Redfin offering massive consumer rebates and commission discounts. On another is the first well-funded effort to bypass brokerage firms and buy agents—Compass. Yet another company now gaining traction is eXp Realty which jumped their ranking into the top ten in REAL Trends 500 brokerage rankings. Some not as new as the ones above but also gaining ground are firms such as HomeSmart, Realty One Group and a myriad of others offering low costs to agents.

No Funding Worries

One thing that makes this a little bit different than in the past is that at least three of these firms have no funding worries. eXp, Compass and Redfin have access to significant sources of capital that are larger than all but a few brokerage firms in the industry. They also don’t have much pressure to produce earnings from their operations and are far less constrained than most competitors we have seen before. Some are so low cost that any earnings are a plus. Do they have to grow? Yes. But, they don’t have the pressure that firms like Realogy and RE/MAX do to produce higher earnings.

READ MORE: The April Newsletter Is Now Available For Download

Some have told us this feels like a race to the bottom. While it feels that way, the trend towards lower splits for brokerage firms started a long time ago. This is just a continuation of a trend that started over 35 years ago. We can all agree that the downward pressure on Gross Margin is far more pronounced today than it was back then.

Are You Adapting?

We said in our commentary last fall that it requires that brokerage firms adapt. Most have already done so or are in the early stages of responding. Yes, brokerage firms are forced to respond to the success of eXp, Redfin and others. The good ones will continue to be fine. Brokerage firms are using everything from matching offers for the agents they want to retain and stepping up recruiting efforts to putting a stronger emphasis on core services, offseting the loss of Gross Margin in the brokerage business and lowering their own costs of doing business. All are being deployed successfully across the country. As one national CEO commented, ‘It feels like war, and we will react accordingly.’

We believe that the market has been heading this way for a long time. It didn’t start yesterday, and where it leads is likely that there will be fewer large brokerage firms with large numbers of agents with high productivity levels. And fewer higher productivity realty firms with lower, yet still significant, market share, who focus on investing more in their business and having material core service operations.

It’s kind of like other retail industries. There will be Walmart/Amazon and there will be Nordstrom and Tiffany’s. It will be far more difficult to be a company in between them— not impossible, just more challenging.

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