In this episode we are breaking down the trends of the week and showing how they impact brokers and agents. Steve Murray, President of REAL Trends discusses agents stock ownership, iBuyer programs on transactional volumes, and falling home sales and implications for brokerage.
Let’s jump in! Listen to the audio or continue to read below.
Throughout the last 40 to 50 years, a variety of brokerage companies have in some cases given stock or sold shares to top agents or founding agents of their companies. This is across the board. Of course, the modern day versions of this, one might say, are Keller Williams which had many of their top agents and teams own shares in various market centers. But truly, there are a wide ranging number of companies that have had anywhere between 5 - 25% of their shares sold to agents.
Most recently, we now have the phenomenon of Compass acquiring agents and part of the currency for that acquisition of an agent and their book of business is stock options in Compass itself. And lastly, eXp which is traded over the counter and when teams or agents join them, end up getting shares in their parent company, eXp.
There's nothing technically wrong with having agents as shareholders in a company. The most common benefits of course that people perceive is that agents will be more attached to the company, less likely to depart the company, and it'll create a closer relationship with the company. An interesting study I did for a number of brokers four to five years ago, surveyed 26 brokers who at some prior time had had agents with stock ownership. Probably the most important question we ask the broker was, "If you had to do it all over again, would you offer agents stock ownership?" The answer from all respondents was, "No. We did not get the benefits we expected from having agents as owners in the brokerage company."
Now in many cases there may not have been a lot of equity appreciation for those agents in those firms. There may not have been dividends in those firms, because I know for a fact, there are hundreds if not thousands of agents and teams who have done very very well on their ownership in Keller Williams market centers. Very satisfied with that investment.
I can tell you on the retention answer, it really hasn't worked very well at all for almost any brokerage that I'm aware of where retention rates of agents who were shareholders were all that different than regular agents who weren't shareholders. So I think the answer to the question, is agent stock ownership worthwhile? In the case of Compass and eXp, we'll have to see how that turns out, and we have no way to make a judgment call on that right now. We have interviewed about a dozen agents with Compass who when asked about the stock ownership said, "Well, we don't know how that will turn out. But there's a chance it will turn out extremely well. If it doesn't turn out well, that's okay, and we understood that risk going in." I presume agents are looking at eXp the same way.
But on the side of that question of the financial returns to agents, will it cause agents to be more glued to a brokerage company? History has shown so far that's not the case. We'll wait to see how it works out for the agents who are getting stock and stock options in Compass and eXp and others.
This second topic is something that we have not much talked about, and I think it's important everybody knows this potential impact. Some of the iBuyer companies, not all, but some of them and some of the important ones, if you think about it when they buy a home direct from a consumer, that eliminated the listing side transaction and the buy side transaction on that home. So when they buy a home, two transactions go away immediately. And if like some of them do, they manage the listing and resale process inside their own doors, then there is only one transaction side when they go to sell it.
Let's say, Offerpad buys a hundred thousand homes. Well in normal circumstances those hundred thousand homes would result in approximately 400,000 transaction sides because someone would sell a home. That would create two sides. And someone would buy a new home, and that would create two transaction sides. You can also look at it that well somebody might say, "Well, Steve, that's really two transaction sides that disappear." You could also look at it that way. But either way you look at it, as a consumer sells their home and then goes to buy another home, there are four transaction sides created. When Offerpad buys it, there's only one created out of that transaction where there may have been four. So either way you look at it, it's either a loss of 300,000 transaction sides or it's a loss of 200,000 transaction sides that normally would've been available to brokers and agents. So for every thousand homes, the company like Offerpad buys, you may see two to three thousand transaction sides that would've been there before are not there anymore because of their service they're providing consumers.
I have written and said, I think it's a hugely valuable service they're offering. I don't know the total market potential of how many people will accept these offers and why they would need to sell it at a discount of fair market value of some kind but there could be numerous reasons for people to do this. It could be the need to move quickly to a new town for a job. It could be you need to move quickly back to where your parents live to care for your parents if they're ailing. Any number of reasons would cause this market to grow and expand. And we won't know for some time just how big it is. But it is our belief that it's potential if you think about it at some point between Coldwell Banker, Redfin, Zillow, Opendoor, or Offerpad, Knock.com and others certain to enter the business, we one day could look at $300,000 - $400,000 dollar homes being bought annually, or even more.
If you think about the ratio for every home that's bought at least two and maybe three transaction sides disappear. That could have a significant impact on the market share of the incumbent brokerage industry. Because you could be talking about a million to a million two transaction sides out of a total market of 11 million over the next 12 months, by example, that would no longer be available to the traditional brokers and agents in our industry. It's something to think about.
Well, ladies and gentlemen, as we've said and written, we're in a cyclical slow down with housing affordability dropping to an all time low. There are gonna be fewer existing and new home sales. Report out just this week, new home sales have now fallen three months in a row, and existing home sales have fallen in seven of the last eight months.
But the implications for brokerages is what we want to talk about. We have a shrinking market of home sales. We have a very tough commission competition going on. We have fierce competition for productive agents and teams. And by our own data which we've shared before, fewer agents are doing more and more in the business and obviously commanding a greater share of the commission dollar.
Brokers need to take a step back and they need to write new business plans right now this week or this month.
Brand new business plans and they need to rewrite that plan to say, what if home sales fall 5 or 10 or even 15 percent in the next 12 months? What happens if average home prices are only going up three or four or six percent instead of five, seven, and nine? They need to write an additional loss of two to three points in their gross margin. They need to project that the average commission rate will fall to just under 5%. And you need to write those plans and you need to run those scenarios out one, two, and three years, and then see what you're gonna have to do cost-wise to keep a profit.
You're also gonna have to see what the impact on that is in recruiting talent and write some numbers out in a future pro forma. Every broker of every size, every brand and every model should right now this week this month be rewriting a future pro forma one to three year forecast of what their business looks like in that kind of environment. We know the market is trending down. We don't know for how long. We don't know how deep it goes. No one knows that answer. Although, no one suspects it will be as deep a dive as that that took place between '05 and '08, nor do we think the same reasons will cause that decline.
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