REAL Trending Episode 25: 2019 Housing Market, Agent Incentive Packages, M&A Trends

REAL Trending Episode 25

Steve Murray talks about the 2019 housing market and what it looks like for brokers and agents, what’s new and not so new about agent incentive packages, M&A and Valuation Trends. Let’s jump in.

Steve Murray

From REAL Trends, the trusted source for Industry News, this is REAL Trending. We’re breaking down the trends of the week and showing how they impact brokers and agents. I’m Steve Murray, president of REAL Trends. And today we are discussing what does the 2019 housing market look like for brokers and agents? What’s new and not so new about agent incentive packages? And trends in valuations and mergers and acquisitions.

2019 Housing Market For Brokers And Agents

Housing sales are now down eight of the last nine months in the United States. The stock market has suffered a 15 percent to 18 percent decline since September. Mortgage rates are rising, affordability is trending down. On the good news, inventory is coming up. This correction is overdue and needed to cool off the housing market to bring affordability back in line with tens of thousands of American potential homeowners. Pew Research and others continue to show that whether it’s gen x, millennials, or even gen Z, have the same passion for owning their own home in their futures as every generation before. This all bodes well for 2019, if you look at it from a point of view that a correction was long overdue. We expect to see housing unit sales slide further, at least through the next six to eight months. By then, we may well hit a floor. What does this mean in terms of aggregate residential brokerage commissions and what does it mean for brokers and agents in their practices? We’ve seen this before here at Real Trends, having operated for the past 32 years. We’ve seen markets that were stagnant, where unit sales were flat or declining a little bit, where prices started to soften. And I’ll tell you it’s the greatest opportunity there is for those brokerage companies and agents who focus on the fundamentals. If you want to get motivated with what we’re talking about and suggesting, pick up the movie Hoosiers with Gene Hackman and Barbara Hershey, a true story about a small town high school basketball team that won the Indiana State Championship. I won’t tell you more about it, but only recommend that it’s highly inspirational and instructional. What we know is that those brokers and agents that focus on the fundamentals will gain share in this kind of market. Because, whether it’s unfortunate or not, most people really don’t know how to get focused. And if they do know how to get focused, they don’t know what to focus on. Here’s some thoughts. If you’re a brokerage company … and we’re repeating ourselves somewhat. If you’re not focused on recruiting and developing agents and your staff, you’re missing the boat. Everything starts with that. It’s kind of like Billy Bean and Paul DePodesta in Moneyball. They discovered it turns out the teams that score most runs win more games than others. And it turns out that to score more runs, you have to get more people on base. So they started with a fundamental of, let’s put a baseball team on the field that can get on base. It’s as fundamental as that concept. Are you actively trying to seek talent for your company? What is your plan? How much time are you dedicating to it? And then, when you get those people, what are you doing to help develop their talent and help them get focused? So that’s it for brokerage companies. Of course, you have to watch your costs in these kinds of markets, of course. I’d suggest you really look at that budget and see where you can take, if you had to, 10 or 15 percent out of that budget, it’s a good place to start. For agents, it’s the fundamental of the activities that lead to listings and sales. Are you in touch with your database? Are you really staying in touch with them now? Are you, secondly, staying in touch with what’s going on in the market so you can be professional and smart and educated and you can convey that to buyers and sellers in your direct mail or your online newsletters or your phone calls or your texts? How do you keep people engaged in your practice and in the housing market, and the opportunities that will now be available that wouldn’t have been available six months, a year or three years ago with growing inventories and softening prices? And might I add, sellers, who are now having to adjust to this kind of market? So, it’s a fundamental activities for an agent in staying in touch with their database and their past clients and customers, really staying in touch with them. And secondly, make sure you really, really know what’s going on in the marketplace. Total residential gross commission income for 2018 is going to come in somewhere in the ballpark of 73 to 75 billion dollars. Even with the downturn, the very soft but noticeable downturn in 2019, it’s going to be between 68 and 72 billion dollars. It’s not a huge decline. There’s still a ton of business to be done. What are you going to do to get your share in a tough market ? And what are you prepared to do to get it?

Agent Incentive Packages

Secondly, what’s new and not so new about agent incentive packages. There is a lot of gnashing of teeth in the United States right now over a new company called Compass and a relatively new company called EXP. And it goes without saying that people like Realty One Group and Home Smart, and firms like them all over the country, are hyper competitive in terms of recruiting top producing agents, and many of them are also hyper competitive at recruiting new or lower producing agents, but none of this is new. One has to have been around 40 years to know that RE/MAX was the original company to significantly offer incentives to top agents with their 100 percent commission plan. By the way, much like today and the industry’s moaning and groaning about Compass and EXP and others. The whole industry detested what RE/MAX was doing as they came out of the blocks in the eighties and started to impact market shares of incumbent brokerages. They were the originals to flat out go out into the marketplace that offer the agents a “Better deal”. None of this is new. Once the whole industry four or five years after RE/MAX started gaining strength, they chose to adapt, and they had to adjust their commission schedules across the board. I remember major incumbent brokerages in the late eighties going, “I cannot run my brokerage business with less than a 30 percent gross margin. I don’t know what I’m gonna do.” It is kind of amusing today to think the national average gross commission, that is the money that the typical brokerages have after they’ve paid their agents, is now down between 15 and 16 percent. And there are still numerous profitable, big, small and medium brokerages. And independent and franchise brokerages of all those sizes in every region who are at 15 percent gross margin and still making money. Compass is very aggressive and yes, they have a billion dollar checkbook. We’ve heard from some brokerages are complaining greatly about them offering all these “crazy incentives. Well, it’s only crazy to us. It’s not to them given their business model, their goals and objectives and the fact that they still have likely a billion dollars in the bank. They’re not going away. They’re not going to change their tactics. They’re not going to change their strategy. EXP offers a virtual brokerage at $16,000 approximate cap. Complaining about it does nothing. How are you going to compete to both keep your good people and recruit others in that environment? In Canada, we note that market is already at an average of 11 to 12 percent gross margin. And we note that we have a lot of clients in Canada that are very profitable even at that level. And they’re very good at recruiting and keeping top agents. You’re going to have to rewrite the business plan. But let’s get over the fact that we have new aggressive, well funded competitors who are doing what we’ve been doing as an industry for 40 years. Let’s not forget agent incentives offered by RE/MAX , or by incumbents when they reacted to RE/MAX , followed by Keller Williams in a big way. And Realty One Group and Home Smart aren’t new. They’ve been around 10 to 15 years with a flat monthly fee and a flat transaction fee. The fact is, as we’re apt to say, if it were always and only about money, every incumbent brokerage in the country, including many RE/MAX’s or Keller Williams, would be out of business. It’s not only and always about the money with a lot of agents. There are intrinsic values they place in their relationship with their brokerage company. Have you focused on those?

Trends, Valuations

Secondly, yes. You may have to give some ground in your commission splits or fee programs. More likely than not, that’s going to happen regardless of whether compass or EXP had ever arrived. If not them, it would have been someone else. Last, let’s talk about trends and valuations, mergers and acquisitions. I can speak that Real Trends, we believe ourselves to be a leader in valuations, mergers and acquisitions among residential brokerage companies in the US and Canada. We are running between 25 and 30 valuations a month, which is double what it was a year ago and triple what it was two years ago. We’re handling a record number of brokerage companies looking to sell interest in their brokerages or the whole brokerage company. And this is all regions, all types, all brands, all sizes. It’s a very, very active market. Yes, prices are down from where they were at the peak, which was about a year to a year and a half ago. Realogy’s NRT unit announced, in January of 2018, they would no longer be acquiring large brokerage companies. Certainly, they’d been a leader at that for the past 20 years. Home Services has alerted us and others that they’re going to be less aggressive in making acquisitions of large companies, and likely would lower their price points and the favorability of their terms. This is generally true throughout the brokerage industry. You’re going to look at softer prices for brokerage companies and a little bit softer terms. But here’s the good news. There is still a lot of capital and liquidity both within and without the residential brokerage industry.

Mergers & Acquisitions

We have worked on several transactions where we have investors from outsider industry interested in well run, profitable brokerage companies. we know and are working on several transactions by and between industry participants, two or three companies merging to create a stronger brokerage company, or one buying another, or one buying a majority of another. And we’re working on dozens of these simultaneously. The market is very active. It’s not like prices have dropped precipitously. They’re just softer than they were a year, year and a half ago, a natural outgrowth of both the cyclical restructuring, that is lower housing sales, and a structural change, new competition, Compass, EXP, Home Smart, Realty One Group and others, Redfin, all causing brokers to reexamine, if this is a business they’re going to be in, do they get small niche boutique focused, or do they get larger, where they can also then affordably bring on mortgage title, property management and insurance?

Numerous opportunities still in our business. It’s still a very fragmented industry and it will remain so. There’ll always be opportunities in mergers and acquisitions as a means of growth. Learn more about industry trends, marketing and technology strategies, as well as listen to past REAL Trending episodes on our website, www.realtrends.com/blog. This has been Steve Murray. Until next time.

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