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Will Traditional Brokerage Firms Soon Be Dead and Gone?

Jan 29, 2018 8:01:05 AM

We read recently that Robert Reffkin of Compass said that brokerage firms as we know them will be dead and gone in ten years, that technology and agent teams will become the prevalent model at that time and that Compass will be a market leader.  This comes on the heels of Reffkin saying last fall that Compass would have “20 percent market share in 20 large markets by 2020.” We weren’t there at Inman this week where Reffkin supposedly commented on the future of brokerage, but we will accept the written words and recollections of an Inman writer on this issue.

I suggest that all leading brokerage firms call us and let us sell your firm quickly before all this happens and/or before there are no buyers any longer!

Just kidding.

Some 40 years ago, in the fall of 1977, one of the largest financial services firms in the country gathered over 50 of the top firms in the brokerage industry to announce that they were going to buy them or attempt to buy them.

In the ensuing years, that same financial services firm threatened many of these firms with the statement, “if you don’t sell to us we will put you out of business.” True story. That firm was Merrill Lynch Realty. They left the industry after running through a few hundred million dollars, a spin off from Merrill Lynch itself and less than 12 years. Just for the record, that is only slightly longer than the other big giant at the time, Sears, lasted in its ownership of Coldwell Banker.

This isn’t the first time that someone or some organization has entered the residential brokerage business, backed by a big pile of money and threatened brokerage firms with extinction. It won’t be the last.

Why is this happening to our industry? Here are our views of why we make such an inviting target for so many people with so much money.

  1. 2017 Gross Revenues: $72.4 billion
  2. The two largest national franchise organizations have about 10 percent national market share.
  3. The ten largest national or regional brands have less than 50 percent market share which has not grown appreciably in 15 years.
  4. The two largest owned and operated brokerage firms, NRT LLC and HomeServices of America, after spending billions buying brokerage firms over the last 20 years, together will handle about six percent of all transactions in the country for 2017 (700,000 transactions divided by about 10.2 million brokerage-assisted transactions).
  5. The best 20 percent of brokerage firms, regardless of brand, business model or location, have average EBITDA margins of four to six percent. There are outliers above that percentage, but they are few. There are many more who don’t do that well.
  6. Depending on who you ask, 40 to 50 percent of all Realtors® did one deal or less last year and, likely, the most productive 20 percent of all Realtors did close to 75 to 80 percent of all sales.

Therefore, residential brokerage is highly fragmented at the brokerage level, more concentrated at the agent level, with low margins (at the brokerage level), low productivity generally and is somewhat inefficient.

So, we have new competitors. Compass is one, Open Door, Offer Pad, Purple Bricks, HomeSmart, Realty One Group and EXP are other relatively new ones. As Jamie Dimon, Chairman and CEO of JP Morgan Chase said the other day from Davos, new competitors are a fact of life, and they will try to be lower cost, more efficient and more appealing. He said, “that is what capitalism is.” Incumbents must change and innovate to stay competitive. They have no other choice.

Compass has some advantages. One, they have a lot of capital.  Two, they likely have no pressure to make money at what they are doing. Three, they have their investors thinking they are a technology firm, not a brokerage, and we all know how much the investing world loves technology companies—at any price.

Sooner or later, their money may run out. Sooner or later their investors will likely want to get a return from their investment (not a sure thing at all). And sooner or later, the world will find out that Compass is not a technology firm, but a realty firm like most of your companies. In the meantime, they are creating challenges for incumbents.

I recall that once it became clear that RE/MAX wasn’t going away, incumbent traditional brokerage firms had to change the way they did business. At the time, none thought there was any way they could survive with gross margins of less than 30 percent (the portion of total commissions retained by the brokerage firm).  Then, they said they couldn’t survive if it declined under 25 percent. Then, no way under 20 percent gross margin.

Yet, today there are dozens of large brokerage firms with gross margins under 20 or even 15 percent that are profitable and growing firms. They adapted and moved forward.

As a leader, you can’t control what your competitors do. You can only do what you need to do to grow your business and profit. A leader should anticipate that new competition will always appear, and for the most part, try to do the same for lower costs and more efficiently than the incumbents.

So a leader’s key question is how to change to adapt to these new circumstances. Pining about yesterday does not help.

Personally, I don’t think Compass will get 20 percent in all 20 markets by 2020. We know those markets, we know the top incumbents in most of them, and we know the top agents and teams in those markets. The numbers say it is not likely. Maybe they get there in one or two markets. Maybe. But, it doesn’t mean they won’t be disruptive in the meantime.

As David Clayton Thomas of Blood Sweat and Tears sang a long time ago, “and when I die, when I’m dead, dead and gone, there’ll be one child born in this world to carry on, to carry on.”

For the past 40 years, our business has been one of constant change and constant adaptation. We think this is just a continuation of this constant change.

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