REAL Trending Special Edition: Disruptors
Hi, this is Steve Murray, president of REAL Trends. In a series of REAL Trending podcasts, I want to try to tackle what I consider to be the biggest issues facing men and women who own, operate and lead brokerage companies today.
If I hear someone mention disruptors one more time…
Here’s the bottom line: We have been disrupted like every other industry in the world. For all 42 years, I’ve been in the industry, somebody has been disrupting this industry. It’s not new that outside entities have wanted to change our industry. I mean, Century 21 was launched in 1971. Let’s call them the first disruptor.
How about RE/MAX in 1973? Merrill Lynch in 1977? If you read our materials, you know I’ve gone over this before. Some new person or company has a great idea to reform our industry and they either want to disrupt the relationship between agents and customers, or between brokers and agents, or totally get rid of brokerages. Or they want to replace all of them because lord knows, no one really needs them.
Here’s the point. It is a very large business with over $70 billion in revenues where the top companies control less than 10% market share. There’s only two of those. It’s a highly fragmented business with low barriers to entry. People can form brokerage companies with very low capital, a lot less than almost any other business you can name, with the potential that this industry has.
We attract hundreds of thousands of people a year who want to get their licenses and join in the fun, if only they knew. We are always being disrupted, and it will not stop this year, nor 10 years from now, nor 20 years from now. It is the way it is. You adapt to the changing circumstances. We’ve all heard that.
But let’s get to the point. How do you navigate this? First of all, recognize that gross margins or company revenue are under pressure. They have been for 30 years. They’re going to continue to be under pressure, period. Which also puts profit margins under pressure.
So where great brokers might have made 4% to 6% pre-tax in years past, they’re either going to change their model to maintain those, give up market share to maintain those gross margin and net margin, or they’re going to find a way to enhance that margin by being more valuable to the people they serve.
The number of agents and teams who value the monetary aspects of the relationship with their brokerage has grown and it has become a far larger segment than in the past. What am I talking about here? It probably would be safe to say that 10 or 15 years ago, 70% to 75% of the agents in the industry really liked the idea of a well-known brand name company that had a graduated commission plan that made sense with lots of support staff and private and semi-private offices.
The number of agents who find that bundled approach appealing has shrunk. That’s the main point. The number of agents therefore who value the brand and the relationship have also declined and probably will decline further.
There will be hundreds and hundreds, if not thousands, of low-cost brokerage companies for all those people, all 50% to 60% of the realtor population that did fewer than two or three deals last year. There will be great appeal there because that’s likely most of them will ever do. And most of us have known this for all 42 years I’ve been in the industry. It’s been the same way the whole time.
So, what do you do about that? Well, you have to pick business models and you have to understand that it’s very tough to be a generalist where you have hundreds of agents, of which 50 produce 80% of your volume and all the rest of them are doing one, two, or three deals a year. We all know that that has actually been a profitable model in the past. Under a graduated commission plan or even a cap company dollar model.
With the growth of low-cost brokerage models, whether it’s eXp, whether it’s HomeSmart, whether it’s JP and Associates, Rutenberg, Solid Source, Benchmark, and I could go on. They are growing. The number of them is growing, and the number of agents to whom that will be appealing is also growing. It’s not going to stop growing. So, you have to determine as a brokerage company what do I want my brokerage company to look like going forward because the past is gone and it’s not going to return.
We say small is beautiful and large is attractive. In the middle, it’s ugly. To put in perspective, I think Nordstrom is doing fine. So is Walmart. How’s Sears doing or JC Penney or Kohl’s? And what happened to Borders? Increasingly brokers are going to have to pick what kind of firm they are going to be. An industry leader said at his conference a few years ago that global CEOs have a saying now that you’ve got to be unique or cheap.
You can’t be both. Although I suppose you can be uniquely cheap. The point is you have to offer something that’s very special, very unique, very customized to have a brokerage company that’s going to maintain higher than average gross margins and profit margins. On the other hand, you can also be a flat-fee brokerage model with very low costs. You can also make a wonderful profit at that business. You do have to have enormous scale, that is largeness, but just can’t coexist in between for much longer without a lot of anxiety.
While technology is the topic and it’s going to be used to great effect and has been by top-producing agents and teams, what we note is that training and mentoring and coaching will be of equal or greater value. Why do we say that? We say it because we see brokers who do enormously well with coaching and training and mentoring and we see their results. It’s that simple. One of the greatest coaching brokerages in the country, The Group Inc. in Fort Collins, Colorado, home of Ninja Selling.
But unknown to a lot of people, another one of the great coaching organizations in the country just down the road is Your Castle Real Estate where every day, or virtually every day, they have onsite in-person real live training for those agents who want to take advantage of it in all facets of the business, including an in-house ninja trainer. We say that because Keller Williams Realty International, which may have the largest training and coaching business in the country, tens and tens and tens of millions of dollars spent by their agents and teams to get training and coaching and mentoring from Keller Williams Realty International.
I know people go, “Well, they have 180,000 plus agents, but they’re not very average productivity.” Ladies and gentlemen, Keller Williams has as many top- producing teams and individuals on our rankings of top agents as anybody in the country. That is their top 2000 are as good as anybody’s top 2000. Does that make them less of an organization? How do they get there? They invest hugely in training and mentoring and coaching.
Another indication of this is just look at the money that is spent by agents and teams, some of them likely yours, on these great coaches. Men like Tom Ferry, Brain Buffini, Larry Kendall, and others. There is a great huge demand for training, mentoring and coaching. I think that for most brokers in the United States of America, it is an area they have not really applied themselves to figuring out how to deliver it.
Let’s go back to technology for a minute. You know what, it’s not actually technology we’re actually talking about these days because we’re not talking about the machines that we use or wireless. You hardly ever hear anybody talking about that. What we’re talking about is data and the ability to access it that will make the most difference in the future and in the performance of agents and teams and brokerage companies. Right? Nobody can disagree with that.
We see the growth in the number of teams and the size of those teams as also evidence of this. Most of the teams we’ve interviewed and done research with are making great use of simple technology tools, like CRM and transaction management,email, text or Facebook to improve their businesses.
You can’t question that technology can be used to improve performance. what we do notice in some of the data is agents who are making good use of it, particularly individual agents, are not necessarily producing more business by using technology, but they’re spending less time to make the same money they did before. But technology enables them to do it easier, faster, simpler, and they can spend more time pursuing family and fun pursuits.
But to say that technology will make the defining difference in the future, well it will in some fashion, but here’s the point. Companies like Redfin already have, best we can tell, a completely integrated full functioning brokerage platform. And after 10 years, they have about 1% market share in the U.S. If technology was going to make that big a difference, why isn’t that 5%?
Keller Williams Realty, Berkshire Hathaway, RE/MAX, Compass, eXp, Homesmart, Realty One Group, they’re all racing to build the ultimate technology platform, but as we have asked before, even among brokers in markets, well fine. So we end up with five to six companies all have that platform, all works tremendously well.
Now how are those companies going to compete with each other? It’s going to go right back to recruiting and developing talent and training and developing that talent. So while I agree with a lot of people that say we need to invest in technology, I know enough brokerage companies who have basic technologies in place that seem to be doing fine at growth and profitability without a maniacal focus on it.
One exception to that is if you’re using data and technology to generate business for yourself, for your company, for your agents, ah now that is a different thing altogether. So, navigating the new brokerage world, it’s simply doing what you always had to do before, which is adapt and adjust your model, but do understand what’s changed. The audience of agents for whom a graduated commission plan company will be appealing with a bundled approach, well that market share of agents is shrinking rapidly. Keep that in mind.