It seems everywhere we look, the real estate industry is being defined by success and excess. Turn on the television, and we’re immediately bombarded with luxury real estate shows and series — Netflix’s Selling Sunset initially comes to mind. And while the Selling Sunset cast is bringing in hundreds of thousands of dollars on commission alone at times, that’s not necessarily the reality behind real estate. What these shows don’t show is the challenge behind running a brokerage, a successful business.
Inman reported that the average retained company dollar fell to just 14.8 percent in 2017, a number that had dropped more than 7 percent from only five years prior. Brokerages, for the most part, are not experiencing glitz and glamour; they’re struggling to profit.
The traditional brokerage model is under siege
The industry has been characteristically slow to adopt technologies, that’s a fact. A KPMG survey found that nearly 60% of brokerages don’t have a digital strategy in place. This large gap has left the industry wide open for a barrage of technological innovation, and Zillow is just the beginning. Residential buyers and sellers can access nearly anything online from listings to sales and valuations — areas where brokerages, at one point, ran the show. Without evolving to ways to offer more value, the traditional model can easily die off.
New companies have turned the traditional brokerage model upside down by completing all aspects of a residential sale, from beginning to end, online. The old way of doing things is changing as there are alternatives now available to both agents and home buyers and sellers. For example, companies like Purplebricks and Reali have gone completely away from commission plans in exchange for a flat-fee rate. With the aid of new tech, both companies have disrupted the market in a few ways, and this is just one example of a tech disruption.
- One, a flat fee challenges the traditional brokerage model as the commission split has always been the primary source of income for brokerages. Many brokerages are dropping the commission split in order to remain competitive. And while they might earn the listing, that doesn’t necessarily mean they will earn a profit.
- Two, these brokerage alternatives provide more options for the home seller. Not only do these provide complete care from listing to closing, but they give the seller budget options to consider — and this hasn’t been available before. For example, a home seller looking to cut commission costs might settle for a flat fee, depending on what’s included. In addition to the commission split mentioned earlier, brokerages are learning to market differently in order to earn those listings.
The commission structure doesn’t cover expenses significantly enough to make a profit
Let’s revisit the struggles traditional brokerages are facing when it comes to commission structures. In addition to flat-fee models mentioned earlier, alternative buying and selling options pop up daily. Whether it’s For Sale By Owner (FSBO), through a direct buyer or selling online via a virtual brokerage in a contactless fashion, it’s fair to say that the traditional brokerage model has its strong share of competitors.
In order to compete with these alternatives, brokerages must have competitive commission splits to draw interest. But even if a broker drops their fees from a traditional 6% down to 2 or even 1%, they still have to pay their agents. On top of that reduced commission, traditional brokerages are still, well, traditional. They’re still coming into work in a conventional office space as opposed to a work-from-anywhere situation. Overhead is significant, including those office fees, janitorial, supplies, utilities, and more. In comparison, an online brokerage has none of those additional costs, leaving them with the ability to more easily make a profit.
Brokerages spend far too much time and money on legacy softwares
Let’s not forget that the majority of the industry is still operating on legacy software (is it too harsh to call it ancient?). In fact, the average brokerage operates on more than 12 technology systems — yes, 12. Not only do all of those software fees add up for the broker, but it gets even pricier when you slap administrators and agents on top. Let’s consider:
- Manual data entry is lengthy and not-to-mention all the duplicate errors and wasted time that comes with it.
- The time and money it takes to juggle far too many applications (like 11 too many!).
- Accounting for finances on excel spreadsheets that don’t integrate.
- Legacy systems operate using on-premise software. This means that all team members must come into the office to use their desktop computers, requiring the broker to maintain a traditional office space ($$$).
If you ask us, this list looks like an extraordinary waste of time. Brokers don’t need to operate on 12 different tech systems when they could be using one. That same issue was a key motivator behind the founding of Zipi — it created an industry solution for these massive headaches and will help brokers focus on solutions to remain profitable.
Alternative brokerages create more options for agents
In addition to the fact that new technologies have forced brokerages to charge a lesser and lesser percentage, they also cause intense negotiations between brokers and their agents. Think about it — agents have an array of job opportunities in this day and age.
Whether it’s new construction, a virtual brokerage, working for a flat fee, i-buyer, tech-enabled, or for a team, agents get to pick and choose the brokerage model that works for them. Agents have choices: they can negotiate for a higher split knowing there are alternatives, or they can simply walk away from their current brokerage. This leaves many brokers in a bit of a pickle — how many agents can you keep on paying out at a higher percentage? An office full of top earners will only add to the issue.
So what’s the takeaway? Traditional brokerages need to offer more value to their agents than just the commission split. You need to reward your agents while also taking your business’s finances into consideration.
Zipi is the Real Estate Operating System (OS) that aims to make real estate simple from agents and deals to commissions and billings. Request a demo to get in contact with one of our expert team members.