By Don Kottick

The landscape of real estate is changing, and it appears to be changing quickly.  The downward pressure on commissions by the consumer, scrutiny by the Competition Bureau, the precarious state of the global economies, the threat of rising interest rates, increased operating costs to run a brokerage and the arrival of new business models are all creating a very dynamic environment.  

Sometime in the next few years, the boom market that many of us have been experiencing will inevitably undergo a correction, the scope of which is yet unknown.

“Canada’s housing market is expected to avoid the sharp downturn witnessed in the United States and Europe,” said Adrienne Warren, senior economist at Scotiabank. “However, the downside risks to domestic housing activity are increasing. The full impact of the slowdown may not become fully visible until mid-decade.”

Coupled with the changing economic climate and the arrival of “change” companies, traditional brokerages have been forced to rethink their commission plans and structures and subsequently, new innovative business models have and are emerging. Some of these models may not be sustainable when the market softens.  History has proven that for-sale-by-owner companies and deep consumer discount firms are quite often the first casualties when markets shift. 

The mindset of salespeople appears to be changing along with the mindset of the consumer.  Many salespeople are now questioning the value proposition delivered by their brokerages and the corresponding high cost of membership within their firms.  Some brokerages that have in the past demanded high monthly fees and dues are starting to see a new mentality sweeping their ranks.  Their salespeople are now questioning their monthly expenses, their intractable exit penalties and the need for locked-in long-term independent contractor agreements.  

In this new and changing reality, the key indicators of a brokerage’s success is now directly correlated to the number of salespeople that appear on their roster, the corresponding production and activity of these individuals, the depth of financial reserves of the brokerage to manoeuvre the cyclical nature of the market, and the strength of the management team shaping the strategic and operational direction of the entity.

Other recent trends in the industry point to some brokerages offering a smorgasbord of commission splits, fee holidays and fee structures.  The challenge here is that it becomes increasingly difficult for the brokerage accountants to determine and predict cash flow and profitability.

When a firm has simplified consistent commission plans, it is easy to successfully predict cash flow, expenses, expansion requirements and overall profitability.  The need for transparency and consistency is a requirement for company managers, but also for salespeople who depend on their firm to stay in business. 

Another disconcerting trend is when the brokerage solicits direct investments from the salespeople in exchange for shares. In situations such as this, it is advisable for potential investors to get outside advice and conduct thorough due diligence to find out the following:  when will the investment be paid back; what is the anticipated return on investment, how much equity has already been invested and subsequently consumed, liquidity of the shares, and what rights (voting rights) accompany the shares. 

A dramatic shift over the last 10 years has seen a larger portion of commissions flowing to the salespeople as opposed to going to the brokerage. Broker margins are shrinking.   

A word to the wise:  demand transparency of commissions being offered by the brokerage, the associated fees, any cancellation penalties and any extraneous costs prior to making a career move; and finally ensure to the best of your ability that the financial strength and viability of your brokerage is on solid footing now and for the future. The winds of change may be about to expose the weakest links within our industry.    

Don Kottick is the president and broker of record of Right At Home Realty Inc. It has six office locations and more than 2,200 salespeople and brokers. Right At Home Realty ranked 7th in units sold and 8th in volume for all of Canada last year, and it is Canada’s largest independently owned brokerage, according to Real Trends.

  • John P

    Interesting article.

    Question is, how much time and support can a management realistically spend when its brokerage’s roster is in the thousands, and the fees collected per salesperson are so low? Could you realistically devote a decent amount of time to 1000+ salespeople with a small management team, versus helping a small group of salespeople produce six figure salaries?

    The ‘team’ structure we are seeing today, particularly with top teams starting up their own brokerages, is similar to the business models of what profitable brokerages had years ago. Splits are back to 50/50 but the team leaders are generating leads. So is it worth it for a salesperson to give up a “100%” commission to earn 50% if they rely on receiving leads from the team/brokerage?

    Don’s point of view has some merit, though. I believe we will see brokerages at two extremes: either really, really gargantuan ones with literally hundreds to thousands in their rosters who rely on a massive volume based on a handful of transactions per salesperson, or small boutique or team brokerages who focus on a higher number of transactions per salesperson.

    Either way, you get what you pay for. There’s still a reason why people buy luxury cars instead of cheap cars, and likewise, people will still pay a higher split or fee plan for brokerages who provide top tier service and give their salespeople top notch training. After all, 100% of zero is still zero. 20% of $100,000 is still better if a brokerage helps a salesperson achieve that level of success.

  • Don Sutton

    We look for the lowest cost on everything we buy, even the cheap products and then complain because the seller wants a break on our fees.

  • John Rowe

    It is extremely difficult to make a profit owning a Brokerage. If you are a top producing agent and have some crazy dream about owning a Brokerage, file it and keep selling. It will be the best decision you ever make. We, as agents, are ruining this business. The world is changing very rapidly. Where did you book your last flight or vacation? Where did all the travel agents go? The Internet is changing the game. My advice is keep on selling and invest every dime you can in real property or other business.

  • Rita Giglione

    An addition to my previous comment.

    In my opinion polarization of commission earning potential which I

    believe is a direct result of the “TEAM” business model has also

    taken the Brokerages out of the drivers seat somewhat.

    The “TEAM” model allows 1 Salesrep to take all income
    by all team members and credit it to 1 Salesrep… Thereby boosting

    the 1 Salesrep.

    I have to wonder why Brokerages ever allowed this .

    Any astute business person would ensure all Salesrep have

    maximum earning potential … not 1 or 2, after all it takes financial

    contributions from all office Salesrep to make an office viable.

  • Great insight and thank you for sharing this with us.

    In my opinion, Brokerage Stability went out downhill with the emergence of "TEAM" business models. This "TEAM" model allowed a polarization of commission earning potential ( some may argue unfairly), and it seems Salesrep are not the only group to have suffered, however after reading your article ….. the Brokerages as well.