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.