By Tony Palermo
In an interview for a recent REM article, long-time Royal LePage Foothills broker Ted Zaharko said that brokerages in Western Canada aren’t taking in nearly money enough from their salespeople compared to other parts of the country.
He described the difference in the financial models between the east and west as “a real problem” and part of the reason for his financial demise.
We wondered: are the financial models really that different from one coast to the other? If so, at what level are the differences occurring and why are the models so different?
Royal LePage Foothills was a full service brokerage. A few months after it closed its offices, Discover Real Estate, a discount brokerage with offices in Calgary, Edmonton, Red Deer and Strathmore, told its nearly 400 agents that they would have to find work with another brokerage.
Two different brokerages – two completely different models – but both in Alberta collapsing only months apart.
Both brokerages cited market pressures as major contributing factors but how does that explain all of the other brokerages that are surviving? And how about the agents? Are they helping to fuel the financial challenges being faced by brokers by trying to squeeze more out of them?
East versus west: examining the differences
Phil Soper, president of Royal LePage, says for Canada’s major real estate brands, the compensation model doesn’t change between the master franchiser and the brokerage based on where the brokerage is located.
“It’s not like an Air Canada flight where you wonder if the guy beside you paid half of what you did,” says Soper. “Within each major brand, everyone pays the same right across Canada in terms of licensing and cost per agent.”
He says it typically works out to be about 2.5 per cent or less of gross.
The differences occur, he says, at the brokerage level where every owner sets their own business model and financial structure and how they handle splits with their agents. Many brokerages offer a few different compensation options for their agents to choose from and the structure of those options vary by region based on the different competitive pressures of the local market.
Soper says that’s where you see the major differences between how brokerages in the east operate versus those in the west.
“British Columbia and Alberta are the toughest markets in Canada for a brokerage to operate, period,” says Soper. “Brokers need to have a sharp focus to run a brokerage here.”
Market pressures aside, another reason for the differences, he says, have to do with how the real estate business has evolved in the west, where brokers tend to take in less because most of the fee is redirected back to the agent. The brokerage, in order to be successful, has to ask the agent to absorb more of the costs associated with servicing a client.
“If you offer 95 per cent commissions back to your agent, you better make sure 95 per cent of the costs associated with servicing the client are directed back as well,” says Soper.
To illustrate his point, he says what an agent in Ontario would take for granted as a service provided by the brokerage, in Alberta or British Columbia, an agent would likely say, “my brokerage doesn’t do that for me”. If it did offer the service, it would likely involve an additional charge.
Soper says he has no idea how it evolved to be this way in the west – that it’s been like this for at least the 14 years he’s been a part of Royal LePage. But he says the relationship between brokerages in the west and their agents has evolved to become the least efficient way of doing business in the country.
“What you have in Alberta and British Columbia are thousands of little islands of purchasing people – agents – all getting their own technology, their own training, their own whatever,” says Soper. “The agents have the revenue; therefore they must have the expense. It’s the reality of the market, but it’s not efficient.”
He says it’s like having a big company like General Motors tell every employee they have to go out and sign a contract with a cell phone service provider, rather than General Motors using their purchasing power to negotiate a better rate with one service provider, under one contract, and then distributing those savings to each employee.
“Most professional services firms operate as a collective because one-offs are a less efficient model that carries a higher risk,” Soper says.
Still, efficiencies aside, there are many successful brokerages of all types and models that operate in the west.
“East or west, you can make money in this industry in a number of different ways; you just have to make sure your business model is structured for your local market,” says Soper.
“We don’t operate a fee-for-service model – every agent gets the same level of service,” says Corrine Lyall, broker/owner of Royal LePage Benchmark in Calgary, which took in several agents from the former Royal LePage Foothills in late 2015 when the brokerage ran into financial problems.
Lyall says she offers different compensation programs to her agents based on their production level. In general terms, the more the agent produces, the less the brokerage takes in, eventually capping out at a certain amount. It’s a model that works and that, she says, most agents understand and are willing to work with.
“At the end of the day, the brokerage has to attain a certain level of profitability,” says Lyall. “It’s like any business. Your income needs to be higher than your expenses.”
Soper agrees, adding that it means a broker has to be willing to say “no” and to accept the consequences.
“Some brokers are not leaders,” says Soper. “They operate in fear of their top agents and give them the power. There has to be a stake in the ground where the broker comes back and says ‘whoa – we both need to be successful in business.’ That takes a great deal of courage and hard work, but it’s critical.”
Soper says he presented to a large gathering of Royal LePage faithful in Vancouver last fall. The theme of his presentation, titled Share the Wealth, was that by working together everyone on the team could be successful.
“Agents can’t think of it in terms of win or lose,” says Soper. “They can’t say ‘I’m only happy if my broker is broke.’ It’s being short-sighted and it doesn’t create happiness.” He says there was resounding applause and several top agents approached him afterwards saying “I get it.”
That being said, Soper says he also knows they weren’t lining up at their broker’s door to offer more money back. “But it gets everyone thinking – it helps to stop the trend,” he says.
A race to the bottom
Todd Shyiak, vice president, Century 21 Canada, says that a good agent recognizes the importance of working with a quality broker.
“A good, full-time agent recognizes that they can’t be an island unto themselves,” says Shyiak. “They recognize the need and value in having good oversight, management, training, mentoring, technology and networking opportunities.”
He says it’s a mistake for agents to think they can do it all themselves – and that “those who believe they can are shooting themselves in the foot.”
Shyiak says a strong broker who has a solid business model and is a good business person will give an agent the tools to survive and thrive in any market. It becomes especially important, he says, when times get tough, as they currently are in markets like Calgary.
Still, Shyiak admits brokers are increasingly facing a “downward pressure” on what they can charge agents because there are some agents, top producers included, who continue to shop for what he calls “warehouse model brokerages” – those who charge the lowest possible fees and offer the lowest possible services.
Shyiak says this is creating pressure on full service brokerages who feel they have to lower their fees, especially in hot markets like Vancouver and the Greater Toronto Area, where Shyiak says there is a lot of competition to recruit agents, and a lot of options for those agents to choose from.
“Brokers have to hold the line and can’t give away the farm,” says Shyiak. “There is a race to the bottom that they don’t need to be a part of.”
Gurcharan “Garry” Bhaura, broker of record with Century 21 President Realty in Brampton, Ont. agrees that it’s important for brokers to take a firm stand against agents who are pressuring them for more commissions.
In his words, it’s simple: “No means no.”
“Broker viability is very important,” says Bhaura, who operates a full service brokerage out of one office that services approximately 135 agents. “I’m operating in one of the toughest markets in the entire country where there’s a lot of competition.”
Bhaura believes most agents understand that a brokerage needs to remain profitable, and will stay with a brokerage that offers full services and good management and support. Still, he too noticed a swing where top talent was going towards lower-fee structured brokerages – but he says he’s starting to see some of those same agents return to traditional full service brokerages because they realize the value in what a full service brokerage provides.
Overhead is a killer
But it’s not just the local market pressures – or those from agents – that’s spelling the demise of some brokerages. Overhead, especially when it comes to office space and all of its attached costs, is a huge expense that some brokerages need to get a handle on.
“When I started in the 1980s, a brokerage could have eight offices with only 30 people working in each office and still make a lot of money,” says Shyiak. “Now, not only do you need a well-run organization, you also need a lot of people to support each office because of the competitive nature of the industry.”
Broker George Bamber of Century 21 Bamber Realty in Calgary puts it bluntly: he says running a brokerage in any market comes down to common sense and being a good leader.
“I’ve got four different programs for my agents to choose from and I feel no pressure from my agents or top producers when we’re talking splits,” says Bamber. “To run a brokerage, you need a solid business model. You need money coming in and you need to keep your overhead low. If you can’t do that, you need to be in a different business.”
Bamber operates out of one office, which he owns, and has approximately 180 agents working with him. He says that overhead, especially when it comes to having too many offices, can – and will continue to – spell the end for brokerages.
“Here in Alberta, sales have been down every month from this time last year,” says Bamber. “And, with the leases some brokers have committed to and the other overhead they have, I’m telling you, there are going to be more issues.”
Shyiak agrees, and said brokerages that have stretched themselves too thin or weren’t charging enough in the good times to carry them through the bad are going to be in trouble.
In fact, he’s had brokers tell him they look forward to the tougher markets because they know other offices will close.
“They consider it an opportunity to pick up talent from the other offices that are closing,” says Shyiak.
Value model for agents
Howard Drukarsh is president and broker of record of Right At Home Realty, a value brokerage with over 3,400 agents that operates out of six, soon-to-be seven, offices in the GTA, all of which are corporately owned.
“Our model is bricks and mortar and has been from the beginning,” says Drukarsh. “All of our new branch offices are high-profile, retail locations featuring modern, high-tech facilities designed to give our agents a comfortable and attractive work environment.”
Drukarsh agrees that the real estate industry is a competitive business and always has been, but the industry is changing, he says. The Internet has really “opened everything up” and is the biggest change from when he started in real estate years ago.
Agents and brokers need to adapt and change their business model if they want to survive, Drukarsh says. It’s the reason he and his partners created Right At Home Realty back in 2004.
The company’s financial model is simple: the agent pays $89 per month ($59 per month if you’re a new agent who signs a one-year agreement) and $295 per transaction. The agent keeps the rest.
No franchise fees. No extra charges.
As Drukarsh points out, the majority of agents are independent contractors who run their business like they want. The difference with the Right At Home business model, he says, is the majority of the transaction earnings go back to the agent, who now has the financial freedom to invest back into their own business how they want.
“We’ve created a value model for agents that can help them weather the storm in down times because we keep our fees so low. And when it’s a hot market, it just means they profit even more.”
Drukarsh says some people have tried to unsuccessfully copy his model; others have questioned his company’s viability. He says his business model works because of the sheer number of agents he has on board.
“Our model wouldn’t work if we only had 100 agents,” says Drukarsh. “And, given our scale, we are very financially secure and can weather the storm in a down market, as can our agents because of our low fees.”
In his words, “it’s a win-win.”
He says in his experience down markets are the most active recruiting times for Right At Home, and says it’s because agents realize the low fees can help them easily weather a downturn without concern of franchise fees building up month-after-month with no relief in sight.
“And, agents who are working in commission split models realize that the costs of continuing to operate that way are making it difficult to stay in the business,” says Drukarsh. “So, in a down market, we maintain our own agents and attract many, many more from other brokerages.”
The take-away: whether you’re located in the east or west, and whether your brokerage is modeled as a full service or value-based (or any combination in between), all of our experts agree it really does come down to the basics – you can still run a profitable real estate brokerage if you have a solid business model.