By Don Kottick
Why do people in the real estate industry rarely talk about the one of biggest changes to hit the real estate industry over the past few decades: the declining profitability of the real estate brokerage? Many people talk about the business shift from the broker to agent centric and how it has now evolved to consumer/tech centric. Throughout each of these paradigm shifts, the net-to-office revenue share for the brokerage has steadily been declining. Interestingly, Canada leads in declining net-to-office revenue share when compared to brokerages in the United States. There is also a noticeable decline when you travel east to west in Canada, with British Columbia being the tightest market.
Brokerages in the U.S.A. tend to have more ancillary service revenue from mortgage, title insurance, insurance and their relocation businesses. In many cases, it is this ancillary revenue that prevented many of the U.S. brokerages from going under in 2008.
In Canada, lawyers and title companies typically handle any services related to title, so this is not a revenue source available for the brokerage. The vast majority of Canadian residential brokerages really just stick to their core competency of operating pure residential brokerages. A small number of brokerages have integrated mortgage services, property management services, new development and marketing services to supplement their main revenue stream.
The arrival of teams has created an interesting dilemma for the brokerage as many teams enjoy favourable split arrangements with their team members, and do not share any of the liability, risk or exposure from running the necessary infrastructure. Many teams have left the fold of the parent brokerage to set up their own operation, only to find that running a full brokerage comes with many new and unexpected risks, costs and headaches. It is not uncommon to see some of these entrepreneurs folding up their team tents and coming back to the traditional brokerage arrangement.
Recently there has been much discussion about whether a physical office is a necessity and if a virtual type of brokerage is a sustainable option. The challenge for the virtual brokerage is creating a distinct and attractive culture when human interaction and direct relationships are masked or absent. The jury is still out if virtual organizations can create a sustainable culture in a people business.
Some espouse that the day of the traditional real estate brokerage as we know it is coming to an end. Cliff Stevenson, managing partner and co-owner of Re/Max First in Calgary says the future of the traditional brokerage is actually quite bright. Stevenson says that brokerages focussed on continual improvement will continue to thrive. “We are tremendously bullish on the brokerage model with some adaptive measures,” he says. “Corporately, we have a laser focus on creating a success-oriented, collaborative, culture-focussed organization that hires only the best talent. Then it is up to our corporate team to provide a unique value proposition that distinguishes us from our competitors.”
Todd Narlinger, CEO of Madison & Company Properties in Denver, Colo. shares Stevenson’s enthusiasm for the future of the brokerage. Narlinger says, “The key to our culture is the thought process of being the best, not the most. Having like-minded agents who want to bring superior service to our clients will allow us to differentiate ourselves from our competitors and the “disruptors” in our market. We constantly tell our Realtors if you provide ‘Nordstrom’ quality service and marketing for your clients, you will not only succeed in today’s market, you will thrive. It’s our corporate mandate to deliver exceptional support and value-added tools to address the needs of both our Realtors and the consumer.”
Nelson Goulart, president of Better Homes & Garden Signature Service in Mississauga, Ont., says, “If I am looking to have someone join our team and if commission and lead generation remain the key decision drivers, then I have not adequately communicated our value proposition to the prospect.”
Goulart, Narlinger and Stevenson, who have all defined themselves as exceptional leaders that embrace technology, social media and innovation, believe in the importance of creating and delivering an exceptional experience for their Realtors through their unique value proposition. This increases the viability and sustainability of their bottom line profit, while being attractive to Realtors in their communities.
We are definitely witnessing a polarization of the brokerage community with low value, limited managerial support fee-based brokerages on one end of the spectrum and with full-service brokerages operated by strong leaders that serve up compelling value and culture for their members at the other end. This polarization is already underway. We see a hollowing out of the middle ground in the brokerage community as managers and owners are being driven to choose their location on this business spectrum.
The high volume of Realtors required for a fee-based model to be profitable requires substantial managerial and compliance resources to ensure that quality service levels are monitored and maintained. In order for the full-service model to deliver their unique value proposition, it also requires substantial resources and determined leadership to ensure exceptional service levels are delivered and that innovation is a constant ingredient for their evolving vision.
The brokerage model is not going away, just as the Realtor is not going to be disintermediated from the real estate transaction. The road ahead is going to be exciting as innovative brokerages adapt and respond to the changing times ahead.