What will it take for brokerages to survive in the future?

Profitability at real estate brokerages is declining, and this downward trend will continue indefinitely; to survive, brokerages must stay hyper-focused on recruiting, recruiting and recruiting. In successfully recruiting the right agents, culture, technology and marketing support trump commission splits.

The national real estate picture continues to improve, and brokerage owners who have suffered through the past nine years and, more importantly, the ones who have survived, should be ready to rejoice.

Many of the brokerages who have gone through the downturn and have come out the other side in one piece are reporting record sales volume.

Interest rates are at near historic lows, the stock market is near record highs, and sale prices are increasing in many national markets. However, there are no sounds of champagne popping in the owners’ offices.

The celebratory cheers have been replaced with the looming fear of the inevitable disaster just around the corner. If everything looks so rosy, what could be wrong?

It turns out that the one metric that matters — profitability — is in free fall. Although this hasn’t affected all brokerages yet, nobody is safe from what’s ahead.

There are many factors that figure into this disappearing act of profitability, but all of the major (permanent) problems are summed up in three words: splits, commissions and aggregators.

Splits

Who remembers the time when agents were all at 50-50 splits? And perks? What were they? That was the past.

The future is here, and the game has been changed. Competition for agents has gotten so fierce that agent splits are growing faster and faster.

As splits get closer to 100 percent, brokerages are adding perks such as marketing budgets, personal assistants and even personal drivers to recruit and retain agents, further decreasing company profit per agent.

Commissions

Before, 6 percent was the standard commission. Every market, every brokerage — 6 percent. In many markets now, brokers are fighting just to get 5 percent.

If your market rate is typically still around 6 percent, it’s just a matter of time before you join the rest of reality. Fierce competition and a free market have worked exactly how they should by providing better pricing for consumers, even if the result is sometimes worse service.

Aggregators

Aggregators are not necessarily evil, and consumers seem to love their products. With over 50 percent of all consumer searching done on aggregator sites, it’s impossible not to give them credit for what they have accomplished while the broker/owner’s guard was down and the National Association of Realtors was more focused on its revenue than it was on member advocacy.

Many brokerages have even inked high-priced marketing agreements with aggregators, promising huge flows of qualified leads. The problem is not that aggregators can’t deliver leads to brokers; the problem is profitability.

No matter how many consumers conduct their searching on aggregator sites, the aggregators don’t increase the market size. If 6 million homes sell in a year, those 6 million homes would have sold with or without the aggregators.

The current residential real estate industry generates approximately $60 billion in gross commission income annually. Aggregators do nothing to increase this number but generate hundreds of millions of dollars of revenue out of this pot.

Singularly, none of these obstacles deliver the deathblow to the traditional brokerage. Combined, these three trends will forever change the face of the current brokerage model.

Upward pressure on splits, downward pressure on commissions and new hands in the same-sized pot equals consolidation of epic proportions and an industry with little to no resemblance of its former self.

If there is a silver lining, the sales agents seem to be safe in the short term from the turmoil in the brokerage world. Many sales agents will benefit from the increase in their demand from brokerages, but I will get to their obstacles and long-term concerns in future articles.

So does this doomsday scenario mean that owners should close up shop or sell their company and become full-time agents for someone else? That may be smart for some broker/owners, but I don’t believe that this is the case for the savvy entrepreneur who should be able to navigate through these challenges and use this as an opportunity to outpace the competition.

To do this, they need to stay laser focused on the one factor that they can control — growth. The only way to offset shrinking profit margins is to grow top line revenue.

Coaching and mentoring your existing agents is a good place to start, but it can never on its own add consistent and sustainable increases in revenue. There are three words that will separate the winners from the losers: recruiting, recruiting, recruiting. The companies that are not effective at recruiting will die — with no exceptions.

As the game changes, so does the strategy to recruit. Most brokerages used commission splits as their main lure to recruit. However, with splits at record highs and several models already offering near 100 percent, there is little room to offer increased splits large enough on their own to motivate a recruit to make a move.

Successful brokerages will need to think way beyond the offer package when they recruit and focus on the three factors below (in this order) if they want to be around in five years:

1. Culture
2. Technology
3. Marketing

In the next article, I’ll break down each of these factors to detail how the right culture, technology platform and marketing support services will attract the right recruits and retain your existing agents. The resulting increase in revenue should be enough to offset the unstoppable decline in margins.

Due to the mass consolidation that will take place in the not too distant future, the brokers who get this right will be stronger in five years than they are today because there will be fewer companies left standing.

Glenn Felson is the senior vice president, general manager NY and affiliates for William Raveis Real Estate Mortgage & Insurance. Connect with Glenn on LinkedIn.

Email Glenn Felson.