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With rising interest rates and affordability challenges poised to shift the balance of power in residential real estate from sellers to buyers, brokers and agents are scrambling to adapt to these and other trends.
Co-founder and CEO of Side Guy Gal will discuss “Critical Factors That Are Reshaping the Real Estate Landscape,” Aug. 3 onstage at Inman Connect Las Vegas.
Side, which provides branding, marketing and back-end support for independent brokerages and teams, said last summer that it was on track to go public after achieving unicorn status and raising more than $250 million in funding.
Despite recent layoffs, the real estate tech startup announced earlier this month its expansion into six new states bringing the total number of states where it provides services to 16.
The following interview has been edited and condensed for clarity.
Inman: Are we starting to see a market shift from a seller’s market to a buyer’s market? Is that necessarily a bad thing for real estate brokers and agents?
Guy Gal: I would start by saying, there’s no such thing as a good shift or bad shift with real estate. It’s just the normal market, and it’s a cyclical one. It will have its peaks, it’ll have its flows. Sometimes there’ll be an advantage for the sellers, sometimes the market will give an advantage to the buyer. But by and large, good agents make sense of all that for the people who are looking to sell, buy, rent. It makes them valuable for everyone, and fair for everyone.
So I’m not overly concerned with what happens in the shift with reference to agents because no matter what, the condition of the market is a top-performing, full-time real estate professional is going to stay in the market and continue helping people with their real estate needs, creating lots of value for them.
And in a market that maybe is contracting or shifting — we’ll know in a few months here — that’s their opportunity to serve even more people to grow their business. Because about half of the deals that are facilitated in any given county, in any given market, are done by part-time agents. These types of market dynamics tend to affect them much more so than the full-timers. That is, the dynamics favor the full-timers because the full-timers stay in business.
And maybe the market goes down 20 percent, but it sheds more than that in terms of agents, agents who are part-time agents. So big picture, it’s a big opportunity for full-time communities and teams to do even more of what they’re currently doing.
There’s some talk that rising interest rates will create a “lock-in” effect, discouraging some would-be sellers from putting their homes on the market, which won’t help alleviate inventory shortages.
Well you know, home sales and inventory are different things. Last year, there was historically low inventory, and historically high home sales. This year, you’re getting less home sales, more inventory. What an odd relationship right? Because an inventory is about how many available houses are there to meet demand on the market at any time. It’s not the sheer volume of more properties coming to market and being sold last year. NAR was 6.2 million homes traded hands. So that’s over 12 million sides. This year, they’re projecting 4.8 to 5.2 million sales. So more inventory, but actually less home sales.
A dynamic like that does affect part-timers more than anyone. Part-time casual agents make up roughly 90 percent of total agent licensees, and roughly half of all closed transactions. In more challenging market conditions like this one — especially where there’s a lot of fear and uncertainty and doubt, and nobody’s quite sure what’s going to happen next — homes don’t sell themselves and it’s much harder to get into one. It’s an opportunity for the people that are true experts that really deliver value in this industry to do more of that. So most of the folks that we work with, they look at this market as an opportunity and they’re leaning into it as such.
What should agents and brokers do to prepare for that? What business models have an advantage in the current climate?
So the challenge that the traditional brokerages will have is that most of their revenue does derive from part-time agents. Obviously, there are top-producing agents and teams that are affiliated with traditional brokerages, and generate and contribute a whole lot of volume to the total pot. But more than half the revenue of a traditional brokerage is coming from part-timers, who pay a much higher split for transactions than the top producers pay, and the same amount of monthly or annual fees as the top producer. And that is a really important revenue stream for large traditional type brokerages and even some of the virtual ones.
Think about a virtual brokerage that has 100,000 paying members, of which maybe 2,000 are productive, and the rest pay $100 a month in fees to have an opportunity to close one or two or three deals a year. Those are the brokerages that will most be affected by a contracting market. Forget seller’s market or buyer’s markets. There’s expanding markets and contracting markets, and we’re in a contracting market. That is for sure.
In a contracting market, the people that are affected the most are the ones that create the least amount of value. And that tends to be the part-timers, and that tends to be more than half the revenue for the large traditional brokerages who make a business out of affiliating anyone and everyone because just one more deal a year from that part-timer is really lucrative for them, and all the fees that go along with it. That’s going to be the thing that’s very challenging for those companies to contend with.
The models that I believe are positioned to succeed are ones that make it possible for agents to differentiate themselves from one another, so they actually stay stand out and make it possible for potential clients to understand what they do relative to what others do.
Where that’s valuable is, if you’re just one of those agents with the same brand, the same pitch and the same presentation as 1,000 others in your markets, now the consumer has this power [to say], “We’re just going to work with whoever will discount commissions the most.” Because from their perspective, you’re all part of the same company, you might as well go for the cheapest. That hurts the brokerage, and that hurts the agents, right?
When you are able to present yourself as what you truly are, which is this unique professional with a focused, specialized business, you can really maintain your ability to command a full commission because you’re delivering full service and full value as an owner, not a contractor. And you’ll see that play out. The boutiques will do a lot better in this market, and the large companies, they’re the ones that will see the bigger revenue declines.
What are your thoughts on the potential for a slew of pending lawsuits challenging real estate agent commission practices to upend the traditional brokerage model?
Side, having been doing this now for five plus years, one thing we know is that buy-side representation is valuable. Buyers want it. They get more from it than what it ultimately cost them in the form of the commission that’s paid from the GCI [gross commission income] that is generated through the proceeds of them purchasing the house.
And even if the Federal Trade Commission decided amongst 400 active cases that this was the one that deserves priority, and decouple buy-side and listing-side commissions, I wouldn’t expect much of anything to change. Because it’ll still be in everyone’s best interests for the buy-side agent to be compensated to do the work that they do.
Very few buyers today have the appetite to only work with the listing agent on a double-ended deal. They can do that today. Right? That is possible. They can go to a listing agent without an agent that represents them, they can negotiate [the commission] down from 6 percent or 5 percent to like three or four. Both sides can be handled by that one person, and that does happen, but it’s seldom. And the reason is, just the consumer preference. So consumers see value.
So even if [NAR is forced to decouple buy-side and listing-side commissions] I don’t see that fundamentally affecting the economics at all. Now, will that happen? I’m skeptical. I think it’s far-fetched that the government will disappear half of the revenue in a well-established, mature industry, where there’s not a lot of consumer complaints.
Editor’s note: This story has been updated to remove references to “boutique brokerages” in the headline. Although Side refers to its partners as “boutique real estate companies” or “boutique firms,” the companies aren’t technically brokerages, because Side acts as their broker of record.
Hear more from Guy Gal in person — Aug. 3-5 at Inman Connect Las Vegas! Join us.
