Fix for broken brokerage model is within industry’s grasp

Broker as investor: Tearing down the old business model

Recruiting new talent image via Shutterstock.Recruiting new talent image via Shutterstock.

Editor’s note: This is the second of a four-part series on a new model for real estate brokerages, in which brokers would invest in their agents. Read Part 1. Renwick Congdon will explore his vision at Real Estate Connect San Francisco, during a Thursday, July 11 panel discussion, “Broker as Investor: Tearing Down the Old Broker/Agent Relationship.” Also participating in the panel will be Kevin Lisota, CEO, findwell; Debbie Lewandowski, director, First Team Estates; and Brian Boero, partner, 1000watt (@1000wattbrian).

The system is broken and someone is going to fix it.

The question is, who? Zillow? Trulia? Google? Or will the solution come from within the industry?

When we recently surveyed top real estate executives about their biggest business challenges, “not attracting enough younger agents” far and away ranked No. 1.

The problem, as I see it, is that the industry has fallen into the economic trap known as “the tragedy of the commons” — individuals acting according to their self-interests, even though they know they’re depleting a common resource that’s vital to the group’s long-term interests.

And that never ends well. Recruiting agents from competitors doesn’t solve the underlying problem. Eventually, there are not enough experienced agents left.

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How do we as an industry renew our most valuable resource?

Rather than continuing to focus on recruiting sales agents, brokerages need to learn how to tap into the growing numbers of people who want to be business owners. The future of real estate brokerage should be in nurturing businesses, not agents. There is a big difference.

It’s a concept I offered at the CEO Summit sponsored by Inman News and the New York Times in January, and judging from the feedback and subsequent calls from many of those in attendance, it has sparked a lot of interest.

The core idea is to create businesses within the brokerage, which would allow brokers to share ownership with an “agent-owner.” The limited liability company (LLC), potentially with multiple investors, is an interesting structure to consider.

What does an LLC offer the agent-owners (a partial list):

  • A sense of ownership — This would be a key attraction to today’s young or young-ish entrepreneur.
  • Seed money — The agent/owner/CEO could raise capital for this LLC startup from friends, family or outside investors, just like any business startup.
  • Reduction of risk — In an LLC, personal income would be separated from business income, providing a layer of insulation from liabilities beyond the provisions of traditional errors and omissions (E&O) insurance.
  • A salable asset — Say the agent-owner decides that real estate hasn’t turned out to be the right business, or he decides to retire, or dies: The LLC has value as a business and could be transferred to a buyer or be inherited. It is an asset.
  • A vehicle for growth — The LLC can acquire assets — for example, another agent’s business — and instead of paying cash the agent-owner could offer stock in the LLC. It works for businesses in other industries, why not ours?

What would be in it for brokers?

Let’s stipulate an important point: Brokerage is no longer about a single salesperson, it’s about facilitating the closing of real estate transactions. In the LLC scenario, the agent-owner comes at the problem from the bottom up, rather than the top down.

The broker who elects to be one of the investors in this LLC (either by direct investment or by acquiring a stake through providing the brokerage’s infrastructure and services) is a potential long-term investor. Not only would the broker share the LLC’s profits, but he could hang on to those profits if the agent-owner should decide to move his business to another brokerage, or if the LLC were sold to another agent-owner.

This is no small consideration for the broker who has invested time and training in a promising agent, only to see him cross the street to a competitor or to start his own brokerage.

Watching the agent-owner manage his own company would also provide window into how he or she might fare if tapped to run the whole show — a scenario for a succession plan.

Those are some immediate talking points, and they’re not without their “But what if …?” reservations, not the least of which is the crazy-quilt of licensing laws from state to state.

But clearly, we’re not succeeding in fixing the system by trying the same old recruiting tactics. We can do better, because if we don’t, someone else will.

Tomorrow, Part 3 will explore how one real-life entrepreneur contemplates her next business venture. After running a multimillion-dollar company with 300 employees, would she consider the real estate industry?

Renwick Congdon is CEO of Seattle-area based Imprev Inc., a marketing technologies company he founded in 2000. A serial innovator and entrepreneur, Congdon serves on the board of directors of the Seattle chapter of Entrepreneurs Organization, a network of more than 8,000 business owners in 40 countries.

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