8 reasons we need independent contractors
The coming shift in real estate: Part 2
By Bernice Ross, Thursday, April 22, 2010.
Some members of Congress and the Obama administration are taking a hard look at abuse of the independent contractor employment classification.
And while an executive for the National Association of Realtors has said that the real estate industry's use of the classification for sales associates appears to be safe (see "Crackdown on independent contractors") from scrutiny, it is important to highlight how vital independent contractor status has been for brokerages across the country.
The first column in this series examined some of the macro-level changes that could result from a massive, hypothetical overhaul to independent contractor status. The list below describes eight issues that individual agents could face if this actually came to pass.
1. Reduced agent costs coupled with lower splits/salaries
Productive agents who lack broker's licenses would most likely be forced into employee relationships. This would mean a huge shift in how an agent does business. When you become an employee, you typically become salaried. (Many commercial brokerages use this model, normally relying on a "draw against commission.")
As an employee, your broker would have to provide you with health insurance, workers' compensation insurance, unemployment insurance, and make matching contributions to FICA (Social Security) that you currently pay in full. Failure to cover your draw and expenses normally results in termination.
2. Lack of independence
As an employee, you would be subject to your broker's "employee guidelines" that can include attendance at all office meetings, minimum production standards, regular work hours, mandatory "up" or "floor time," plus requirements to use particular mortgage, title and other services. For agents who choose the employee model, the days when you would be able to conduct your business "your way" will soon become a distant memory.
3. The industry shatters into thousands of pieces
Agents who have a broker's license and who do not want to become employees will be forced into setting themselves up as a new brokerage. The result would be a huge resurgence in the "mom and pop" model of real estate.
4. Challenges in setting up new brokerages
There are numerous challenges that this next wave of new brokers will face. Most will be very proficient at selling property, but will they be able to cope with the brokerage side of the business in addition to their sales responsibilities?
To begin with, the broker will have to go through his or her state's approval process to set up as a separate entity. This involves getting a federal taxpayer ID, setting up to do state and federal withholding of taxes (if required), plus setting up the necessary accounting systems to do the required tracking. The newly minted brokers would also have to establish a trust fund account and join the local Realtor association and MLS as a broker member.
5. A mountain of startup costs
New brokers would have a wide variety of additional startup costs. First, they would need to either set up an entirely new website or alter the one they're currently using to reflect their new brand. They would also have to change their yard signs, open house signs and name riders to reflect their company's new brand. Additional costs could also include a new business phone number, customized transaction forms, stationery, copy and fax machine, etc. ...CONTINUED
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Submitted by John Rowles on April 22, 2010 - 4:51am.
Reading between the lines of this list, I see fear of change and fear of a smaller industry.
The status quo is not unlike health care in this country: Most everyone agrees it need to be fixed, honest people disagree about how it should be done, and the entrenched interests will do all they can to maintain a system that works for them.
Submitted by Jay Thompson on April 22, 2010 - 5:02am.
"Virtually all agents who change brokerage firms report that their production drops for about six months after the change."
Really? I would *love* to see the data that supports this statement.
Jay Thompson
Broker / Owner
Thompson's Realty
Blog: www.PhoenixRealEstateGuy.com
.
Submitted by Rick Smenner on April 22, 2010 - 5:25am.
I wouldn't be too concerned about this issue. Why would any Broker want to keep a bunch of unproductive agents and put them on a salary. We will see the ranks drop in our industry and those of us who are serious about the business will have more business.
This group of politicians currently in Washington are the ones who gave us the mess we currently have in real estate. Now they want to regulate us as an industry.
I'm for regulating them in November and vote them all out and get some common sense back in government.
Rick Smenner
RE/MAX Preferred Properties
Knoxville, TN
Blog: www.TheBigOrangePress.com
Submitted by jim canion on April 22, 2010 - 5:28am.
Jim Canion ,Co-Founder
http://www.connectrealty.com
Jay-- I had the same reaction that you probably did when I read that statement. We hired almost
one thousand agents in 2009 in 14 different states
and in almost every case their production increased within the first six months. A lot could be written as to why but mainly I think it is the energy and relief felt by finally making
a break with the old system on the part of agents
who knew all along that they were the ones that
mattered and not the broker.
Jim Canion
Submitted by David Jagerson on April 22, 2010 - 6:54am.
After 26 years as a Realtor it seems as if a professional association model for the brokerage community with principles and partners with an employee staff like other professions might serve our customers and clients better than the current holding company model. The holding compamy model that exists are service organizations service the independent real estate agent. It is not very productive to the client or the agent.
Under the PA model senior partners would be the rain makers...highly productive rainmakes. Employees would service clients and be paid as employees. Employees could become partners after proving themselves as competent in all aspects of real estate transactions.
Submitted by Michael J May CRB CRS GRI on April 22, 2010 - 7:26am.
I can't find a down side to this potential change. Brokers profits improve, unprofessional agents can no longer survive, and unscrupulous brokers are eliminated.
Where do I sign up?
Michael May
Submitted by Paul Scheufler on April 22, 2010 - 8:22am.
Prior to switching from a franchise company to my own S corp I was one of the top agents at the franchise company. When I switched to an S corp under my own brand my income multiplied dramatically. The start up fees were not that much. I no longer had to pay desk fees or be required to buy into company advertising and I avoided many other franchise related expenses. It was cheaper to run my own operation and I was free to provide even better service to my clients.
Submitted by John Rakoci on April 22, 2010 - 9:22am.
If it curtails or eliminates the part time agents it could not be a bad thing. They cannot answer their phone or return calls while mixing paint or selling merchandise. Many are not being fair to their agency, peers, or clients. Still, they are a no-cost item that may sell a house once in a while.
Submitted by William Metzker on April 22, 2010 - 9:49am.
I take issue with paragraph four. The items you note are, by and large, graphics, not branding. A brand is an internal ethic and statement that differentiates one from another, such as Saks Fifth Avenue from Wal Mart: Just see the name, and you know the company.
Nothing inherently distinguishes, say, Remax from Keller Williams.
Submitted by Vicki Lloyd on April 22, 2010 - 10:15am.
I also question your statistic about income being down for 6 months after a brokerage change.
The times I've moved, it increased substantially partially due to the new energy I felt from the change in environment.
Moving offices is a great excuse to contact past clients and let them know where you went!
Vicki Lloyd, MBA, e-PRO, ACRE, Realtor
http://LiveLakeForest.com
(949) 457-0281
Submitted by Rachel LaMar, J.D. on April 22, 2010 - 11:07am.
Bernice,
I agree with your synopsis on why it is important to keep independent contractor status alive for Realtors. As a Broker I choose to hang my license with a strong company for many of the reasons you mentioned. As an attorney I understand the legal dilemmas and hassles that can arise and I am thankful to not have to deal with those on my own, should a situation ever arise. It would take too much time away from helping people and doing my job efficiently.
Although I applaud the Brokers who DO have their own brokerages, I think it should continue to remain a choice as to whether to start one's own company or work under the umbrella of another.
Rachel LaMar, J.D.
Broker Associate
Windermere Exclusive Properties
760.310.9466
rblamar@roadrunner.com
http://RachelLaMarRealEstate.com
Submitted by Bruno Skopinich on April 22, 2010 - 1:48pm.
The real estate industry must fight to keep the independent contractor status alive!
I have seen this happen to the mortgage industry (of which I am also a part of) and it increased operating costs, to the point where I decided to close a few offices.
If you want more market share... create more value for your prospects, don't try to regulate your competition out of business, because eventually it will come around to bite YOU, in the rear-end!
Submitted by Ileri Ogunfiditimi, REALTOR® on April 22, 2010 - 2:28pm.
I think real estate practitioners are safe for the most part. It's already "on the books" that real estate agents are legally recognized as self-employed independent contractors, although, the brokerage firm still has the option of making them corporate employees (e.g. like most commercial brokerage firms).
I also agree with one of the earlier comments that there seems to be some underlying fear. Fear that is grossly overstated. The independent contractor (IC) is just another way employers form relationships with workers. And it's been in existence for a long time. ALL businesses have the option of having workers as ICs. The difference, however, is that professionals in other industries who work as ICs aren't statutory.
So, they have to be more diligent in making sure that the employing firm or individual doesn't categorize them incorrectly. This is something agents don't have to worry about (for the most part) because the government already knows how agents are classified. The industry lobbied for this status as real estate agents are the ONLY service professionals in the country, in addition to some direct sellers, classified as "statutory independent contractors."
Go to the IRS web site and under the small business section, real estate agents are listed as sole proprietors - so we're good! This status still doesn't remove the rules governing how agent ICs are treated though. So as long as brokerage firms adhere to the "treatment" rules and agents know the "treatment" rules, there shouldn't be a lot of firms getting fined or agents having to become a sponsoring broker in order to do business as an independent practitioner.
Ileri Ogunfiditimi, REALTOR®
Ileri Ogunfiditimi, LLC/Jobin Realty
7825 Tuckerman Lane, Suite 201
Potomac, MD 20854
Direct Dial (240)403-3400, Ext 742
Direct Fax (866)283-7840
Email: ileri@ileriogunfiditimi.com
www.ileriogunfiditimi.com
www.jobinrealty.com
Submitted by pam shea on April 22, 2010 - 2:34pm.
This is my 26th year as a broker/Realtor. I have also worked as an agent in several states. This industry has changed enormously over these 26 years and not for the better. None of the companies I have worked for have really treated us as IC's. We are treated more like employees, but without the benefits.
This bill may be the best way to change the real estate model, which no longer works. There are way too many non-professional and part-time agents in this business. When I began in 1984, there were 10-12 Realtors in a few offices in each town and we were much more professional. Now there are 100+ agents in the same size office. It is time to professionalize this business and hire agents with years of experience and industry knowledge, who have taken the time to get their CRS, their GRI, and many other real estate designations.
At this time, I do not see a downside to becoming employees.
Submitted by Tom Wolf on April 22, 2010 - 2:40pm.
The effect on real estate professionals is certainly open for debate, but I think you would be hard pressed to make a case that any of the effects would be anything but a positive for the client. For a long time now, the financial incentives of many broker models, as well as local/national boards have not been aligned with that of the client. Instead, these models have been driven by one thing...quantity of agents.
Submitted by Jim Crumbaugh on April 23, 2010 - 9:32am.
James A. Crumbaugh III, CEO
12653 SW County RD 769
Suite F
Lake Suzy, FL 34269
1-866-463-5780
Allison James Estates and Homes address's many of these issue's. www.AllisonJamesInc.com
Submitted by Tyler Webb on April 23, 2010 - 1:59pm.
Bernice,
When I read this at the end of your post, I shuddered:
"This could bode well for improving the professionalism and the quality of the business. Given the severity of the potential impact, however, let's hope that this is one change that never makes it to the president's desk."
You admit it would be good for the industry ["professionalism"] and for the clients ["quality"], but hope it does not happen because people will have to adjust.
Please save us from ourselves.
Tyler Webb
Champion Realty
Associate Broker
www.recrab.com
@recrab
Submitted by Anonymous on April 23, 2010 - 2:10pm.
Memo to Bernice: It's 2010 and the real estate buying public is one hell of a lot smarter than the average Realtor slug! Improvise, adapt and overcome or go the way of the Fuller Brush Man!