Liability costs, technology, discounted commissions

Editor’s note: Real estate brokers are feeling pressure on profits from all sides. Business and insurance costs are up, top-producers want higher commission splits and new technology, and new competition in the brokerage space is lowering the average commission on a home sale. In this three-part series, we dive into the economics of real estate brokerage, find out what brokers are thinking and what they’re doing to protect their stake. (See Part 1: Profit margins up for brokers; worries remain and Part 3: Taking on the real estate enemies.)

Technology is expensive. There is software, hardware and the IT team to maintain it all. Also, the costs of the Internet are rising: the cost of getting traffic, leads and exposure on the Web.

“These are all expenses that I didn’t have 10 years ago and that have become a major part of our expenses now,” said Paul Giannantonio, broker/owner of ERA American Dream, Realtors in Hillsborough, N.J.

Despite a 10-year housing market run, real estate brokers complain about a margin squeeze and point to technology costs as just one of many factors making it increasingly difficult for them to make money in the brokerage business. Brokers worry about different things, but at the top of their list are agent commission splits, increasing liability costs and lower commissions throughout the industry.

Most brokers are concerned about declining profit margins, though some worry more than others. Some have accepted them as inevitable changes in the industry, and adapt to them by trying to find new sources of revenue

Still, many brokers say there’s no denying profits are being squeezed from a business that never was very profitable, and many point to technology as a big factor.

Debbie D’Valentine, president/broker of Tomie Raines Inc. and Tomie Raines LLC GMAC Real Estate, is a proponent of technology, but she recognizes the cost involved. “Technology, in theory, is supposed to lower the costs,” D’Valentine said. “We’re not finding that’s the case.”

Lead generation also factors into that expense, D’Valentine said. She said her brokerage is benefiting from lead generation, but it can get expensive.

Giannantonio believes lead referral services can cut into brokers’ profitability especially when the third-party company does nothing more than refer the brokers’ customers back to the broker. That does nothing but cost brokers money and weaken the brokers’ position, he said.

“The more brokers allow that to happen, the more strength they give to these third party companies to be the first point (of contact),” Giannantonio said.

What is the greatest source of pressure on broker profits? Take a survey.

Some of the third-party lead generation companies aren’t asking for a 10 percent cut, but rather 25 or 30 percent, he said.

Duane Sauke, broker of RE/MAX of Rochester, Minn., however, believes lead generation acts as more of a tax on consumers, ultimately making their process of buying or selling real estate more expensive. He hasn’t found those leads cut into his profit margin as much as other brokers have.

For Sauke, legal liability costs, which have always been a large expense, have become even more of “a pretty significant draw on profits.” This year, for example, his Errors and Omissions insurance tripled from its amount last year, and that was a year with almost no legal complaints.

“The liability has extended itself to areas that neither party has control over, yet you’re being assessed for it,” Sauke said.

Mold, for instance, is now covered despite it being more a factor of home construction or homeowner lifestyle and not really the broker’s problem, Sauke said.

And while agent commission splits aren’t a big concern for some brokers, others such as Sauke worry about their impact on a brokerage’s profit. In general, they’ve shifted so far away from the broker that it’s unlikely they can shift much more, Sauke said. He’s hopeful they will shift back – eventually.

Top producers are forcing other costs for the broker. D’Valentine recently invested in an in-house marketing department staffed with employees with ad agency experience. They’ll provide agents with marketing know-how, just one of many additional services D’Valentine is adding as a bonus for agents, given the competition of higher agent/broker splits at other companies.

Sauke believes a general shift in consumer attitude cuts into commission dollars. Today’s consumer is “wiser, more sophisticated and a more astute shopper of any service.” That means they are very interested in knowing what they’re purchasing and how its value is justified, and that extends to real estate services. Consumers are now more interested in knowing why an agent’s full commission is worth it compared with a discounted rate, Sauke said.

That has left the door open to discounted commissions.

Giannantonio also believes the increasing number of agents also has contributed to discounted commissions. With so many agents out there competing for a fixed amount of business, some feel the only way they can succeed is by discounting their fees, he said. That makes it more difficult for the serious and competent agents to compete at their full price, putting downward pressure on all commissions.

“My concern is that I don’t believe the majority of the brokers, the business owners, realize the devastating effect,” Giannantonio said.

Richard Weidel, president of Weidel Realtors, believes the industry can accommodate all types of brokerages. If consumers perceive no difference of service level among brokerages, they’ll seek the lowest cost provider.

“The challenge for today’s real estate broker is centered around the value proposition,” Weidel said.

Weidel said he knows he can’t compete with discount brokerages, and instead has chosen to differentiate his company by focusing on high-quality service to customers. So his company focuses on making their listings as attractive as possible to buyers’ agents.

Unfortunately, Weidel said, many brokers are still doing business the same way they did before 2000.

One thing that hasn’t changed is the overall belief that brokers make a lot of money.

“The general perception is that brokers are running around making money hand over fist and that we’re greedy,” Giannantonio said.

“I don’t think our agents don’t want our companies to be profitable,” D’Valentine said. “But I think they think we make a lot more money than we do.”

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