OpinionBrokerage

Opinion: How changes to commission and industry structures threaten agent longevity

The product of NAR's 70-plus interviews with industry CEOs and nearly 8,000 Realtor surveys

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Released at the Mid-Year Legislative Meetings & Trade Expo, the National Association of Realtors’ “Danger Report” analyzed the potential threats to the real estate industry over the next 10 years. It listed 10 “dangers” facing agents, brokers, NAR, state/local associations and MLSs.

My last post looked at the ways an agent’s role within a real estate transaction might be threatened in the years to come. As waves upon waves of new agents enter the business, many will not be adequately trained or prepared to conduct transactions in a professional manner. Thus, the value of using an agent will decrease in the consumer’s mind.

However, this is nothing new to the industry, and agents who combine traditional customer service with new tools and technology will continue to rise above the swarming herd. Unfortunately, maintaining their role within the transaction is only part of the battle for agents.

The second category of threats to agents relates to commission or compensation. Three distinct dangers fall within this group, the first of which is “commissions spiral downward.” The other two dangers to compensation are the “IRS Forces Exodus of Independent Contractors” and “Commissions Concentrate into Few Hands.”

The end of agents as independent contractors would be the ultimate game changer on every level: It would impact brokerages, state/local associations, NAR and the agents themselves. The fallout would result in a real estate industry entirely different from the model of the past century.

Worrying about this is sort of like worrying about Earth getting hit by a meteor — the likelihood of it happening is probably slim, but if it is going to happen, there is not much we can do to stop it.

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Concentration of commissions has largely already happened. Many are familiar with the 80/20 Pareto Principle (as it applies to commissions, the top 20 percent of agents will generally account for 80 percent of commissions earned).

The Danger Report goes slightly further, referencing a recent study that argues that same principle applies to the top 20 percent. If commissions are truly divided along those margins, 64 percent of all commissions go to the top 4 percent of agents.

There is no way to know exactly how much commission is earned yearly in the U.S., but during the presentation of the Danger Report, Stefan Swanepoel tossed out $60 billion. That is a good-sized pie to divide up.

Where this concentration could become a game changer is if the size of the total pie is significantly reduced, which brings to the greatest threat in this category: commission rates spiral downward.

Since 1992, the average commission rate has fallen by 10 percent (data from Real Trends). However, that average increased between 2005 and 2013. The Internet has not resulted in the bottom dropping out on commissions, as some expected.

New compensation models have failed to gain widespread traction. But it would be a mistake to assume that just because fee for service, buyer rebates or low listing commissions have not grabbed large market share yet, they will continue to struggle to gain consumer support.

To maintain commissions, agents need to show their value and importance continually to their clients on both ends of the transaction. Buyer’s agents need to do more than open doors and write an offer. Listing agents need to do more than just put a sign in the yard.

They both need to show value in commission, which is too long a topic to take on here, but the value proposition needs to be an ongoing topic of conversation within the industry.

Technology has made it easier for an agent to handle a greater number of transactions. Electronic signatures and online transaction management, plus the growing use of transaction coordinators or administrative support, make it possible for an agent or agent team to do more deals in the same or less amount of time.

Couple this technology with new agents entering the business, who are not as firmly tied to any standard commission, and the compensation model could change rapidly. Alternatively, new commission models could become a larger part of the market.

The smart agent will proactively seek ways to make their business more efficient, rather than wait for a change to occur. If the status quo remains, they will benefit from greater profitability. However, if commission rates do fall drastically, they will have placed themselves in a better position to survive the change.

Now let’s analyze the last category of threat to agents: changes to industry structure.

The top threat in this category, according to the report, is that agent teams will threaten the survival of brokerages. The propagation of teams increases a firm’s liability by the volume they create but typically fail to provide the same profit margin that would be generated by two or three successful agents producing the same volume.

Ultimately, I suspect we will see the trend of some brokerages accepting that risk and structuring themselves in a team-friendly manner while others will take a more conservative approach. Agents will select their broker based on their business model.

The team concept is also susceptible to other changes in the industry. If commission falls dramatically, individual agents with less overhead might be more profitable than mega-teams with high fixed expenses (advertising, payroll, office fees). Government scrutiny of the independent contractor status of some team members could also have a major impact.

The last two threats to discuss are a failure of the housing finance system and the commoditization of residential real estate. So much of American wealth, and an individual’s perception of their wealth, is tied to real estate; a collapse of the housing finance system would send the U.S. into a recession unparalleled in magnitude.

Short of a total economic meltdown, it is hard to picture a scenario where the government would not intervene to prevent such a collapse.

Commoditization of residential real estate is another long shot. The Danger Report summarizes this threat as the possibility of large investment companies buying and holding a significant market share of residential properties, reducing homeownership and impacting market dynamics.

Current market conditions are ideal for this to occur, and though these residential real estate investment trusts have grown, they still represent only fractions of a percent of the total home inventory. Rents cannot continue to rise at the rates they have in many markets, and a future market correction will reduce the profitability of real estate investing.

The real estate industry has survived numerous dangers and threats over the past three decades: double-digit mortgage rates, the development of the industry, the bust of the housing bubble. Although some pain has indeed accompanied these periods, the industry has always come out more or less intact on the other side.

Perhaps because of the entrepreneurial nature of the business, each period of disruption has resulted in innovation and new opportunity.

Agents who remain flexible, able to adjust to changing winds and embrace new challenges and build a business on the foundation of outstanding customer service and professionalism will continue to find ways to weather the storm, whatever form that might take.

Read “Danger Report Part 1: Focusing on the agent.”

John Blom is a managing broker for The Hasson Company. You can follow him on Twitter (@johndblom) or LinkedIn.

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