OpinionAgent

Wake-up call: The brokerage model is evolving

Brokerages that are changing the game
  • New York City-based Compass raised an additional $50M at a reported valuation of $800 million to further fuel its expansion into new markets, while announcing that it will offer over 100 percent commission split for the first year to the first 25 top agents who sign up in NYC as a test.
  • With agents now using different methods to achieve their goals, it's up to the large brokerages to examine their business models and update them.
  • Because Redfin employs the agent, it pays agents a salary -- which is a substantial departure from the commission system that has been in use for many years.

The old saying that change is the only constant in the universe applies to everything that we do, and that includes the brokerage model.

Just recently, New York City-based Compass raised an additional $50M at a reported valuation of $800 million to further fuel its expansion into new markets, while announcing that it will offer over 100 percent commission split for the first year to the first 25 top agents who sign up in NYC as a test.

This investment and test shows that the view of brokers who view agents as working for them is quickly becoming a thing of the past. Many agents are independent contractors who run their business under that of the broker. That model presupposes that both agent and broker are working toward the same goal, but the reality is that brokers get most of the action. 

Although brokers enjoy this particular model of business, the agents have been trying to re-balance the system using techniques that have helped change the current brokerage model. With agents now using different methods to achieve their goals, it’s up to the large brokerages to examine their business models and update them.

The classic models

There are several different models that have been used over the decades in the broker-agent relationship. In fact, the brokerages have charged their listing and buyer clients, but agents have managed to find a way to get compensation including earning a salary.

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There is the traditional 50-50 split between brokers and agents, referrals that come off the top before any split of the commission is made and a percentage fee also paid off the top of each commission. And then there’s direct salary paid to the agent.

Instead of using the fee-for-service or the fixed-fee listing method, brokerages have actually paid their agents through a direct salary that avoids the standard commission. By agreeing to pay a salary for their work and a smaller commission for the transactions made, brokerages are simply using a different but proven method that accomplishes their goals while the agent gets the fees they deserve for their work.

Another classic model is the 100 percent compensation that is actually paid to the agent by the brokerage. Because the agent pays what is known as a desk or monthly office fee, this might provide a significant amount of money each month. However, experienced producers like this system because the costs they incur are capped while their income potential remains quite large.

This particular model is nothing new, as it has been in use for quite some time. Realty Executives created what is known as the 100 percent model starting in 1965 with Re/Max following suit in 1973.

R. Dale Rector

R. Dale Rector

Since then, there have been new models created in recent times that are challenging the status quo. For many agents, they prefer having a new system that offers greater potential for earnings. Brokers should learn about what is currently available.

The Redfin model

One of the more interesting models created for the agent is from Redfin, a firm established in 2004. This homebuying and selling service became fully established two years later and offered a new dynamic in the agent-broker relationship.

Redfin actually offers a refund for part of the commission to homebuyers, which means greater savings for those purchasing homes. Although the states of Oregon, Tennessee and Missouri currently ban this practice, it’s available in the rest of the 47 states.

In addition, Redfin has managed to use the Internet to charge a 1.5 percent listing fee for home sellers, which is half the normal fee and saves even more money. Plus, because Redfin employs the agent, Redfin pays agents a salary — which is a substantial departure from the commission system that has been in use for many years.

The agents are reviewed under this system after every transaction has taken place or failed to take place, and such reviews will appear on the website with the agent in question.

Coming up tomorrow in Part 2, we’ll analyze the one thing most responsible for changes to the brokerage model and how it has affected clients. We’ll also take a look at some of the services that modern brokerages will need to provide and how they can grow in the future.

Omri Barzilay is the CEO at Propcy. You can follow him on his blog or Twitter.

Email Omri Barzilay.