Imagine that a year from now new regulations allow banks to broker and manage real estate. What will change? The answer may not be quite what people expect.

To start, banks are very good at banking -- just look at industry profits. But outside of banking per se, banks have not been especially successful beyond their protected nooks. Compare online banking with online stock brokerage. Brokerage is booming on the Web because savings and discounts are passed through to consumers. As to banks, services online are largely regarded as still another profit center, one reason online banking has hardly taken off.

We can divide the world of banking into local community banks, mid-sized banks, and multi-state mega-banks. Each is likely to have a different real estate strategy if brokerage is allowed.

For small community banks -- some of which used to be S&Ls -- and for mid-sized banks, those with perhaps several dozen branches, it's unlikely that they will move aggressively into real estate. Such institutions depend on local realty brokers for business, and few brokers are going to assist a competitor.

The result is that some small- and medium-sized banks will go into real estate, and competing banks will capture the brokerage banking business that the first group used to own. Not wanting to lose their current real estate accounts, and not wanting to lose business to other banks, it's likely that many banks will opt for little more than low-key realty operations. In fact, not having a real estate subsidiary may well be a bragging point for banks that wish to attract business from traditional realty brokers.

The story with major inter-state banks is different. Such banks do their biggest deals with government, Wall Street, and major corporations. Yet even these giants are likely to tread carefully because of the business they obtain from the real estate community -- a reality demonstrated last summer when Wells Fargo apologized for posting material online which offended large numbers of brokers.

The strategy that makes the most sense for a major bank is to acquire one or more real estate firms or franchises, cobble them together, and then build-out a single brand across many states. This way, promotional and administrative costs can be cut, economies-of-scale can be realized, and a branded identity can be developed.

In this scenario, those who own key brokerages will benefit greatly from the premiums they will extract from empire-building banks wishing to buy existing realty firms and franchises. As to salespeople and managers, the future is less clear.

One idea is that banks could control costs by building salaried work-forces to operate real estate subsidiaries. However, banks do not exist in a competitive vacuum and the best people in real estate -- the top 10 to 20 percent of all active licensees -- will likely reject salaried positions because such jobs mean less money. In effect, the very people banks need to be successful in real estate are the ones least likely to work in a salaried environment.

The alternative is for banks to run subsidiaries as most brokerages are operated today; that is, with armies of salespeople paid on the basis of performance. The problem with this option is that it creates subsidiaries which duplicate current brokerage operations, businesses which rack up big numbers -- but businesses which also show small profit margins.

The banking industry should not be under-estimated, yet it's difficult to imagine how banks will find a way to make brokerage more profitable than those now in the business. And if higher profit levels are not in the picture, then why should banks enter real estate?

One theory is that with a real estate subsidiary banks will be able to offer one-stop shopping -- you get your insurance, mutual fund, mortgage, checking account, and house from one source. There seems to be an inherent attraction to one-stop-shopping because it keeps coming up, year after year. In practice, efforts to cross sell financial services are not new and perhaps not especially attractive -- for privacy reasons a lot of people prefer to work with different financial services.

There is also the matter of "fit."

Real estate is not a commodity like mutual funds, stocks, bonds, or insurance policies. All properties are different, all properties are local, all parties to a transaction are unique, and all deals are distinctive. Real estate is tangible -- you can touch it, walk on it, and live in it while stocks, bonds, mutual funds and the like are "notational" assets you can stick in a drawer or move through a modem. Stocks and bonds are "fungible" -- a share of GM is exactly and precisely like any other GM share of the same class. One share of IBM can replace any other IBM share of the same class. A hundred homes, in contrast, will each be unique.

Real estate simply does not fit within the administrative systems, accounting protocols, or marketing programs which work well for traditional financial products. What may make sense for banks is to see brokerage as a way to capture more loans. As long as such business is earned competitively in the marketplace and not produced through "tying" to traditional bank services, few will object. Brokers are at the point of sale when a home is sold, an ideal time to introduce a lender.

In the end, if the Federal Reserve and Treasury allow bankers to broker and manage properties, some transactions, fees and commissions which would have gone to traditional brokers will instead go to bankers and their realty subsidiaries. But with proper regulation, banks are likely to have about the same marketplace impact that they've had selling stocks, bonds, insurance, and mutual funds -- which is to say, not much.

Today's brokers will not get a free ride if bankers are allowed into the field. Traditional brokers will need to fight for every commission dollar because banks or no banks, realty brokerage is already competitive. If you disagree, just consider the throngs of people who enter the industry each year -- and leave not too much later.

For more articles by Peter G. Miller, please press here

Published: January 25, 2001

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Peter G. Miller, also known as OurBroker®, is the author of six real estate books -- including The Common-Sense Mortgage -- and is the original creator and host of America Online's Real Estate Center. Peter's weekly columns appear in more than 100 newspapers nationwide, he is also published in a variety of other media outlets and he is a frequent speaker at national events and conventions. Peter welcomes your questions, comments, and news releases via e-mail at .