Reduced broker profitability is a pressure cooker about to explode. What's pouring on the steam? High commissions paid to agents, commission cuts paid by consumers, technology expenditures to third-party vendors, and more. The answer? Find other revenue generators besides brokerage. That's why you will see a new trend reaching maturity in 2002 - brokers as technology service providers.

Sound far-fetched? The industry has already identified the trend of reduced broker profitability and it's taking pro-active steps to correct the problem by adopting technology talent from failed or failing dot-coms. The question is will this vent the steam enough or cause more pressure?

Higher splits, lower profits

In 2000, REAL Trends, an independent consulting firm for brokers, performed a profitability study which showed that while transaction sides and sales volume had increased for 97 brokers participating in the study, gross commission rates, per unit profits, and profit margins declined.

The survey showed that the larger the brokerage operation, the lower were its profit margin, but the rate of decline in profitability was greater among smaller firms.

According to big brokers, many of whom participated in focus groups in a study for the National Association of Realtors called "A Changing Landscape," broker profitability is moving downward. The study, published in April 2001, quoted one broker's estimate that brokers net no more than approximately $150 per transaction side. A consultant was quoted as saying that the "net national average commission percentage realized is 4.2 percent, more than 25 percent below the 6 and 7 percent regarded as the industry norm.

The study said that the lower net is due in part to higher commission splits under the traditional sales model which pays independent contractors to serve as agents of the broker.

RE/MAX president Daryl Jesperson says that the findings from the two studies are all too true. "Even while we enjoy the longest and strongest real estate market ever, broker profit margins continue to shrink" he wrote in an article for Agent News.

Both Jesperson and the NAR study admit that eliminating high commissions to agents isn't the answer. That means that to return to higher profitability, the broker has to find another means to raise revenues.

Broker-controlled technology to the rescue?

High commission splits to agents is not the only cause of diminishing broker profitability. Also mentioned in the NAR study was this telling sentence: "Brokers feel it necessary to invest in expensive new technology for their agents, as well as in marketing their services to the public."

Instead of cutting commissions, could higher technology (or transaction) fees be passed along to the agents instead? If so, brokers could defer the costs of technology to agents, and regain control of the agent by becoming the agent's portal. Agents could benefit because they can return to the job of selling instead of spending time and money on marketing. If the agent is dependent on the broker for marketing and business tools at lower costs, then the agent could conceivably be less willing to leave for greener pastures. As long as brokers provide high cost services such as newspaper advertising and Internet exposure at low cost to agents, agents have less need of higher commission splits because their own costs of doing business have lowered.

What's putting bricks on top of this framework? Two trends: The adoption of the NAR IDX policy, and the emergence of broker-controlled technology consortiums.

By January 2002, all MLSs are supposed to be IDX-ready, able to allow members to post MLS listings on their personal Web sites. While some see this as a dent in national portals' business models, others recognize the very real costs that it will take to get consumers to find these brokers and agents. Rather than minimizing costs for agents, IDX means that finding buyers and sellers on the Internet will become an expensive proposition for individual agents. Agents will pay more in marketing and technology costs to enable their Web presences with MLS listings, and to advertise this ability to buyers and sellers. Costs can include higher hosting fees, advertising fees, and search engine placement fees, totaling from hundreds to thousands annually, according to some agents who are already IDX-enabled. Others are enabled at low cost by their MLS organizations, but find that having the listings on their sites does little without consumers knowing they are there.

Huddling under the more cost-efficient wing of a broker makes more economic sense for many agents, as long as the broker provides means for the agents to capture Internet leads personally.

Two broker-controlled consortiums plan to do just that by investing in real estate-targeted technology companies. HomeSeekers, which has recently been delisted from the NASDAQ, is now majority-owned and its board of directors is controlled by broker-backed consortiums. Dallas-based HomeMark led by Realtor Joseph Harker owns the majority stock in HomeSeekers. Two new board members, pending shareholder approval, are from the Realty Alliance, a for-profit broker cooperative. Realty Alliance has said that its purpose to getting on the HomeSeekers board is to participate in the development of technologies for Realtors. It also plans for its members to become HomeSeekers' customers.

The second group is called wheretolive.com. Led by Roald Marth, a real estate industry trainer formerly associated with Homes.com, wheretolive.com is backed by brokers, including Lennox Scott, president of John L. Scott Real Estate. Scott is also an investor of RELO, a large relocation referral network of independent brokers.

The main question that hasn't been answered by either group is how the brokers who are participating in these companies plan to make money. There's a very real cost of technology and doing business on the Internet. Who will pay? Will those costs prove higher than expected? Will agents be more willing buyers than they have been to third-party companies? These are questions that only time will answer.

With a return to higher profitability as the goal, brokers have no choice but to pass on the costs of Internet technologies and marketing to the salespeople who will benefit. Either way, salespeople will have to agree to share the costs of business, whether they pay the broker or a third-party service provider, or both.

Published: August 30, 2001

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Blanche is a renowned author of five real estate books. Her newest, Bubbles, Booms and Busts: Make Money In Any Real Estate Market, McGraw-Hill, was rave-reviewed by The New York Times. She was also selected from hundreds of real estate experts to contribute to Donald Trump's book, Trump: The Best Real Estate Advice I Ever Received: 100 Top Experts Share Their Strategies, Rutledge Hill Press, and is featured on page 68. Order Now Review - Honors In 2006, Blanche was selected among scores of candidates to author two consumer real estate guidebooks for the National Association of Realtors: The NAR Guide to Home Buying, and The NAR Guide to Home Selling, Wiley & Sons. She is currently planning two new books for the NAR and its members.       Known for her keen insight into real estate industry issues and for her ability to make complex subjects easy to understand, Blanche is a sought-after keynote and continuing education speaker. Real estate organizations from MLSs, to brokerages, to franchisors, to associations hire her to provide up-to-the-minute analysis of real estate industry news and advice on how to improve revenues. Her passionate delivery, peppered with stinging wit, is a huge hit with audiences and fans. Don Klein, CEO Greater Nashville Association of Realtors, Blanche Evans, Richard Courtney, president 2007, GRAR "The GNAR membership meeting last week featured Blanche Evans as the keynote speaker. Her comments and insights resonated extremely well with those in attendance and we have had many requests for copies of her PowerPoint Presentation. She was a terrific part of the membership meeting and convention program!" - Don Klein, CEO Greater Nashville Association of Realtors Coverage from WSMV, Nashville - 8-14-2007 That Interview Guy - Get Inside The Head Of Today's Generation 2007 AE Institute Session - To purchase 2006 AE Institute Session - Parts 1 2 3 4 5 6 7 8 9 HouseValues Mastermind call - Parts 1 2 Blanche's fireside chat with Jeremy Conaway, HAR - Click here. For more articles by Blanche, click here.