Recession, depression, or compression in the Real Estate market? It doesn’t really matter!

Many of the economic pundits are predicting that our economy will weaken over the next couple of years. Many more have said we will see a recession that could impact the Real Estate sector. I actually heard one of the popular analysts compare what he thinks is coming to a depression like 1929! Does any of this really impact you as a real estate professional? Let’s examine this a little further.

The Housing Market

First, mortgage rates are at a historic low. Under 4% for a 30-year loan and the Fed says they will cut further which could cause a slight additional drop. Second, housing demand is at a low compared to housing availability. We simply aren’t starting enough new homes to have enough available to the new entrants into the housing market. That means that supply is low and demand is high with more people able to qualify with lower loan payments! Sounds like a solution, not a problem!

How to prosper

That means even if only the same number of houses sell next year, the agents that set a business plan in motion to let people know that they can purchase first time, move-up to something better, or capture their equity and down-size easier than at almost any time in recent history will continue to succeed. If the market drops off a little, those who aren’t consistently pushing their relationships and marketing are the ones who will decline in the number of sales. Don’t let the market have any effect on you. Set your target, figure out the best approaches to hit your target and break down each approach to the little things that need to be done consistently to succeed in each approach. Once you have done that, track what you do for each of the little things and the approach becomes successful and the target gets hit, regardless of what the economy does!

Carpe Diem!!

Change is inevitable, except from a vending machine! The Real Estate industry is changing rapidly and dramatically. Tech companies are invading the space and capturing the supply of buyers. Now they are working hard on capturing the supply of Sellers. What’s next, go after commissions as well?

Whats happening now

That’s exactly what is now happening! There are as many as 9 major law firms in the US that have joined in a lawsuit challenging our system of commissions. They have sued the major MLS systems, NAR as the Mothership, and all the major Franchise firms as co-conspirators. Those firms believe that a firm, the MLS, or the Mothership requiring a listing agent to “offer” cooperative compensation is anti-competitive and artificially increases the cost of selling a home. To help with their claim, they note that this system “prevents” Buyers from negotiating with their agents for the services they provide.

The Dept of Justice is now looking into MLS data to determine how many agent searches begin with or include cooperation commissions. This is to determine how anti-competitive cooperative commissions really are. Results could be that sellers save the cost of paying commissions to the buyer’s agent and leave the Buyer to negotiate what his/her agent will be paid. That becomes an additional cost for the Buyer that would need to be built into the loan system or will increase out-of-pocket cash costs to the Buyer.

Here’s how it could change…

Do you know a few buyers who won’t seek an agent’s help if they have to pay cash for services? I certainly do! More importantly, what amount will Buyer’s be willing to pay for the services we can provide?? How many will willingly pay $6,000 for your services to purchase a $200,000 home? Unless I miss my guess, and I haven’t missed many, how Buyers agents get paid IS going to change, and probably dramatically. The very least of changes will be total full disclosure from the agent to the Buyer of how much the agent is being compensated. This will be only if there is some sort of Seller participation. If not, you will have to negotiate your compensation with your Buyer before beginning your representation. Are you confidant enough in what expertise you bring to a transaction to set across the table from a first time home buyer and tell them they will be responsible for paying you 3% of the cost of whatever they purchase?

Many firms have tried to avoid these pitfalls by having their agents negotiate with their buyers at the beginning of representation and complete a Buyer’s Representation Agreement. That is a significant step but how many of you have managed to get a buyer to sign a Buyers Representation Agreement only by telling them they don’t have to worry because the Seller will pay it? I’ll bet many of you have even told Buyer’s that if you collect less than what you agreed to on the Buyer’s Representation Agreement you will settle for whatever the Seller paid!

Conclusion

The results of these lawsuits are going to at the very least require significant disclosures of what you get paid to represent the buyer (no more cloak of invisibility because the Seller paid it) and more likely will require both front end negotiation and full disclosure. If you are primarily representing Buyers, ask yourself if you would willingly pay for the services you provide to a buyer what you want them to pay. Should you answer yes, get what you provide down on paper so you can build upon that with other buyers. If you wouldn’t pay for your services, you need to re-think how you represent buyers and discover what you would want to make it valuable enough, then implement it! Don’t make it about what you get paid, make it about what your buyer needs and wants!   

After 34 years of operating in and around real estate, I believe the future of real estate is bright in spite of the coming changes to real estate! The housing market is such an economic driver that many will try to disrupt and change, but no one will defeat it.

Right now, the primary change in the market is toward consumer choice. It will start with compensation. The broker co-operation model as we know it will disappear in the next 3-5 years. No longer will Sellers dictate what Buyers agents will be paid. Buyers agents will have to negotiate with their Buyers for what they get compensated and what services they provide.

Consumer focused:

Other coming changes to real estate are that consumers will want all services coordinated in a cohesive single environment including contracting, title, escrow, mortgage, and inspection. These services will need to be digital, accessible, and coordinated. This requires fewer people and thus less cost as the industry moves forward.

The Industry will evolve to a single nationwide (worldwide?) database that will replace local MLS’s. That provides greater access to knowledgeable brokers/agents and will erode the “local knowledge” advantage currently enjoyed.

As all of this comes into play, it will hasten the entry into the industry directly of at least one of the mega players; Amazon, Google, or Facebook. Not as on-demand or iBuyers but as full-fledged integrated real estate services companies.

Last, but far from least, the Independent Contractor model that we are familiar with is going to be replaced with an employee/employer model. That’s right, the one with withholding, job descriptions and requirements, and social security!

Are you ready:

All of this bodes well for those agents who have exceptional knowledge, refined negotiating skills, and understand the true nature of customer service. They will have access to the nationwide MLS and be able to coordinate the process from scheduling showings, writing contracts, and obtaining mortgages to closing the transaction digitally! They will need to be exceptional at creating, building, and maintaining relationships with consumers.

New mortgage advances, more employment, and greater opportunity are going to make home ownership more accessible to more people. More customers and a reduction in the number of agents competing for their business, what could make the market any better? The future of real estate really is bright if you are ready, willing, and able!!

The Claims

I love getting new real estate recruiting ads. I continue to see claims of providing 1 to 1 support and a whole laundry list of support services while paying out something near 100%. When I look to find out how many ” employees” these companies have to provide the services they claim to their real estate agents, I find the number to generally be 1 or 2 support personnel. Really?

The reality

That number of support personnel works if there is less than 10 agents. Otherwise, they must be super talented employees, have many years of experience in real estate and thus must get paid well. If that’s the case and you receive 100% of your commissions, how is this payroll covered? As a matter of fact, how is the rent, internet, copier, and utilities paid? Now ask how many real estate transactions the broker does in a year? That governs how much time he or she has available for thee. Without a reasonable split from the real estate agents, related service providers from which they profit, or a large number of agents the math simply doesn’t work. If you have a large number of real estate agents and a fixed fee, how many “people” are there for you to ask real estate questions of and get specific real estate advice from? You can’t expect specific advice from a video and you can’t get specific advice from an out-of-state “broker” as they have no knowledge of local laws and forms.

Fuzzy math?


You get what you pay for, regardless of how much business you do. Nothing more, nothing less, even though they will tell you they can give you more for less. One model even claims no franchise or tech fees of any kind. So, am I to believe the real estate Franchise company gave the right to use their name and resources to a real estate broker that gives all his real estate agents 100 % of their commissions for no compensation? Either capitalism or math has dramatically changed. In my 34 plus years as a real estate agent, broker, lender, and developer, I have met few real estate brokers that will take on liability for no return and even fewer real estate franchisors that provide name recognition and services without charging a fee. There is always a “but” in these arrangements. Don’t let the “butt” be you! Ask questions. Get fully informed. If we as agents made these representations in selling a property, we would violating the rules in most all states, yet they just keep recruiting with the same old promises.

I am seeing lots of “Fuzzy Math” these days. It is in the form of a recruiting pitch to agents telling them that they can keep 100% of their commissions. Well, we know that is not true as the sponsoring broker will have to have a method of earning back the amount put out for office rent, utilities, equipment, employees, telephones and back office systems. Additionally, a broker will want to be compensated for paying all these expenses up front as well as for his/her time in managing the office. Then, of course, there is the dreaded “profit” for the Broker. Now come the claims that you can not only get paid 100% but that the Franchisor and the Franchisee will provide you with systems, training, and support. People to do this and the systems themselves cost money. These are substantial expenses. So now, you have a Franchisor and a Franchisee who are apparently paying out of their pocket for the expenses necessary for you to carry on your business because you get 100% – right? I know, they also pay you for bringing in other agents and even though they claim they are attracting the best they are apparently attracting anyone who will sign and was recommended by you.  See what I mean about “Fuzzy Math”?

They get paid by a monthly fee so the “more” agents in the office, the better (what was that about quality?), and they receive a fee per transaction-side closed. Nothing they receive is based on the quality of the work, the value the agent has to the client, or how the client feels about the work performed. If you flame out, there are always other agents to replace your monthly fee and your transactions. Sounds like a perfect way to help commoditize what real estate agents do – which helps the big boys replace agents and reduce their compensation (think Uber and Expedia).

What commissions you charge are up to you but without standards commissions often get discounted. So, let me see, 100% of 2% is 66.6% of 3% or a one-third reduction in pay. But nobody in the brokerage cares because they get the same amount regardless of what you get. That makes what you receive far less than that other brokerage that wanted a reasonable percentage. Now let’s throw in opportunity! I know, you want your signs and cards to only advertise you! Forgetting the fact that to do so in most states violates the Real Estate rules and regulations, the only marketing you get is from your listings. Every sign promotes you as well as the listing agent in the other brokerage. Isn’t about making the phones ring and being seen on the internet? Then there is that pesky SEO.

If you need to make more money, work harder and smarter. Find a broker that thrived in the market downturn (even a blind squirrel can find lots of nuts under a nut tree in a good nut year) and learn how they did it. You shouldn’t be focusing on getting more agents for them to supplement your compensation. (Are you a Real Estate Professional or a head hunter?) Focus on selling more real estate and satisfying more client’s needs. Find a brokerage where education is important. It should have qualified staff people who can assist in every element of real estate representation and systems in place to facilitate the review of transaction documents on a timely basis to ensure accuracy and obtain signatures digitally. The brokerage should be monitoring the changes in laws, delivery systems, and the practical barriers to properly completing transactions and protecting your clients interest. If they aren’t, how will 0% sound when your license is revoked for something you weren’t even aware of? Professionally representing your client and assisting them in achieving their goals ethically, legally, and responsibly will be the only way to thrive in the future. After all, have you heard any rumblings about attorneys or CPAs being replaced by technology? Like other professionals, it’s the personal and individualized attention to clients’ needs that prevents us from being replaced by a machine and enables us to charge a reasonable fee based upon our skill, expertise and knowledge! In the end, it’s not about the split, it’s about how much you make and keep at the end of the year and how long you can do it! Make your choice intelligently after analyzing all the facts and don’t rely on their “Fuzzy Math”!