We started getting into this a bit on my Disappointment Index post, but I think its worth a post and thread of its own. David Losh’s comment “Every Brokerage wants you to do it yourself so they can get rid of all the dead wood they have hanging around in the office. Real Estate is a numbers game. The more agents, the more money. With an online Brokerage all you need is a technical support staff” kind of triggered my decision. Read his whole comment; there is some interesting insight in there.

Is the business really changing? And do the different generations – Boomers, Gen X, Gen Y have different preferences that would favor one business model over another?

In 2006 we had a lot of discussion about new business models and the rise of the Internet, including an MIT Enterprise Forum program on the topic, and a post here on RCG by Robert Gray Smith. So now it is three years later, Redfin has declared its first profit (congratulations, Glenn), we are no longer in a bull market for real estate, transaction volumes are way down, and everybody is three years older and wiser 🙂 Has anything really changed in the real estate business? The core of the business is still appears to be the big traditional brokerages – RE/MAX, Coldwell Banker, Windermere and John L. Scott – some are national, some are regional; some offices are franchises, some are company owned. Some people will want to add others to the list, from Skyline to Realty Executives to …

My view of the big brokerages (I happen to be affiliated with RE/MAX, and formerly with John L. Scott) is they fundamentally are not in the real estate business; they are in the real estate services business. Their client is not the buyer or seller, it is their affiliated real estate agents. As a residential real estate agent in the state of Washington, I am licensed to facilitate the buying and selling of residential and condominium homes, under the direction of a licensed broker. In the traditional model, I am not an employee of that broker, I am a sub-licensee and an independent business person. My activities are not directed by the broker, I do not get benefits, and my earnings show up on a 1099.

For the privilege of being affiliated with that broker (i.e. sub-licensed, or ‘hanging my license’ there) I pay a fee – actually lots of fees. There are transaction fees and E&O fees and B&O fees and legal reserve fees and desk fees and non-desk fees and membership fees and advertising fees and website fees and commission splits. In general the big brokerages expect to collect about $20,000 to $25,000 per year from each agent; that is how they make their money. So I am their real client, and they are in the business of selling me real estate services. They certainly want me to be successful, and able to pay their fees. They will claim that being affiliated with their brand will help me attract more business, and they spend big money on institutional advertising, particularly their website. It is not clear how much of the advertising effort is aimed at attracting buyers and sellers to their agents, vs how much is aimed at attracting agents to their brand and fee services – the more agents, the more fee revenue for the broker, almost regardless of sales volume. They often say I will get a share of the institutional leads they get from their web site – but in practice for me, so far, no value. In fact, I have to do my own business development and establish my own reputation with things like newletters, seminars and blogs (and taking good care of my clients), and I have had to build my own web site to get what I consider to be a credible web presence. I am for all intents and purposes an independent business person who contracts for certain support services. The traditional model.

An alternate model is for the broker to hire the agents as employees. Then they are W-2 employees, probably get benefits, the company probably generates most of the leads – for example with a good website and some buyer/seller incentive programs, the agents probably do more transactions, and probably get a lower percentage of each transaction commission in exchange for the lead flow. But those agents will show higher in the transaction rankings, because they are basically on an assembly line instead of spending a lot of time doing their own marketing and business development. I think this is basically the Redfin model, but happy to have someone who knows it better chime in.

A third model that was tried by Redfin initially in 2006 was a model of generating the leads through the website, referring them out to a set of selected agents (sub-licensed to other brokers), and collecting a substantial referral fee if that agent was able to convert the lead into a transaction. During this time I was Redfin’s lead referral agent for the Eastside. That model did not generate enough revenue to support the Redfin business model, and it was abandoned in favor of the agent emplyee model above in mid-2007. During that period I served some wonderful clients who came to me from Redfin, and I am still in touch with them, but I agree that the “wanna see a house? – we’ll get an agent to show it to you” model didn’t have a very high success rate for either the referral agents or Redfin.

So how much do we really think the business is changing? Do we think the big brokerages would really like to migrate to the Redfin model? There is an implication that the Redfin model is a short-term relationship transaction model and that the traditional brokerage model is a personal referral and longer-term relationship model. Which model to consumers prefer? And does it vary by generations?

This seems worth exploring.