Why real estate’s agent-centric broker models are doomed

Agent-centric broker models are set up to lose and fail

Last October, I entered my 44th year as a licensed real estate agent, the last 36 of which have been as the designated broker and owner of the family’s real estate investment firm. I’m second generation. The date on my first license was barely 60 days past my 18th birthday. I aspired to be merely wet behind the ears. In those years – BA-C (Before Agent-Centric) – more business was done by less people in terms of transaction quantity than is dreamed of these days.

I was blessed (unknowingly) with the rarest of opportunities, starting from below the ground up in a hugely productive real estate company, family owned – read: Dad – and run on the Broker-Centric model. Below, the two models are defined through the lens of my experience on the inside of both.

Broker-Centric (BC) model defined

There are many factors, but the main thing is that the broker is in charge in every sense of the word. They produce the bulk of the leads, pay for them, and in many cases, design their in-house distribution. They pay for office space, and the various machines/computers necessary to do business. They don’t charge agents for much, if anything. They take virtually all of the financial risk and liability.

Commission splits in the BC model of yesteryear aren’t even believed by most modern day agents. Exclusive listings paid 20 percent of the listing side, while exclusive agency and open listings paid 15 and 10 percent respectively. The selling agent made 40 percent of the buyer side commission. There were variations of this, but the range of pay between companies was relatively narrow.

If looked at in terms of sales volume per agent, or GCI (gross commission income) if you will, the BC model requires significantly fewer agents than the Agent-Centric model requires. Adjusted for inflation, agents made more in terms of dollars than they do today at double or more the commission splits. For example, in a five year period from 1965 through 1969, just 25 to 30 full timers and eight to 12 part timers closed over 1,000 sides a year, every single year. I saw the last three in person, from the inside. The average full timer in that firm made more than twice the median household income. Twice.

Agent-Centric (AC) model defined

The AC model is, in my experience the perfect business model. That is, if you prefer the tail waggin’ the dog. It’s based upon the idea that all agents know what they’re doing and will use the time available efficiently and profitably, to their own benefit. Lead generation is typically left up to the agent.

The commission splits are typically 50 to 100 percent higher than agents toiling in a BC-based brokerage. It often requires two to five agents to equal the GCI produced by agents working under the BC model. There are exceptions, but most broker/owners employing the AC model use the mud on the wall principle. They pray that hiring the max number of agents they can house will produce the the bottom line profit they require to keep the doors open.

Brokers in the AC model often rely on newbie agents who begin with a 50 percent commission to make up for the more highly paid ‘experienced’ agents. Typically these rookies will do two or three deals in their first 6-12 months, then disappear, only to be replaced with the next rookie.

The irony of real estate teams working for an AC model firm

Note: There are kinda sorta hybrid models out there, the ones with various profit sharing and other agent-participant type models. Some are highly successful, but can’t (at least by me) be categorized as either BC or AC. I’ll leave thoughts on those outliers for others who are more informed about those models than I.

I have to believe that there are hundreds of brokerages out there who are more than a bit perplexed not only by the success of the teams they employ, but the bottom lines of the team owners. If, for example, we use the team model I ran for years, agents made a maximum of 50 percent commission split. Let’s compare that to John Doe Real Estate, a traditional company operating on the AC model, with around 50 agents. However, of those 50 agents, 10 of them, including Debbie, belong to a team owned by Debbie. Four are buyer-agents (BA), some are support staff, T/A, tech guy, team ‘manager’, etc. Debbie is a listing demon. This year, she’ll list 100 homes. Her team will close 250 sides. Fully 91 of her listings will sell and close escrow. The median price per closed side was $200,000.

The remaining 40 agents working for John’s firm closed another 280 sides, with all sides computed at three commission as a constant.

His agents make 80-90% commission splits. We’ll use an average of 80% if only to give John a fighting chance against Debbie (laugh track would be perfect here). Also, we’ll allow the median price on John’s other agent sales to be $220,000 a side, 10% higher than Debbie’s team. Let’s compare the two:

Outlining Debbie’s year:

On her 250 closed sides, here’s how Debbie did. She’s at a 90% commission split from John due to her phenomenal production.

So, 159 closed buyer sides at $200,000 median price = $954,000 GCI for the brokerage. $858,600 is Debbie’s ‘team’s’ share. Her BAs pocketed $429,300, which is an average income of six figures per BA.

Then, take 91 closed listing sides at $200,000 median price = $546,000 GCI for the brokerage. $491,400 is Debbie’s share. Debbie does all the listing and none of the selling. Furthermore, she doesn’t take referral fees from her own BAs when she gives them her own buyers.

Debbie’s take for the year after her team’s commissions are paid, comes out to $920,700. That’s before overhead of support staff, marketing, etc.

Outlining John’s year:

First, his take from Debbie’s efforts amounts to $95,400 from her buyer side transactions. Her closed listing sides netted him another $54,600. Total harvested from Debbie’s team = $150,000. But how about his other 40 agents? How did he do with them? Don’t forget, his other agents’ median closed side price was $220,000 – 10 percent higher than Debbie’s.

They closed 280 total sides. That’s a GCI of $1,848,000. John’s take from that GCI was $369,600.

Add to that his share of Debbie’s production – $150,000 – and John’s grand total comes to $519,600.

I want to tip this as much to John’s side of the table as possible, so we’re gonna assume he’s not part of a franchise operation. Therefore, he doesn’t have to shell out a percentage of every closed side to the franchise big guys. He does, however, pay for office space and the usual expenses that come with that. He has a marketing budget. With an office of 50 agents, he has a pretty sizable phone system and support staff – neither of which is free. Even if his operating expenses are the same percentage as Debbie’s (clearly a stretch to make a point) he grossed just a bit over 56 percent of what Debbie did.

The practical side

John gets a taste of 530 closed sides. Debbie gets a taste of just 47 percent of the total business done by John’s brokerage, 250 sides, yet almost doubles his gross income. Since most of John’s agents are lucky to last a year or two, he’s constantly spending time and money to replace them.

Debbie’s people? She has an impressively long waiting list to be a BA on her team. Think about it. Sure, they work very hard, but they show up looking professional, grab that day’s buyer leads, show property – follow up with the help of support staff – and make six figures. Debbie’s operating expenses, as a percentage of GCI, are lower than John’s. Duh.

The numbers really get silly when the team is under the umbrella of a ‘100% commission’ AC office. I personally know of a couple of highly successful team owners working under that system, and it’s almost like being given the key to the broker’s bank vault.

What brokerages have done for 25 years

Does this explain some of what brokerages have been doing for 25 years? Though many have been called brilliant for their forays into related vendor ownership like title, lending, escrow, etc., they did that in self defense, for Heaven’s sake. If they hadn’t done that, most would have already been face down in the water, completely forgotten.

Then, there’s the 100% commission approach. I love this one, as it’s really the brokers conceding victory to the poor caliber of agents they’ve been hiring and overpaying for the last several decades. Is it any wonder they’re failing right and left with a model that promotes the hiring of woefully unqualified, unproductive agents who will be paid roughly the same as highly qualified and productive agents? As Dad loved to ask at this point, “What genius did the math on this one?” Indeed. At least when every agent is paying the broker/owner a monthly fee for their existence, the broker makes something.

The AC model is a loser from day one

The AC model is a loser from day one and always has been. I suspect it will continue to be so. But there’s another major reason, aside from the math, that doomed the AC model before it started – the AC model violates the real life Risk vs. Reward reality.

I’ll give you a choice of two ways to go as a new agent.

1. In one, you get paid 80% commission on every dollar you produce. The brokerage takes virtually all of the liability, pays all the major overhead, and provides you with a suitable office atmosphere in which to work. For the most part, you’re responsible for generating your own business. Not much, usually nothing, is handed to you in terms of business. You close business based upon your own efforts, or else you starve. Of course, you look at that $220,000 median price at three percent commission split 80/20 in your favor. Then, you say to yourself, “Self, there’s no way I won’t close less than 20 sides in a year. That’s $105,600 — I’m in!!”
2. In the other scenario, you get paid 40 to 50 percent commission. You must follow strictly written protocols, do the same thing every day, be a BA, and make just 50% commission. The thing is that your buddy down the hall, the one who works as one of Debbie’s BAs, made that much and wasn’t expected to generate any business whatsoever on his own. Hmm. What to do?

Then there’s the disturbing fact that the typical agent makes only $30-something thousand per year on their own. But you’re not like those agents, right? No-sirree-Bob, you’re three times that good. Since these brokers are willing to take virtually all of the business risk, yet pay me at least 80% commission, why wouldn’t I wanna go for it? I get the best of both worlds — extraordinary pay without the commensurate risk.

And there’s the rub. 

Gravity wins every time it is challenged

When we jump off a very high place without a parachute, we’re gonna die. Gravity eventually wins every time it is challenged. The same with the physics of economics. Whenever the market produces a business model challenging the laws of risk/reward, it’s as doomed to a bad ending as the guy jumping off the cliff’s edge thinking he can flap his arms and fly.

Brokers and team owners/leaders are the ones taking the risks. They should be the ones reaping the lion’s share of the profits. When brokers as a group thought they could ignore the undefeated law of risk/reward, it was akin to jumping off the cliff while flapping their arms.

Most agents simply can’t generate enough real estate business to matter. That’s not my opinion, it’s my experience since 1969.

Wanna know how feeble the typical real estate agent is? In one of California’s best years since the end of WWII, I think it was 1977, the state’s turnover rate for real estate agents was more than 2/3. If that’s not a convincing indictment of the newly installed AC model, nothing is. If you had a pulse back then, you printed $100 bills. Yet two of every three agents were either out of the business or with another broker, hoping against hope that the change of address – and not them – would make the difference.

Once and for all, let’s run from the AC model. That one change in our industry would do more to restore the public’s faith in what we do than anything else I can think of. When the vast majority of real estate agents simply don’t produce the results for which the public hires them, it’s time to reject the model creating that reality.