RISMEDIA, July 23, 2009-I have read at least a hundred articles over the last several years regarding the profitability of the typical brick and mortar real estate office business model. Having owned an independent real estate company with the brick and mortar business model in California years ago, and then, up until 3 ½ years ago, owning six Prudential franchises with 200 Realtors, I think I can speak to this issue with some authority.
When I first got into the real estate industry in the early 1970’s, the commission rate was a 50/50 split between the broker and realtor. Then in the early 1980’s, it started creeping up. By the time I sold my Prudential franchises, it wasn’t unusual to see a Realtor getting a 90% split. In fact, I started seeing my competitors offering 70% splits to brand new Realtors in order to get them to join their companies.
What I could never understand was why a Realtor wasn’t concerned with their broker’s profitability, because without a profit, their broker would eventually be forced to close his or her doors. From reading articles and speaking with my broker friends around the country, the typical brick and mortar business model averages only about 19% gross profit after subtracting the Realtor’s spilt and the franchise fee.
It’s very hard to cover the expenses of a brick and mortar office with only 19% and also show a profit. I have noticed that many brokers are now trying to reverse the trend and are lowering the commission split with their Realtors. However, I don’t think this strategy will last very long and here’s why.
A few years back, we started seeing a proliferation of the 100% companies, where a broker would pack 100 Realtors into a small office and force them to share work space. In the last three years with the real estate meltdown in this country combined with the financial meltdown, these companies are suffering greatly. Their whole concept was based on volume, and we all know what has happened to volume in the last couple of years.
So the strategy of reducing Realtor’s commissions in the typical brick and mortar business model can’t last, because we will never be able to put the 100% genie back in the bottle.
The newest business model is the Internet-based real estate brokerage. In this model, Realtors work from their home office and then meet their clients at their favorite lender’s office or their favorite title company’s office. With this business model, a broker is able to offer a true 100% to the Realtors, with no extra costs and no franchise fees coming off the top of the commission. The only cost to the broker is the corporate/administration office.
With today’s technology, supervision is not a problem. In fact I can testify that I have less supervisory problems with this business model than I did when I operated six franchise offices. In fact, my most surprising discovery in operating a national Internet-based real estate brokerage is that I deal with the exact same issues I did when I operated the typical brick and mortar office.
I do believe that the Internet-based real estate brokerage business model is a little ahead of the curve, but I truly believe that within ten years or less, this business model will be the norm in the industry.
It is the only way that a broker can operate a truly profitable real estate brokerage without having a mortgage company, title insurance company and all the other affiliated companies he or she would need to make a profit, when operating a brick and mortar business model.
James A. Crumbaugh III is the CEO of Allison James Estates and Homes, a national Internet-based real estate brokerage.
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