Brokerage Wars: Transparency in Value & Compensation
As the market changes, we've been hearing more stories about brokerages rebranding themselves, adding fees, and selling "pitches" to agents to get them to join their company.
This is no surprise as many brokerages are having to survive this new market environment with volumes dropping 25-30%+ in just a few months while still sustaining their high overhead.
FYI Momentum Agents are actually up 19.7% in volume YTD versus 2021! As we say, numbers tell the story.
With more turbulence ahead, I'm sharing my prediction and thoughts since top agents call me weekly to discuss their businesses and their brokerage models. These are anecdotal conversations that may be relevant to you. The goal of this article is to share with you my thoughts and you can pick and choose what is valuable to you. To summarize the this information, below is a visual to consider. Enjoy!
1. The Brokerage Rebrand, Profitability, & Franchise Fees.
Several brokerages are beginning to get off the franchise models since the franchise fees are too high for the amount of work they have to do to run the company. The owners of the franchise aren't making enough money and neither are their agents. I've heard through my network that approximately 90% of big box franchise brokerages in a normalized market net less than $100,000/year. This is way too little profit for the amount of work it takes to run a brokerage. This is important for the agent to know because there’s high risk that their brand and leadership can and will turnover, disrupting their business.
On the agent side, it's nearly the same story and statistics as brokerages - only 10% of agents are really profitable due to high splits and not enough production. Most brokerage owners understand that agent compensation is the number one factor in attracting talent. When competing for the next wave of talent to join their firm, it's challenging for these big box brokerages to convince agents to join them when they charge 2-3x more than other great brokerage options in the marketplace. Their compensation model makes it difficult to grow.
Frankly, if an agent can't make money under the brokerage's financial model, it's likely they won't stay in business long or they'll just switch brokerages. So, the fees must be fair for value that is provided to the agent from the brokerage. Most agents I speak to at big box brokerages feel they no longer get value at their company and feel the fees are still too high. That's why I believe, and have seen before, that low fee compensation models will become even more attractive as the market shifts and agents look to save money.
Similarly, large agent teams experience this same phenomenon of charging their team's agents too much and not providing enough value, only to lose their top performers to a low fee platform after training their agents up. It's frustrating for the team owner and the agent because the financial model never made sense in the first place. A model only works if it works for everyone.
Thus, brokerages and agents are breaking away from the larger franchise fee companies (of which some have caps for their agents and some don't) and move toward low fee brokerages. This trend has been happening for years but will accelerate during the recession we are in.
We've heard from agents who don't have caps at these big box brokerages that their total fees can range from $70-170k in one singular year. Yes, read that again. I thought my big box was bad when I paid $44,000 my first year and received practically no value, but there's a lot worse out there apparently. Again, all this information is anecdotally received.
I didn't understand how agent financials worked when I started either, so I understand why this happens. I didn't ask questions because I didn't know the questions to ask. In the beginning, it's all exciting and you think every piece of information is valuable; so you value the brokerage highly in the beginning, and after a year or two, you realize there are better options out there at a lower cost.
2. Brokerages Adding Fees
Some brokerages are beginning to add additional fees, on top of their monthly fees, high splits, and franchise fees. For example, they're adding transaction fees. They're basically looking to fee every aspect of the transaction to drive revenue. But it puts the agent in a hard position, because if they can’t pass that fee onto the customer or don't want to, they must eat that cost themselves.
For a lot of agents who are already paying high fees, it feels insane to pay more. Changing compensation models can be a death sentence for a brokerage. The compensation should make sense from the start for all parties, regardless of the economy. The compensation to the brokerage should reflect the value the brokerage provides to the agent.
Yet, these brokerages adding additional fees must do something to keep revenue going as sales drop, as they have large overhead, multiple offices, and a handful of staff. Unfortunately, a handful of these brokerages overspent and overextended, and now they're having to backtrack on services provided and raise fees. The agents are caught in-between in the crossfire. We expect brokerages to continue adding on additional fees to their agents to keep afloat in 2023.
3. The "Pitch / Story" Brokerage
There's several, what I call, "story" brokerages out there, that tell you a nice story and put out pretty pictures to get you to join, yet when you get in their doors, it's not what you expected. Perhaps one company says they've built a better mousetrap by issuing restricted stock that will cause faster wealth building, yet the stock has already fallen nearly 90% within the year, and their company is notorious for having a very high turnover ratio, making it hard for you to sustain revenue share from recruiting.
Another example would be a flat fee brokerage that sells you a story that you'll thrive on their "free leads" yet when you get in their doors you find out it's bare bones and just Opcity leads that come with a 35-38% referral split and that they're basically available at all large brokerages. Or they claim that they have systems where you can buy quality leads, only to find out you must pay a technology fee and the leads you are buying are Google pay per click leads that you can buy yourself at an even lower cost. They sell a big vision and make it look pretty, but very few are producing and it's not due to these systems that are advertised. It's because actual producers follow the fundamentals of real estate.
You can get a clue about the brokerage being a “story” brokerage by asking: what does your average agent produce in sales per year? If they don't know the answer, they're not tracking, which is a red flag.
The Takeaway:
Overall, there's no get rich quick scheme. There's no magic brokerage that's going to fix your business. There's you and then there's hard work, grit, focus, relationship building, and strategy. Then there is who you choose to surround yourself, what you read, and who you choose to listen to and there's the financial model you choose to plug into (because it must make sense regardless of loyalty). The beautiful thing about being an agent is that you have SO many options. It's important to explore all of them, collect the data, and then make the best decision for you and your business. Not every brokerage is going to be the right fit.
We believe that the best brokerage fit would come from all three of these criteria: compensation model, training/coaching/investment opportunities, and culture.
Lastly A Common Comment We Hear About Flat Fee Brokerages.
So while agents look to switch from high fee companies to low fee companies, they quickly find that the low fee companies are primarily filled with 2-3/year producers who won't or don't want to advance their mindsets and businesses. I’ve heard that drains on these top agents over time since they become the average of the people around them. Frankly, no one is living a big life on 2-3/year production. Yes, it's a nice income and there's no judgement about someone's goals. It's just that low production is not a good thing in any business.
These agents who switch to flat fees also have found that their leadership has never achieved what they want to achieve - financial independence. They've never built a team and scaled a business. The agents find out it's just another business that is barely profitable with limited upside for their personal growth. So, who are they to learn from if they're looking to grow?
Shameless Plug.
That's why we made Momentum, a platform that combines the best of both worlds - a low fee platform with a proven playbook that also provides high value through valid leadership, speakers, and coaches. We also provide equity, revenue share, and additional investment opportunities. We put all of it on the same brokerage platform. What's different is that the results from our story are showing up through the numbers in the marketplace, as we have become the #7 brand in Northeast Florida within our first three years (we started in January 2020).
This isn't an accident.
We've seen $3M producers become $20M producers in one year. We've seen our agents become financially free. We've seen our agents payoff all their debt, buy cash-flowing investment properties, flip homes, open additional businesses, and make the perfect hire that allows them to scale. This is what gets us excited! Seeing our agents win and improve their financials, their lifestyle, and their families. We love seeing the financial success of our agents, their entrepreneurial spirit, which is supported and encouraged by the level of conversations within our tribe.
To leave you and to assist in your brokerage choice journey, if you are considering a change, here's some questions to consider asking leadership when joining a brokerage:
1. Leadership Validity. Has the broker or the leadership ever achieved the financial results you are looking to achieve? Not only from a revenue perspective, but a profit and lifestyle perspective as well. You cannot learn from someone what they don't know or haven't yet done themselves. Everything rises and falls with leadership.
2. Productivity Environment. What is the average production of the agent at your brokerage? How many homes does your brokerage sell / how many agents do you have at your brokerage? This will give you an insight into where you'll likely end up statistically. Look to connect with other agents who have grown their business quickly by making a change to their brokerage.
3. Agent Financial Results. How many net worth millionaires has your brokerage spit out? If they haven't spit out any millionaires, that's a clue. Most brokerages don't even know what net worth means, and that's fine - our education system doesn't teach us financial literacy. Just be sure to ask so you can check the level of mindset of your brokerage leadership. Ask to speak to these millionaires directly.
4. Level of Conversations & Access to Them. Does your brokerage focus on wealth building, tax strategies, and investments? If your brokerage isn't helping you advance forward your wealth building, what are they helping you with? Do they have additional investment opportunities?
5. Coaches, Trainers, and Speakers. Who do you bring in as valid trainers and speakers so we can continue to grow? You want to know who you will get access to when you join the brokerage, not only the leadership, but also who they know and can connect you with. Know upfront!
That's it for now. If you have any questions, or would like a friendly debate, feel free to comment or give me a call (jon@movewithmomentum.com / 904-570-1216). We believe in transparency and data and we are happy to share with you what we see and why.
Thank you as always for reading along. Let's crush it. The opportunity of a lifetime is coming between now and Q2 2023. Onward!
