This article is part of our HousingWire 2022 forecast series. After the series wraps early next year, join us on February 8 for the HW+ Virtual 2022 Forecast Event. Bringing together some of the top economists and researchers in housing, the event will provide an in-depth look at the predictions for next year, along with a roundtable discussion on how these insights apply to your business. The event is exclusively for HW+ members, and you can go here to register.
Some 15 years ago, real estate agents had only a few choices when deciding which real estate business model to choose. Today, the choices are abundant. From virtual, capped models to low-fee and discount, agents can pick the company that best fits their needs. Because of that, and several other reasons, gross margins for real estate brokerage firms are declining with no real end in sight.
2022 Forecast series
In 2015, according to RealTrends data, gross margins were at 16.4% for the largest brokerage companies in the United States. Now, they’re at 13.5% for 2020, down from 13.8% only one year ago. This is an average for a variety of business models, with some models trending lower and some higher.
Why is this happening? The first cause of the decline is the growth in competition for productive agents and a variety of new brokerages.
“Another factor is that leading market-share brokerage ﬁrms now get as much, or more, of their earnings from mortgage, title insurance and other core settlement services,” Steve Murray, senior advisor to RealTrends, said.
“As such, their strategies often go to capturing share of the brokerage business, not just for the sake of brokerage profitability, but to drive transactional volume and profitability through these related services,” he added.
This will drive the real estate brokerage of the future. A brokerage where core services are no longer value add-ons, but fundamental to the health of the firm.
Here are some trends we’re seeing in the real estate brokerage industry.
Emerging new business models
The one-stop shop of today will continue to evolve as consumer demand for an easier, less stressful transaction increases. There has been an explosion of companies offering financing solutions such as bridge loans, iBuying and more.
Companies such as Zillow, Refin, Opendoor, Offerpad, Knock.com and Ribbon have put a new spin on financing services that have been around for more than 30 years. These companies have come up with innovative marketing and new delivery methods.
Consumers are demanding more from real estate companies, including a mix of these services. “I think it’s a foregone conclusion that leading brokers are going to need to retrain agents on these financing services, much as they did 10 to 12 years ago to deal with distressed inventory and short sales,” Murray said. It will require a whole new skill level and different level of service to compete.
Leading brokers will need to embed these financing services into the base services that all their agents are encouraged to offer.
“Partnering with other companies to offer them suffices. But we think that leading brokerage companies, or market-share leaders, will need to incorporate and embed these services in their everyday offerings to buyers and sellers,” Murray said.
With that, comes a whole new level of skill, implementation and training.
Segmentation in the industry
The growth of teams and concentration of more market share among fewer agents may also cause a decline in gross margins.
“The competition for productive agents will not cease in the years ahead and gross margins will continue to be under pressure and tend to decline further in this environment,” Murray said, which leads to segmentation in real estate brokerage.
In the past, most brokerage firms were either a graduated commission plan, traditional independent, a 100% commission concept franchise or a 100% commission plan, ﬂat-fee independent. Now, there’s an explosion of teams and new models, including salaried agents and virtual capped models.
The agent offerings of traditional brokerage — technology, market-ing, office space, managerial oversight, deal doctoring, coaching, mentoring — once attracted about 60% to 70% of agents who chose these companies as a place to hang their licenses.
In the current market, with so many options, including numerous low-cost brokerage companies that charge either a monthly fee or a transaction fee, as well as online access to technology and marketing templates, there is a lot more competition.
“Combined, these companies, including eXp Realty, Fathom Realty, United Real Estate, Real Brokerage and others, now have about 150,000 to 180,000 Realtors associated with them,” Murray said.
In addition, Murray said, “Many new agents join a team, not necessarily a brokerage company.”
The market is segmenting as never before. So, it’s important for real estate brokerage companies to avoid being caught in the middle without a clear differentiation in what they’re offering. What does that mean? Are you a Walmart or Amazon, or are you a Tiffanys or Neiman Marcus?
Murray explained that the agents you used to appeal to are fragmented, so you must define what you offer and understand “that the audience for that may not be as big as what it once was.”
In the coming years, it will be more important than ever to clearly define your brokerage’s value proposition, expand into core services and thoughtfully recruit agents. Real estate is still about relationships — with consumers and agents. Your offerings and value proposition should reflect that.
This article was first featured in the Dec/Jan HousingWire Magazine issue. To read the full issue, go here.