“This could be the beginning of the end for small brokerages.”
Or not.
The quote comes from a comment in the Inman News story published yesterday, Howard Hanna invests $1M-plus to enhance real estate listings.
That commenter is not alone.
Notorious Rob Hahn wrote this piece, Some Thoughts on Zillow’s 2011 Results and Howard Hanna (In Which I Declare Peace In Our Time). As always, Rob writes thought-provoking copy. In his piece he announces “The Next Battle Line”…
So that announcement by Howard Hanna, together with Zillow’s quarterly report, delineates the next battle line: the big dogs vs. the little independents.
On Howard Hanna (the fourth largest real estate brokerage in the country) paying Zillow $1M for a “partnership”, Rob went on to say in a Facebook Group:
Trick is, try getting that rate if you only have 50 agents or so.
Get big people. That era is upon us.
An aside to Rob and the many others quoting this $1 million dollar deal, please note that Inman reported the price was “$1M-plus” and went on to quote the President of Howard Hanna saying:
… the Pittsburgh-based brokerage is making a “seven-figure investment” in separate agreements with the two national portals… (my emphasis).
“Seven figures” could mean $1,000,000 or a penny under $10 million. So let’s not be calling the deal closed at $1M… But, I get the point. The big dogs can write seven-figure checks.
Thompson’s Realty is clearly not a “big dog”. We are a “little independent”. And while I could physically write a seven figure check, it wouldn’t be worth the paper it was printed on.
Is the small broker doomed?
Granted, I am quite biased, but I think the answer is a resounding NO.
Here’s why…
Take a look around the real estate brokerage landscape. There is carnage everywhere. Realogy (think Century 21, Coldwell-Banker, Better Homes and Gardens Real Estate, Sotheby’s, et al) lost $28 million in Q3 2011. That’s over $300 grand a day, every day, for three months. The Phoenix franchise of Realty Executives filed Chapter 11 reorganization in May 2011 (and successfully emerged from that in Oct 2011). Way back in December 2007 RE/MAX 2000 closed 13 offices in the Phoenix area. In February 2009, Century 21 Town & Country (10 offices in Michigan) filed Chapter 11. Yesterday, Grubb & Ellis Company, a large commercial real estate services firm, announced they were selling most of their assets in bankruptcy proceedings.
Many brokerages, big and small alike, are and have been struggling. Some, of various flavors and size, are flourishing.
I suspect it has been this way since time immemorial.
Here is my response to Rob’s, “Get big people. That era is upon us.” comment:
I am also far from convinced that “getting big” is the answer. My brokerage will be 4 years old next week. And we’ve been profitable for 47 of the 48 months we’ve been open. I’d ask my old C21 broker what he thought of that, but he had to shut his office down. Maybe I should ask Realty Execs? Oh, wait, they filed bankruptcy. I know, the big Re/Max office in town! No, gosh darn it, they shuttered their doors too…
Big might get you better deals with certain service providers, but it certainly doesn’t ensure profitability….
(Nota bene: Realty Exec’s did not shutter their doors. They filed (and emerged from) Chapter 11 reorganization. My FB comment might read they closed along with my old C21 office and the RE/MAX offices. Apologies as that wasn’t the case and was poor writing on my part.)
Rob then asked me, “… so going Big is not the answer. What is your strategy for surviving and dominating?” “Dominating” was later clarified to mean, “annual growth of 10% or more”.
A fair question. How have we managed to survive and grow? Francy and I opened a real estate brokerage in the middle of the worst real estate market downturn in recent memory in one of the hardest hit markets on the planet. And we’ve been profitable and are growing. I’m rather proud of that; but it’s not because I am some genius business wizard. There is no secret sauce, the formula is actually pretty simple:
- Hire kick-ass agents.
- Ruthlessly cut overhead costs.
It’s business 101 folks. Profit = Revenue – Cost. (Yes, I know you learned in Accounting class that it’s more complicated than that. I took 6 hours of college accounting too. This is the gist of it however.)
From that simplified formula, if you want more profit, you increase your revenue and/or reduce your cost.
Want to increase your real estate brokerage revenue? Hire agents that sell homes. Sure, you could sock your agents with all sorts of fees too — that will increase revenue to the brokerage. Desk fees + transaction fees + E&O fees + technology fees + whatever fee you desire or think you can get away with = more revenue. It also = annoyed agents who spend more time looking for a new brokerage than they do selling homes.
Yep, you can lower your agent’s commission splits too. Or raise your cap. That will raise your revenue but also tends to lead to agent dissent.
Here’s a thought… Try making your agents happy. Happy workers are productive workers.
Andrew Oswald, a professor of economics at Warwick Business School and a leading authority on the relationship between economics and mental health, led a team of economists that did a study confirming that happy workers are more productive. Why it takes a study to discover something fundamentally obvious is a story for another day.
“We find that human happiness has large and positive causal effects on productivity,” the team said. “Positive emotions appear to invigorate human beings, while negative emotions have the opposite effect.”
Well duh. But thanks for the verification.
We do what we can to keep Thompson’s Realty agents happy. We let our agents run their business like the entrepreneurs they are. We don’t impose a bunch of polices, procedures and additional forms on them. We pay them immediately as opposed to holding their checks while they “complete a file” that requires some ridiculous broker-mandated form to be submitted in triplicate. We give them leads at no additional cost. We have aggressive splits and low caps. In short, we treat them like human beings — like we would want to be treated — not like pieces of property.
Again, it’s not rocket science.
The other half of the profit formula is cost. Lower cost = increased profit. Want to lower your cost in a real estate brokerage? Lose the fancy office with flat screen monitors, Corinthian leather couches and an espresso machine. Your agents are going to be in the field anyway, selling houses. Provide oversight, be available, help them grow their business. Remember, when their business grows, so does your profit.
So there you have our “strategy for surviving and dominating.” Is it scalable? Could I grow Thompson’s Realty to 500 agents? Maybe, maybe not. Personally I have zero desire to run a 500+ agent brokerage. That’s mostly because I’m selfish. I want to know all my agents. I want to be available for them all the time. I want a “family atmosphere” where our agents cooperate with each other, not compete against each other. I think we’d lose all of that if we grew too large. I am not convinced that size matters…
I say the little independent can go toe-to-toe with the big dogs.
And win.
Photo Credit: Jeff Moss on Flickr. CC Licensed.
Hat Tip to Michael McClure for the C21 Town & Country link
The Phoenix Real Estate Guy was started by Jay Thompson, and I have a little blogging problem... he liked to say...
Great post Jay, I’ve been both a small and large brokerage. Small and profitable is definitely more fun. Keep doing what you do best and enjoy the ride. 🙂
Jay, I need to clarify some things regarding your comments about my company. Realty Executives of Phoenix did file for reorganization in May of 2011, but you fail to let people know that we emerged from that in October of 2011, after only 6 months. We did not “shutter our doors” as implied by one comment. In addition, some people don’t understand that was just one franchise of 600. Realty Executives International is the franchisor, and it was not involved in the reorganization.
But, back to your thesis…I am a true believer that franchising allows brokers of ANY size the ability to compete better. Many smaller brokers cannot afford the websites, syndications, mobile apps, SEO and other tools by themselves. That’s where a franchisor can be very helpful.
Really?! In 2012 people are scared of large business domination? The time is ripe for creative entrepreneurs to grow businesses that thrive. This is now easier than ever before. Hannah’s strategy is important to take note of and monitor, but it surely does not mean that the end is near for the small brokerage. Obviously the real estate environment is constantly changing, those who adapt and innovate will prosper – big or small. The other big takeaway from Jay’s article is culture. The general business environment is changing too – people want engagement, flexibility, and autonomy in their work. Smaller brokerages have a HUGE advantage in achieving this kind of culture and environment over are franchised counterparts. I don’t know about anyone else, but to me this is the most exciting time to be running and growing a real estate company. I’ll save my million dollar check and invest time into tech and people development.
Thanks Rich. My apologies. I added some clarifying language in the post in a couple of spots. Agreed that the Facebook comment (that I made and quoted here) was poorly written.
I hope people follow the link in this article to the Realty Execs story. They’ll see what a great operation you run. For those that don’t want to scroll back up, here it is: https://phoenixrealestateguy.com/an-open-letter-to-phoenix-realty-executives-agents/
Jay, what a great perceptive on big vs small real estate.
From years of managing in a large franchise I can tell you how difficult it is to keep agents going in the same direction, kind of like herding cats. As independent contractors we always want to stay out of the wallpaper and do something different from the next guy. No one wants to be the blue suit IBM guy.
Second a small brokerage with smart people can build an organic web presence that is hyper local and what the consumer is looking for, data is everywhere, the want and need perspective and local knowledge. Just look at what M Realty has done in Portland.
Finally I’m not a big fan of large companies. They become profit motivated, not purpose motivated and start to weigh down with lots of stupid middle and upper management. Not unlike a small speedboat, we can outmaneuver them whilst they shove services and policy down their agents throats.
@jeffreydouglass I like that “herding cats” 🙂
There are certainly hurdles for a smaller brokerage, but to my mind, the inability to waste 7 figures on a deal with Zillow is not one of them. Perhaps the DC area is unique, but less than 10% of my clients are doing anything through Zillow when I meet them. If the advantage of a large brokerage is the ability to throw money at the wind, then more power to them.
I spent my first 4 years in real estate in a large brokerage. The only thing I miss is the people, that particular office had a great family environment. Otherwise, I have not looked back, and never once felt at a disadvantage. Do home owners sometimes like to see the bright recognizable sign in their yard, sure. But I am finding plenty who trust and respect me more because we are small.
@ColinStorm … great point. We’ve been on listing appointments where the seller says they PREFER a small “family company”. Of course, it’s quite possible that some have never called because we aren’t a big brand. But there have been plenty of studies done that show that the brokerage name / brand is WAY down the list of why people chose an agent.
jay, I agree with your view. Lets not forget the basics of our industry. Clients don’t care about the company name, its size, or its profits. They care about the agent who rocks the marker.
The only real value added a big company can offer to an agent is leads, but as we all know, leads are not in their formula.
@OscarGarcia I agree. I’ve long said a home buyer or seller picks an agent, not a brokerage.
And small companies can provide leads too. We distributed over 7,000 leads to our agents last year…
@Jay Thompson There you go…Theory proven!
Keep it up Jay.
@PhxREguy I don’t think it’s the end for small brokerages at all. Howard Hanna did what they HAD to do so it wouldn’t be the end of ”¢them”¢
Jay, thanks so much for clarifying your comments regarding my company! I appreciate your journalistic integrity! It is very rare these days!
Thanks Rich, I try… As you know, I’m a big fan of Realty Execs, and wish you and all your agents nothing but the best!
Jay,
I really enjoyed your article. I liked it so much, I wish I would have wrote it! Yes, the independents will win that’s because we can move quickly and we haven’t lost sight of the most important resource in our companies: our agents. When you invest your money and time and energy back into them, good things happen. We have been profitable just like you from day one with the same formula. It just plain works! Great article Jay!
Jeff Sutherlin
United Brokers Group
Jay,
As an Broker/Owner of a small(ish) independent, I couldn’t agree with you more. Also, I love the approach you take as a Broker. My brokerage has a very similar approach. We have a competitive commision structure, don’t charge for internet or company generated leads, which total about 200-300 per month. We do charge a small transaction fee, but that pays for things like signs, mailings and E&O insurance. We are a little bit bigger, with 3 offices and around 50 agents, and have very little turnover. We don’t just hire anybody and our agents rarely jump ship.
I also agree that the small independent can still work and will still remain relevant. I believe that bigger is not always better, and that it is the quality of the agent that Brokers should focus on, not the quantity. If you have the right agents who do what it takes to be successful, and you treat them right, not only will you thrive, but you build built-in recruiters for your company. Your agents will know the type of agent that will fit into your brand, and be a vocal cheerleader to those agents.
I agree with Russell Shaw’s tweet, Hanna HAD to do it. I don’t know Hanna from Adam but if they are #4 in the country in size, my guess is they are hurting big time and desperately searching for something, anything, to differentiate themselves from every other brokerage where their agents can move their licenses. The Zillow deal will be a nice thing to add to Hanna’s recruiting materials.
But then again, I think a lot of the big boys got into trouble because of their high and inflexible cost structures and the Zillow deal will just make matters worse in that respect.
Economies of scale in print and television advertising gave the big boys a big advantage back in the day but now in the internet age, why do you need to be so big? So you can buy ads on Zillow at it’s zenith?
I completely believe the small broker is not doomed. And while I wish Zillow congrats for the deal, I am sitting here wondering how many people are relocating to Pittsburg and hovering somewhere in other parts of the world viewing Pittsburg listings on Zillow.
Given Hannah’s market share and brand recognition locally where I am thinking most people are moving within, wouldn’t that 7-figures be better used to invest internally on things like a state of art website, tools for their agents and a dozen other things?
While these mega brokers are getting sidetracked by cutting these big deals and seduced by the 15 seconds of fame they garner on YouTube, they are leaving huge cracks in the concrete for the small brokerage to wedge in.
Considering the wide range of brokerages we work with we’re watching these events closely. What we are seeing is an alternative movement – the big guys taking a cue from the small guys who are growing and kicking butt in their markets.
We live in interesting times.
Every eco system out there has some large critters, some medium sized ones, and lots of small ones. Why should ANYONE believe that RE brokerages are different?
@itsEric Yeah, but sometimes a meteor like the internet hits and changes the ecosystem so fewer large critters survive.
@John Wake My point is simply there are always little critters around making do with the current environment irregardless of how few or how many big ones are in the neighborhood. My last listing happened because I started talking to someone who wanted to see the listing I was previewing for another client. He never asked how big or small my brokerage was. He was sold by my conversation with him over market info, short sale facts, and positive attitude. Small brokerages will survive and survive well no matter what the big guys try to do.
@1000wattmarc i agree. HH coulda spent that money and built their own Z from the ground up
The pressure on the big guys in Pittsburgh to bring all those leads in is great because it is a broker only MLS area and agents are not permitted to have IDX on their websites….
Right now I believe the Redfin is the most disruptive force in the RE space right now. Zillow, syndication and everything else is a sideshow in comparison. The growth of Redfin’s buyer-side sales in the metro DC area has been breath-taking. They arguably have the best and most accurate consumer website, and they are monetizing it. And they are learning from past mistakes and getting better. For buyers, the new “Big” could be Redfin on a scale not seen by any other brokerage. Howard Hanna should be thankful they haven’t landed there (yet).
Jay – since they are in your market, I would be interested in your thoughts on their success (or lack of success) in Phoenix.
Right now I believe that Redfin is the most disruptive force in the RE space. Zillow, syndication and everything else is a sideshow in comparison. The growth of Redfin’s buyer-side sales in the metro DC area has been breath-taking. They arguably have the best and most accurate consumer website, and they are monetizing it. And they are learning from past mistakes and getting better. For buyers, the new “Big” could be Redfin on a scale not seen by any other brokerage. Howard Hanna should be thankful they haven’t landed there (yet).
Jay – since they are in your market, I would be interested in your thoughts on their success (or lack of success) in Phoenix.
@MoCoRealEstate Redfin the most disruptive force in the RE space? You have to be kidding, yes they have one of the best brokerage websites out there, they republish the Case Shiller report and call that accurate market information, and have failed to make any impact on the listing side of things (In San Diego Market_. They have all but abandoned the discount model and while crying out for transparency in the industry, misrepresent how many Redin agents it takes to make a deal. For all the money that has spent, I hardly would call them disruptive.
There is, and always will be, room for big and small and competition is always good for the consumer.
@jeffreydouglass I agree that they haven’t made traction getting and selling listings, and I agree that the market is big enough for all sizes of business. But like them or loath them, Redfin’s success in closing buyer sides is impressive. I took a quick look at volume in my market. Our MLS has $15M in buyer-side volume in 2007. In 2011 – $400M. That’s $400M in sales not going to other local brokers. Disruptive? Yes, I would say so.
@MoCoRealEstate According to the MLS, I can count on one hand the number of transactions closed by Redfin agents themselves. Can’t speak to what may have been referred out. Essentially, though, Redfin’s impact on the Phoenix market has been nil.
Conversely, perhaps the most disruptive force in real estate is the pig headed belief held by many that real estate is sacred. Like God. It was. It is. And it will always be. And that ideas like Redfin will come and go but the traditional brokerage will be here for eternity.
@Marc Davison Marc, we are in fact, our worst enemies, mired in old fashioned ideas, beliefs that we cannot be replaced, and talking while Rome is burning. There is no one company that can control the Internet or the consumers desire to find information where they want to find it. These guys need to take there MLS books and go home.
@jeffreydouglass @Marc Davison We also tend to spend way too much time wringing our hands over the likes of Zillow rather than focusing on what we need to do ourselves to succeed. For all the talk, all of this has had exactly zero impact on my business.
@JonathanDalton @Marc Davison The problem is there is not enough talk. No one wants to get involved to solve the problem, happy to not get involved while everything collapses around them. It may be zero impact today (your perception), but it won’t be so tomorrow.
@jeffreydouglass @Marc Davison Nothing is collapsing around me. Until there’s an offer of cooperative compensation attached, Zillow cannot replace the MLS as it’s not duplicating the essential (and oft forgotten function.) And should they add that, fine. I don’t care if it’s offered on a cocktail napkin, the key for me is that it’s there. I’ll leave the talk to those who have far more time to spend on the topic. I’m too busy selling.
@Marc Davison Didn’t Redfin basically announce they are going more traditional? Pretty sure they did.
@mikeroose @Marc Davison I believe so. And I’m sure it’s because the past model was so, so effective …
@JonathanDalton @mikeroose @Marc Davison Yes, Redfin recently announced “Redfin 3.0” which focuses more on {gasp!} customer service and cuts, once again, their rebate program. Seems they are edging closer and closer to becoming a “traditional” brokerage. Albeit a traditional brokerage with a pretty kick ass web site. More info — http://blog.redfin.com/blog/2012/02/introducing_redfin_30_redfin_becomes_a_no-brainer_introducing_redfin_30_redfin_becomes_a_no-brainer.html
@Jay Thompson @JonathanDalton @mikeroose @Marc Davison Of course they have a pretty kick-ass website. How many real estate companies have raised $46.8M to build a discount or any other kind of brokerage.
http://www.crunchbase.com/company/redfin
@mikeroose Yup. And at some point those VC’s are going to want a return on their investment…
@Marc Davison Couldn’t agree more. I think the RE market has confirmed that buyers and sellers have a real need for agents. If not, this industry would have evaporated like it has for travel agents. What’s often lost in these types of discussions is “how am I bringing value to my customer?”. The broker that continues to ask and answer that question – big or small – will prosper. Not to defend Redfin’s model, but I do see reduced costs as part of the value proposition. How could it not be with the seismic changes taking place around us?
In most markets brokerages can’t get big enough. My brokerage was the top 2 in a small market. The biggest are consolidating and more and more small brokerages like yours are being born. I applaud you on it.
It’s almost impossible with the velocity of the market for big to make sense. If you are already big, you are trying to roll-in companies and sustain the massive overhead. This situation is not going to change in the near future.
In my personal opinion 10 years ago the brokerage business was extremely scared by the internet and listing/lead aggregators. The fear was the disintermediation of the real estate agent/business by the internet.
I believe the fear is partially true. The internet has empowered agents to be less dependent on big brokerages and brands. The internet is providing free or low cost business tools, inexpensive and excellent website being built on WordPress, and made costly advertising completely ineffective. The player that is most at risk in the game is the big brokerages.
@ProfessionalOne @PhxREguy Happy to see the resounding “no” answer; I love my small brokerage. Ethics & relationships become the focus.
The headline caught my attention Jay 🙂 I’m with the small, intimate, client focused brokerage strategy believers. Is there a whirlwind of change and challenge ahead? Hell yes, but we will adapt and thrive. It seems like one of the greatest challenges that small brokerages are facing is providing useful, user-friendly technology to their agents and more importantly their clients that will improve the home buying and selling process…I believe there is opportunity there, and based on Zillow’s 10Q and acquisition strategy, I think they see it as well.
Hey Jay — As I wrote earlier this year, the common denominator found in brokerage failures is the employment of the agent-centric business model. The next time it succeeds, long term, will be the first. Broker-centric on the other hand has a predictable batting average. The best broker/owner/manager simply hasn’t found a way to stay in business under the A/C model. Cutting costs, adding income sources, hiring 5-star agents, and all the rest, only delay the inevitable.
It’s my opinion that was the only reason the biggest brokers didn’t go under years ago. They bought into title/escrow/lender etc., which delayed their demise. The agent-centric model, as least as it’s been employed since the early 70’s has never lasted. Defying gravity works as long as you have air under you and an effect parachute.
Would love to hear your thoughts. Thanks, Jay.
Wow! Too much to read, too much to digest, but most mostly too much to overcome! IMHO the small brokerage is not only NOT dead, but represents the best of what this country offers in entrepreneurship!
Think Apple vs Microsoft and you will see. So fricken what of Microsoft can (actually could) write a bigger check, Apple did it better. Apple pioneered customer service in the industry.
Do you know how big Trader Joes is compared to Vons/Safeway in SoCal? OMG! but do you know where you wait in line longer, and pay more? you guessed it Trader Joes! because they kick ass in customer service
The Real Estate business will soon rely so heavily on the Internet, and Technology that it’s very existence will depend on know and understanding it. Talk to a Big Brand Brokerage lately about that? OMG! what a bunch of Techno-Tards! yet here is lil old Thompsons or Kristina Wise’s group in Texas, The Good Life Team and so many other great examples of Techno-Titans, not only making money, but making people happy =) People who will come back and tell friends.
Don’t give me this crap that bigger is better, cause you are blowing smoke up my %$#& … I sit in on 100’s of Real Estate Agency “Sales” meetings and listen to the crap spewing from the mouths of Big Brokerage Management, trying to convince their Agents to use technologies that they provide. technologies that are not only costly in time and dollars, but already outdated! Then I sit in a “Boutique” Brokerage who has the time and ability to truly train it’s small, but worthy group in real Internet related opportunities, and I laugh at just how much they will DOMINATE Real Estate in the years to come…
Big Better? Ha It is to laugh my friends! Too big can’t possibly tough the soldiers on the streets like small can, and it is those soldiers (properly armed) that shall overcome! 300 Spartans vs 800,000 Persians, though they ultimately succumbed to the hoard ”¦ who fought more gallantly? Who was the Better soldier?
Fight on Lilttle Brokerages, Fight on!
And everyone unite against Big! =) and STOP THE MADDNESS!
Indeed an article worth reading for. very strong points and bright analysis regarding brokerage. Great post! Thank you so much for the information you have shared.
Jay, just a quick thanks for the effort you put into your posts. This is a topic that’s a watercooler coversation daily at every RE office in the country, yet your ‘brainpower’ and writing make it feel fresh, and as a result we’ve seen some really strong responses.
I do think ‘big money’ is going to do some stupid things now and again in order to protect its territory… territory they’re losing to smaller more tech savvy teams. I’m unsure what sort of sloppy move they’ll make, but whatever it is, this is the age of ‘free information,’ and I’m certain that those of us who stay inventive and customer friendly will have plenty of opportunity.
I keep missing those memos of my imminent demise.
My little firm is a lean mean machine, and we’ve grown while other larger firms have closed or consolidated. Our best recruiting tool has been our own agents because, as you point out, we work hard to help them make money and be happy. A little respect goes a long way.
Awesome post , very informative..
Thanks for sharing this insightful post Jay. There is so much that you have explained to me but I think to understand what you have shared I need to read it once again.
I completely agree with the post. Even myself too came across this news and was surprised with it. Thanks for the share sir.