The Business of

Residential Real Estate – The Broken Business of Brokerages – An Editorial

Real Estate Class

Today, the business of real estate has little to do with actual real estate. Real estate is the single most valuable asset in the world, more than global gross domestic product (GDP), any market index, business sector, or commodity. According to a 2018 study by Savills World Research, the total usable real estate across the globe was valued at more than $280 trillion. Almost 80% of that falls within residential real estate, with more than 20% in North America alone.

Why is this important? The number of industries that rely on residential real estate as the basis for area economies is staggering. There is a saying within commercial real estate development: “The big box follows the rooftop.” According to the Congressional Research Service, residential construction and housing services account for nearly 15% of annual GDP in the United States. Business saturation within any given region relies upon sufficient and stable housing markets for overall economic prosperity. 

Enter the real estate brokerage. 

In 2020, according to the National Association of Realtors (NAR), real estate brokers and practitioners represented 90% of residential real estate transactions across the United States. As a real estate broker, my fiduciary duty is to the practitioners within our firm and the hundreds of clients we serve each year. The quality of our services and skill of our practitioners measure how we are judged within the market. 

Over the past several years, however, I have witnessed a striking degradation of professional standards held by practitioners, specifically brokers. From 2006 to 2012, leading up to and following the 2008 financial crisis, the number of real estate practitioners in the U.S. dropped by 26% from 1.36 million to 999,000. From 2012 to today, the practitioner count has rebounded by 45% to 1.45 million. During that same time, other professional fields including law, medicine and financial services saw no decline in practitioner count and have experienced stable and consistent single-digit-percentage growth. Why? In short, there is almost no barrier to entry into the residential real estate field. 

The incentive system in real estate is upside down. In Florida, to become a broker, the individual licensed to supervise real estate practitioners, all that is required is two years’ licensure plus a maximum of 260 classroom hours. By comparison, a cosmetologist seeking a license in Florida must put in 1,200 hours of class time. 

For almost all homeowners, their property represents the largest and most valuable asset they possess. The intricacies of a real estate transaction are considerable. A lot can go wrong if practitioners do not know what they’re doing or if they lack sufficient support. Considering the potential ramifications of a failed real estate transaction, shouldn’t the shepherds of those transactions be held to the same standards as, say, a physician or an attorney? 

NAR, the governing practitioner association, generates more than $217 million in revenue through membership dues, according to 2021 estimates. Many local real estate associations throughout the country mandate membership in order to participate within a multiple listing service, the predominant source of all residential listing data. In effect, if you are not a member, you cannot gain access to listing services and are out of business. 

This structure benefits NAR directly. The maintenance of low industry standards fuels the massive volume of real estate practitioners, thus filling its coffers with membership dues. There are no professional standards for business skill, real estate and market knowledge, experience or apprenticeship. If you have a license, you’re in. 

Rather than emphasize quality of service, skill of practitioner and differentiation within the market, there seems to be a focus on creating profit centers around real estate practitioners. The emphasis is placed on fees for franchises, closings, desk space, office supplies, technology, compliance systems and so on. 

Many models today pay a practitioner between 90% and 100% of total fees generated. You may then ask: How is the company able to afford and provide any degree of support, supervision, service or meaningful training to the practitioner? In short, it cannot. Commission structures within the organizations racing to win the practitioner game are disincentivized to support any individual practitioner, only to increase the total number
of practitioners. 

Another common commission and recruiting tool, the “capping” system, limits total revenue realized by the company. Once a practitioner “caps,” the company has no further use for the practitioner and has no incentive to invest. This leaves the practitioner having to be all things to all people, including the marketer, administrator, negotiator, and valuation and market expert. How well do people perform when they are required to do everything with no support? Will that allow them to reach their full potential? Most certainly not. 

So, how is this solved? It is remedied through responsible brokers and the consumer. A real estate firm should have proper infrastructure and tools to support its practitioners, a sufficient physical location, and marketing, sales and business staff. The consumer should ask to speak personally with the firm’s broker, who should identify what systems are in place to provide the practitioner and the consumer an advantage within the market. Most importantly, though, consumers should not be shy about holding the firm to account. They should demand accountability, establish a plan, set proper expectations and measure
real outcomes. 

Brokers, on the other hand, should push for professional standards in our industry. Our future is in our own hands.

Jason Schmidt

Jason Schmidt is the president of Stockworth Realty Group, a broker and the author of “The Schmidt Report,” a comprehensive, consistently updated 300-page guide to national, state and regional macroeconomic and financial market conditions, Central Florida real estate market conditions, and local submarket real estate activity. 

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