New Business Models: Do They Really Make a Difference?

In the age of the internet, where numerous industries have been turned inside out by the web, the residential brokerage industry has seen only process change, not a fundamental change.

By Steve Murray, publisher

We often get asked about new business models. Most recently, the questions have been about firms like Compass, EXP, Next Home and Fathom Realty. While each is interesting in its own way and may have a larger impact down the road, none of that is certain. Besides, by the time they reach maturity and scale, it may not matter.

High Level of Service

For the past 30 years of REAL Trends, and 40 years of my career, there is one thing industry professionals talk about in hushed tones. When will consumers begin to demand consistently high levels of professional services? What will happen to our industry when that happens? How will we survive that wave of change?

Fundamental Change?

In the age of the internet, where numerous industries have been turned inside out by the web, the residential brokerage industry has seen only process change, not a fundamental change. We’ve used the web to improve our processes and transaction productivity (on each transaction), but we haven’t seen housing consumers make themselves heard regarding overall professionalism. Estimates are that 30 to 40 percent or more of the Realtor® membership didn’t do a single transaction in 2016.

Surveys of housing consumers continue to indicate that having a relationship with a sales associate is the most important determining factor in who they chose—not experience or productivity. They chose that person because it was someone they know or a friend knows. Old-timers in the business will tell you that it’s been this way forever. The same old-timers will tell you that sooner or later this will change. It just hasn’t yet.

As to new business models, they are interesting, and some may become successful. But, they don’t address the coming consumer changes any more than the incumbents do. They address how and where services to agents will be delivered and at what cost. While we do not subscribe to the notion that technology will soon crater our business; we do believe that changes of a more dramatic nature are coming.

What Changes?

When will housing consumers start to choose a sales associate for reasons other than they know one or someone referred them? Today, more than two-thirds of buyers choose their sales associate this way. What changes would be wrought should this number decline to one-half and the other half found their sales associate online, through rankings, ratings and reviews?

What would this do to the ability of new sales associates to enter the business? What would the impact be on those who pay their dues and fees to Realtor® Associations and MLSs but have far less chance to refer clients for a referral fee? What would this do to the economics of the brokerage firm? Would the resulting consolidation because of fewer agents and teams affect the number of Realtors and brokerage firms?

Seeing the Impact Today

In fact, we already see some of the impact from this today. The consolidation of market shares among fewer sales associates has been underway for some time. In some markets, the top 20 percent of sales associates already control more than 80 percent of the listing side of the transactional volume. While their share of the buy side is not nearly as strong, it is increasing. One example is the number of teams doing more than 75 sides on REAL Trends Americas Best—it’s more than doubled in the last three years. The top 250 teams increased their volume by more than 41 percent over the last three years, while top individual sales associates’ volume has declined.

There are many areas where the fundamental change in the way consumers find and select a sales associate could impact industry economics. We can’t list them all. While we don’t subscribe to the theory that consumers will bail on the use of sales associates for selling and buying homes, we think this foundational area of our business by itself could have a material impact on how the business is organized.

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