Cash, Kinship and Culture

Factors for success that brokerages must consider in the pandemic world

| 12 Aug 2020 | 12:39

How does a real estate brokerage succeed in the COVID-19 world? Of course, it’s about the agents who choose to associate and remain with the brand. But much more goes into building a real business. How management deploys earnings, how much of every dollar the company is able to retain to put towards expenses, what costs are considered corporate overhead, what costs the agents assume, which are shared, all these issues powerfully impact a real estate brokerage and its ability to survive. And when times are tough, a lot depends on the CEO’s ability and willingness to take painful steps to make sure the company lives to fight another day.

Today, brokerages nationwide struggle with the impact of skyrocketing COVID-19 infections and a shrinking bottom line on their businesses. In the wake of so many poorly timed state and local reopenings, the entire industry must evaluate its value proposition and how it executes on the promise implicit in our work, that we advise consumers through the complex twists and turns of any real estate transaction. How do these consumers find us, and vice versa? How do they know whom to trust? And how do they know, amidst the closings and consolidations which mark our industry nationwide, who will still be around to represent them on the day of the closing?

Throughout the latter half of the 20th century, residential agents depended on relationship building and word of mouth to create their careers. While many agents continue to depend on these time-honored methods to enlarge their spheres, a number of new, tech-driven points of access to clients have entered the residential business as social media and artificial intelligence have become more powerful tools. Buying customer leads, unheard of two decades ago, now fuels the growth engines of aggregator sites like Zillow Z +2.6%; these sites compete with brokerages (often deceptively, in the opinion of the New York Secretary of State), by selling buyer access to agents. At the same time, a number of newly created real estate firms rely upon business models that center on purchasing buyer leads from a variety of different sites to create opportunities for their agents.

VC-Enabled Firms

Meanwhile, venture capital has entered the residential real estate universe, attracted by the almost six million annual home sales which take place nationwide and the prospect of gobbling up a piece of the billions of commission dollars generated by these sales. Most of these VC-enabled firms, including some of the largest, don’t function like traditional brokerages because of their vast reserves of someone else’s money. Andrew Heiberger owned and ran Town Residential, the big and (in many ways) forward-looking firm which had to close its doors a few years back because it spent so much on recruiting agents that in the end, it couldn’t afford to support them.

In an interview a few years ago with The Real Deal, Andrew noted that in the old days, brokerage companies retained about 35 cents of every commission dollar earned, the other 65 cents going to the agent. Then some firms took a page from Wall Street’s playbook and offered agents larger and larger splits and marketing budgets, sometimes even hefty cash signing bonuses, in order to lure them away from competitors. Retained company dollar at Town (which did not offer signing bonuses) sank to 26 or 27 cents over time. At 26 cents on a dollar, no brokerage can stay in business in New York, where firms pay all business-related costs for agents, including marketing. So Town went under. In Andrew’s opinion, his failure was that he didn’t raise enough money. In truth, even the largest war chest runs out. As we learned from WeWork, a business needs a path to profitability.

So whither the brokerage, in this strange and unsettling time? Time and again, agents cite culture and kinship as mattering as much to them in their choice of a firm as money. And money, even venture money, doesn’t last forever. Every firm, large or small, in every town and city across the country, needs to take a hard internal look at what it is and how it functions. What is its agent value proposition? While there is always movement in any sales industry, retention and productivity signal the success or failure of every firm. How cash, kinship, and culture play out over the next few years will determine which brands are left standing when the pandemic dust clears.

Frederick Peters is the CEO of Warburg Realty, a luxury residential real estate brokerage in New York City. Reprinted with permission from Frederick Peters’ Forbes column.