#AskMarcAnything | The real estate industry has operated in a very traditional way with real estate agents being self-employed independent contractors. However, companies like Redfin have been making the news recently with their recent IPO and a valuation of $1.73 Billion. The controversial question is, should real estate agents be employees to the broker? Here I go into detail as to why I believe the future brokerage will be a hybrid of the traditional and new model.
Should real estate agent be employees?
Yes and no. I believe if you’re in the real estate industry, you need to look at companies like Redfin that have agents working as employees. Meaning they get paid a salary and many of the companies provide a variety of benefits.
People laughed at Redfin’s model years ago yet they just went IPO with an evaluation of $1.73 Billion. Who is laughing now? It’s Glenn Kelman, that’s who.
There is a reason why that model works. But there are a lot of agents that work at companies like Redfin that eventually leave because they realize they can make more money selling real estate on their own in a traditional model where the agent is self employed under a broker.
Let’s analyze this a bit further
The Traditional Brokerage
Real estate agent works under a broker’s supervision however the agent is an independent contractor, aka self employed, and receives a 1099 at the end of the year.
Benefit for the broker is that they do not have to pay salary thus the cost of bringing on an agent is low. Very beneficial if the person turns out to be an agent that can’t produce business.
If the agent turns out to produce a lot of business, the agent makes a lot of money and the broker makes good money. Both are happy.
Problem #1 – Brokers are losing the advantage to agents in the attention game. The public hires the agent for who they are and their reputation, not because they are with Main St Realty. Thus brokers have been forced over the years to provide more services and give the agent a higher split. This becomes less profitable for the broker with high risk because the broker is responsible for any wrongdoings of the agent.
Problem #2 – Not everyone enjoys being self-employed. Sure everyone loves the idea of self employment. The flexible hours, being your own boss and the income potential can be nice. But lets be real.. Average agent makes about $38,000 per year with 3-4 sales. Working and waiting on the next paycheck can be very daunting when you are closing 3-4 deals in a 12 month period. There can be a period of 6 months without a paycheck. It can inhibit their ability to have a clear mind with the distraction of finances and the agent has won’t be able to do their job well. Or worse, they have to take a part-time job which takes away from selling for the broker.
This is expensive for the broker from the start, however you have more control over your company in terms of how it operates. You can enforce technology adoption amongst your agents and limit the flexibility of teams, logos, or advertising.
With a guaranteed salary, the broker will have expectations of sales. An agent will have to perform otherwise they are fired. It’s that simple.
This model limits the agent’s ability to gain attention over the broker thus keeping the attention on the broker themselves. This allows the broker to keep the advantage thus being able to pay salary and take the rest of the commission as profits.
I think the biggest selling point here is that the agent has steady income. They do not need to stress and worry about the next deal or having a period of 4 months without a paycheck. The financial stress is relieved. Less mental distractions allow for more creative mental juices to flow and allowing the agent to be more productive. We see the proof of this everyday in that the majority of the population works for someone else.
Problem #1 – The biggest problem with this model is when an agent excels at their job. They quickly realize they can make more money in a traditional model than getting paid a salary. So the broker loses the agent to a more attractive business model for that agent.
Problem #2 – In addition to salary, many agents will want bonuses for extra sales. There is also payroll taxes and benefits you have to include above a certain number of employees.
Both models clearly have their Pros and Cons.
I think a brokerage that has both options will be a standout in the future. And they don’t necessarily have to be the same company but can be sister companies with very similar branding and models. This will limit public confusion but the key here is to cater to the agent depending on their personality makeup.