Residential real estate has long been a business of exaggeration. Agents boast of millions being sold while brokerages boast of billions. The result: the public believes real estate agents and brokerages make too much money and agents feel their broker takes too much of their hard-earned commissions.
Adding to the confusion, the public does not understand the true scope of an agent’s job, and agents misunderstand how challenging it is to run and manage a sustainable brokerage that can reinvest profits to support their efforts in serving clients and ensure their livelihood for the long run.
At the core of all this lies the critical flaw in our industry: a lack of transparency between agents and brokers which ultimately hinders the ability to have meaningful conversations about the purpose of the brokerage, the need for reasonable profits, and the value the brokerage provides to agents, clients, and the communities they serve.
It is no small wonder that the red carpet was practically rolled out for the forces of disruption that either raided or bought both brokerages and agents alike.
The fact remains that ours is a uniquely personalized industry, something that is often overlooked by outsiders looking in with a mind to grab market share. As the dust settles from the latest attempts to “disrupt” real estate with revolutionary technology, it is becoming more and more evident that the true disruption was the resulting behavior caused by the unprecedented flood of capital.
This capital was strategically used to artificially and temporarily raise agent compensation packages and acquire brokerages, mostly through duress, with the aim of shutting down local and independently owned brokerage competition. Stripped down, the strategy amounts to using the pipeline of cash to fund losses while making lucrative agent agreements to “disrupt” the agent brokerage relationship. As a result, agents have been pitted against brokers in a competition of inflated expectation and value which could ultimately result in the demise of both.
The disruptors end goal: create a monopoly or perhaps oligopoly by limiting agent choice within the marketplace. Once choice becomes limited, the resulting companies in power have immense freedom to dictate and shape our business in ways that undermine agents’ ability to earn and make a meaningful living.
Seasoned owners and operators of real estate brokerages understand that profit margins historically range between 4% and 5% of gross revenue. In his 2019 mid-year update, Brian Buffini of Buffini & Co. estimated that 90% of US brokerages are losing money and those which are profitable are in the 1% to 2% return on revenue range this year to date. To put this in perspective, an individual agent who earns $300,000 in gross commission income, would realize a total profit of $3,000 to $6,000 for their hard work. It’s doubtful if many, or any, real estate agents would sign up for such a minimal return on revenue.
That’s the reality of the real estate brokerage business as it stands today. Hardly the sort of margins that support an IPO or a multi-billion dollar private enterprise valuation. Ancillary services, such as mortgage and title, are not revolutionary concepts and have been integrated into the business by firms such as Realogy, Berkshire Hathaway, and other prominent, privately-owned brokerage firms for decades to help improve the bottom line with only modest success.
Amid these distractions, Sereno Group recognized that the natural economic realities of the business would eventually take hold. Additionally, with many long-standing, independent firms, including Pacific Union and Alain Pinel in our marketplace being acquired, we expect agents will find increased opportunity and appeal by choosing to work with locally owned and community-minded brokerages.
With all of this in mind, we deemed that a new vision and clear strategy would need to be imagined and implemented. It began with immersing ourselves in the state of the business from every possible angle, leveraging our unique industry relationships with many of the top leaders and brokerages in the nation and applying what we learned to create a vision for our future. We are convinced that honesty coupled with a sustainable strategy and the courage to execute will be required of all brokerages that wish to prevail in this business; venture capital-funded real estate firms included.
To shine a light on transparency, we demystified the brokerage business for our people with a modern, standardized commission schedule and overarching three-pronged strategy which includes a revenue enhancement program for agents and Sereno Group, cost efficiency improvements and agent enhancement offerings.
First: Revenue Enhancement for Agents and Sereno
Most brokerage commission schedules, including Sereno Group, have a genesis tracing back 30 to 40 years or more. We required both a sustainable and realistically incentivized schedule structured in a way to support our No Exceptions policy. Special deals kill the culture, breed distrust, and ultimately contribute to the downfall of brokerages.
This two-level schedule is simple and allows producers to increase their split level substantially above Sereno’s historically highest split. We hope this will make Sereno Group even more attractive to higher producers and teams. It also introduces an off-the-top agent support fee which will be used to reinvest in our collective future. In addition, a 50% business fee reduction for mobile agents allows us to determine actual office space needs. It is important to note that our agent support fee stays within Sereno Group and does not go back to the pockets of a distant and detached corporate office. It will be used to reinvest in the business locally where it will have the most immediate and effective impact on our agents and clients alike.
Second: Cost Improvements and Efficiencies
Other than labor, brick and mortar costs, particularly in the San Francisco Bay Area, are the most significant. Many real estate offices are underutilized and empty much of the time and it is our prediction that the traditional model of large offices in every city or town with hundreds of agents is a model of the past. We identified offices that will serve as regional centers, and are currently relocating, merging and aligning offices within strategic cities to function more efficiently and collaboratively.
Third: Agent Enhancement Offerings
We have chosen to forge ahead with a model that provides the highest level of full-service brokerage support staff, technology platforms and business systems available. To enhance our agent offering for the benefit of clients we have created a partnership with LendUS and are introducing a maximum leverage, “Buy Before you Sell” bridge loan product for clients of Sereno. In addition, we are providing an interest-free, Listing Enhancement loan for our sellers to complete agent recommended pre-marketing property improvements.
Concerning redundant claims that technology will remove the agent from the equation, we arrived at this conclusion: while technology certainly provides phenomenal marketing and communication leverage, it still falls short of offering varying levels of personalization required in each unique real estate experience.
It remains evident that there is something at the relational heart of real estate which cannot be extinguished by an application.
Since our founding in 2006, the leadership at Sereno Group has never felt more empowered and inspired as we do today. Our objective is to inspire like-minded firms and agents to join us in evolving from the reactionary, traditional model to an authentic, modern real estate brokerage.
How we expand in this next real estate evolution is yet to be determined, but three things are certain: We love our people, we love the communities we are privileged to serve, and we will humbly and responsibly do our part to lead the way for the positive future of our profession and independent brokerages throughout the country. We believe this state of mind is key to the survival of our profession, and to providing our clients with the personalized service they require and deserve.
No exaggerations, just the transparent truth.