Last week, I spent some time highlighting information presented in Game Changers, a new book written by Steve Murray, Lorne Wallace, and Lon Welsh.  The focus of the discussions has been on how the major trends in the real estate industry are impacting recruiting.   If you didn’t read the first two WorkPuzzles, take a few minutes to catch up (Part 1, Part 2).

We’ll finish this series by addressing an issue that is relevant and of concern to almost every real estate leader:  the decline in company revenue percentages.

In Chapter 6 of Game Changers, the authors present the following chart:

Over the past 20 years, company revenue percentages have been declining for three reasons:

Competition for Agents.  There is intense competition among firms to grow the number of agents as well as sales production.  This has led to increasing splits (and lower company margins) for experienced agents.

New Brokerage Models.  The types and numbers of brokerage models that offer low costs to agents increased greatly during the last 20 years.  Also, there are many “capped company revenue” models and virtual brokerage firms that offer a flat fee for agent services.

New Sources of Value/Assistance.  Some of what brokers use to provide assistance to agents is now being offered a la carte from an increasing number of 3^rd party sources.  This includes technology, marketing and educational services, tools, and products.

Also, there are some indications this trend may be accelerating.  In an annual survey recently done by Real Trends from 2011 to 2012, the decline in company revenue was 15% in one year.

How can this problem be fixed?  Unfortunately, there are no quick and easy solutions.

Certainly, the Wal-Mart philosophy applies—if margins are low, the natural path to profits is increasing the volume of transactions.  But, that doesn’t come easy in a competitive, low-barrier-to-entry real estate industry.

The other alternative is maintaining (or increasing) the company revenue percentage (i.e. stabilizing or reversing the trend).  While this is also difficult, it’s the option that most brokerages have the best chance of accomplishing.   This can happen on a micro level in spite of the competition.

The authors of Game Changers draw the conclusion that this strategy (maintaining/increasing margins) leads back to recruiting:

At some point, realty firms will have to radically change their approach to recruiting and retaining sales agents and teams so that they can remain viable.

Hiring New Agents.   The new agent recruiting arena is the only place where these radical changes will have an impact because there will continue to be low margins in experienced agent hiring.

By necessity, this requires realty leaders to…focus on developing new agents as their firms’ primary focus.  [Recruiting and] providing support for these new agents to develop their businesses can generally be accomplished at lower costs to the brokerage firm.    Although there will always be departures, a firm adept at developing new agents as an ongoing mission can raise its gross margin.

Keep in mind, when an agent does leave your organization, he or she will typically sign with a competitor at a higher split.  In essence, you’re forcing your competitors to continue to struggle with low margins.

Retaining New Agents.  Game Changers also suggests that a new agent hiring strategy be combined with an abandonment of the “increase market share at all cost” mentality prevalent in the real estate industry today.

Firms can change course away from the pursuit of market share at all costs. Instead, they could focus on developing agents and teams who respect the tools, resources, and culture of the firm—while gracefully allowing those who value higher splits to depart. 

There are examples of firms currently operating that do not view market share as the most important measure of success: instead, theirs is a more balanced approach between growth and profitability.

Focusing on profitability—that’s not a bad strategy for any business!

Editor’s Note: This article was written by Ben Hess. Ben is the Founding Partner and Managing Director of Tidemark, Inc. and a regular contributor to WorkPuzzle. 

The scariest part of Game Changers, an insightful new book written by Steve Murray, Lorne Wallace, and Lon Welsh, is Chapter Four.

In the book, the authors list, explain, and rate ten of the most important strategic issues facing the real estate industry.  Each topic is rated by the potential impact the issue could have on a real estate company and the probability of it materializing.

Only one topic among ten was rated as potentially having a high impact on the real estate industry.  All other strategic issues were rated as having moderate or low impact.

So, where’s the nuclear bomb that could go off?

It’s the potential loss of the independent contractor arrangement the real estate industry had enjoyed for more than 40 years.

As most of you know, several companies in the past have tried to employ agents as employees rather than as independent contractors.  Most of these attempts have failed.

There is little risk that a new grassroots employment business model will sprout and gain traction in the near future.  But, what if the government mandated such a change?

Game Changers makes the point that such a change may not be as farfetched as it sounds.

The federal government, along with local and state governments, are hungry for additional revenue.  At the federal level, social security and Medicare shortfalls are looming; income tax bites have been on the rise.

At the state level, as many states have struggled to balance their budgets, several states sought to squeeze more revenue out of taxpayers; unemployment taxes and worker’s compensation taxed have also been impacted

Finally, at the local level, unemployment and income taxes are a factor.  Momentum is certainly building to place pressure on the safe haven of independent contractors.

Game Changers lists and explains five factors (mostly recent developments) that are making this change more probable in the next few years.  These issues are worth reading through and digesting (to do so, you’ll need to buy the book).

I suspect many of you think this could never happen, but you might be surprised. Things can change quickly when the government wants/needs money.

For example, in my home state, we’ve seen several changes we didn’t suspect in the last couple of years.  Hard alcohol distribution laws were changed, recreational marijuana was legalized, and the $15/hour minimum wage was mandated in the city of Seattle.

The common thread among these changes:  government needed money and they were willing to throw businesses (particularly small businesses) under the bus to get it.

Game Changers goes on to describe the “countering forces” that would likely keep this change from becoming a reality.  Realtor organizations and most national branded firms would fight this change in the political arena.  These organizations have a lot to lose if the status quo changes—some believe the number of agents in the industry would fall 50 to 70 percent.

Bottom line: This change will probably not happen in the short term, but the forces that would impact this change are stronger than they’ve ever been and they’re continuing to gain momentum.  At some point, there will be a tipping point.

How would such a change impact real estate recruiting, and what should you be doing now to prepare?

As the authors of Game Changers state, this is not an urgent issue.  Make sure you and your agents are paying your Realtor association dues—these groups are your best defense for maintaining the status quo.

From a recruiting perspective, here are several other things you could be doing as well.

Develop a plan.  A few weeks ago, we discussed some issues that keep small organizations from growing (How to NOT Think Like and Entrepreneur).  One of these issues was a lack of a contingency planning.   I’m not suggesting you work up a 50-page “what-if” document, but it wouldn’t hurt to jot down a few ideas on how you would handle such a major change.

Start reading some non-real estate recruiting sources.  If this change were to happen, you’d be joining the rest of the recruiting world in hiring employees rather than contractors.   These folks have their own set of problems and solutions, but they are different issues than those in real estate.   A good place to start would be the Electronic Recruiting Exchange (ERE).

Study what happened in other industries.  Some of these changes (or similar issues) have impacted other industries such as financial services, insurance, and lending. There are recruiting lessons to be learned in all these areas.   In addition to developing contingency ideas, you may learn how to improve your recruiting under current circumstances—some of the folks run very high-performing recruiting operations.

Editor’s Note: This article was written by Ben Hess. Ben is the Founding Partner and Managing Director of Tidemark, Inc. and a regular contributor to WorkPuzzle. 

There is no doubt access to reliable data equips a business owner to be more successful, but that’s only one part of the equation. Combine reliable data with insightful interpretation and you’ll arrive at wisdom.

The application of wisdom is what separates high performing organizations from low performing competitors.

Game Changers, a new book recently authored by Steve Murray, Lorne Wallace, and Lon Welsh, is a treasure chest of wisdom for those in the real estate industry. If you have not ordered a copy of this important book, do so before your competitors get it and apply what’s contained in its pages.

Game Changers addresses a number of strategic topics that are far beyond the scope of the WorkPuzzle charter. However, there are a number of insights that do apply (or can be applied) to recruiting.

In the next couple of WorkPuzzles, I’ll share a few of the insights that I found most interesting and applicable to those focused on improving their recruiting game.

You don’t have to get far into the book (page 2) before the reader is presented with the following chart:

The authors make the following observations concerning this data:

Historically, sales agents productivity has been distributed in typical bell-curve proportions. Most agents sat in the middle of the curve with seven to ten deals, while few low-producing sales agents (< 3 sides per year) and high-producing sales agents (> than 25 deals) made up the tail distributions.

In 2013, the average productivity was 8.5 transactions per sales agent per year—not a departure from historical numbers. But in recent years, the bell curve has flattened—and in fact, is not a bell curve at all….

Since the downturn, more agents have achieved limited or no volume. In addition, the number of high-volume agents and teams has increased. There are fewer agents in the middle achieving moderate amount of volume.

(Note: The chart shows distribution for the Denver metropolitan area. The authors state that other data suggests that this distribution is common in other metro areas across the country).

Game Changers takes this data and more research highlighted in the first chapter to make the point that a segmentation of the agent population has taken place. There are a low number of very high performing “counselors” who do 20+ transactions/year and a high number of “facilitators” who pick up the crumbs left by the high performers and self-educated real estate consumers.

Reading and digesting this concept is worth the time and money of buying the book, but I want to focus the rest of our discussion on recruiting. More specifically…

What does this data tell us about real estate recruiting?

The new status quo is not very profitable. For years, owners and real estate leaders have told me the most profitable agents are “B” and “C” performers. While it is obvious why “D” performers are undesirable, it can also be problematic to have a few “A” performers producing a lot of volume.

For example, it’s more profitable to have five agents each completing 10 sides/year than one super-performer completing 50 sides/year. In addition to lower margins, high performers are risky. If one leaves the organization, they have a larger impact on overall volume.

In essence, the profitability of many real estate companies depends upon the bell curve that no longer exists.

Age demographics will continue to put pressure on real estate companies. Game Changers notes: The median age of a Realtor is 55+. A large proportion of the high-volume agents are those in their last decade of working before retirement (often their more productive years).

The fact that about 60% of the agent populations are nonperformers (< 2 sides/year) and many of the remaining 40% are going to retire or lose energy towards the business in the next 10 years is a concern.

The attrition of high performers will happen and their production will need to be replaced.

Recruiting alone will not solve all your problems.

Recruiting new agents under the reality of the Game Changers data outlined above is a losing proposition. It’s tough to make the math work in this equation and produce a profit.

The solution? Of course, improving recruiting methodologies is a must. Talented individuals from outside the industry must be identified and engaged more successfully. Recruiting systems must be upgraded to improve the raw material entering the system.

However, Game Changers suggests this is only part of the solution. New talent must be introduced to systems and training that reflect the segmented nature of the agent population. Not everyone has the capacity to be a high producing agent (“Counselor”) and training everyone as if they do, is a mistake.

Summary: There are difficult and complex problems to be solved in the next decade. Those owners, brokers, and agents who solve them will be rewarded and experience much prosperity. Those who keep doing the same things they’ve always done will likely find themselves in (as Game Changers puts it) a death spiral.

BenHessPic2011Editor’s Note: This article was written by Ben Hess. Ben is the Founding Partner and Managing Director of Tidemark, Inc. and a regular contributor to WorkPuzzle.

Back in May, Dave posted a WorkPuzzle on the positive impact walking has on creativity.  Nothing could be easier than taking a quick walk when your feeling stuck or having difficulty solving a problem.

Earlier this week, I posed the question:

Will the same talents that made you a successful entrepreneur (agent) serve you well in a leadership role (managing a team or organization)?

I know many of you initially ventured into a real estate career because you had an entrepreneurial streak. The idea of being your own boss and working outside of the constraints of a traditional job seemed appealing.