Which Realty Firm Model Works Best for You?

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Which Realty Firm Model Works Best for You?

September 13, 2018
by Colin Marcum

Within the real estate sector there generally exists three business models for realty firms, and these models are the means by which the firm itself generates revenue. These models dictate the economic relationship between the firm and its individual Realtors, and each model has its own advantages and disadvantages depending on how the Realtor conducts their business. As commissions are earned, they are processed by the firm, and then paid out to the agent. At some point in this process, the firm will either pull its share or charge a fee to the agent as dues for being affiliated with the firm.

To Emphasize: It is the Realtor, YOU, that meet with clients, provide them services, and ultimately close deals that draw commissions into the firm. Without the Realtor, the firm is nothing. Therefore, the cost of doing business with firms means your work invariably brings money to the firm at your expense. The rub then becomes, what do you get out of the arrangement? That is were our three firm dynamics come into the equation. To make the most of the arrangement, you need to assess whether or not the benefits of association are worth the costs.

There are both tangible and intangible benefits to association with firms, and much of that comes down to the firm’s business model. The cost-benefit relationship that you can derive can change based mainly on your experience in this industry. Which is the best firm? That may depend on you specifically. We will discuss the three types and how you may benefit and/or hurt from that relationship.

Split Commission Firms

There was once a time when the only workable realty firm model was that of the split commission. Agents would close deals, commissions would be received by the firm, and the firm would split that commission with the agent and sometimes take upwards of 40% of an agent’s commission in the process. As an agent’s expertise in the industry as well as their interpersonal skills with clients improved, they became much more valuable assets. These producers would see their splits reduced in order to keep them performing for their firms; as low as 10% for some of the best. For Oregon’s cities with high property values; like Portland, Lake Oswego, Salem, Bend, Corvallis, and Eugene the subsequent commissions can also be high, and therefore the change between 40% and 10% can be a life changing amount of income.

Some of the tangible aspects of associating with split commission firms is that, at the very least, they don’t require monthly dues. This means that in a down trending economy, when real estate may not be transferring hands as often, the firm won’t take money unless you make money. Additional benefits may include access to branch office facilities from which you can work and hold meetings with clients. There is also the ability to shadow industry veterans in order to learn tried and effective methods for generating business and successfully closing deals on behalf of your clients. Branch managers, in engaging with the walk-in business of potential clients, may also distribute those clients amongst agents like yourself, providing you business without having to produce the client yourself.

Intangible benefits that you may find beneficial, comes from using the firm’s “brand” as a means of developing your own legitimacy. Decades of operating within the industry and generating business, as well as using those splits to fund local advertisements as part of a branded marketing campaign, can have a positive effect in the minds of future clients. Being a Realtor for these firms, like Coldwell Banker and Century 21, can therefore provide a veil of legitimacy that otherwise would have to be developed personally by a skilled and charismatic agent. Meaning a rookie agent can make up for what they lack in confidence and effective customer relationships through branded association with an already well-known firm.

Bottom-line with split commission firms is that the more you make the more you lose to the firm, and while initially the association is beneficial for the rookie, the veteran Realtor begins to see the loss as too much. To prevent attrition the firm reduces the split, but it is apparent to the competent Realtor that they don’t need the firm as much as the firm needs them.

Monthly Fee Firms

While split commissions firms were the norm, in the 1970’s REMAX entered the market as the first realty firm to successfully introduce a monthly fee model and succeed nationally. Those veteran Realtors that were perturbed that sizable chunks of their commissions were being retained by their firms saw the potential of a single monthly association fee as highly desirable. This is understandable in locations with high levels of property turn-over and high property value, where the loss of a percentage of commissions in one month could cover many monthly association fees at REMAX. While other monthly fee firms have been established they all follow; generally, the same principal, and that is that monthly fees are based on the average value of properties, and property turnover, in vicinity of their branch office. Therefore, there is a direct correlation between the monthly fee for associating with the branch, and the potential income a Realtor can expect for their area of operations.

The benefits of monthly fee firms are practically the same as the split commission firms, expect that there is a single one-time monthly payment to the branch office for association. This is fantastic for high-producing agents that close multiple deals per month, or for those agents that make bank on large-ticket properties with grand commissions.

The biggest negative to this model, however, is that the fee is still payable regardless of whether you are able to close. That means that in time of economic downturn when size and frequency of commissions drop due to falling property value, and when properties are simply not changing hands as often, then lower performing agents may find it difficult to pay their monthly dues while also keeping their families fed. This was all too apparent during the 2008 recession, and new and experienced Realtors alike were abandoning REMAX, and other monthly fee firms, for split commission and transaction fee firms. Because at least with them you don’t lose money unless you make money.

Transaction Fee Firms

Finally, there are some firms that model themselves based on fees associated with closing transactions. These firms have been around in some capacity, but really blew up in the aftermath of the 2008 recession. The premise of these firms is that there is a fixed rate fee for the processing of completed real estate transactions, and as a result the costs to the Realtor themselves are generally low. Operating costs for the firm are kept low so as to permit the fee to subsequently be low in order to entice experienced Realtors looking to save as much of their commissions as possible.

One of the primary negative elements of transaction fee firms is that in order to reduce fees then operating expenses have to be reduced. This means that facilities, and costs associated with operating them, are kept purposefully low, and therefore, some of the support that one might expect with other firms; such as robust training programs and walk-in clients, are thereby reduced. That being said, for experienced Realtors in Oregon this isn’t an issue, as they don’t necessarily require this level of support anymore.

There are only a few transaction fee firms in the State of Oregon, and one of the lowest rates belongs to Sundance Realty. For each closing the firm processes a $400 transaction fee, regardless of the size of the commission, and there are no monthly fees. Such a business model was enticing to many experienced Realtors, especially since the recession saw the well of commissions starting to dry up. Realtors working with monthly fee firms could no longer afford the fee, and split commission Realtors were losing too much of their income to thrive effectively. As a result, these transaction fee firms started to see an increase in agents coming on board in order to simply survive, and as the economy improved most stayed when they realized their experience easily compensated for the lack of brand awareness. For truly independent Realtors this situation provided a mutually beneficial relationship. They were able to operate under a licensed real estate firm with principal broker support, all the while optimizing the return on their time investment.

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So which realty firm is the best?

As mentioned in the beginning of this article, it is really up to who you are as a Realtor who determines which firm is best, and more recently somewhat based on the current economy. That being said, here is my humble opinion about which firm might be the best fit for you based on your current status:

Are you an inexperienced Realtor that needs assistance as you get your business up and running and the economy is stable or upward trending? Then one of the big split commission firms will help you become proficient in the industry.

Are you a moderately successful Realtor but feel you need a large franchise firm backing you... and the economy is strong? Then one of the big monthly fee firms may work for you while you can retain the lion’s share of your commissions.

Are you an experienced Realtor capable of working independently for yourself regardless of the condition of the economy? Then one of the transaction fee firms will allow you to retain the most of your commissions, and thrive better than the other two models.

If you do indeed have this experience and determination to retain what you are entitled to then reach out to Join Sundance Realty, and we will provide you the honest assessment of how this relationship can benefit you!

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