A Snap Shot of the Business of Real Estate

Throwing money at the real estate business has been the nature of the business for most of history. Unlike other business models, real estate people go into business to establish the “biggest” presence possible in order to overwhelm the consumer and real estate agents, offer to pay the most commissions, and provide the largest advertising presence.

Rather than focus on the “best” consumer product, the industry is focused strictly on numbers and size. (When using strictly numbers and size we validate the consumers’ impression that we are wealthy, and that we rip off more consumers than the competition.)

While providing ruinous competition to other Brokers, the cost of this folly is usually unsustainable especially when at the bottom of a recession.

In a hot market, while revenues are high, spending stays commensurate and margins of profit decline severely. In the last hot market (2004) the average profit to a Brokerage per transaction side was only $132.00.

Then, what happens in the hot market:

BROKERS…

(1) Throw money at business to grow the business (and avoid taxes), resulting in lower profit margins.

(2) Throw money at advertising (that, of course, does not work), resulting in lower margins of profit.

(3) Pay agents too much (overheated competition), resulting in lower margins of profit.

(4) Discount commissions to consumers, resulting in lower margins of profit (when our only product is to discount, we can only go lower to compete).

(5) See desperation as market sinks leading to scams and frauds.

(6) Add on fees, desk rents, etc., to offset costs.

(7) Businesses just stop when recession again hits, while costs are still at their highest.

Due to the competitive nature of the business, Brokers try to keep the rate of spending up too long, and consequently, some just disappear.

Currently there is little or no profit in this market or even less. REO’s, short-sales, foreclosures pay less to Brokerages, they are unreliable, and take a long time to pay out.

We survivors in the industry will make it to the next market cycle, which hopefully is soon. We can either continue to brutalize each others’ profit potentials or we can rework our business models.

The starting point I think should be to focus more on the real estate consumer’s needs, provide the best products and services, and do business on our own two feet, not on each others’ backs. When we elevate each other in the consumer’s eyes, we all win. To accomplish the above, we need to abandon mistrust among ourselves and resist the urge to cannibalize each other – a great concept that takes open and honest communications. The local Association of Realtors needs to start that dialogue today.

Sincerely,

Emmett Brennan
Owner-Broker
Sugar Pine Realty, GMAC