Today’s announcement by Hanna Realty of the acquisition of Roy Wheeler Realty in Charlottesville, VA is another reminder that 2021 could be one of, if not the most, active consolidation year in real estate brokerage history. The consolidation trend is rampant as aging baby boomer owners contemplate their exit strategy. There are also many other forces at work that are not age-related and will assure continued consolidation in the industry.
The major trend of the last few years is the difficulty of achieving profit in the ownership of small brokerage firms. Many markets around the country, in spite of, or because of the virus enjoyed 2020 as the best year in their history. I have worked with companies that enjoyed a 50-70% increase in revenue year over year. Unfortunately for some the profits have not followed at even a single-digit increase.
If a firm did not make a significant profit last year will it ever? Why is it so hard to make a profit in today’s market? The answer is commission compression hitting owners from all angles. The industry for the last 40 years has had a reduction in net commission dollars to the brokerage companies. It is finally catching up to ownership of traditional models causing them to alter the model or consolidate with others. In a growing number of firms the real estate transaction is the loss leader. All profit is derived from ancillary services to the transaction such as escrow, title, mortgage, or insurance offerings. There is still significant money to be made but scale is now more important than ever. Why is commission being reduced?
We as consumers are always demanding more for less, it is our nature. In a real estate market where a good listing can generate 6-7 offers in a day, sellers are asking how hard is it to sell my home? Many ask for and receive a very reduced commission because there is now an agent (I am not saying qualified) who will list and represent the property for not much more than a good meal for 2. Many homes also have sold at or above list price in 2020. Those stories are out there and well known to today’s savvy seller. Differentiation, whether perceived or real is hard for today’s seller to understand when they are looking at the Sell It Yourself feature on Zillow.
Agents have more options and there is generally not as much loyalty to the firm or back to the agent. There have been so many new models and start-up firms in the last few years. The competition is fierce. Some very large firms even have significant investment capital that does not require them to make a short-term profit. Some firm goal’s is to get to scale at any cost, cause disruption, and outlast the survivors. Most traditional firms are not equipped to survive negative profitability for long. There are also many models that virtually based, others that offer high splits with differing support levels. The bottom line is that agents have options for significant splits that may not be affordable for the traditional brokerage. The “grass is always greener on the other side” adage was prevalent in 2020. Even a firm’s existing agents are not as profitable in a very robust market. They hit thresholds for higher splits and caps for payments to the firm very quickly. Many firm owners have agents that are costing them significant losses on each transaction early in the year.
How many of a firm’s transactions had a referral fee attached 10 years ago, even 5 years ago? Then it was USAA (the pioneer of lead generation) and broker-to-broker referrals. Today there are huge investments in lead generation from major corporations like Zillow, Realtor.com, HomeLight, and others that are well capitalized. Some agents and/or firms are paying 30-50% referral fees on upwards of 30% of their business. This will soon be the norm and will escalate I believe exponentially over the next 3 years. Some will benefit (especially the lead gen providers) but his means significantly less money to operate their business, support their agents, and eke out profits. This also causes agents to ask for higher splits as their commissions are net lower and the perception is the company is not providing as many leads anymore.
This convergence on compression will continue. The need to provide ancillary services will be mandatory. The ability to generate profit will be a direct result of scale. We only need to look at commissions and companies in the stock brokerage and insurance business over the past 2 decades to see where real estate is headed.
My belief is that continued consolidation is inevitable. In fact, it is healthy. Consumers have triggered the complete upheaval in the industry and only brokerages that adapt can survive. Hanna’s acquisition yesterday is a perfect example of the ability to add scale, support, ancillary services, and synergies by merging two fine companies.