Opinion: In real estate, it’s still all about relationships
Most major publicly-held national real estate companies have reported their fourth quarter results and full-year 2022 results as of this week. There were some surprises.
All of these groups saw their earnings (and EBITDA), decline since 2021. The fourth quarter of 2022 saw dramatic declines in revenues and earnings (EBITDA), which was more than the full-year results. Their full-year results for 2023 will likely be even better as the market shrinks from 5,000,000 existing home sales in 2022 down to 4.3 million in 2023.
The housing market’s whims are your only guide
It doesn’t matter if these firms are real-estate franchises, brokerage companies, home-buying or real estate “tech” businesses, their entire welfare is dependent on the housing market. Their results improve and sales go up. Their results drop and sales go down. Their entire fortunes depend on the health and sales of housing, regardless of what their leadership or Wall Street speculators may think.
They are therefore in the same boat with all private brokerage firms, as well as mortgage, title, and other housing-related businesses. Earnings for all segments of the housing industry saw a decline in 2022 and will likely experience a rebound in 2023.
Things change more than they stay the same.
Big picture: While technology has played a greater role in our industry over 40 years, it hasn’t affected the foundation of brokerage nearly as much than the application of capital.
While most buyers and sellers use several websites to search for homes for sale and similar sales information, more than 90% of them still use an agent to help them with the transaction.
Agents and teams still prefer to work with a well-known brokerage over their own independent brokerage. Brokerage firms compete to retain and recruit agents and teams with a range of financial incentives and services, just as they did in modern times.
Agents and brokerage firms still spend substantial money advertising their listings and services, just as they have always done. However, they have moved that spending away newspaper ads to online portals, SEO and SEM Facebook and other channels.
Referrals and capital are the core of the business
We wrote in our 2011 book, “Game Plan” about how national real estate firms used referrals and capital as a core part of their offering to build their networks. Coldwell Banker and Prudential, for example, provided financing to their affiliates through their relocation management arm. To grow their networks, firms such as Keller Williams and RE/MAX offered attractive commission splits (financial incentives) to increase their profits.
We now see Compass and eXp using financial incentives and agreements to help build their businesses. The ability to generate customers and clients has helped teams grow exponentially.
What role does tech play as the industry evolves?
It is clear that there is no evidence at the brokerage level that billions of dollars spent on various technology offerings (e.g., CRM, transactional management, apps, etc.) has resulted in any tangible return. It has not produced any meaningful return.
We haven’t seen data showing that a brokerage that has more tech or fancier tech has seen an increase or decrease in the number or retention of agents. Nor have we seen any increase or decrease in agent productivity in the past 5-10-20 years.
Although digital forms, signature systems, and transaction management have helped brokerage firms reduce office space and the resulting headcounts, we don’t see any data that indicates that this has increased brokerage financial performance or growth.
Big tech has an impact at the team level
It has had a tangible impact at both the team and agent levels. Over the past five year, the number of teams and their average production have increased dramatically. This is largely due to the strong use CRM tools and their use of online marketing channels.
Their per-person productivity is up to three times that of the average per-person productivity at top brokerage firms. This is where technology has shown the greatest return on investment in residential brokerage.
It’s still all about relationships
What seems new may not be actually new. Even with all the technology available at the consumer level, and new entrants, it is still about the relationship between a client and an agent.
Even with all the new capital, it’s still about the relationship between the agent and brokerage. While the financial relationship is an important part of this, it’s not the only aspect.
It’s not about the money. There have always been low-cost brokerage companies.
We found that client and customer lead generation is one of the most valuable services that a brokerage or team can offer agents. However, nearly two-thirds all housing customers choose an agent because they have a relationship. Lead generation is still a small part of the business.
The 2022 financial results for large publicly-held real estate companies show that their success is based on the same principles as all other businesses in the industry.
Steve Murray is a Senior Advisor to RealTrends, and a Partner with brokerage consulting firm RTC Consulting.
This column does not necessarily reflect RealTrends editorial department or its owners.
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