For nearly 100 years the residential real estate industry has been dominated by the Big Box Brick and Mortar Brokerage (B3MB) model. Some examples of these companies are Century 21, Remax, Keller Williams, and more lately Compass, which despite pretending to be a technology company still falls into the Big, Box, Brick and Mortar Brokerage category. For decades the model has been big companies with offices all across the United States and even several foreign countries. Offices with anywhere from 20 to 400 or more agents. The model has had a good run. It’s outlived most business models, but now it is in decline and rapidly approaching its death. A new model is on the rise.
Before I tell you about the decline of the Big, Box Brick and Mortar Brokerage (B3MB) let me tell you a little bit about myself and my experience in real estate. In 2011 I decided to get my real estate license. It was never the plan after going to the Naval Academy, serving as a nuclear officer on a submarine, getting my MBA at Georgetown, and becoming a military contractor. My plan after getting my MBA was to land a strategy consulting job at a top firm like McKinsey, Bain, or Boston Consulting. After 55 interviews and no job offers I got the hint, but not before asking one of the top interviewers why I didn’t get the job. I still remember his response today. He said while I had the technical skills for the job he did not believe I had the sales skills. His advice was for me to go out and get a different type of experience.
A Real Estate Side Hustle Became the New Plan
At the time I was buying a home for the 5th time. I bought my first home in 2003 while in the Navy. So I had been through the buying and selling process a few times and had been a landlord/investor since 2004. So I thought I would get my license to save money on my own deals and gain some sales experience by doing a few deals for friends and family on the side.
Once I actually got my license a month later and joined a Century 21 office, the plan changed. Since I had a full time job, I did not want to do a big marketing push to people who knew me as a defense contractor. I decided to market to one condo building with 189 units. The strategy of concentrating my efforts into a tight niche worked fast. (You can read more about it in my best-selling book, The HyperLocal, HyperFast Real Estate Agent). Within a few months my 90-day commission pipeline exceeded what I would make in a year at my job. So I quit that.
In my first full year I sold over $22M in real estate volume and generated nearly $600,000 in gross commissions. Between the uncapped six percent franchise fee, the 30% broker fee with a $30K cap, and transaction fees and other office fees, I paid close to $100,000 in fees. In return I got a public workspace at the office (not a private one), very little effective training and very little support.
The next year I went to Keller Williams and hired people and built out a team. The cost structure was a little better. (The franchise fee was capped at $3K). The training was marginally better, but far from being anything that would change my business. I remember brand new agents teaching Open House classes despite only closing 3 or 4 deals ever. I remember a national trainer teaching recruiting despite having a team of less than 5 agents.
At Keller Williams I met my wife, Keri Shull, who had started her brokerage career at Remax before moving to Keller. We soon combined our teams and built it to the number four team in the world at Keller Williams. After reaching that level we decided to form an independent brokerage in 2014. We quickly became the highest-selling real estate team in the DC market and have been ranked as high as 13 nationally. In 2021 our team sold nearly 1,100 homes.
For the last four years Keri and I have also built an educational and training company, The HyperFast Agent. On my podcast I have interviewed 400+ top real estate agents and investors. We hosted events with Grant Cardone, Ryan Serhant and Tat Londono. We have a mastermind and coaching program and have helped dozens of other people scale teams.
My perspective on the B3MB model comes from the direct experience Keri and I have from working at three of these types of brokerages, building our team at our own independent brokerage and coaching and training hundreds of successful agents from all around the country.
What is the B3MB Model?
The B3MB model is one of the oldest models in real estate. Decades ago this was the way nearly everyone started in real estate. You would join the franchise office. Your split was 50/50 until you became established. Then it might go up to 80/20 or maybe 90/10, or for some people maybe even capped at a certain level. You also paid a national franchise fee and lots of other recurring or transactional fees.
What did you get in return for this?
Maybe a desk. Maybe a few leads. Maybe a little marketing or administrative support. Probably not much training. When this model first came into existence much of the branding, marketing and lead generation happened at the broker level.
Over the years different brokerages have risen and fallen. Some of them have added small tweaks to the model. There have been variations in the local office splits. Some have put caps on the national franchise fees. The B3MB industry has marketed different technologies, branding, and training to real estate agents. But, for the most part, no one within the B3MB industry has come up with a different model or made significant improvements.
What are the current problems with it?
The B3MB model has hung on for a long time. It has long surpassed the typical lifespan of most business models. It has hung around not because of any innovation, but rather because until recently (more on this later), no one has challenged the model with anything substantially new or better.
High Costs and Low Margins
One of the biggest problems with this model are the expenses associated with starting and scaling large brick and mortar operations. To open a licensed brokerage office you have to spend money on the following items:
· Brick and mortar rent
· Office furniture and furnishings
· A broker and/or manager
· Administrative staff
· Taxes and insurance
On top of these expenses, which are quite a lot, most national franchises have huge branding budgets which arguably create very little benefit or lead generation for agents. I actually remember my first year at Century 21 when the company marketed to agents how much spending millions on Super Bowl commercials would help us. I never did see a lead from that.
As you can see this structure creates two large layers of expenses before any money is even available to spend on lead generation at a local level. I was the top agent at two different Big Box, Brick and Mortar Offices. Despite closing hundreds of deals that came from my own lead generation efforts, I never closed one lead generated from those brokerages.
With this heavy spending and cost structure you would expect fairly decent margins for the company, right? Unfortunately those do not exist. Most brokerages operate in the low single digit margins of profit. This means for every $100 of commission brought in they are pocketing a few dollars at most and spending huge amounts of money to get there. Many local brokerages and even a few large national real estate companies actually operate at a loss. With this kind of structure it is very hard for anyone in the B3MB industry to actually create value for their agents.
The Marketing and Lead Generation are at the Agent and Team Level
Decades ago someone looking to buy or sell a home would call up a local real estate office and ask to be assigned to a real estate agent. The internet has changed that. Consumers no longer need to call an office to see what homes are for sale. They can look up homes for sale anywhere in the world from a smart phone. They can get instant valuations (although many times these are flawed) of their home in just a few seconds on the internet.
The growth of the internet and social media has made it much more cost effective for individuals in real estate to market and brand themselves or their team. You can build an organic following now to make people aware of you and generate leads. For just a fraction of what it costs to do print marketing, radio, or television you can reach thousands of local people through digital media.
Real estate agents have figured out how to get the consumer to come directly to them. The broker office is no longer the primary part of this equation. If you have been in the real estate industry for a while, think of the last time you recall getting assigned a lead that called the office looking for an agent. For most people I bet this has not happened in decades.
Real Estate Technology Tools Have Become a Commodity
If the cost structure is high and branding and lead generation are now at the agent or team level, the broker must at least be providing the tools needed to run a real estate business. Again, this is something that might have been true decades ago, but the internet has changed that.
Here is a sample of some of the tools you need to run a real estate business:
· Lead generation system
· Marketing and design tools
· A CRM or customer relationship management system
· Phone system
· Email system
· A budgeting system
There is nothing on this list that any brokerage has a monopoly on. They all use systems that, although branded differently, provide the same functions and benefits to you.
Need a lead generation system?
They are all over the place. Ylopo, Commissions Inc, Zillow and Realtor.com are just a few examples. You can also build your own on Facebook or Google or outsource this to someone.
Need marketing and design tools?
Great. Use Canva, inShot, Capcut, or one of probably over 100 options.
Need a CRM?
Follow Up Boss, Salesforce, and BoomTown are just a few of the choices you have. There are hundreds.
What about a phone system if you want to get leads from calling?
Simple. Redex, Mojo, and Vulcan will work.
An email system?
Constant Contact, ActiveCampaign and Hubspot are some of the dozens of choices you will have.
Need to run budgets and return on investment analysis to make your business more profitable?
We have used multiple platforms to do this.
Whether you are a solo agent just starting out or running a team that closes over a thousand deals a year, the tools to run every part of your business are available as a software or smartphone app. Many B3MB companies market that they have proprietary tools for every part of your business. Some new players even market that they are not real estate companies, but technology companies and therefore have some sort of monopoly on the tools you need to run your business. I don’t blame them for trying to do this. Like a wounded animal struggling for their life, they are trying to stay alive. The truth is, though, for a very low cost, you can get the tools you need to run every part of your business from anywhere in the world where there is an internet connection. The tools of the real estate business are now a commodity.
The Office is on the Decline and the Remote World is on the Rise
The technology to conduct business online and remotely away from an office has become more and more available over the last decade or so. In 2020 when the world shifted from in-person to remote due to global shutdowns, the pace of online adoption for everything in our lives accelerated more than 10X. In just a few months the share of activities that shifted online was greater than the shift that had taken place in the entire decade before. This affected everything from shopping, healthcare and work.
Real Estate was no different. In the week after the lockdowns our team offered remote and in-person appointments. While the total number of appointments did not change over half of them were remote. Overnight, the importance of agents having an office to meet clients dramatically changed. Running a real estate business no longer requires an office. Most of it can operate completely remote.
In-person meetings are great for meeting new clients, showing homes and conducting listing presentations, but you certainly do not need your local brick and mortar brokerage office to do that. And, if you do want an office for your or for your team, there are now plenty of month-to-month memberships and shared office companies that give you the exact amount of shared and private space you need with the ability to adjust it every month.
It is a challenging time for the B3MB industry. The rise of the internet and rapid shift towards a remote world have given agents the ability to directly and cheaply reach consumers, easy access to tools needed to run their business, and the ability to do it all without the traditional brick and mortar office. This is what the B3MB industry is facing all while experiencing high costs and declining margins.
What is the proof of this?
The B3MB industry still has the lion share of agents so it might be natural to question whether the industry is truly on its last legs. Since a lot of these companies are now publicly traded it is fairly easy to look at the numbers.
Take Realogy, for example. It is the parent company of such brands as: Century 21, Coldwell Banker, ERA, Sotheby’s, Better Homes and Gardens, and The Corcoran Group. In the last decade, the stock price has fallen nearly 70% in a time when the overall stock market has skyrocketed. The company has had declining profits. In 2018 and 2019, earnings were negative. In 2021, one of the best years ever in real estate the company broke even, but barely. With nearly $8B in revenue the company had a net income margin of just above four percent. If that’s the best they can do in a banner year, does long term profitability and growth even stand a chance?
What about the new kid on the block? The newest member of the B3MB industry likes to pretend it is a technology company despite its large presence of Brick and Mortar Offices and lack of meaningful differentiation from the rest of the B3MB industry. I’m talking about Compass, of course, the company that raised billions in capital the last several years.
Let’s look at the numbers.
First, the company has never had a profitable quarter. In the first quarter of 2022 they lost $188M. Just over $2M of losses a day, although better than the 2021 quarter where they lost over $213M. Although Compass has raised over $2B from investors as of the writing of this book, their stock price has hovered around $3 with a market cap of under $2B, less than the total amount of capital they raised.
With roughly $400M of cash on hand and a burn rate that would go through that in less than a year, the company recently announced they were laying off ten percent of staff and halting expansion. In the last four years, the company has lost well over a billion dollars. In earnings calls they have stated to investors that the path to profitability is through cutting back on agent commissions and benefits. Is that possible though without a mass exodus?
While there was a lot of fanfare around the Initial Public Offering back in 2021, the IPO produced a disappointing number and since then the stock has fallen from about $21 to around $4.
The publicly visible results of two of the biggest companies in the B3MB industry show just how much the model is in trouble. Think about it. In some of the best years ever in the real estate industry, two of the biggest companies in the B3MB industry lost money or at best produced razor thin margins.
What is the model that will replace it?
Outside of the B3MB industry there are a few other models.
There is the independent model. This is the local or regional brick and mortar office. This model eliminates the national franchise expenses. It is cheaper in some cases than the B3MB industry. However, it still has all of the brick and mortar expenses. Because of this, and its smaller size, most independent brokers still operate at razor thin margins that have been declining. Like the bigger companies, they do not have any business tools for agents that are not a commodity. In some cases they might be better at local lead generation than the B3MB industry, but still not more so than an agent or team that does it well.
This is the model Keri and I have run for 8 years. It has worked for us because we have used it almost 100% as the place to run the Keri Shull Team. This “teamerage” model is the reason we have margins that are higher than single digits. It takes a massive spending budget to get there though for a large team. Outside of this rare case, the local brick and mortar model does not produce different results. Most teams are not big enough to effectively run this way, and nearly all are better off in a different model.
What about the discount broker? This is the model where brokers attract agents with 100% commission splits and no or low fees. How do they make money you might ask? It’s almost always through affiliates, joint ventures and other services they add on. They are 100% reliant on agents using their in-house title and mortgage partners. The model requires hundreds or thousands of agents to join and to reduce expenses to as little as possible – although in most cases they still have brick and mortar offices.
What are the problems with the discount broker model? Like the rest of the B3MB, this model does not give agents any tools they cannot get elsewhere or branding and lead generation. It cuts out the expense of national franchising and attempts to reduce the brick and mortar costs. However, since this model requires hundreds or thousands of agents and has very little margin the resources available to give to the agents is very small.. With all of the agents operating in one market, collaboration and top agents helping each other does not seem to exist. On top of that many of these companies with their race to the bottom strategy in terms of costs with their agents, also deploy that strategy with the consumers. Many, but not all, are closely associated with charging low commissions to the end users. While this model does exist in several markets, it is rare, but not unheard of, for top agents to hang their license there as the only benefit they offer is low costs.
Which model will change the industry?
In recent years a new model has gained significant traction in the real estate industry. It is the first virtual, agent-owned model growing almost 100% organically, without Wall Street money. I am of course talking about EXP Realty which is in the process of doing to the real estate industry what Netflix did to Blockbuster and Uber did to taxi cabs.
EXP was a virtual brokerage long before virtual offices were a thing. Glenn Sanford founded the virtual brokerage model after years of experience at other brokerages building top selling expansions teams. This new model cuts out the expenses of the local brick and mortar real estate shop. By focusing on giving agents the tools they need to operate from anywhere in the world the agents in this model have more work flexibility and get to keep more of their money, while the company still remains profitable since it is not paying all of the expenses the traditional brick and mortar shop needs to pay just to keep the lights on. As both consumers and workers switch more towards remote operations this model will only expand.
The cost structure is not the only benefit of this model though. Collaboration is another huge benefit. I know what you’re thinking. Wouldn’t more collaboration take place at the local office. No. It doesn’t. Keri and I have been at three such offices. Collaboration between top agents was rare. You mostly got jealousy, gossip and office politics. In the virtual brokerage top agents from many different markets are more inclined to get in online workplaces and zoom meetings and help each other out. This is more likely without the local competition and because of another key point in this new model which I cover in the next section.
The EXP model that is taking over the industry is not one that is owned by Wall Street or foreign investors. Nor is it one that is owned primarily by the founder. It is one that is owned by the agents. Since 2015, EXP has offered stock option awards to its agents for sales and recruiting and created millionaire agents along the way. A lot of firms claim to be agent-centric or agent-focused. But only a model that is owned by the agents can truly put the agents first. Many publicly-owned real estate companies are owned by less than 10% of the agents and founders.
The other benefit from having an agent-owned model is true collaboration in a way that the B3MB model does not have. In the brick and mortar model, local office politics and jealousy are the norm. Keri and I experienced this at all three of the B3MB companies we were at. Information sharing amongst top agents did not happen. Petty infighting did.
In the virtual, agent-owned model, collaboration is the norm. It’s easier to get on regular virtual meetings and share with agents in many different market centers. No one is concerned with fighting over market share and everyone has an incentive to help everyone grow as it helps the company they own.
Rewards for Growing
In the new model, growth does not come from buying market share. It does not come in an unprofitable, unsustainable way. Rather, it comes from the owners. It comes from the agents. Those who help the company grow are directly rewarded for it with passive recurring income.
I’ve built multiple streams of income in real estate: development and flips, long-term rentals, and short-term rentals. It’s great and I love it. I think all real estate agents should do it. Here’s the deal though. It’s not passive. It takes time. It takes capital or the ability to raise capital. And it comes with liability.
The EXP model gives its agents the ability to build passive income with no liability, no time, and no capital. Since the new model operates at a cost structure that is a fraction of what the B3MB industry operates at, it can share a significant portion of the revenue with the agents that build the company.
Revenue sharing incentivizes agents to use their influence (big or small, as many of the top earners are far from household names in the real estate industry) to bring other agents to the company.
I know some will say the profit share model has been around for decades with a B3MB company, Keller Williams. The problem is: this is based on the profit of the local office. Keri and I did not see significant profit share during our time there despite bringing on many agents. The EXP model delivers 6 to 10 times the amount of money to its agents than the profit share model used by Keller Williams.
The revenue share model puts more money back into the pockets of agents. There are some people who have built six figure, even 7 figure incomes, from revenue share in just a few short years. Not everyone will want to participate in helping other agents join and build revenue share. That’s okay. Even without this, the model far surpasses that of the B3MB industry.
How can I help you take advantage of this model?
For years I have been looking to grow outside of the DC area market. I knew what it took to run a brick-and-mortar operation selling over 1,000 homes in an area. I looked for low-cost ways to start in other areas. I had many resources that others did not: reputation and branding, experience and capital. It was not until I decided to make the switch to the new brokerage model that I decided to expand.
I made this switch because I wanted to use my experience, training programs, and influence to help people everywhere build amazing real estate sales businesses. I am more than certain this model is the best way for me to help other people grow, not only their sales businesses, but to take advantage of the greatest passive recurring income opportunity that I have ever seen. This system allows me to plug real estate agents into training, coaching and mentoring programs that my partners and I have built to help them grow their business, all at no cost to them.
If you want to learn more about how I can help you do that, send me a text message directly to my phone at 703-638-4393.
Dan Lesniak is a billion dollar real estate agent, best-selling author and speaker, founder of the HyperFast Agent coaching program (hyperfastagent.com) and the host of the HyperFast Agent Podcast.