Thanksgiving at our house is known as the day of the home-cooked meal. In preparation for this year’s holiday, I was clearing the pantry — or as we like to call it, the "black hole of mystery." I vaguely recall having undergone this ritual in the past, but my most recent survey of our unused things of food origin reminded me that it may have been awhile.
As I closed the kitchen for inventory, it became a game of sorts to see which item was the most resounding testament to my failings on the domestic front. Forgetting that I counted five cans of tomato soup and that no one in the family even likes people who like tomato soup, my chore quickly became sport. I was looking for the oldest "best by" label.
The tomato sauce was leading for awhile ("use by Sept. 8, 1996"), as were the pinto beans ("Canned in Mesopotamia"), but these were soon overtaken by the ketchup dating back to Britney Spears’ "Toxic" tour. Finally, I had a clear winner: the freeze-dried scalloped potatoes. (Before you call child protective services, understand that Steve enjoys backpacking.) It seems that to fully enjoy the potatoes, consumption was to have occurred in early 1992. I guess I was too busy selling homes.
Waste. Three very sizeable trash bags later, I was staring at the "open other end" end of a mortgage payment. My bags of potential food poisoning were filled with good intentions yet nary a satisfying meal.
My business balance sheet is starting to look a lot like that cupboard. Waste. Our business and marketing expenses totaled between 20 percent and 25 percent of our gross earnings last year, and this doesn’t count the fun little extras that independent contractors enjoy such as healthcare premiums, Social Security matches or fuel costs, to name a few. And no one is funding my 401(k).
Next year I anticipate the number will be a lot higher. This is because our scales always tip toward the listing side, and so much of our inventory never gets consumed these days — or even hits the shelves.
When I started in real estate in the ’90s it was a rarity when a listing didn’t translate to a payday. A listing was considered an account receivable and the commission was something around which you could schedule your online bill pay with confidence.
Today, a listing is feeling a lot more like a turn at the craps table, and we just never know what’s in the dice. That’s because at any moment, for any reason, our clients can pick up their chips and head back to their room while we watch the croupier sweep our bets into the trough.
Our industry is unique in that we must gamble on ourselves and on our clients every day. Our listing contracts have time durations and provisions for our being "owed" a commission, but few of us would dare enforce a contract to which our client no longer wished to be a party.
We are selective in the business opportunities we take on, taking care to partner only with those who have reasonable price and time expectations, but often their true expectations are never honestly communicated. And often, circumstances change. The job transfer falls through, separating couples reconcile, happy couples separate, or stock values fall, making that next home now out of reach.
These days, prices decline and previous expectations routinely need adjustment, though many are unwilling or unable to make the necessary adjustments.
Most recently it was new underwriting guidelines that were to blame. When our client suddenly found he couldn’t secure the promised financing on his new home, an up-leg transaction over which we had no authority or control, our listing of his current home got derailed before it hit the multiple listing service but only after we had spent well into four figures on a stager, a photographer and on print marketing. Oh, and there was more than a little of our time involved.
This has caused me to take inventory of the way we run our business in this crazy market. Times are challenging enough for agents. When we find that we have effectively thrown our checkbook out on the freeway, it can be more than a little demoralizing.
Yet there really isn’t a good solution under the current compensation model. And I don’t see the consumer ready for a different pay structure. It’s much more fun to play with house money.
The reality is that this is the nature of our business. Ours is a pay-to-play profession like none other. In 1995, the enormous costs associated with a misfire went largely unnoticed by me. This was because there was plenty of business to cover the occasional loss.
Today, when many of us are going backwards, the story is much different. I have long felt that the undercurrent of change we are feeling in our industry has very little to do with the market and everything to do with technological progress, but the difficult times are a factor; they are serving to hasten change.
Brokers are under scrutiny for the value they provide the agents and, on some level, the scrutiny is greater because everyone is a little hungrier. I think many agents are having an "aha" moment as a result. We incur all the transactional costs, and we carry the associated financial risks.
When we succeed, the broker takes his cut; when we fail, the broker just restocks the shelves. And when consumption is down, others are ushered to the table to take our places and in greater numbers.
When the grocery store sold me all of that tomato soup, they had priced each can to reflect their anticipated losses. So when they had to throw out their expired inventory, I already had them covered. In my store, however, prices are coming down and my margins are shrinking. When I fail to move my inventory, it costs me dearly. No one is covering me.
That’s not to say that brokers are without risk; many are in a world of hurt right now. But, they have options the agent does not. I can’t stop investing my time and resources on my clients’ behalf. The only way to increase my bottom line is to do more business or to keep more when I do, which is why the down times see so many agents playing a game of musical chairs. Add today’s indictment of the broker’s value proposition and it’s time to take a harder look at the model.
I hear people saying that you can’t compare the real estate model to Amazon.com, but I think brokers can learn a lot from Amazon. They stock books and the broker stocks agents. The agents have been taught that they need company-provided window offices and furniture, phone systems and computer banks, faxes and copiers, and expensive "comped" collateral material, but they don’t.
They used to need these things, just like there was a time I probably needed six boxes of Minute Rice at my disposal, but the "best by" date for this product has come and gone.
Brokers can cut their costs, and they should cut them to the bone and stock me "virtually." Aside from the managerial oversight and risk management (neither of which require huge buildings and fancy trappings), all agents really need today is training, and this is coincidentally the thing at which the brokers are historically best. So hold the meetings online, book outside space, or outsource. Maybe require agents to pay for training the way they pay for their other "professional" fees.
Give them the authority to make decisions, make them responsible for their successes (or failures), and then reward them with higher splits to offset their high costs of doing business, all while you have reduced your own.
You can always add more agents to the roster and, with the right efficiencies, your additional costs will be nominal. This is because virtual space is limitless. Your investment capital and mine are not. It’s got to pencil out for all of us if we are going to extend our shelf lives.
Kris Berg is broker-owner of San Diego Castles Realty. She also writes a consumer-focused real estate blog, The San Diego Home Blog.
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