August 3, 2008 11:57 AM
Deede You Wrote in part:
I am interested to know if, anywhere else in the country, is experiencing a surge in new, 'mom & pop' type brokerages. It seems that agents who have been with real estate franchises, some for many years, have decided that they were just not getting any bang for their buck anymore. Many companies, such as Re/Max (correct me if I am wrong) have management fees, desk fees, royalty fees in ADDITION to all of their own marketing fees. There is just not enough business out there to justify the cost of franchise debt. Many of these agents have moved their offices home, use internet only advertising, use the latest technology and keep 100% of any commission they get.
Deede, I think your observation that there are a lot of new mom and pop type brokerages is somewhat correct, the degree of which is probably very localized, much like real estate in general. I don't remember the exact numbers, but it was not that long ago that the association study concluded (fairly convincingly) that franchise operations were more profitable and successful than independents.
I have observed that there is a great deal of movement of agents in general. Unquestionably that is largely due to economic considerations, as the market has slowed considerably.
You mentioned RE/MAX agents, specifically. Having been an agent / associate broker with a Remax firm, I know all too well the fees. The way their model works, the agents producing very high numbers would net a lot more under their model than with traditional split companies that had no fees, but less than favorable percentage royalties and brokerage splits for the agents. While the (even high) fee model works to the agent advantage in very hot markets, it is extemely difficult for the agent in sporadic and slow markets. You need a good line of credit. Hence alot of agents have been moving back to traditional split type franchise brokerages. While many pay 6 and 7 percent royalties to the franchise and then 30% to 50% in brokerage split, in a slow market they may fare better than the 5% plus fees etc paid to a REMAX type model because of the very high fixed fees they have to pay - whether they are selling or not. If it is close at the end of the year on net, the lack of stress on extending credit and going in debt to pay the fees may well be attractive as well.
In your post you questioned the viability of a franchise selling a license to use the name only and then a sort of ala carte menu of services. Although their are some that have tried that in the truest form, it can be a risky proposition and almost impossible for the franchisor to stay in business and execute any sort of benefit to the franchisee. Most national franchise initial license fees are not that expensive in the big scheme of things. They would have to sell an awful lot of licenses to make that a viable option, without having some sort of continuing stream of revenue to continue to promote the brand. It would also lead to some heavy overhead in terms of trying to make sure that there were some sort of standards adhered to insure that some of the ‘fly by niters’ did not damage the brand identity. Being reliant on selling a very large number of licenses would hinder that effort. Can you imagine how many licenses you would have to sell a year just to pay for one national magazine advertisement?
It is basically a numbers game for any franchisor and the franchisee (brokerage). One of the problems with SOME fee models is that the brokerage really makes much of their money as a “landlord” and while times were good, they had full ‘occupancy’ and built large offices to house those numbers. The franchisor does well too in that situation. Lots of people paying management fees and a royalty.
But, when the market slows the landlord broker will have quiet a large number of vacancies, as many of their former ‘tenants’ (agents) moved back to traditonal brokerages to reduce their fixed expenses. This exacerbates the problem for the brokerage and possibly the remaining agents. Less people to pay the same fixed bills for a high overhead operation. Nobody wins.
The traditonal brokerage with royalties and splits, plays the numbers and his numbers maybe increasing with the migration from fixed fee brokerages. He also has a large overhead, often charging agents nothing for desk space- only actual use expenses (postage, telephone etc). He is betting that a sufficient number of agents will sell something and pay him enough in splits to cover the several other agents that are selling nothing. Problem is that moderate and top producing agents subsidize the low or non producing agents. Ouch. This, of course, reduces their net per transaction because of the higher split for the broker and the royalty fee for the franchisor. After they reach a certain level of production, they would be better off with high fixed fees and the better split.
So what is the answer for the agent? Bounce back and forth between the models according to the market conditions? And re-brand yourself each time? Probably not a real good way to establish credibility and confidence.
In your post you mentioned that many agents moved out of their offices and into their home and kept 100% of their commission. In many, if not most of the states, that is not even legal for a broker, much less an agent. Not to mention it is a little ‘un business like’ to meet clients in your home and down right dangerous to meet unknown clients at a listing. I know that in Alabama the broker (company) must have a physical office outside the home (except in special circumstances) and agents have to be under the direct supervision of the qualifying broker. I’ve heard some states requiring that agents be within a certain number of miles of their supervising broker (to prevent the purported supervision from being in name only).
And then there is the bottom line – the consumer. Some independents do very well in a local or even regional market area. The people in these markets are generally familiar with the name. In past generations, people pretty much stayed in the area where they were born and raised. That has changed and people move around a great deal and probably will continue to do so. They tend to gravitate to the security of a name they’ve seen before. For example, how many times have you stopped at a McDonald’s when out of your own area, not because you needed a big mac fix, but because you knew what you were getting, unlike the Bubba Burgers that you just drove past. Even though Bubba Burgers makes the best cholesterol patty in town.
In other words, the franchises will not, in my opinion, lose out to independents brokerages and I don’t see a trend out of the franchise systems. I do, however, think that franchise models are changing.
A few years ago, I would have said that the traditional models (many of the more familiar names in real estate) would either adapt or die. The downturn has actually, in my view, delayed that fate with the migration by agents back to some, to help cash flow at the expense of their splits. In the end, however, the ones that have been fortunate enough to expand in this environment, may speed their collapse when and if the market gets back to normal and a reverse migration of agents occurs, leaving many empty desks and overhead for the broker.
I see some bumps ahead for high fee models, especially if the downturn persist. I am someone that actually likes to run numbers using the different franchise models, with different production levels. There are some pretty obvious givens that revenue minus cost equals profit. The agent either increases revenue or reduces cost to affect the net in a positve way. If revenues are stagnant or decreasing, you must reduce the cost to improve net.
The key to profitability for agent that produces at either an average or high level, is either to jump back and forth between models as the market changes or find a model that has favorable splits AND low cost - preferably variable cost (not fixed) or a combination so that expenses are more closely tied to actual revenue.
It is pretty eye opening to use different production levels against the models to see which produces the best net for the agent and yet makes sense to the broker as well. Except for the non or low producers, the traditional models (broker splits over 10% or so) almost never win, even those with a gimmick. And the high fee models seldom win except in some cases with very high producers.
Admittedly, I am partial to the system I chose after an extensive exercise running numbers, but it is the more balanced systems that will thrive in the future because they just make sense. And they don't force you to flee when the market fluctuates. If you want to stay in this business as a career, that bouncing around would get old.
I have kind of gone off on a tangent, and I apologize if I have bored you but the short answer to what your question actually asked is: Franchise Brands are here to stay.
Wayne Fitts
Alabama Regional Owner
Sellstate Realty Systems, Inc.
Gulf Shores, Alabama 36542
866-607-4109 Toll Free
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