Lessons from the siege of real estate franchising

The downturn has fuelled a revolution in how the real estate market is conducted, and the larger ramifications will make or break practitioners in many industries. JASON GEHRKE

By Jason Gehrke

The franchising of residential real estate agencies – one of the single largest parts of the franchise sector in terms of overall unit numbers – is undergoing a revolution.

This revolution went largely unnoticed during the booming property market, which fuelled explosive price growth and pushed housing affordability to record lows.

Until recently, the runaway success of the economy, easy finance and an oversupply of consumer confidence created an environment where virtually any property was in demand, and sellers would be fielding offers before the “For Sale” sign was erected.

The market boom resulted in ever-shortening intervals between listing a home for sale and the signing of a deal. Selling real estate in such a market may have been something like shooting fish in a barrel – it was almost impossible to miss.

The rapid turnaround from listing to sale, as well as the large sums to be made from commissions, attracted an influx of Generation-Y salespeople whose early careers have been defined by selling properties many of their friends couldn’t possibly afford to buy, and by the weekend advertisements which feature bigger photos of themselves than the actual house they are selling.

But all that is changing.

Real estate prices are stagnating, or in some cases going backwards. The tightening of credit markets has strangled the flow of easy-money loans. Combined with creeping doubts about job-security and a general decline in consumer confidence, buyers are no longer falling over themselves to buy real estate, shares, cars, big-screen TVs or pretty much anything that isn’t absolutely necessary.

Additionally, the current economic climate is forcing more properties on to the market as buyers and investors who over-extended themselves now realise the difficulty of their position.

The result is that agents no longer have to compete so heartily for listings, but instead compete for buyers. Listings will continue to take longer to sell. Buyers will be fewer and further between, sales will be more conditional, vendors may be more reluctant to spend big dollars marketing their properties, and the costs of running an agency will start to bite.

Rent rolls will assume a new importance in meeting the running costs of an agency, and the ranks of salespeople may gradually reduce as sales slow.

This is not meant to sound unduly pessimistic. As a former real estate franchisor and network marketing manager myself, the property cycle is moving into a new phase, with many of the same conditions emerging that existed in the early 90s during the recession “we had to have”, and unemployment was nearly double its current amount.

On top of this – and this is where the real revolution is occurring – is that the traditional commission structure under which agents have operated since time began is now under siege.

In a rising market, an agent’s commission may be acceptable to the seller if the agent can sell the property for a higher-than-expected figure. But in a stagnating market, buyers forced to sell at prices below their expectations will be very reluctant to hand over sizeable commission cheques.

However even in the rising market, agents were coming under pressure to justify why such little effort (in securing the sale when buyers were apparently everywhere), should result in such high rewards. Under the traditional agency model, commission rates have remained unchanged for decades, while property prices have grown exponentially.

When houses were less than $50,000 (yes, it was once possible to buy a house for the same price as a new 4WD), a commission of 5% on the first $18,000 and 2.5% on the balance didn’t add much, and for a $50,000 property would come to just $1700.

Out of this the agent would have to pay for the For Sale sign, maybe also pay for the advertising in the weekend papers, driven as many buyers as possible to the property, and handled all the telephone inquiries.

Today agents are selling properties for $500,000 on the same commission structure, resulting in a commission of $12,950, on top of which they also charge the vendor for the signage and advertising, and through the power of the internet, are no longer plagued with phone calls for details about the property, which are available online for the world to see.

The reward for effort is substantial, but vendors who don’t get at least an additional $13,000 in their price struggle with this value proposition. Especially now that money is tight.

This changing economic environment has given rise to a quiet revolution in new real estate agency models that challenge the status quo. These models do unheard-of things like charge vendors flat-fee commissions or discounted percentages, where total commission costs are just a fraction of those under traditional models.

Agencies of this nature are springing-up around Australia, and some have even indicated their intentions to franchise. They are unlikely to win many converts from established agencies who view the newcomers as upstarts and their business models as a threat to the viability of the real estate industry.

But nonetheless such agency models are winning traction in tough times and perhaps signal the beginning of the end of traditional real estate agency models.

This is a revolution other established industries within the franchise sector should observe keenly. Mature business models, however profitable, are always at risk of an unexpected innovation that takes the market in an entirely new and unpredictable direction.

In the current economic climate, other industries are likely to experience similar radical changes. Good franchisors will be monitoring both opportunities and threats to arise from such changes and look to capitalise on them quickly to ensure the long-term sustainability of their businesses.

Those which don’t will cling to the outdated practices of the past as their competitors sweep past them.

Jason Gehrke is a director of the Franchise Advisory Centre and has been involved in franchising for 18 years at franchisee, franchisor and advisor level. He provides consulting services to both franchisors and franchisees, and conducts franchise education programs throughout Australia. He has been awarded for his franchise achievements, and publishes Franchise News & Events, Australia’s only fortnightly electronic news bulletin on franchising issues. In his spare time, Jason is a passionate collector of military antiques.

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