Why Agents Aren’t Employees

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The Raise the Bar Facebook group is always a fun place for me to visit. Its ostensibly a conversation about “raising the bar” (increasing professionalism) in the real estate business by people in the real estate business, but the conversation seems to meander all over the place.

Recently one of the members asked what seemed to be a simple question.

I’m reading “E-Myth” and wondering how possible it is to implement given we hire independent contractors.

As you might expect, the conversation started about the confusion generated in the real estate industry about the term “Independent Contractor“.  In order to understand the the issue, a quick look at some background material might help.

According to the IRS, the matter is as clear as mud

“The general rule is that an individual is an independent contractor if you, the person for whom the services are performed, have the right to control or direct only the result of the work and not the means and methods of accomplishing the result.

Another way to say this is that a person is an Independent contractor is they are told what to do , not when and how to do it.  Of course, these instructions are modified by the Independent Contractor agreement between the Broker and the agent.  More information is supplied by an article published by attorney Steven Fishman on the website Nolo who says;

To qualify as a statutory independent contractor, a real estate agent must by duly licensed and meet two threshold requirements:

  • the agent’s pay must be based on sales commissions, not on the number of hours worked, and
  • there must be a written contract with the hiring firm providing that the agent will not be treated as an employee for federal tax purposes

So now we understand what an independent contractor is and that we can establish a framework for them to operate in through the independent contractor agreement. In fact, that contract is a document that we must have to assure their  independent contractor status for tax purposes. The contract provides a framework delineating what they are employed to do without specifying  when and how they do it. This framework allows us to manage agents (with their cooperation) and answers the question posed to the group.  It was quickly pointed out that a good manager would be able to manage their independent contractors as well as another manager might manage their employees, and the conversation moved on.

(1) Raise the Bar in Real Estate

It was here that I needed to put in my two cents and the conversation took another fork

(2) Raise the Bar in Real Estate

Obviously I had failed to make my point – that the independent contractor status doesn’t stand in the way of an owner running their business in a manner that is consistent with their vision, mission statement, and business policies. So once again I jumped in to the conversation;

(3) Raise the Bar in Real Estate

And here was where the road led to a place that has me writing this blog post. Greg Fischer, a smart young real estate broker in Texas sent us down the road to discuss what seems to be a simple solution to the management problems perceived by many in the industry. In fact he states it plainly just a little while later;

(4) Raise the Bar in Real Estate

Michael McClure, the admin of the group quickly jumped in to share his experience

(5) Raise the Bar in Real Estate

A little later Michael shared some reasons and Greg responded;

(6) Raise the Bar in Real Estate

Though Michael, through his experience, has superior knowledge of the impact of a real estate brokerage operated with an employee model, I think he’s keyed into the wrong reasons at least twice-  though he is right on target about  the whole culture thing , which in my opinion, is a huge challenge to creating and operating such a model. After observing a number of businesses with employee models, I believe that the structure of the industry, and its broken compensation model contributes to the reason no one has yet been able top create an employee based real estate brokerage model that works even though large local, regional and national firms (along with Michael McClure) have tried to make this work.

Here’s why;

  1. Consumers are accustomed to having real estate services provided for free in unsuccessful transactions. When a property doesn’t sell, or settle, the consumer expects the real estate agent and their firm to have provided their services without compensation. In many cases, the real estate agent and their has marketing expenses, time spent, materials used, andin many cases, may have even advanced money for the client with little or no hope of getting their money back.  Any change in this type of business model would require some payment from consumers in these situations, and as long as there are brokerages available to operate in the traditional manner, with no expense to the consumer, the majority of consumers are unlikely to choose to reach into their pocket to pay for a real estate firms services.
  2. Real estate agents and real estate brokerages rely on the successful transactions to pay for the ones where they don’t get paid We often hear that the commissions charged by real estate firms and agents are too high, and if we didn’t have to absorb the costs of the “lost transactions” it might be possible to reduce that fee and still; make a good living, but as we just explained above, that’s not likely to happen since consumers don;t want to bear the risk of loss in an unsuccessful transaction –
  3. Good real estate agents are driven by their ability to make lots of money if they are successful – and they are generally ego driven enough to ignore their failures in favor of their successes. You don’t hear a lot of people talking about the costs of lost transactions. In fact, to preserve our sanity as agents, we forget about the financial losses as rapidly as possible concentrating on our success rather than our failed attempts.  That being said, we plan for them when we want to take our business to “the next level” most business plans call for the inclusion of expired listings, and in recent years, a prudent plan would call for a certain percentage of failed transactions. In many areas as high as 15-20 percent of the business written, every transaction of which had costs incurred.
  4. People that choose stability over higher potential income are generally not driven to excel I actually had an experience with a salaried employee of a large national company (who later terminated their salaried agent program). A nice enough guy, he was a retiree who was working to make income supplemental to his pension, and had been a failed traditional real estate agent prior to the salaried career he retired from. He was far more interested in a weekly paycheck than he was in being the best he could be at his job.
  5. The economics of the broken compensation model (items 1&2) and the personality types of items 3&4 make it difficult for a salaried model to work in the real estate industry. Organizations that have successful salaried salespeople – like the business machine industry or insurance sales, invest large amounts in their training and have meticulous management requiring strenuous prospecting, etched in stone goals, and quick removal from the program for those who fail to meet the standards set by the companies. And yet they still burn through large numbers of potential salespeople in order to acquire the limited of salespeople who can do the job and make the numbers required. And these companies are typically selling products that they create or distribute with some exclusivity. Real estate agents need to obtain their products one at a time, and them make their sales the same way. These companies also have a much faster turn around on their earnings – a typical listing in today’s market might need to be marketed for 90 to 180 days, and then might take 60 to 90 days to settle. When a copier is sold, or an insurance policy written, the income is generated, profit made and the company paid within days.

Add to this the cultural inertia that Michael mentioned, the simplification to business that is provided by the independent contractor status of the agent , and the tax deductions available to the independent contractor real estate agent, and the chances someone will find the “secret sauce” is indeed minuscule – Doesn’t mean it will never be done, just that the job of the person doing it will make a job like the one facing  Sisyphus look easy.

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2 comments for “Why Agents Aren’t Employees

  1. December 30, 2012 at 12:49 pm

    I found that point #2 is the most compelling. The deals that close pay for themselves and the deals that fail. The public, as much as they may feel that commissions are high, would never share the risk with their agent, and the economics of that model make it a higher risk/higher reward arrangement. 

  2. Bill Lublin
    December 30, 2012 at 1:47 pm

    I agree with you – think about the seller who wants to “test the market” . If it was going to cost them, they would never be so cavalier about the time and money expended. 

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