What Those Real Estate Brokerage Rankings Really Mean

What Those Real Estate Brokerage Rankings Really Mean

Late last week Dennis Rodkin ran a story on the 2015 sales performance and rankings of the top Chicago area real estate brokerages in Crain's. Much ado was made about the fact that Berkshire Hathaway HomeServices KoenigRubloff Realty Group's (yeah, that's one company) sales volume dropped while all the other major area brokerages saw increases - as high as 29.3% in the case of @Properties. And the fact that Berkshire Blah Blah was the recent result of a merger was not lost on Dennis Rodkin. But what really is the significance of these rankings for consumers?

The answer is: not much. As I have long maintained the traditional real estate brokerage plays almost no role in anyone's real estate transaction because the home buyer or seller is dealing solely with a broker who is pretty much an independent contractor of the brokerage, operating without any real supervision outside of legal and ethical requirements. Furthermore, the broker who is working for @Properties today was probably working for Berkshire etc... yesterday. The fact that the broker moved from one brokerage to another does not result in any change in behavior. The brokerage really only makes a difference within a handful of the new real estate models.

As for the sales volume of a brokerage...well, you need to understand the traditional real estate brokerage model to appreciate how meaningless sales volume or rankings are. For starters, who do you think the primary customer of the traditional real estate brokerage is? Surprise! It's not home buyers and sellers. It's real estate agents because the brokerages make their money off the real estate agents who are the ones bringing in the majority of the business - typically in excess of 90%. The brokerages collect fees from the agents and also get a cut of their commissions under a variety of compensation models and it is through creative compensation models and support services that the brokerages compete for agents.

Now, it's not like the brokerages aren't interested in home buyers and sellers because they are. To the extent that the brokerage can generate their own leads and give them to their agents they can collect a higher commission split on them and they can use those leads to entice real estate agents to come to work for them. It's just that the brokerages know that the fastest path to riches is through real estate agents that have their own client base that they will bring with them.

Consequently, most traditional real estate brokerages will hire every broker that walks through the door, regardless of how qualified they are to do the job, because every new broker represents incremental income to them. They want to hire your cousin Vinny because when it's time for you to buy or sell a home they know you are going to feel obligated to use him. And this is the #1 path to growth for the traditional brokerage - hiring more agents.

If you don't believe me just check out this recently posted article in Chicago Agent Magazine about The Path To Becoming A Managing Broker. Being a managing broker is all about recruiting and retention of real estate agents and helping them find more clients. Sadly, it's not about making sure that the agents are being responsive to their clients or that they know what's going on in the real estate market or that they know how to analyze data or that they are not being too pushy.

The Crain's araticle actually touches on this when discussing the growth of @Properties. At least 14 percentage points of @Properties' 29.3% growth was due to hiring more agents. I say "at least" because if the average agent they hired during 2015 was more productive than the average existing agent then the contribution from recruiting was greater than 14%.

Similarly, the article mentions that Berkshire_____ lost agents right after the merger and that almost certainly explains the 12% sales decline in 2014. As for their 2015 sales decline it's possible that they lost more productive agents to the likes of @Properties (after all, @Properties had to get their new agents from somewhere) and replaced them with newer, less productive agents.

What's almost certainly not the case is that the agents of a given brokerage suddenly become substantially better or worse at helping their clients buy or sell real estate, which is what these rankings seem to imply on the surface. Fortunately, you now know better than to believe that.

#RealEstate #ChicagoRealEstate #RealEstateBrokerages

Gary Lucido is the President of Lucid Realty, the Chicago area's full service discount real estate brokerage. If you want to keep up to date on the Chicago real estate market, get an insider's view of the seamy underbelly of the real estate industry, or you just think he's the next Kurt Vonnegut you can Subscribe to Getting Real by Email using the form below. Please be sure to verify your email address when you receive the verification notice.

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