Brokers and their businesses face 10 big dangers – none of them easily solved

The real estate industry is on a precipice, and how it falls from that point will determine its future.

That was the central statement – if not warning – of NAR’s “Danger Report,” an exhaustive look at the many challenges that threaten to demolish real estate’s foundations. Commissioned by the Swanepoel | T3 Group, the report analyzes the industry from multiple vantage points, including agents, brokers and associations.

Last week, we covered the dangers facing agents. In the second installment of our series, we look at the 10 dangers facing brokers.

1. Regulations – Since the creation of the Consumer Financial Protection Bureau in 2010, which was charged with the objective to “rebuild the mortgage banking landscape,” new regulations have been introduced to protect and educate consumers. NAR’s report warns that increased regulations will result in additional compliance costs and more risk for small brokers with limited capital – both in terms of maintaining compliance and holding on to agents who might move to firms with more strict compliance policies. But those costs are inevitable and ultimately help protect the consumer. The more pressing and relevant risk, especially considering the TILA-RESPA changes taking effect in August, is the one posed by noncompliance, which could cost brokerages a hefty price.

2. Paper Brokerages – With this new business model, firms are popping up all over the Internet, each offering agents access to MLS feeds, but little more. The major concern is not that these brokerages are syphoning agents from bigger brokerages, but rather their existence is fundamentally undermining participation in the Internet Data Exchange (IDX) feeds that support the MLS system. It allows non full-time brokers to utilize MLS information, which may ultimately dissuade the bigger brokerages from providing the information, because it’s being used to hurt their business.

3. Controlling the Data – Unlike the old days of real estate, where data was aggregated locally and the pace of collection was such that accuracy was assumed, the industry is in a new age. Data collection is now rapid and the streams of information are coming from so many directions that determining quality and relevance is often difficult in real time. That is the problem facing brokers. Understanding how to manage the overwhelming amounts of real estate data – with consideration to its release, withholding and application – will require a collective effort to lay down new rules and guidelines. That kind of organization is hard to come by in an already disjointed industry.

4. Consumer Brands Come In – Historically, brands outside the residential real estate sphere have had trouble breaking into the industry. However, over the past decade, Realogy, the parent company of Better Homes and Gardens and Sotheby’s, has proven it’s possible to not only step into the limelight, but also stay there and revel in it. Because of Realogy’s success, as well as other brokerages, like Berkshire Hathaway, the door for other companies to step in and take market share is open. The authors of NAR’s report speculate that Home Depot, Lowe’s and even HGTV, as well as banks, could all conceivably make a future push to get into the residential real estate game.

5. New Business Models – It seems every decade a new business model is being popularized in the real estate industry, and as technology becomes a bigger part of the business, the same thing may be happening again. As with any industry, any shake up in the popular model usually corresponds to new global leaders. Granted, leaders in real estate have traditionally stayed on top for large periods of time. However, today’s industry is hardly traditional.

6. Broke Brokers – The allure of brokers has long since been their ability to generate leads for their agents, among other offerings. But with the introduction of syndicated portals, like Zillow, which can generate literally thousands of leads a day, the apparent relevance of brokers is waning. Portals themselves are not the sole culprits, though, but merely a representation of a growing field of third parties willing to supplement services typically offered by brokers. With enough outside help, an agent could effectively run a business himself.

7. Technology Explosion – Since the mid-1990s, the portion of people around the world with access to an Internet connection has spiked dramatically from less than 1 percent to approximately 40 percent; and the trend is similar for mobile devices. Most brokerages have tried to embrace technology rather than ignore it, but even with open arms, the rate of development is such that real estate companies can’t keep up. It’s becoming too hard for brokers to deliver top shelf technologies at the same rate they’re being developed.

8. FSBO – In 2014, for sale by owner properties accounted for 9 percent of the year’s total sales volume, according to NAR. It doesn’t sound like a lot, but in the world of real estate 9 percent of 5.1 million homes is significant. It’s a reflection of the U.S.’s new devotion to DIY. And as more online and mobile applications become available to assist the everyday person during the buying or selling process, the relevance of brokers and even agents is set to take a hit.

9. Taxes – Lawmakers are always looking for less visible ways to increase tax revenues, and in some states, real estate is already feeling the sting of that tradition. One example is South Dakota, where the state is taking taxes on real estate commissions. To supplement the cost, brokers usually end up including the tax in the property’s overall sales price. While taxing real estate commissions is not currently a widespread practice, it’s an easy way for states to pull in a little extra revenue, which means it may become standard practice in the very near future.

10. Portals – NAR estimates that real estate professionals spend between $6 billion and $7 billion on advertising and promotion. Portals like Zillow and realtor.com already capture a large portion of those dollars, and are expected to attract even more ad spending in the near future. Bigger portals don’t necessarily mean agents will leave the wing of their brokers, but it certainly means they’ll be less dependent on the services brokerages offer.