Posted by: Jack Harper | April 15, 2010

The Real Estate Industry Series – Part II- Herding Cats

The Issue of Independent Contractors


Herd Cats for a Living

In the early 2000’s, I managed offices for a large regional real estate franchisee. At one point, I was asked to move from one office, where I had been for five years and had my own management systems in place, to another, larger office that had very different systems. I will draw no conclusions about which style was better than the other – both worked and both didn’t work for various reasons. One thing for certain, my style was much more hands-on than the other.

The very first day I went to the new office, my regional manager handed me a stack of eight transaction folders. “These are your current lawsuits,” he told me. Eight active lawsuits from one office ?! Even more of a sad surprise; not a single one of them involved an agent who was still in our employ. As you can imagine, I spent many hours of non-productive time managing the impact of these eight lawsuits. Maybe I have just been lucky, but I don’t think it is all luck. In more than 25 years in this business, I have never been sued, and none of the agents under my direct management have ever been sued over a real estate transaction. To have eight from one office can only partially be explained by relative office size. The real difference, I believe, lies in the fact that I am a deeply hands-on manager – probably to a fault. I believe it is my almost instinctive need to cross every “t” and dot every “I” that keeps me and my team slightly above reproach in a legal sense. Of course, anyone can sue anyone at any time. But I feel that there must be a potential to win that is the deciding factor when a consumer considers suing a broker. He must really think he can get some form of award before he spends time and money in going after a broker.

As an important aside to this, we should look at associate mindset as it relates to management oversight. Most of the agents I have talked to over the years truly believe that they are their own and only boss. “I am an independent contractor.” You don’t really have the right to tell me how to run my business” they say. They are absolutely correct, by the way. The IRS uses the willingness of the broker/owner to allow agents to make all of their own business decisions without being told what to do by management as the true litmus test for independent contractor status. Tell them what to do and when to do it, and you might violate the spirit of independent contractor status. The repercussions will be huge: brokerages will have to withhold taxes, probably provide health insurance and more. But, this is where we need to go.

Let’s put things on the table where we can examine them more closely. We start with an industry filled with “professionals” who were able to get licensed  by spending about 90 hours in front of a computer screen or in a classroom listening to rote lessons designed to satisfy dubious state requirements. Next we have them use “practice tests” (often the actual questions on the state test) until they score consistently high enough to pass (sometimes only 70%). Finally we ask them to pay fees and submit fingerprints in order to be judged to be “ a real estate licensed professional.” In some states, by the way, even convicted felons who wait a prescribed period after release from parole can sit for their license test! Next, we tell these newly licensed “professionals” that they are independent contractors. We lead them to believe that they can make deals, hold negotiations and commit the brokerage without any real supervision. If you have ever tried to get an agent to reopen a listing negotiation because they accepted less commission than the agency wants, you will know how strong this independent contractor thinking goes.

Finally, we let them know that we generally don’t care how much business they do or don’t do. Oh, we make noises about minimum performance, telling them they need to work harder. But rare is the brokerage that actually holds the line on these so-called standards. On the recruitment side, companies press managers so hard to recruit that the result can be an office filled with underperforming agents who just happened to fog a mirror.

Something has to change. This is a broken equation.

Brokerages must be willing and able to provide direct management over field operations on a daily basis. If you agree with the concepts outlined in Part I (Raising the Barrier to Entry) then you must realize that the independent contractor model no longer works for the residential real estate business, if we have any hope of elevating professional standards. The quality of professionals must increase dramatically as the number of available agents drop. Mirror fogging mentality needs to be put in check and a new focus on professionalism needs to be our guiding light. Here is my simple yet extremely large formula for ending the herding cats syndrome and moving a brokerage into a level of professional service that they have likely never experienced:

  • Restructure as an Employer/Employee brokerage
    • All agents and associate brokers become salaried employees
    • Pay can be all commission, part draw, part salary/part commission or all salary
    • Pay scale commensurate with prior year success
  • Implement real and meaningful management of associates
    • Objectives vs. Key Results metric management
    • Required contract review within 24 hours
    • Management reserves right to accept or reject all contracts written into agreements
  • Create in-house training and require timely participation by all associates
    • Over and above mandated CE for the state
    • Focus on risk management and business building
    • Corporate Culture must be taught
  • Co-op classes with local Community Colleges
    • Can be great for recruitment
    • Sets your associates apart from the crowd
  • Design, Implement and Monitor a true apprenticeship program
    • Sponsoring associate earns bonuses based on apprentice-generated business
    • Sponsoring associates gets a quasi-assistant for a time
    • Company gets to “try out” all new associates before turning them loose on the public
  • Promote associates as being “best of the best” as a result of stringent standards
    • Hiring standards
    • Performance standards
    • Training standards

Once these new structures are in place for a time, they will attract the better quality of agent that you have always wanted but were not always able to attract as a byproduct of your “hire them all and see who makes it” culture.. Clients will soon recognize the shift in quality (of course your marketing will help them to see the light) and this will attract new business.

Now, business management can exist in a real estate brokerage. Employee-agents and employee-brokers will soon assimilate into the new structure. You will likely find that professionals actually appreciate a structured business environment. In fact, they prefer it over a non-structured environment. Before long, you will see that these changes will have a positive impact on your bottom line. Associates will be happier, the workplace becomes less stressful and more exciting and your corporate culture of highly professional associates will move you to the very summit of your markets.

In a very significant development, you will soon learn that your days of trying to herd cats are over. You have become a true business manager and your new business can now operate as a series of business units, each working in harmony with the others in a cohesive movement toward your corporate goals.

Again, I ask; Are you willing to make the changes you know must be made by all in the very near future, or do you prefer to sit on the sidelines and wait for your competition to lead the charge? Do you truly believe that the status quo will reign supreme? Or, as I believe, do you believe we have a critical need today to make serious and timely changes in nearly every aspect of our industry for our own sake and the sake of the consumers?

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