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Opinion: Disaster is looming

Stakeholders in the real estate industry love talking about disruption and speculating about who or what the next big disruption is going to be.

Well, allow me to provide my best guess – and it may not be what you think.

Technology has played a significant role in allowing our industry to adapt to change. The perfect example is when a global pandemic was declared, and like many industries, the real estate sector adopted new methods of leveraging technology to do the job more efficiently and minimize in-person interaction.

How real estate transactions are conducted continues to evolve, but the business structure of the real estate industry is under pressure for not evolving enough.

The regulated structure in Canada as we know it is quite consistent across the country – with minor regulatory and terminology differences between jurisdictions. A licensed individual oversees the actions of all licensed agents and personnel in the brokerage (in areas where regulation allows for it, larger brokerages may have several people in this role).

For the purposes of this article, we will refer to this individual as the broker. However, depending on the jurisdiction, they may be called the managing broker, broker of record, manager, etc. This individual carries most of the regulatory compliance responsibility and liability related to the actions of those they oversee.

The broker is being tasked with ever more regulatory oversite. Over the years, compliance requirements from the Financial Transactions and Reports Analysis Centre (FINTRAC) and the increasing number of disclosures placed on the industry have been added.

On top of that, there is evolving provincial and federal privacy legislation and the ever-growing complexities related to neighbouring sectors such as tenancy, development and condominium legislation. The pressures on the broker have grown exponentially in a very short period.

Canada’s traditional brokerage business model sees a commission split between the real estate agent and the brokerage. The portion of the commission split paid to the brokerage is meant to cover the costs associated with physical office space, support staff, advertising, brand or franchise expenses and, perhaps most importantly, all of the oversite, guidance and liability outlined in the previous paragraph. The commission split is part of what is used to attract agents to a brokerage, so providing a more favourable split to the agent acts as an incentive for agents to join a brokerage.

And therein lies the rub.

Deemed to be a differentiator for the brokerages, arguably, a low commission split does not give anyone in the transaction a competitive advantage. It may be more enticing for agents to join a brokerage but only at the risk of the industry entering its own race to the bottom.

Equally, a commission split that favours the agent does not provide the agent with a competitive advantage when marketing themselves to the consumer. So, we end up with the broker’s role becoming increasingly important and strained while the brokerage’s revenue cut diminishes.

Add to this the demographics component, and we are entering the territory of disruption like the industry has not seen. In British Columbia, more than 40% of brokers are over 65. Granted, the real estate industry is well known for the retirement age being something far exceeding the average, but this ratio remains staggering. Couple that with a sweeping reluctance of the next generation of licensees unwilling to take on the role, and it quickly becomes evident that disaster is looming.

The amount of responsibility, accountability and liability that comes with the broker role is not enticing for the compensation that brokerages are able to pay based on the current business model.

Succession planning for the broker should be high on everyone’s priority list right now. Nobody is immune to the impacts of a brokerage that is ill-prepared for the sudden or future departure of the broker.

Without a broker, the agents of the office cannot be licensed. Without a broker, the regulator typically has some mandated intervention. Without a broker, the clients’ listing and purchase contracts are disrupted. Without a broker, there would inevitably be chaos.

There needs to be a plan. As a broker, what is your plan for the brokerage if you cannot fulfill your duties tomorrow? What are you doing to prepare for the day you want to travel and enjoy more time with your family?

As a realtor or agent, do you know what your broker’s succession plan is? As an industry, if the regulator were to implement requirements to protect the sustainability of contracts and consumer impact, would we be ready for this?

The succession of the broker role is the largest potential disruptor to the real estate industry in the coming years, especially if nothing changes from the current model.