Zillow’s Move to Salaried Real Estate Agents

Patricia Sherlock

 

Recently, Zillow announced that it was hiring its own employees to be real estate agents. While Redfin pioneered this approach, other firms such as Opendoor and Offerpad are also hiring agents for their new brokerage services. Mike DelPrete, a well-known real estate tech strategist, observed, “All the largest real estate disruptors are moving in this direction — that’s nearly $35 billion in enterprise value pushing in this direction. It’s a megatrend that’s possible, but not advisable, to ignore.” This raises the question: Should mortgage origination follow this trend?

There are a few reasons why mortgage managers seem reluctant to abandon the variable cost sales structure that has long been dominant in our industry. A number of managers still believe a salesperson on a 100% commission will work harder for the customer and provide better service than a salaried employee. Some managers also falsely assume that if there is no volume, that a variable cost originator does not cost the lender anything. In my opinion, the real reason is that no mortgage company wants to be the first to change the industry’s approach to compensation.

So, why are real estate firms shifting to salaried employees? According to DelPrete, there are three reasons companies are moving in this direction:

 

  1. To deliver a consistent consumer experience
  2. To gain greater operational efficiency
  3. To achieve better economies of scale

A closer look at each of these reveals important insights for mortgage managers. First, delivering a consistent consumer experience is a primary goal for sales executive teams. While mortgage firms have taglines that tout excellent customer service, the reality is often very different. The Consumer Financial Protection Bureau receives more than 30,000 complaints a month about lenders!

Providing a great customer experience across the board is structurally impossible when employees are basically independent contractors who can leave for an extra basis point. The quality of the customer experience varies greatly depending on an originator’s knowledge and skill. According to recent research from Stratmor and the MBA, the majority of originators are content with being average producers. Average originators translate into an average customer experience.

Second, operational efficiency is also a target for mortgage firms. But again, it is hard to be efficient when originators are being courted by the competition with exorbitant sign-up bonuses and the promise of greater payouts. Senior managers often feel they have no choice but to cater to the sales force because originators can leave so easily. Here’s the rub: If the only thing keeping an originator in a position is the compensation plan, the employer is not doing their job in providing value to the salesperson.

Third, when lenders scale their origination efforts with quality producers, they can reduce costs. Unfortunately, without a repeatable process for sales success, originators cannot deliver a stellar customer experience. An excellent CRM system will not bridge the gap between top producers and average originators in terms of how they interact with customers. Installing a uniform sales process is difficult when employees can quit if they don’t like what management is requiring them to do.

For real estate companies moving to a salaried pay structure, it comes down to control. A variable pay structure makes it harder for companies to deliver a consistent customer experience, operate more efficiently, and achieve economies of scale. By transitioning to a salaried environment, real estate firms can take control of factors that ultimately impact profitability. What will the mortgage industry response be?

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