A pyramid scheme is a business model that involves promising participants payment for enrolling other people into the scheme rather than really supplying any real value to the public. The business model is unsustainable and eventually collapses when the public realizes that they are not receiving any real value for the amount of money being paid. Pyramid schemes are a form of fraud.
While real estate agents do provide a service to the public, the business model employed by every larger real estate brokerage firm is akin to a pyramid scheme. Even though a service is provided, the scheme is built upon the overcharging for those services. Instead of charging the public a fair price, larger firms charge the public 5-6% of the sales price as a commission. Thus, there is no "real value" provided to the public and the overcharging of the public establishes the foundation of the scheme.
The next element of the pyramid scheme is to enroll participants into the scheme with promises of lucrative payments. Larger firms recruit as many people as they can as quickly as they can. In most cases, these firms will hire anybody that holds a license to sell real estate. These firms do not care about background, experience or qualifications. Their primary concern is to get bodies to help spread the scheme to a wider array of the public.
Like most pyramid schemes those at the top of the pyramid show their recruits just how successful they have been in selling the scheme to the public. They convince these recruits that they can be equally successful by first joining the scheme and then recruiting other agents to help grow the scheme.
The next element of the scheme is for the participants to convince the public that they will receive real value by hiring their firm. They often use their size, which is the very essence of the success of the scheme, as a selling point for their services. Larger firms will, without support, tell people that their size will help get their property sold faster or that they will be able to secure a better deal for their buyers.
The participants in the scheme will prey upon their social networks, friends and family to help perpetuate the scheme. They will use the trust established through their relationships to convince their social network, friends and family that they are receiving real value for the 5-6% commission. All the while these participants know that the services can be provided for less and in fact are provided for less by other firms.
Like every pyramid scheme the large firm real estate brokerage model is unsustainable and will eventually collapse. As the public becomes more knowledgeable about the true value of the services provided, the public will begin to question the participants in the scheme. As more and more people lose confidence in the participants in the scheme and less and less fall victim to the scheme, the dollars necessary to perpetuate the scheme will disappear. As with any other pyramid scheme, once the dollars dry up the pyramid will topple.
It is amazing that the pyramid has lasted as long as it has.
At Flat Fee, we don't believe in the Pyramid approach. We work with an honest business model to provide the best real estate services for both buyers and sellers. To learn more about Flat Fee, or to contact us, click here.