Pricing Clinic 1: I’m Just Gonna Wait

‘So, according to the Market Analysis,’ said Broker Al, ‘we should price your home between $275,000 and $285,000.’

There was a long pause. Bob and Carol slowly sat up and exchanged concerned glances. Although it seemed as if a decade had passed, Al said nothing. He knew this was a closing situation and remembered what Tom Hopkins had told him to do at times like this: Shut Up!

Finally, it was Bob who spoke. ‘I know the market has dropped . . . I mean, this place was worth about $400,000 not too long ago. We just can’t afford to lose that money.’ He looked back at Carol. She was nodding. Bob continued, ‘I think we’re just going to wait until the market comes back.’

Another long pause; but this time it was Al who slowly sat up.

‘I know it seems like you lost a lot,’ he began, ‘ But, truth is: you gained.’

‘Gained?’ asked Carol, ‘How do you figure?’

‘Here, let me show you.’ Al pulled two laminated sheets from his clipboard.

‘According to the National Association of Realtors,’ he began, ‘Trade up buyers — that’d be you — tend to buy 50% more home when they move. They spend 50% more than the price of the home they sell.’

‘In your case, using the peak value of your home, that means you’d have sold for $400,000 and probably bought something at around $600,000.’

price1b

‘Whoa!’ said Bob, ‘We can’t afford $600,000!’

‘Of course not,’ answered Al, ‘But back when your home was worth $400,000 that’s probably what your dream home would have cost.’  Carol looked skeptical. 

‘Now,’ said Al,’Let’s assume prices drop 30% . . . which is a good guess, because that’s about right.’  He picked up the second sheet.  ‘Here’s what you’d be looking at.’

  price2

‘Your $400,000 house is now worth $280,000 and you feel like you lost $120,000 — but you really didn’t lose it.’ 

‘We didn’t?’ asked Carol.

‘No,’ replied Al.  ‘Because we’re not really talking about dollars here, we’re talking about value — and that $600,000 house you’ve always dreamed of is now worth $420,000 — a drop of about $180.000.’

‘Oh, we can probably afford that,’ said Bob.

‘Of course,’ replied Al.  ‘And the good news is:  you’re actually ahead of where you’d have been a few years ago.  The drop in value has been greater in your trade up house:  $60,000 greater.  That’s $60,000 you won’t have to finance . . . ‘

‘Oh, don’t worry,’ laughed Carol, ‘We wouldn’t have qualified anyway.’

‘Right,’ chucked Al, ‘But that additional $60,000 could mean as much as $115,000 in mortgage payments over the life of a typical loan.’ 

‘So, I guess you’re telling us to go ahead and take the hit now?’ asked Bob.

‘It’s not really taking a hit,’ answered Al, ‘It’s taking advantage of an opportunity.  After all, your dream home will never be less expensive than it is right now.  Despite what you read in the papers, this is actually a great time to buy!’ 

This was followed by another long pause, one that was far less uncomfortable for Al.

 . . . to be continued . . .

How Ordinary Brokers Mistake Cash Flow For Profit

It’s darn hard for a broker to make a profit in the ordinary (traditional) real estate business.  I know this because I spent years working for one of the large national franchisors specifically to help their franchisees find ways to become profitable.  I worked with hundreds of brokers and learned to dissect their financial statements and make recommendations that might help increase the bottom line.  It was a futile effort.  Once brokers started averaging less than 30% in Company Dollar, there was little hope there would be much left after expenses.

Many of the offices I saw made no money at all.  Most bumped along at between 1% and 3% profit.  And a few — just a few– approached 5%.  They’d usually protest when I gave them the bad news.  ‘What do you mean, I’m not profitable?  I got money in the bank!  I pay my bills!’  What they had was cash flow — not profit — and there’s a big difference.  Cash flow is just the money a business kicks out from a variety of sources.  Profit is a measure of a business’s success.  Successful businesses are profitable.  Failing businesses are not.  And the problem with traditional brokers was their business model:  it was broken.

Time and again, I’d ask for financials and receive these fairy tale statements that had seemingly  been created in never-never land.  Filled with magical thinking, they usually showed piles of cash at the bottom line . . . until I started straightening them out.  As a refresher, here is how a real estate office looks at profit:

  • Gross Commission Income
  • Less Cost of Sale (which includes Agent Commission Expense and Franchise Fees)
  • Equals Company Dollar (Net Operating Income)
  • Less Expenses (Rent, Marketing, Utilities, etc)
  • Equals Profit/Loss

And here are a handful of the most common things traditional brokers do to their P&Ls to hide the fact that they make no money:

Basing profit on Company Dollar, not Gross Commission Income.  Doing so can make a 1% profit look 5-10 percentage points higher.  Just a reminder:  Profit(%) = the bottom line divided by Gross Revenue, not by Net Operating Income. 

Not paying themselves for performing the management function.  Most brokers run around all day long, cleaning up their agents’ messes, solving their problems, deal doctoring, training and recruiting, recruiting, recruiting.  Few ever budget compensation for that massive task.  I insisted they build in a salary for themselves equal to what they’d have to pay someone else to do this job– even if they never write the check.

Not paying themselves as an investor.  Most brokers sink thousands into their businesses getting them open and to the break even point.  That’s money they could have invested anywhere else . . . and gotten a return.  I insisted they build at least 8% Return on Investment into their income statements.  When they’d protest I’d challenge them to go out and find someone else who would loan them an equal amount for that kind of return. 

Not paying themselves for personal production.  Over and over they’d say, ‘Oh, I just leave my own commissions in the company.’  Wrong.  You pay yourself on the same basis you pay your top agent.  If, after doing so, there is not enough money left to pay the electric bill, you invest more money into the business. 

Attributing ancillary sources of income to the real estate business.  Title, escrow, mortgage, insurance, termite and on and on.  I actually had a group of California brokers tell me they never intended to make any money in their real estate operations.  They just used the real estate office to generate business for their ancillary services!  Anybody who would intentionally take on the risk and liability of a real estate company with no intention of making a profit is . . . well:  there’s a new definition of insanity for you. 

Not too many years ago I was doing a project for another one of the large nationals.  I was in a meeting with some of the execs when someone came into the room, fresh from a meeting with a group of their top brokers. 

“How’d it go?’ she was asked. 

‘Not too good,’ she replied, ‘They’re all struggling with profitability.’ 

‘Well, did you show them how to charge a transaction fee?’ 

I had to bite my tongue.  If your business model is so messed up that you have to charge your customers a fee for handling their transaction in addition to the commission you charge them to handle their transaction . . .  

These are just a few of the many reasons I fell in love with Help-U-Sell.  Here I found brokers who were making a reasonable profit and delighting customers at the same time.  They were controlling the biggest drain on income most real estate offices face, Cost of Sale (which includes agent commission expense).  Company Dollar was greater and so more cash fell to the bottom line.  In Help-U-Sell, brokers had a way to charge less  .  .  . and make more.