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.