There are lots of ways to measure success in life. I guess the most fundamental measurements have to do with happiness, satisfaction, fulfillment, a feeling of accomplishment and worth. We all aspire to those ideals.
In the real estate business we measure success in two ways: Market Share — which we talked about the other day (see previous post) and Profitability.
The important thing about Market Share is to recognize that it is both a goal and a process; or, as we said in the previous post, both static and dynamic. If we are aggressive and positive, we will never achieve our Market Share goals . . . because we will always be adjusting them upward! The important thing is the process: are we always growing our Market Share or expanding our reach into new areas?
Profitability is a different kind of challenge. First we have to achieve it. Then we have to maximize it . . . and we have to know when we’ve done that. Then, if we want to continue to grow, we have to replicate what we’ve done in a new outlet.
Step one in any discussion of profitability in real estate is to define it. This can be confusing because there are many people with strong opinions about it. For example, your accountant wants to cram as much ‘stuff’ as possible into your balance sheet to minimize the bottom line and, therefore, your tax liability. That’s fine; but that’s a different purpose. Your purpose is to measure the success of your business, not the performance of your accountant, so you need to employ a different process, a different formula.
Start with Revenue – the top line. If it comes into your office bank account as payment for the goods or services of your real estate company, it’s Revenue.
From Revenue, we deduct ‘Costs of Sale.’ A Cost of Sale is any financial obligation that is triggered by the generation of Revenue. The best example I can think of is your Franchise Royalty. As a Help-U-Sell member you pay 6% of your Gross Revenue on each transaction as a Royalty (well . . . it’s 5% through Dec. 2010 to help everyone get through the current difficult market). The Royalty is triggered by the production of Revenue so it is a ‘Cost of Sale.’ If you have Buyer Agents on your team that you compensate by splitting commissions as a traditional broker would, their portion of the commission is also a Cost of Sale. It’s Revenue you don’t have available for Expenses because as soon as it is generated it is sent somewhere else to cover an obligation. What you have left after Costs of Sale is Net Operating Income or what’s commonly called ‘Company Dollar.’
From Company Dollar, we take the Expenses. You have the hard expenses of Rent and Utilities, Support Staff Salaries, MLS Dues, etc. and you have the somewhat less fixed expense of Marketing. Interesting: at Help-U-Sell we approach marketing in a very systematic way so that, over time, your monthly marketing expense shouldn’t fluxuate much, becoming a nearly fixed item as well.
A couple of mistakes real estate brokers make when calculating expenses are not paying themselves for their production as agents and not paying themselves for managing the agents that work for them. The result is an inflated bottom line — not an accurate picture of what’s going on in the office. You have to think: what would I have to pay someone to do what I do in the office if I ran away to Tahiti tomorrow. Then, be realistic, crank it back down to earth and plug it in. At Help-U-Sell, if you work with a Buyer and make a sale, you should compensate yourself (at least on paper) just as you’d compensate one of your Buyer Agents. We consider that the Listing belongs to the company and that the system (not the agent) markets the listing, so the set fee you earn when the Listing sells can remain in ‘Company Dollar’ without an allocation to you, the broker, personally.
What’s left after we take out Expenses is Profit (or Loss). It is a dollar amount but becomes meaningful when we convert it to a percent of Gross Income (or Revenue). Take the bottom line and divide it by the top line. What you get is your profit (assuming the bottom line is positive). Traditional brokers often delude themselves about profitability by taking the bottom line an dividing it by ‘Company Dollar,’ but this is folly. It’s not an accurate measurement of the success of their offices because it doesn’t take into account the huge splits they generally pay their agents.
How much profit do you have to make for your office to be ‘worth owning?’ That varies especially when you factor in the human elements we discussed in the first paragraph. But here are some thoughts. If you are Wall Mart, you’re probably happy with 3% -5%: you make scads of money on volume. If you Agnes’s Boutique, you probably need to see something more in the 20% – 25% range: the risk is higher for your small business and you are much more susceptible to market fluctuations. In 15 years of profitability consulting for traditional brokers I never saw anything better than 4%. I had some who tried to convince me they were making 10% or 12%, but they were usually running ancillary service Revenue through the company or not compensating themselves as agents or managers. ‘Oh, I just leave my commission in the company,’ they’d say. ‘Uh-huh.’ Again, that’s fine. It’s just not an accurate reflection of the success of your business.
My goal for Help-U-Sell offices is 15% – 20%, figured properly. That’s a successful office and a good income. It’s also very attractive when it comes time to sell your business — something you can do much easier than your traditional broker counterparts because you build your Help-U-Sell business on systems, not personality. If you do it right (and the new ownership doesn’t monkey with it!) the business should continue to function long after you’ve gone away.