They Don’t Call ’em BROKErs Fer Nuthin’

You are a real estate broker, an ordinary real estate broker – which means you charge sellers something like 6% of their homes’ sale prices and hire a bunch of agents to work in your behalf.

Since the day you started learning about this ordinary business, you understood that the way to build your business, the way to grow and make a healthy profit was to recruit more and more agents.

Agent’s, you learned, come to you with their own sphere of influence, their own un-tapped client base.  Every time you add an agent you acquire the ability to pocket some of the dollars that will fly when he or she sells something to their family, friends or neighbors.

You attended seminars where you learned you weren’t actually in the real estate business, you were in the people business; and your single most important task was to recruit!

You lusted in your heart over 500 agent offices!  You bought mahogany desks and Herman Miller chairs in hopes of attracting more and more agents.

You also made adjustments in your commissions splits to make your office more competitive on the recruiting front.  You started brand new, ‘green’ agents at 65%.  After 3 closings, they went to 70% and then more as they did more and more production.  You even had a 100% program that kicked in for the balance of the year once an agent generated $24,000 in Company Dollar.  Your average commission split to agents is 75%.

All of this emphasis on recruiting has netted you 30 agents!  Very good!  So . . . how’s that workin’ out for ya?

Because you have a mix of new and experienced agents, your average per person productivity is 8 closed sides a year (about industry average).  That’s .67 closed sides per agents per month.

Since your average sale price is $300,000 and your average commission % per side is 2.65%, your gross per closed side is $7,950.

Because you average paying your agents 75%, you get $1,987.50 of that!  Since your agents average .67 closed sides per month, you can count on $1,332 per agent per month and since you have 30, that’s almost $40,000 in company dollar each month!

Here’s a breakdown of your monthly expenses:

Franchise fees (6%):      $9,587

National Ad Fee (2%):  $3,196

Office Rent:                      $6,500

Dues/Memberships:        $300

Office salaries:                $6,500

Your salary:                     $5,000

Insurance:                            $500

Equipment/supplies:      $800

Utilities:                               $600

Vehicle Expense:             $800

Miscellaneous:              $1,000

Marketing:                      $4,000

Total:                              $38,783

All of your hard work has netted you $1,217!  That’s a 3% profit!  I know that sounds really low.  Any reasonable business person would be looking for 15% at least, right?

Well . . . I’ve looked at the profitability of ordinary real estate companies for years – 30 years to be exact.  There were 10 years at the end of the last Millennium that I looked at balance sheets a lot.  The very best offices I saw made between 3% and 5% in profit.  Most made 0% and many lost money every month.

But the solution to your problem is right before your eyes!  Obviously, you just need 3 – 4 new agents!  Your costs will not go up significantly and 3 more agents will add almost $4,000 to your bottom line!

But, wait a minute.  Currently 35% of your gross is being generated by your top producer, Sally.  She’s been with you for years and loves you!  But your biggest competitor just converted his office to a new franchise that pays agents a residual based on the production of the agents they recruit.  Sally’s just announced that she’s leaving – she’s going over there and is planning to build a nice team of agents.  And where are most of these agents going to come from?  Right:  your office.  That’s where her closest friends are.  I think you can expect your gross to drop by 50% in the coming months.

You might need to start looking for a second job.

This nightmare is sooo common in our industry.  I’ve seen it over and over again.  And the problem is right up there at the top.  The ordinary broker believes that he is in the recruiting business, that hiring agents is the way to expand his business and profitability.  History clearly shows that that’s simply not true.

If you want to be successful in the real estate business, GET OUT of the recruiting business.  GET BACK INTO the real estate business.  Expand your business by:

1.  Having a superior offer for consumers.  It can’t be nebulous stuff like professionalism, quality service, a personal touch or anything like that.  You have to give them MORE than your competitors and charge them LESS.

2.  Becoming a Marketer.  Market your superior offer aggressively to homeowners in your target market.  Track meticulously, adjust constantly, and own the leads that are created.

3.  As your business grows (and it will), hire agents ONLY when you have more business than you can handle with your current staff.  Hire them not to save you, but to help you take care of the business you have created.  Pay them accordingly.

And if you’d like to make this shift easily and with excellent support, become a Help-U-Sell broker.  That’s who we are and how we operate.

How to Fix Your Broken Real Estate Company (before it’s too late)

Mr. Richard Feder from Fort Lee, New Jersey writes:

‘Dear Set Fee Blog.  I have been reading your posts for some time and am convinced that my current real estate company business model – what you call ‘Ordinary’ – is antiquated, out-of-touch with consumers, and, well . . . it sucks.  But I don’t know how to go about changing it without firing all of my agents, shutting the doors and starting over.  Help me, please.  Tell me how to go about abandoning the tired old agent-oriented model and converting to a shiny new consumer-centric,  set-fee model.’

Dear Mr. Feder.  Thanks for writing and, believe me, you are not alone.  I am considering starting a 12 step program for Ordinary Brokers and I’m sure the meetings would fill fast.

But first, let’s understand that the kind of change you’re talking about is HUGE.  It’s not just a simple matter of altering how you charge consumers or how you offer your menu of services.  Even a well-studied outsider would probably screw it up without expert coaching.

I am a good example.  I came to Help-U-Sell in 2004 as an outsider, hired to do a job:  upgrade the company’s University.  It took three months before I had all of my old paradigms out of the way and could see Help-U-Sell for what it really is:  a bold new way to deliver excellent service to consumers while making a healthy profit in real estate.  You have to question all of your assumptions, all of your beliefs about how the business works.  And you have to change from the core outward.  ‘ Sell Fast – Save Thousands’ is just the outward expression of a ton of tweaking behind the scenes. Nonetheless, here is what I suggest:

Start carefully monitoring the lead flow in your office.  Where are the leads coming from?  What (and who) is generating them?  What portion of the incoming leads are coming from company sources as opposed to agent sources?  You want to consider this to know how much business your company is likely to do in the event all of your agents pack up and leave; which is a possibility if you go through with the change.

By the way, ‘carefully monitoring the lead flow’ means to monitor it like it’s never been monitored before.  You want to get source information on every single inquiry, whether contact information is gotten or not.  You want to know why everyone, even the caller who was a nutcase or the one who simply hung up, called your office.

I don’t think you can realistically expect your current staff, and certainly not your current agents to do this.  My suggestion:  hire someone (or convert your best office admin) to handle ALL phone and Internet inquiries.  One person through whom all incoming traffic is routed.  This person collects source information, handles the inquiry, collects contact information and then turns the lead over to you for assignment to the appropriate agent.  By the way, if yours is a big office, you probably need more than one person doing this important function.

Try to maintain your sense of humor as you review the data your new call coordinators are collecting.  You’ll probably discover that many of your agents, in fact, most of them, have been living off leads YOU generated.  You’ve been paying them huge splits to generate their own leads, do their own marketing and so on . . . but it has been YOUR marketing, your investment in signs, facilities, web presence, and advertising that has been causing consumers to contact the office.  Surprise, surprise!  It’s time to wake up now.

As an aside, I once did a modified version of this exercise with an Ordinary broker who had a ‘Top Producer’ who did about 30% of the office’s production.  The broker spent most of his days living in fear that the agent would leave.  When we did the analysis we discovered that more than half of that agent’s production came from office-generated leads.  Then we put a pencil to the company dollar she generated (after the huge split she was paid), deducted a factor for what it cost to produce those company-generated leads and discovered that the broker was probably losing money every time TP closed a deal!  He was making more from some of his less productive people.  He said goodbye to TP then watched as everybody became more productive and his bottom-line improved.

Start calculating what it actually costs you to market a properly priced listing.  Don’t consider what you have to pay a listing agent.  We’re only looking at hard costs here:  how much marketing, how many days of office operation and so on.  Be aware that whatever number you get today may be different tomorrow.  Cost to market a listing varies in direct proportion to days on market.  If your marketplace slows and DOM goes up, so will your cost to market a listing . . . so take your figure and add a ‘fudge’ factor – say 25%.

Now consider:  is there a way to effectively accomplish the successful marketing of a listing without paying an agent 70% or more?  This involves carefully examining what a listing agent actually does.  We could go through the whole laundry list here and then we could demonstrate how almost all of it could be done much less expensively . . . but instead, let’s just acknowledge a fact you already know to be true in you gut:  You’re paying that agent 70% NOT to sell the listing, but to GET the listing.    It’s the damndest thing!  Today, we pay listing agents at closing not for getting the listing sold – listings, properly priced and plugged into an effective marketing program pretty much sell themselves – but instead as a reward for bringing business into the company.  In other words:  for getting the listing.

Now your task is becoming clear.  You must create marketing and administrative systems for standardizing the marketing of your inventory.  You have to take marketing BACK from your agents.  You need to design it, orchestrate it, hire the admin staff to get it done.  Marketing has to transition from being idiosyncratic – created willy-nilly but a pack of individual agents who have widely different ideas about marketing – to being automatic . . . standardized, monitored, controlled and adjusted by you.  In your new universe you’ll be plugging your listings into your already operating marketing system, not designing a whole new marketing program for every listing you take.  Its a very big shift.

Then you have to take BACK the ‘getting’ of  listings from your agents.  You and your team of assistants now need to be in charge of this inventory procurement function.  I am aware that the faint of heart, having read this far, are now shutting down their computers. Oppressed by their own paradigms, they cannot envision a world in which listing inventory is secured without agents.  But I assure you it can be.  It starts with an examination of your seller offer:  what do you have to offer that is, far and away, better and different than most of your competitors.  If – like most real estate brokers – your offer is identical to every other broker’s, you have a problem.  You’re going to have to refine who you are and what you have to offer until you stand out from the crowd and are thus, easy to spot by consumers.  Then you must market that offer.

Once your offer to sellers is fine tuned and really different, you will discover that it is much easier to present.  Your listing consultation will look something like this:

  • Tell me everything I need to know about your move
  • This is who we are and how we work
  • This is what makes us special and different
  • Here is what our past clients say about us
  • This is how much we can realistically sell your house for and what you’ll likely net
  • Sign here

If you take out all of the fluff and show-biz most listing agents trot out during their presentations, this can be accomplished in, oh, 30 minutes of less.  When you have a better deal to present, you don’t need the smoke and mirrors, the fluff and show-biz to get the listing.

Up until now, most of this could be done in stealth mode.  You could do your research and preparation without telling your agents.  But now that all the ducks are in a row, everything is lined up and ready to go, it’s time to call a special meeting.

Present the state of the company – get right down to profitability.  I don’t know what yours is, but if you’re like most Ordinary brokers your company is making less than 5% profit – which is obscene considering the risk owning a real estate company involves.  Get their buy-in that that’s a pitiful bottom line for a fine real estate company like yours.

Then present your solution:  you are going to become a lead generating machine, which means taking back marketing and investing in it heavily.  They will like that.  But, you’re also going to take back the listing function.  You will no longer need agents to find consumers – you’ll be doing that with marketing.  What you will need agents for is handling the buyer leads your marketing and your listings generate.  You anticipate that a good buyers agent in this new company you are building should close in the neighborhood of 20 transactions this year – all basically fed to them by the company marketing program.   You may now invite all who are not interested in this opportunity (which will be most) to leave.  Now, interview the ones who are left.  Since you will be shouldering the financial burden for lead generation, who on your remaining staff would you trust with the important task of converting them to sales – for a much more reasonable 50% split.

At the end of the day, your office population may have dropped from, oh, 50 agents and 3 admins/assistants to 5 agents and 4 admins/assistants.  You can now begin to look for smaller, less expensive space.

By the way, all through this process, it’s a good idea to contact Ron McCoy at Help-U-Sell for advice and to begin a conversation about becoming part of the family.  The Brand will help you through the transition and position you properly for maximum impact in your marketplace.

As you start to walk down this new path, you will begin to feel as if you are waking up from a very long nap.  Real estate will look new and it will be exciting again. You will be filled, even driven by a new sense of purpose:  the mission.  You’ll work harder and have more fun than you have in years.  And, in six to nine months, your personal bottom line should be way ahead of where it is today.

(Un) Balance Sheet

Imagine an Ordinary (Traditional) Real Estate Office:  Acme Realty . . .

Average Sale Price:  $300,000

Average Commission per closed side:  3% ($9,000)

20 agents averaging 1/2 a closed side per month (some do more most do less — and the ‘average’ is way above what’s typical today)

Average Agent Commission Split:  70%

Expenses:

  • Rent:  $5,000
  • Utilities: $500
  • Office Equipment:  $500
  • Supplies:  $500
  • Admin:  $4,000
  • Management:  $7,000 (Most Brokers do this job 24/7 and never budget for it . . . which is voodoo economics to the max)
  • Dues:  $300
  • Conventions and Training:  $500
  • Insurance:  $300
  • Marketing:  $5,000
  • Total:  $23,600/ month

Production:

10 closed sides/month X $9,000 GCI per closed side = $90,000 GCI/month

Less 8% Franchise Royalty + Mass Ad Fund:  $7,200 (and you’d be crazy to start a business today without a recognized brand and support)

Less 70% to Agents:  $57,960

Net Operating Income (Company Dollar):  $24,840

Less Expenses: $23,600

Net Profit, Before Taxes:  $1,240 = 1.37% . . . which could easily be wiped out if the copy machine breaks or one of the closings falls through.

Is there any question that the ‘Ordinary’ real estate business is broken???

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.