There’s evidence
all around us---many real estate marketplaces are slowing
down. Thank heavens for the past decade of off-the-chart
sales, record numbers of new American homeowners, and
the millions of commission dollars that have exchanged
hands. One would assume that the financial state of brokerages
post-boom would be as rosy as double-digit home appreciation.
Unfortunately,
the opposite is true. Brokerage profits per transaction
side are down substantially, the cost to retain the brightest
and best agents is on the rise and holding times for inventory
are rapidly increasing in many markets. Over time the
latter fact alone has the ability to add twenty-five percent
or more to the cost of carrying, servicing, and maintaining
a listing---even if it never sells! Couple that with
foreclosures at a thirty-year high (according to the third
quarter, 2002, report of the Mortgage Banker’s Association)
and you have a time bomb waiting to explode. The reality
is that if our traditional real estate listing/selling
model didn’t produce strong, sustained profitability for
most brokers in past years, it probably never will. It’s
time to turn our attention away from solely focusing on
gross percentage commissions to methods that help us trim
expenses while moving forward with new, more cost-effective
consumer-centric business models to positively impact
the bottom line on a consistent, permanent basis.
THE FIRST
STEP TO GREATER PROFITABILITY: ELIMINATE “FREE”
The categories
of free in real estate are legendary: free property
showings, free open houses, free broker opens with “free”
lunches and the list goes on and on. While we may have
trained consumers to expect free, not all trust it.
In fact, when I polled more than two hundred consumers
in my 1998 “Frugal HomeOwner® Survey” many stated that
they would pay for services we currently offer for free
if they could obtain them from an “unbiased party without
the pressures of being expected to list or sell something
to obtain the information they needed”. In other words,
our traditional sell-something-before-we-get-paid approach
has many consumers leery of the salesmanship techniques
we use.
It boils down
to the fact that “free” in any industry is an oxymoron.
Each and every activity/service carries its own degree
of overhead for running the enterprise including insurance,
marketing, employees, etc. In fact, one of the most abused
services is the amount of supposed “free” services squandered
by real estate salespeople. Until each one of us determines
what an hour of our time is worth and be willing to write
a check for every hour spent (for most of us it’s between
$75 and $200+ per hour), we will misguidedly attempt to
compete with “free”. As seen in previous recessions,
many real estate people are forced to leave the business
not solely due to a lack of sales, but from the sheer
cost and mismanagement of “free”.
THE SECOND
STEP TO GREATER PROFITABILITY: DETERMINE YOUR BREAK-EVEN
PER TRANSACTION SIDE
Before you can
prudently add profit centers and/or trim costs, you need
to identify your break-even point for transaction sides
in your current listing/selling business. Here’s the
formula: 1) Divide your gross annual expenses by the
number of transaction sides you’ve closed over the past
year (i.e. a listing is one side, a sale a second). For
example, say you had $47,200 in gross expenses and did
a total of forty transaction sides. $47,200 divided by
40 = $1,180 break even per transaction side. In other
words, until you exceeded $1,180 in revenue per transaction,
there was no profit. And to make it worse, it’s not just
bottom-line profit that’s lost---you’ve been paid nothing
for your time! This is one of the most overlooked aspects
of traditional real estate sales---not penciling in a
satisfactory line item to reimburse the most precious
commodity we have and are hard-pressed to replace---our
time and expertise. The good news with new business approaches
like fee-for-services is that your personal time plus
profit is factored into every activity as a line item,
not an afterthought. It’s indicative that new business
approaches could generate stronger bottom-line profit.
THIRD STEP
TO GREATER PROFITABILITY: DETERMINE WHAT PERCENT
OF YOUR GROSS INCOME IS ATTRIBUTABLE TO EXPENSES
VS. YOUR TIME/PROFIT
Another gauge
of where you are financially is to compare what percent
of your gross income is attributable to expenses versus
reimbursing your time and profit. Let’s say that your
annual gross income is $100,000 and your annual expenses
are $47,500. When we divide the expenses by the gross
income, we find that they’re 47.5% (rounded to 48%) of
your gross income ($47,500 divided by $100,000.) In other
words, less than half of what you generate goes to pay
expenses---that’s pretty good in an industry where expenses
often eerily up tick to as much as eighty percent of gross.
FOURTH STEP
TO GREATER PROFITABILITY: DETERMINE YOUR RATE PER
HOUR
While we admit
that our industry has never been stellar in placing
proper “time value” on the personal services we render,
here’s the way we typically (albeit erroneously) calculate
what we’re worth per hour. We take the gross amount
we make and divide it by the total number of hours we
worked during the year---and it turns out to be a negative
number! How can that be? Simple. We’re working too
many hours doing things that 1) don’t properly compensate
us; 2) should be done by someone working at a lower
pay scale; and/or that 3) shouldn’t be handled/accomplished
by us (or someone else working for us) at all.
Using a type
of zero-based budgeting approach, the following formula
is much more likely to help you “get real” about what
one hour of your time is worth:
First: Divide what you want
to make by the number of hours in a year that you want
to work: For example, if you want to make $100,000
per year by working no more than forty-hours per week
for fifty weeks (2000 hours) that would equal $50 per
hour ($100,000 divided by 2000 = $50/hour). We’ll call
this your net hourly professional fee.
Second: Multiply
the net hourly fee by either two or three. Use “two
times” if your expenses were 50% or less (as calculated
in the third step we covered previously). Use “three
times” the net hourly fee if your expenses exceeded
50% of your gross. Since the expenses in the third
step were 48%, your gross hourly fee is $150 per hour
($50 x 3 = $150).
But what’s
the rationale behind multiplying the net hourly by two
or three? In a nutshell, it’s to compensate for not just
your professional fee/talent and profit, but for the cost
of doing business (your overhead) plus down-time, vacation
time, and miscellaneous situations when you can’t be productive.
Much in the same way a wholesale product is marked up
two or more times cost to bring profit in a retail arena,
your net hourly becomes your gross hourly to cover costs
plus profit for your services. You’re safe using two
times your net hourly if your expenses are low; but need
to kick it up to three times the net hourly to cover higher
expenses.
PUTTING
IT ALL TOGETHER:
Now that we’ve
covered four different ways to crunch numbers and evaluate
profitability, let’s apply working examples to beef-up
the bottom line:
ELIMINATE
FREE: The next time you present a CMA and the seller
instructs you with, “Thanks for coming to talk to us today.
We’ll get back in touch with you. In the meantime, just
leave your market analysis there in the pile with the
other twenty three”, I challenge you to retort with your
own rendition of the following: “Mr/Ms. Potential Seller,
I work differently than most other real estate agents.
Like CPAs, attorneys, and other fee-based professionals,
my time and analytical skills are truly my stock-in-trade.
I prepared this CMA to determine approximately what the
home would sell for, but my practice is not to leave the
analysis with you unless you decide to work with me.
If you’d like to purchase it from me, however, it’s available
for $____ which covers my time and expertise to produce
it.” As Dr. Phil McGraw, the Oprah-branded psychologist
says, “The most you’ll ever get is what you ask for”.
GO BEYOND
BREAK-EVEN: RE-THINK EXPENSES/ GET SERIOUS ABOUT
YOUR HOURLY VALUE
Until you
perform your own triage on the amount and type of expenses
you typically incur in a real estate transaction, you
won’t make much of a dent in improving your bottom line.
For two or three sales try evaluating every dollar you
spend BEFORE you spend it. For example, is it really
necessary (and/or wise) for you to hold an open house
on a property that’s not likely to sell via the open
house? Just how much does an open house cost? At an
hourly gross fee of $150, you’ll be spending a minimum
of four hours doing low-level tasks like schlepping
signs and printing flyers. That’s at least $600 in
expenses that make absolutely no financial sense (not
to mention potentially generating no viable leads).
Unless the seller is willing to either a) hold the
open house himself and harvest the leads for you; or
b) pay to reimburse your costs, you’re racking up expenses
that will do nothing but detract from a positive bottom
line.
While it’s enlightening to
uncover how valuable an hour of your time is worth,
it’s a whole other level of guts and gumption to be
empowered by it! Here’s an approach to help you get
comfortable with realizing your value. For one week,
write down every major activity you do and the time
and resources it takes to perform. For example, say
you spend thirty minutes online accessing county records,
followed by another thirty minutes putting the information
into a subdivision analysis for a potential seller.
That’s not only time spent, it’s one hour of your time
at your gross hourly rate of $150. At the end of the
week, determine how many hours you spent on major activities
multiplied by your gross hourly rate. For most agents
this could easily total several thousand dollars. Keep
this figure in mind since we’ll use it again in the
next paragraph.
Next analyze the tasks you
performed to determine: Step 1) How many of the activities
could have/should have been performed by a lower-compensated
assistant and what would you have paid to have them
performed. Step 2) Subtract the answer in step one
from the dollar amount of time YOU spent performing
tasks (your gross hourly determined in the previous
paragraph times the number of hours you spent performing
tasks). The difference is what it COST YOU to do those
tasks yourself!
The end result of your findings
may startle you. Not only are you “majoring in minors”,
you’re wasting hundreds/thousands of dollars per week
by not having someone perform mundane tasks that could
free you up to generate far more hours at your gross hourly
rate. Many of us sacrifice “doing it all” at the altar
of lost profitability year after year after year.
While the changing landscape
of the real estate industry proves ever challenging, the
greatest challenge lies within us---to evaluate what we
spend, why we spend it and how we can positively impact
and improve our own bottom line. It all begins with the
courage to uncover our true value followed by the guts
to ask for it and receive it.
If you’d like to learn more about profitability
and fee-for-services, sign up to take the C-CREC® designation
course at http://www.narec.com/wconnect/wc.dll?jgglogin~newstudent~ccrec
