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This article was published on: 10/01/2003

Business Management
How Profitable Is Your Business?

Know what truly contributes to and what erodes the profitability of your brokerage.

BY JIM HATFIELD

Did you know that 10 percent of the 93,000 men and women who worked as real estate brokers in the nation in 2000 each earned more than $143,000 that year, according to the U.S. Department of Labor? If you were among those who did that well, nice going! If not, read on to learn what you can do to increase your profits and keep them from slipping away.

Profitability is how efficient you are at generating earnings, and earnings—or profits—are what’s left after all expenses have been paid, except taxes and interest. For a real estate brokerage, these expenses include agent commissions, employee salaries and benefits, and office expense, which is sometimes shared by agents and sometimes paid entirely by the brokerage.

For any real estate broker/owner, the cost of doing business also involves easy-to-overlook items, such as business meals, phone calls, Internet service, clothing, and car washes—all costs that can erode the profitability of a business that seems to be generating a lot of revenue (the money you bring in before expenses).

It’s important to control costs, of course. But it’s even more important to generate revenue. Being able to do both at the same time is the real secret to having a profitable business.
Here are some suggestions that will help keep your business profitable and, hopefully, move you into that exclusive 10 percent club of the nation’s highest earning brokers.


8 PROFIT BUILDERS

1. Know Your Numbers. “Financial statements are like smoke detectors,” says Drexanne Evers, a master instructor for the NATIONAL ASSOCIATION OF REALTORS Ō Council of Real Estate Brokerage Managers (CRB). “Be sure you review them every month and remain alert for items you need to investigate. Also, analyze the financial impact of potential changes in your business before you make them.”

Evers says it’s important to have an expense budget, and to be sure your agent commissions are attractive yet recover all brokerage costs and produce a profit. Evers also emphasizes the importance of knowing how much business you need to do to break even. “Redesign your commission schedules, if necessary,” she says.

2. Build Your Own Office. This can help control costs and overhead, says Larry LeoneABR, CRB, broker/manager of Realty Executives Area Realtors in Kansas City, Mo. “ Having extra revenue that comes from renting unused space in the building keeps our costs down, as well as gives us a nice investment in the building itself,” he adds.

3. Leverage Technology. Using the power of the Internet can improve your response time, reduce the amount of time you spend on unprofitable tasks, and enable you to build relationships with tech-savvy clients. “My Web site is absolutely the best thing I have ever done,” says Angela Chan, owner/broker of Morning Glory Realty in Nanuet, N.Y., who adds that it has become her best source of leads.

“The key is to follow up immediately and thoroughly on every tip,” Chan says. “Technology can only take you so far. The rest is up to you.”

4. Hire Great People. Talented, hard-working agents and staff are a big reason why any firm is profitable. Smart brokers are always looking for stars, according to Marsha L. Sloan, a broker who started her own business, MLS Premier Properties in Sugar Land, Texas, in 1996. “I’m always looking for someone who’s smart, likable, has the tenacity and patience for the business, and is willing to try to be the best at whatever job they have,” Sloan says.

5. Keep Learning. “The competition is becoming far more sophisticated,” says Barry Hersh, associate director of Steven O. Newman Real Estate Institute at Baruch College in City University of New York. “To stay ahead, you need to improve your professional skills.”
Hersh, who also is a licensed broker and certified real estate instructor, recommends taking courses in areas unfamiliar to you, like mortgage underwriting, environmental issues, and new financing techniques.

6. Be Adaptable. After a kidney transplant in 1998 threatened his ability to run a traditional brokerage, broker Scott Hedges of Michael Scott Hedges Realty Inc. in Lawrence, Kan., decided to downshift and form a buyer brokerage and property management firm. “I’m a champion of survival and adapting to change,” says Hedges, whose firm now manages 100 homes and town homes and is building market share.

7. Mine Your Database. Don’t let potential profits slip away by losing touch with old clients. “I believe maintaining contact with your database of quality clients is of the utmost importance,” says Jennifer Hartsell, broker/owner of Absaroka Realty in Bozeman, Mont. “I give a large Christmas party every year to maintain that contact,” she says. “It’s been responsible for a lot of my
success.”

8. Have a Plan. “You need to have a business plan and a strategy for achieving that plan, and you need to monitor your progress against it,” says Van Davis, president and CEO of Century 21 Real Estate Corp. in Parsippany, N.J. “You need to answer questions like ‘How big do I want to be? How many agents will it take me to get there? What is the per-person productivity I need? And how much money is it going to take for me to have these additional people in my business in order to generate that incremental revenue?’ When you flying by the seat of your pants in a great market, that’s a wonderful thing. But in a normal or difficult market, it’s extraordinarily dangerous.”


8 PROFIT KILLERS

1. Overspending. “Don’t overspend on things that don’t produce revenue,” says CRB’s Drexanne Evers. “One area to scrutinize is advertising. Be sure to keep records on where you are getting your commissions and clients, so you can exploit the advertising that is working and stop ads that aren’ t.”

2. Cutting Too Deeply. “You need to ask yourself, ‘How can I cut costs and still remain competitive?’” says Century 21’s Van Davis. “If you don’t watch out, you can cut the wrong things, and all of a sudden, your agents are walking out and going to the competition because they got ticked off at you.” How to know what to cut? Century 21 offers its brokers a profitability study that shows how much other brokerages are spending in key areas. “It gives them real data, so they can see how much brokerages their size are spending across the board and shows them what they can do immediately to impact their bottom line,” Davis says.

3. Too Much Dead Wood. “Failing to cull under-motivated agents is a recipe for poor profitability,” says consultant Walter S. Sanford of Sanford Systems & Strategies in Kankakee, Ill. “Under-producing agents are a drag on your business,” says Sanford, who recommends his clients set sales and lead generation goals for agents. “It’s important to hold agents accountable for results if they want to stay with your firm. Word will get out that your agency is a place to buy and sell real estate, not drink coffee, and that will have a positive effect on your recruiting because winners want to be around winners.”

4. Overpriced Listings. “I’ve learned that, unless a seller will reduce the price as needed and put that in writing, I’m wasting my time and theirs,” says Beth Austin CRB, GRI, broker/owner of Mill Brook Real Estate in Waitsfield, Vt. “I also don’ ;t negotiate my commission unless I have a past business relationship.”

5. Out-of-Date Technology. Not updating your technology can leave you, well, out of date. “While a brokerage does not need the latest version of every software package, they do need to invest in and use up-to-date systems for listings, marketing, and communications,” says the Newman Institute’s Barry Hersh. Broker/owner Beth Austin agrees. “I have the latest and fastest machines,” Austin says. “I use a laptop. We have on-line zip forms for contracts, thanks to our Vermont Association of REALTORS. I also use a Palm for contact info.”

6. Too Many Alligators. “Too many fixed costs are like alligators—they’ll eat you alive in slow [economic] times,” says the CRB’s Drexanne Evers. “Shift fixed costs to variable costs where possible. For example, pay a manager part salary and part override based on production.”

7. Burned Bridges. Even sales efforts that don’t succeed, including work with clients who end up going FSBO, can lead to profitability later on if you make the most of the opportunity. “If a client decides to buy or sell by owner, I try to give them information that will assist them,” says Absaroka Realty’s Jennifer Hartsell. “As a result, I’ve gotten referrals from them that led to commissions from other clients.”

8. Not Changing Your Game. “Only doing the same old things is a potential profit killer,” warns the Newman Institute’s Barry Hersh, who recommends attending conferences and seminars to get new ideas on how to improve your business, and moving in different social and business circles to build up your list of contacts.


ADDITIONAL RESOURCES

Books
“Real Estate Office Management,” Council of Real Estate Brokerage Managers, Real Estate Education Company, 3rd Ed., 1996. Available to CRB members for $26.95 and non-members for $35.95 by calling (800) 621-8737 or visiting CRB’s Web site.

Online Resources
Council of Real Estate Brokerage Managers (CRB)
A wealth of information for broker/owners is available from the CRB, an affiliate of the National Association of REALTORSŪ. Of special interest is “Financial Planning and Management,” a two-day course with workbook.

Compensation Planning: The Key to Profitability by David Cocks and Larry Laframboise, 1995. Originally published by CRB, this book is now available as a PDF file.


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