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Broker to Broker
By Robert Freedman
John Wiley & SonsISBN: 0-471-78318-8
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Boosting Your Bottom Line
Double up associates.
Toughen criteria for higher splits.
Give associates more responsibility for ads-on both content and cost.
Diversify income streams.
Gene Ward, CRS(r), added 15 associates in two years without expanding his office space. How'd he do it? The managing broker of the Lincolnshire office of Woods Bros. Realty in Lincoln, Nebraska, puts two, sometimes three, associates into a single office and also doubles them up in cubicles.
Cozy quarters wasn't the most popular move among the sales force, which numbered 130 at the time, but no one has left in search of solitude, he says. That's because he's made it clear to his associates that such cost-cutting is crucial for his office's survival in today's environment of rising business costs. And now, Ward says, he has the largest real estate office in his market.
At a time when sales associates are demanding greater commission splits and technology and marketing costs are eating more of the company dollar, brokers and managers are embarking on a variety of strategies to grow their profitability. Among other things, they're adding services to boost revenue and shifting more costs to associates. Some are also recruiting rookies to push down the average commission split they pay their associates.
"Our business is so competitive today and has so many more costs than it did years ago that you have to continually evaluate your operations to stay profitable," says Nancy Kinney, GRI, manager of Real Living Premier in Marion, Ohio.
The rise in the average commission split for veteran associates is at a crisis level in many markets, say some brokers and managers.
Years ago, the typical split for veteran associates was 60 percent to 65 percent of commissions. Today it's not unusual for associates to quickly earn 80 percent or more-sometimes as much as 95 percent. "Associates make a lot of money; brokers don't," says Ronda Needham, CRB, who oversees the Highland Park office of Ebby Halliday, REALTORS(r) in Dallas.
To combat the problem, Needham's company makes generous splits something to strive for, not a given. Most new associates start with a 50-50 split, but once they bring in $87,000 in gross commissions their split grows to 80 percent. The split increases to 90 percent once they bring in gross commissions of $260,000. Reaching that level is a reasonable challenge, Needham says, because the average sale price in her market is $583,000.
Chris Harris, GRI, who in 2004 oversaw the main office of Keystone Realty in Reno, Nevada, used a similar strategy for keeping splits down. He scouted real estate schools with the express purpose of affiliating rookie salespeople and quickly brought on 25 new associates at a 55-45 split. Veteran associates received an 80 percent split once they brought in $50,000 in gross commissions.
The result? An immediate jump in the company dollar, from about 22 percent to 27 percent, Harris says. He estimated that the lower commission splits of new recruits more than compensated for the fewer sales they generated and the added training and other costs they incurred. At the same time, given the strong market during that period, even newbies were quickly generating robust sales, as well as showing a lot of loyalty. "The new licensees appreciated what the brokerage was doing for them in terms of training and potential for greater splits," Harris said. "We lost few people."
Harris is now a broker with Coldwell Banker Village Realty in Reno.
Ebby Halliday's Needham is pleased to see associates reach the upper ranks of her tiered commission structure, because it shows they're performing well. But to keep costs down, she shifts some key expenses, including most property advertising, to associates, no matter at what level they're performing.
Her associates are generally amenable to absorbing the ad costs, because "they'd rather have the opportunity to make choices in how their properties are advertised," she says.
What's more, the company uses its big size to negotiate favorable rates for graphics work, so associates can get professionally designed materials at a discount. Plus, her office saves by not having to hire staff to create ads or stock paper. Needham estimates she'll save at least $35,000 annually by contracting with a design company rather than hiring someone to do it.
Kinney of Marion, Ohio, says she practices the meticulous art of analyzing her business-where her sales come from and where her expenses go-to better calibrate her costs. For example, within the past year she's pulled significant amounts of money out of newspaper advertising and plowed it into Internet and cable TV advertising, because those sources were generating more efficient uses of her ad dollars than newspapers.
"We're paying $14 a week for each house we show on a local cable channel. That represents 1,200 potential viewers of the listing a day and our biggest value," she says. "A lot of people in our market shop for houses on cable."
Expand Your Interests
Cost-cutting is an obvious source of increased profits, but many companies are looking at the revenue side, too, diversifying their services to reduce their reliance on sales as their main income source.
Ancillary services account for 28 percent of Realty Executives of Phoenix's bottom line, says John Foltz, CRB, president. Specifically, the company generates revenue through mortgage and title services, even though it doesn't own the providers. Instead, it works through affiliated business arrangements with partners and takes a percentage of their net revenues. "That way we don't have to become experts in mortgage and title services," says Foltz. His company generates gross annual sales of some $5 billion and 30,000 transactions in 17 offices.
Long & Foster Real Estate, the mid-Atlantic regional giant headquartered in Fairfax, Virginia, takes a different approach to ancillary services. The company, which has about 10,600 associates in 200 offices in eight states and Washington, D.C., owns a mortgage company with Wells Fargo, the banking giant. The income adds "a lot" to Long & Foster's bottom line, says Wes Foster, president.
Foster's company also partners with a title company and owns an insurance business, both of which add some but not a huge amount to company revenue.
For big companies such as Realty Executives of Phoenix and Long & Foster, offering ancillary services is largely beyond debate. Consumers have come to expect large real estate companies to offer something close to one-stop shopping. But adding ancillary services can pay off for smaller companies, too.
Kerry Veach, broker-owner of RE/MAX Southern Realty, a three-office brokerage in Fort Walton Beach, Florida, launched a title company two years ago. The move is paying off well, generating about 10 percent of his company's bottom line this past year, he says.
Associates can buy stock in the title company in amounts based on the volume of sales they generate, giving them a stake in the affiliate's performance. The title service has about a 40 percent capture rate of the sales the associates bring in.
For the smallest brokerages, ancillary services may not be in the cards, unless they partner with an affiliated business. And even then small brokers may just prefer to stay focused on brokerage services. "I've been approached with opportunities to add services over the years, but I like to keep my operation as simple as possible," says Lydia A. Odle, broker-owner of Lydia A. Odle, REALTOR(r), in Alexandria, Virginia, with 11 sales associates.
Whether you're running a one-stop shop or a boutique that focuses exclusively on brokerage, boosting profits requires constant vigilance over your operations. Analyzing every expense and every potential new revenue source is the surest path to greater profits. -Robert Freedman, with additional reporting by Pat Taylor. This piece originally appeared in the July 2003 issue of REALTOR(r) Magazine.
SIX SMALL WAYS TO ACHIEVE BIG PROFITS
How are brokers and managers maintaining a healthy income? Here are a few ideas.
1. Float commissions. Every day John Foltz of Realty Executives of Phoenix deposits funds used to pay commissions into an interest-bearing account. That way, the funds draw interest between the time a commission check is written and the associate cashes the check. The practice contributes five percent to his company's bottom line.
2. Balance your associate mix. Nancy Kinney, GRI, manager of Real Living Premier in Marion, Ohio, says concentrating on a niche market can gain you visibility in that market. But it can be risky to your cash flow if sales in the niche take a turn for the worse. Affiliate associates whose market specialties fill gaps in your ranks. Several strong associates working middle- market sales can keep your cash flow strong, while a few strong performers in high-end homes can generate nice profits. 3. Purchase advertising, such as classified space, in bulk to obtain price discounts. Parcel out the costs with a small markup to associates who advertise their listings in the ads. Foltz's company charges his associates $5.50 per line, a nominal increase over the bulk rate the company receives.
4. Charge consumers a set transaction fee. It helps offset administrative costs per transaction, says Wes Foster of Long & Foster Real Estate in Fairfax, Virginia. "It's rare that consumers don't pay the fee," he says. But if they don't, the company and salesperson share the cost. 5. Manage risk. Apply tough, standardized quality control measures to each transaction to reduce liability and costs for E&O insurance and litigation, suggests Foltz. His company maintains a staff of three who review every purchase contract to ensure all disclosures and other requirements are met.
6. Charge online referral fees. Foltz charges $800 to associates who receive qualified leads from the company's web site. The fee applies only to leads generated from houses not listed by the company but made available for viewing on its Internet Data Exchange (IDX)-enabled web site, and salespeople pay only if the deal closes and they receive a commission.
Brokerage Financial Management Courses
The Council of Real Estate Brokerage (CRB) Managers, an affiliate of the National Association of REALTORS(r), offers a two-day financial management and planning course that provides help understanding financial statements, forecasting revenues, and developing an expense budget, among other finance areas. Learn about this and other CRB financial management courses, including instruction online and on CD-ROM, at the CRB web site, crb.com. You'll find information on the group's courses under "Education."
Taking Control of Your Accounting
Digitalize your bookkeeping.
Stay abreast of ever-changing business tax deductions.
Know which IRS business-entity structure makes sense.
Orson Woodhouse, GRI, broker-owner of Woodhouse Group in Boise, Idaho, is paying 50 percent more for accounting services than he was at the end of 2002. He couldn't be happier.
That's because he replaced his old accounting firm with one that brings real estate and small-business experience to the table. His experience shows how critical it is to understand the ways accounting and tax issues can impact your bottom line.
The new firm proved its worth quickly by saving Woodhouse money on his taxes and creating more efficiency in his operations. "I didn't have a bad experience with my old firm," says Woodhouse, whose company specializes in new-home sales and relocation. "It just wasn't leading-edge in our industry."
Right off the bat, the new firm-Balukoff, Lindstrom & Co., in Boise-replaced Woodhouse's manual bookkeeping system with Quick-Books, which enables the brokerage to tabulate everything electronically, then e-mail quarterly and annual reports to the accounting firm. When there's a problem, the electronic system makes it easy to make changes. "We've seen a fivefold increase in bookkeeping efficiency," Woodhouse says.
The accounting firm also recommended changes in how Woodhouse categorizes expenses, saving him money on his 2002 taxes. Among other things, it recommended that Woodhouse take advantage of tax laws favorable to real estate professionals for incomeproperty investment losses. "Practitioners can write off 100 percent of their income-property losses, an option not open to passive investors," says Michael Lindstrom, who was president of Balukoff when it worked with Woodhouse. Lindstrom is now a tax partner with Eide Bailly LLC.
The firm also recommended strategies that make sense for brokerages with independent contractors and a handful of employees. Among them:
Asset growth. Changes to federal deduction laws enacted a couple of years ago enable business owners to deduct $100,000 a year, up from $24,000, on business assets such as software. "We recommended that Woodhouse spend money on assets rather than pay taxes," says Lindstrom.
Family savings. Federal laws provide favorable tax treatment for employing family members to do odd jobs such as post For Sale signs. A certain amount of compensation to family members isn't subject to payroll tax. And children's income is typically taxed at a lower rate. At Woodhouse Group, Woodhouse's wife keeps the company books.
Large vehicle deduction. A business car weighing more than 6,000 pounds can be written off, although tax-law changes enacted in 2004 place new limits on depreciation amounts.
An accounting firm also can advise on how to structure your business entity, whether as an S, C, or limited-liability corporation. Each has advantages under certain conditions, and owners can change their structure as company goals change. (See "Match Company Structure to Your Goals.")
So, how do you pick the right accounting firm? Woodhouse assembled leads by talking to colleagues in his market. He interviewed five companies before settling on Balukoff. "You can always find someone who can get your taxes done correctly," he says. "It's worth it to pay more for someone who has your long-term health in mind." -Robert Freedman. This article originally appeared in the November 2003 issue of REALTOR(r) Magazine.
MATCH COMPANY STRUCTURE TO YOUR GOALS
Here are three examples of how to structure your business to respond to your company's changing goals, according to Michael Lindstrom, a tax partner with Eide Bailly LLC, Boise, Idaho. For specific advice, consult an accountant.
Advantage: Put yourself on a salary and get 100 percent of employee medical insurance costs deducted from your taxes. Helpful if anticipating high medical bills.
Disadvantage: May be expensive if there are more than a few employees.
Advantage: Maximize retirement benefits up to a certain point.
Disadvantage: Benefits are limited if the owner reaches $200,000 in income. In these cases, it may make sense to adopt an S corporation structure.
Advantage: Get favorable payroll-tax treatment.
Disadvantage: Lose out on the ability to fund retirement plans.
Finding an Accountant
The National Association of Small Business Accountants maintains a database of member accountants, searchable by state, on its web site, smallbizaccountants.com. Before you select an accountant, the association recommends you check first about the types of businesses they specialize in, the accounting services they provide, and the amount of experience they have. The database is under "Find an Accountant."
Preparing for a Financial Turn for the Worse
In the college town of Amherst, Massachusetts, where the tide of real estate business ebbs and flows with the rhythm of the academic calendar, a broker's finances can sometimes be as barren as a New England winter. Between September and February, area home sales tend to drop by half, a major hit to brokers' bottom line, says Gerald L. Jones, CRB, GRI, broker-owner of Jones Town & Country Realty in Amherst.
Excerpted from Broker to Broker by Robert Freedman Excerpted by permission.
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