by Brian Brady
Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL
Have you ever analyzed the business model your broker has? Try to run the numbers sometime and see just how much profit the owners(s) of your real estate brokerage really earn. I learned a lot about running a mortgage brokerage and real estate brokerage from 1999-2002. I’ve owned both and was successful with the former and a walking disaster with the latter.
Here is the deep, dark truth about traditional real estate brokerage as a business; it’s just not that profitable in its purest sense of practice unless (a) the broker produces (which brings up a whole host of issues) or (b) the brokerage is really HUGE. Let’s analyze the typical medium-sized brokerage (25 producers) in a typical American city ($250,000 median value).
There are A, B, and C agents. There will be five “A” agents who close 20 transactions per year or $5,000,000. Assume they average a fee of $7,500 per transaction. Each producer closes $150,000 in gross commission income (GCI). These producers generally command a commission split of 90%. This means that their gross contribution to the brokerage is $750 per transaction or $15,000 per agent annually. This translates to an aggregate GCI for “A” agents of $75,000.
There will be five “B” agents who close 10 transactions per year or $2,500,000. The average GCI per producer is $75,000. Now, they might command as little as a 80% commission split so the aggregate GCI translates to $75,500. We’re up to $150,000.
The rest are “C” agents who close an average of just 3 transactions per year. They will receive a commission split of 50%. So the aggregate GCI to the company is $168,750. Now we have total revenues to the brokerage of $318,750.
Let’s analyze the annual expenses. Receptionist, operations assistant, and sales manager salaries will total $130,000. We gross that number up 115% to include payroll taxes and benefits for a total of $149,500. This is a traditional model so you should figure on $12,000 for advertising. Throw in the rent and facilities charges of $75,000 for a 2000 sq. ft. office, $12,000 for supplies and $12,000 for phone/internet, equipments lease and we are approaching $260,500.
That leaves $58,250 in profit for the broker/owner. Is that worth the risk and headache? Let’s get rid of the $75,000 cost of a sales manager and add it in to the profit and the profit is $133,250. I ask again, is that worth the risk and headache?
CONCLUSION: The medium-sized, traditional real estate brokerage, as practiced for decades (think brown franchise), is about to become extinct. This weekend we’ll examine the 100%, “desk-fee” model (think balloon franchise) and the hybrid model (think red franchise).
Laurie Manny says:
Brian,
That was a fairly accurate assessment in many ways. “A” producers in Orange County do tend to sell more than $5 million on average. The office I started at in Huntington Beach had many $30 million a year plus producers which given the cost of homes in Orange County is not unattainable under ordinary market conditions. These however are not ordinary times. Even with an adjustment on your estimates you are right though, it is really not worth the investment unless you have a large pool of producers. Most of these companies will either fold into larger companies or disappear in the coming months.
February 9, 2007 — 2:09 am
Mark Flanders says:
Brian, that brings up the interesting point that the lower producing agents are more profitable to the broker. Could that be why some brokerages are filled with undertrained and very green agents? I would imagine it might be a conscious decision on the brokers part, simply because of the math.
February 9, 2007 — 5:34 am
Cyndi Sloop says:
Brian thank you for providing the model of how most traditional companies operate. I agree with the comment that Mark Flanders made regarding the reasons some brokerages may want undertrained and green agents in the office for at least a little while. New agents get a few deals normally from friends and or family before leaving real estate because of its costs. Then the brokerage just replaces this agent with another one and the cycle continues. . .
February 9, 2007 — 7:22 am
Michael Cook says:
Great information here Brian. I was also interested in the very profitable lowest producing agent. This really explains why there is such variation in the quality of agents out there. What is the incentive to keep the A+ agents around. It seems like they would not be in a great bargaining position because of the numbers behind starting their own brokerage. Rather they beat the system by working for someone else and only paying 10%, which is not even close to covering their share office expenses. Why dont more brokerages take a harder line with these agents? Is it marketing?
February 9, 2007 — 7:43 am
Greg Swann says:
> Why dont more brokerages take a harder line with these agents?
If you lean on top-producers, they’ll go to 100% shops, the business model Brian will be taking up next. But if you can hang on to them, their yard signs and reputation will redound to the credit of the brokerage as a whole.
February 9, 2007 — 8:28 am
Phil Hoover says:
Terrific post.
This is a good example of one thing that’s wrong with the real estate profession ~ it is more profitable for brokers to have a herd of incompetent, untrained, inexperienced new agents on a 50/50 split than it is to have a smaller group of skilled agents on high splits.
With an office full of newbies, you get a lot of signs up, brag that you’re #1 in your market (by what standard?), get more listings, etc.
And, some of them will sell their mother’s, brother’s, or cousin’s home before they leave the business and the broker will make some money.
What a concept!
I am hopeful this market downturn will wash out a huge number of the 1.4 million agents in our business.
I have owned several small real estate companies over my 35 years in real estate and never made a nickel of profit from any of them.
I had to be a selling broker to earn the money to cover my overhead while endlessly following up with flaky agents who wouldn’t work, but had plenty of time to whine about me not generating enough leads for them.
I am now a sole practioner (no team) with RE/MAX.
It’s nice to write them a check each month, make my own business decisions, and keep what I earn.
I have the freedom to conduct business as I choose and don’t have to manage people, plus I have the advantage of having a respected well-recognized company behind me.
February 9, 2007 — 8:49 am
Brian Brady says:
Greg is correct. There are things a top agent brings to the table. Listings are one of the most important ones (which provides visibility and activity).
February 9, 2007 — 8:52 am
Jeff Brown says:
Wow Brian, someone finally wrote this post. I think you’ve also, if indirectly, shown why discount brokerages are doomed – again.
If I recall, you and I spoke of my dad’s model, which was incredibly successful in the ’60’s and early ’70’s. I’d like to talk with you about it again.
Michael – The biggest incentive for keeping the A+ guy is that many of his listings are sold ‘in house’ by the C agents, thereby uping the profit.
February 9, 2007 — 11:05 am
Allen Butler says:
I know that when I started, I was on a 65/35 split for my first 12 transactions. My first year in real estate, I closed 27 transactions. After those first 12, I went to a 100% agent. I simply pay 250 bux a month to belong to the franchise now. I have no idea how my broker/owner makes any money, but I suspect it may be what ya’ll are saying about green agents on those lucrative splits. The problem with this thinking, in my own branch of West USA, is that my broker/owner is a fabulous trainer who pushes his agents to succeed by providing 1 on 1 training, and lots of seminars & such. I think it might be more profitable if he just let them run around like chickens.
February 9, 2007 — 9:23 pm
Brian Brady says:
WestUSA is a class act, Allen. I will be talking about the 100% model this weekend. They are an example of how to do it profitably.
February 9, 2007 — 10:43 pm
David Saks says:
Seems to be getting tougher everyday, Brian. The area lenders are gossiping about the mid-south being seemingly vulnerable to the market slumps east and west of us. It hasn’t deterred the enrollment in the real estate schools in the area. We just opened a new office in a depressed part of Memphis where predatory lending is a plague. It’s reported that one out of four homes are in foreclosure in this area, a community of about 100 thousand people called Frayser. It makes it even tougher for the newbies. The investors are putting their bus tours together in this part of town. I suppose we’ll try to be optimistic although it doesn’t help matters when the mayor behaves like the Sheriff of Nottingham Forest by calling for increased property taxes every other day.
We have three locations in Memphis and all three offices come together once a month for a sales meeting which essentially covers the legislation forwarded to the head broker by the Tennessee Real Estate Commisssion. Because of all the luncheons and dinners, the lack of salary seems to be compensated somewhat by the meals. One of the things my Dad told me when I got my license was to eat good because of the free luncheons all over town hosted by the various realtor interests. He said that it might have some socially redemptive value by compensating for lost revenue.
February 10, 2007 — 3:45 pm
Allison Stewart says:
Well Done Brian!
Under the model the proportion of new agents to float office expenses is much higher than most would imagine when compared to seasoned agents. What some do as well to augment a more profitable office to is also charge for transaction managers (mandatory for the first few sales) MLS upload fee, franchise fee, copies, signs, installtion of signs, etc. This offsets the office expenses greatly when exponentially factored in over say 20-30 new agents. By the time the miscellaneous expenses to the agents are factored in the agents closing 3 transactions per year are really averaging more like a 24/76 split in favor of the broker. The broker could see these agents as potentially profitable, not if they succeed but rather if they fail.
February 15, 2007 — 6:10 am
Chuck Marunde says:
Brian, I love your post, because this is an issue I’ve thought about a lot. I think the real estate brokerage business is in the process of the most radical and dramatic change in history. The old is out and the new is in whether we like it or not. The Internet certainly is changing the way business is done. I’ve gotten some heat from my post entitled, Traditional Real Estate Brokerage is Dead. If you want to read it, you’ll find it at:
http://sequim-real-estate-blog.com/real-estate-agents/traditional-real-estate-brokerage-is-dead/
July 28, 2008 — 8:41 pm