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You’re A Master Cat Skinner – The Good News and The Bad News

Are you the ‘go to’ guy/gal? Do you list a lotta property and do it well? Are you a leader? Though I’m sure many will say charisma is required, I beg to disagree. It never hurts, but in the end, the Lord created the ultimate equalizer to charisma:

Results.

Today, let’s have a serious discussion about what combination of approaches would slaughter what’s currently goin’ on in the national brokerage community. First, here’s my perception of the major ‘schools’ I see in operation.

Variations on the Agent-Centric brokerage model

Between us we can come up with a myriad variations. Let’s limit them to very high commission splits, and the desk fee approach.

As I’ve written before, not long ago, that the agent-centric (A-C) model is failing everywhere it’s been tried. It’s ability to fail at pretty much every level is becoming legendary, regardless of the Titantic-like practicianers now lookin’ to technology to save them. Listen guys, if buying ownership positions in title companies, lenders, and starting your own escrows isn’t prima facie evidence of the desperate reach for lifejackets, I don’t know what is.

Let’s directly compare the currently popular A-C model with what I’d open in today’s — or any — housing market.

But first, a word from the Disclosures Department.

My biz model, though it pains me to admit, would indeed work exceptionally well if completely buyer oriented, listing few if any homes. However, when compared to my model — Broker-Centric — the firm primarily based upon listing homes will annihilate the buyer based company. This isn’t theory, or even bias on my part. As anyone should readily be able to discern, it’s a matter of sixth grade arithmetic.

Also, I’m loosely basing my ‘virtual’ A-C company on a brokerage I know of in a northwestern state. The size, and commission split are the perfect example of the results one can expect when using this model.

End disclosures.

Let’s first construct a virtual company built upon the A-C model.

Let’s give ‘em a lotta agents, but not make it a big box setup. We’ll hire 35 full time agents. None of ‘em will have less than three years full time experience. They’ll be hired due to various levels of success, but mostly cuz they don’t require major babysitting. They’ll all be paid 90% commissions, and will be responsible for a $50 per transaction fee for E&O insurance.

We’ll even stack the deck for this brokerage. They’ll have no brick ‘n mortar office. They’ll have whatever technology they wish, but no physical place to go every day. No lease payment, or all the other things that factor in to having office overhead.

We’ll grant them 250 closed sides for a calendar year. The average sales price will be $150,000 with a 3% commission/side. Yeah, I know many will likely be 2.5%, but making my math easier has higher priority. :)

The same number of closed sides, average price, and 3% commission/side will be used by my virtual brokerage. Wanna keep as close to a level playing field as possible. Wait — I take that back. Only gonna give my virtual brokerage 100 closed buyer sides and 36 closed listing sides. Seems I should at least appear to be makin’ this fair, right?

The numbers for our A-C brokerage guy.

This broker/owner grossed about $1.125 Million for the year. We’ll say he has no overhead for the sake of this comparison. That nets him about $112,500 in pre-tax income. On one hand he didn’t hafta show one home, or make one listing presentation. He grossed six figures for the administration duties assigned to the broker in charge, by the state. We’ll also make the assumption this broker did everything possible to generate a reliable source of leads for the company at large. Assuming a typical 2,000 hour work year with a couple weeks vacation, this broker made just over $56 an hour.

Trust me, they earned it.

Now for my virtual brokerage — using the Broker-Centric model.

I’m the owner/broker. I don’t handle buyers — ever. I set policy. Decide commission splits. List properties. Generate buyer leads.

Out of the 36 closed listing sides, my agents sold (double-ended) 10 of ‘em, which are accounted for among the 100 closed buyer sides.

We have an office. I have three buyer-agents. A traffic cop for incoming leads. When the traffic cop’s busy, the buyer agents answer the phone. The overhead for office, traffic cop, phones, lead generation, and general geek expenses run me around $100,000. In point of fact, it’s probably FAR below that, but still, we’ll use it in order to increase the gloat factor when we’re finished. :)

Let’s look at my numbers now.

The firm’s gross income was around $612,000. Net of all overhead it quickly becomes $512,000. From that figure my buyer-agents, paid 40% commission splits, made $180,000 between them — about $60,000/yr average. With the exception of referrals or family/friends, they don’t expend any efforts on generating leads themselves.

That leaves around $332,000 — for me. Barely less than triple what my agent-centric counterpart earned.

Triple the earning for the firm’s owner/broker. Let us not conveniently forget that I gave myself a handicap. The ‘other guy’ was allotted 114 more sales than I was. What if my firm did the same? What if I listed 50 homes, while my buyer-agents racked up 200 sales?

Oops.

That’s an additional $270,000 to me from increased buyer sides.

Then, there’s the additional 14 listing sides, which add another $63,000 to the till.

That would bring my take to roughly $665,000 for the year. Let’s subtract another $65,000 in operating expenses arising from the additional sales. That would bring my total office overhead to around $165,000/yr — expenses we haven’t made my agent-centric competitor bear.

Net of all expenses my take then becomes around $600,000 for the year.

To put that in relative terms — the broker-centric model produced approximately 5.3 times more pre-tax income for the broker/owner than the agent-centric counterpart. That’s $300/hr if you’re keepin’ score.

This could be done in my own office in the San Diego area. ‘Course, if done there, it’d take just 100 closed sides of any combination of listings/sales sides to gross over $1 Million. But I digress.

The TakeAway

If you’re gonna go for the brass ring, why on the Lord’s green earth would you even consider using any version of the agent-centric model? Any way ya wanna look at it, it’s foolish to the nth degree. Teams everywhere are doing business using the broker-centric model. In many instances the team leaders are making more money than the brokers for whom they work — embarrassingly more in some cases.

If you have a team now, consider opening up your own operation. If you’re pondering the creation of your own firm? Ditto — Duh.

What I can’t figure out to save my life, is why, with all the empirical evidence of virtually guaranteed mediocrity, if not outright failure, the brokerage community at large continues taking long walks of short piers.

The Good news/Bad news joke in all this if you’re the broker/owner of an agent-centric operation.

The good news is that you made six figures for the year — major congrats!

The bad news? The guy next door, you know him, the one with less than 20% of your agents? He did exactly the same sales volume your firm did, but paid more income taxes than you made BEFORE taxes.

Bad news indeed.

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  • 14 comments

    14 Comments so far

    1. [...] Jeff Brown over at BloodhoundBlog (“the national real estate industry marketing and technology weblog”) has a post today about the failure of the agent-centric model of brokerages. [...]

    2. Bruce Lemieux April 2nd, 2012 12:59 pm

      Great comparison. You wonder why anyone would take the A-C approach? It may be the desire to get a cut of the action without actually doing much work. The Broker Centric model requires some effort, doesn’t it? Invest in marketing to generate leads, hire your office/lead manager, hire and manage buyer agents, acquire and pay for space, etc, etc. Not a walk in the park.

    3. jeffrey gordon April 3rd, 2012 2:39 pm

      Hey Jeff, how do you think this model BC would work in Boise?

      Sure makes a lot of sense, and the agent/brokers I have seen with small towns sure seem to have this working very well with complete control and very little employee issues.

      jeff

    4. Jeff Brown April 3rd, 2012 3:40 pm

      Hey Bruce — I’m with ya. ‘Course, nothing’s a walk in the park, right? The BC model requires far less effort from both the broker/owner and agent points of view.

      The B/O isn’t ever stressed about hiring more rookies, cuz rookies don’t get to work for him. His buyer-agents are at least moderately experienced. They just lack the makeup to generate their own business. As the post shows, the buyer-agents are handed leads, which they convert via company taught policy. They show up, get leads, show homes, sell homes. At 40% they’re makin’ more in terms of dollars than 90% of their counterparts making 70-90%.

      Also, Bruce, when agents are consistently cashing paychecks, work becomes less drudgery and more fun. I’ve seen agents fall in love with the business once they figured out the puzzle.

    5. Jeff Brown April 3rd, 2012 4:07 pm

      Hey Jeff — I came ‘this’ close to opening an office in Boise. This model would be enormously successful there. In fact, I imagine we could visit Boise for a week, and find several teams using the BC model, and kickin’ major booty. If a medium-high volume team’s leader opened his own brokerage, they’d be a huge player in the area quickly.

      Generally, unless the leader’s a putz, those working under this model look forward to coming to work. There’s no dead wood takin’ up space, wasting everyone’s time. For example, I grew up watching just 25-30 full time agents in this model, close more than 1,000 sides/year five consecutive years. Ironically, lookin’ back, knowing what I do now, it was pretty inefficient. Teams around the country are closing 300-800 sides/year with 8-14 people on the team.

      Bottom line? It’s easy to be a superior brokerage in real estate, cuz the competition is so inferior. If they can’t even discern one model from another, how can you not win?

    6. Dan Connolly April 3rd, 2012 6:53 pm

      What I don’t understand is how to find a buyers agent (much less three) who has the smarts to sell 33 houses in a year who will work for 40% of the commission.

    7. John Hackett April 3rd, 2012 7:22 pm

      Man oh man is this post spot on. It should be taped to the phone of anyone running a direct sales organization into today’s economy. Because it’s not just real estate.

      I’ve got kids. I’m going to teach them to sell. But I hope they never work a regular sales job.

      Because what you’re describing is the triumph of marketing over sales management. A small team – with tight processes and good execution control – that flows a much higher share of the action back to the owner. Ample ability to leverage the internet & inside sales.

      Know something else? If you ever want to sell your business, you’ve now got a real, scalable cash flow. Independent of the “talent”. $1 of earnings from that book of business is worth 3x – 5x more to a smart buyer.

    8. Jeff Brown April 3rd, 2012 7:34 pm

      Hey Dan — That would be an excellent question for a guy like Russell Shaw. His team, which numbers about 12-14 members, closed 401 sides in 2011. His buyer-agents would probably scoff at 33 sales. His self-disclosed median price was $143,000. Don’t believe me though, Russell will have the credible first person scoop.

      But, my point, is that they’re smart enough to put those numbers up in an atmosphere protecting them from having to do any real gladiator work. That’s code for producing their own business by risking rejection, and other scary things. Ask yourself — How many sales could the average agent close if their office atmosphere was a cocoon, warm and friendly, that gently sent leads their way virtually daily. Once they put a home in escrow, other members inside the cocoon took over, allowing them to just show, write offers, and hand over keys at closings. Magically, commission checks then appeared. They’d do whatever it took NOT to ever lose that job. :)

      The more salient point, however, is that they simply wouldn’t have sold 33 homes, period. They had no skill at all generating the leads required to do so. On the team though, they show up, enjoy some coffee, get their leads, go through the process, close sales. Get paid. The team leader does all the work in the arena, the agents under them simply can’t/won’t.

      The point, is that they can’t sell as many homes on their own, cuz they simply can’t or won’t do what it takes to create the potential buyers or listings. Most of ‘em would be hard pressed to close 10 sides a year on their own. That’s $45,000 — 3% X $150K X 90% X 10.

      They go to work for the successful team down the hall? They sell 28 homes in the next 12 months, same median price, but at 40% split. They make just over $50,000. 85-90% of agents out there would run over Grandma to get a steady supply of leads handed over to them, day after day. If this wasn’t true, teams wouldn’t be as successful as so many of ‘em are, all over the country, in every market imaginable.

      Make sense?

    9. jeffrey gordon April 4th, 2012 5:24 pm

      Okay,

      I meant to say smaller teams not towns. Jeff, I can not get the math to work on your example with $180,000 in buyer agent commission splits? 40% of $612,000 is $244,800 and 40% of $512,000 is $204,800 and $180,000/.40% is $450,000????

      I must be missing something here??

    10. Jeff Brown April 4th, 2012 5:38 pm

      Sure Jeff — 100 buyer sides X $150k X 3% = $450k X 40% = $180k.

      Some of the gross income was from the 36 listing sides.

    11. Samara Siegfried April 5th, 2012 6:28 am

      Thanks Jeff. I appreciate your input and couldn’t agree more. The a-c model just doesn’t make sense. Great read.

    12. Jeff Brown April 5th, 2012 10:23 am

      Thanks, Samara.

    13. Carmen Brodeur April 6th, 2012 10:38 pm

      I agree with Jeff above that most agents just can’t/ won’t create their own leads and would rather be handed them on a silver platter then take less commission.

    14. Alex Cortez April 7th, 2012 1:43 am

      Awwww, yet another classic by Jeff. Printing this one and pinning it for inspiration.