Last week, I spent some time highlighting information presented in Game Changers, a new book written by Steve Murray, Lorne Wallace, and Lon Welsh. The focus of the discussions has been on how the major trends in the real estate industry are impacting recruiting. If you didn’t read the first two WorkPuzzles, take a few minutes to catch up (Part 1, Part 2).
We’ll finish this series by addressing an issue that is relevant and of concern to almost every real estate leader: the decline in company revenue percentages.
In Chapter 6 of Game Changers, the authors present the following chart:
Over the past 20 years, company revenue percentages have been declining for three reasons:
Competition for Agents. There is intense competition among firms to grow the number of agents as well as sales production. This has led to increasing splits (and lower company margins) for experienced agents.
New Brokerage Models. The types and numbers of brokerage models that offer low costs to agents increased greatly during the last 20 years. Also, there are many “capped company revenue” models and virtual brokerage firms that offer a flat fee for agent services.
New Sources of Value/Assistance. Some of what brokers use to provide assistance to agents is now being offered a la carte from an increasing number of 3rd party sources. This includes technology, marketing and educational services, tools, and products.
Also, there are some indications this trend may be accelerating. In an annual survey recently done by Real Trends from 2011 to 2012, the decline in company revenue was 15% in one year.
How can this problem be fixed? Unfortunately, there are no quick and easy solutions.
Certainly, the Wal-Mart philosophy applies—if margins are low, the natural path to profits is increasing the volume of transactions. But, that doesn’t come easy in a competitive, low-barrier-to-entry real estate industry.
The other alternative is maintaining (or increasing) the company revenue percentage (i.e. stabilizing or reversing the trend). While this is also difficult, it’s the option that most brokerages have the best chance of accomplishing. This can happen on a micro level in spite of the competition.
The authors of Game Changers draw the conclusion that this strategy (maintaining/increasing margins) leads back to recruiting:
At some point, realty firms will have to radically change their approach to recruiting and retaining sales agents and teams so that they can remain viable.
Hiring New Agents. The new agent recruiting arena is the only place where these radical changes will have an impact because there will continue to be low margins in experienced agent hiring.
By necessity, this requires realty leaders to…focus on developing new agents as their firms’ primary focus. [Recruiting and] providing support for these new agents to develop their businesses can generally be accomplished at lower costs to the brokerage firm. Although there will always be departures, a firm adept at developing new agents as an ongoing mission can raise its gross margin.
Keep in mind, when an agent does leave your organization, he or she will typically sign with a competitor at a higher split. In essence, you’re forcing your competitors to continue to struggle with low margins.
Retaining New Agents. Game Changers also suggests that a new agent hiring strategy be combined with an abandonment of the “increase market share at all cost” mentality prevalent in the real estate industry today.
Firms can change course away from the pursuit of market share at all costs. Instead, they could focus on developing agents and teams who respect the tools, resources, and culture of the firm—while gracefully allowing those who value higher splits to depart.
There are examples of firms currently operating that do not view market share as the most important measure of success: instead, theirs is a more balanced approach between growth and profitability.
Focusing on profitability—that’s not a bad strategy for any business!
Editor’s Note: This article was written by Ben Hess. Ben is the Founding Partner and Managing Director of Tidemark, Inc. and a regular contributor to WorkPuzzle.
