How Brokers and Managers Can Boost the Bottom Line

July 1, 2003

Gene Ward, CRS®, 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, Neb., 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 now numbers 130, 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, ABR®, GRI, broker-owner of Real Living HER Kinney Properties 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®, 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 oversees the main office of Keystone Realty in Reno, Nev., has a similar strategy for keeping splits down. He scouts real estate schools with the express purpose of affiliating rookie salespeople. Since he began this about year ago, he’s brought on 25 new associates at a 55-45 split. Veteran associates receive an 80 percent split once they bring 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 won’t know whether the increase will boost his income until budget figures are analyzed later this year. But he estimates the lower commission splits of new recruits will more than compensate for the fewer sales they generate and the added training and other costs they incur. Besides, given the strong market, even newbies are quickly generating robust sales, he says. Furthermore, the new recruits are showing a lot of loyalty. “The new licensees appreciate what the brokerage is doing for them in terms of training and potential for greater splits,” Harris says. “We lose few people.”

Cost cutting

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, Va., 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 Destin, Fla., 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 Odle, broker-owner of Lydia Odle, REALTOR®, in Alexandria, Va., 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.

—With additional reporting by Pat Taylor

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 in 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 5 percent to his company’s bottom line.
  2. Balance your associate mix. Nancy Kinney, of Real Living HER Kinney Properties 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, Va. “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.
Robert Freedman

Robert Freedman is the former director of multimedia communications at NAR.

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