New Approaches to Business Models

October 1, 2003

Larry Whited, CRB, CRS® believes the big players in residential real estate, wrestling with profitability pressure, will one day soon adopt a business model similar to his: sales associates working out of home offices, accessing documents by computer, conducting their transactions by exchanging electronic files—and offering prospects flexible commission options.

“Big real estate companies five years from now will be virtual offices,” says Whited, a 31-year real estate veteran who launched his Cincinnati-area company, Webmls.net, in November 2002. “Big, beautiful offices are history.”

That’s a bold claim, one that’s not shared widely by real estate professionals. But Whited’s model and other non-traditional business models have gained currency as brokers wrestle with profitability challenges. Rising costs—driven in part by commission splits to associates now routinely as high as 70 percent to 80 percent—are eating up the company dollar, say brokers. So are higher costs for technology, training, advertising, and office space.

Given these pressures, brokers earn smaller per-transaction margins than they did five years ago—by some estimates, as little as $150 per deal, say brokers.

But brokers who’ve adopted alternative models say they’ve found a better way to drive profitability. Here are examples of three alternative models and how they’re faring.

Internet brokerage

Profitability solution: strong client volume
Who’s doing it: Larry Whited, broker-owner, Webmls.net, West Chester, Ohio
Virtually zero cost

Larry Whited launched his virtual real estate brokerage, Webmls.net, in November 2002 and within one year affiliated 20 sales associates—and it cost him virtually nothing to do so.

That’s because his associates came in with their own clientele, work out of their homes, and cover their own costs.

They also pay him $200 to sign on with the company, $50 for each listing they post, and $300 for each closing. There’s no commission split.

The main benefit he provides is flexibility on what associates charge and the opportunity to conduct transactions using e-mail and Adobe portable document format (PDF) files.

Of course, Whited’s associates still attend meetings and fill out paperwork. But Whited thinks his process reduces much of the back-and-forth of deal making.

How? Here’s an example: Cooperating agents are asked to fax offers on Webmls listings. Whited’s proprietary system automatically converts each offer to a PDF file—and the associate with the listing e-mails the offer to Whited, who forwards it to the sellers. They counteroffer by e-mail. Once the parties reach e-mail agreement, the associate working with the buyers obtains their signatures on the original contract and faxes the contract to the sellers, who sign it and fax it to their associate. The contract is converted to a new PDF.

“We now have a clean copy of the contract in PDF format, and we have a sale,” says Whited. “And no one needed to leave the office.”

Whited says he’s devised electronic procedures for every facet of the business, including those that are typically done in the office, such as collecting and disbursing commission payments and storing records. As a result, his company maintains neither storefront nor staff.

That low overhead doesn’t benefit just him, he says. Because his associates pay him only the flat fees, they have flexibility to attract customers with a range of commission structures. “Brokers with high overhead can’t afford to let their associates offer anything but the full commission,” says Whited.

Commissions at his company range from 2 percent to 5 percent:

  • 2 percent plus $500 listing fee with 1 percent cooperative split, limited to homes starting at $750,000
  • 3 percent plus $500 listing fee with 2 percent cooperative split
  • 4 percent plus $500 listing fee with 3 percent cooperative split
  • 5 percent with 3 percent cooperative split

Ninety percent of sellers opt for the 4 percent option, says Whited, leaving associates with a 1 percent commission if there’s a cooperating agent. On a $300,000 co-op sale, which Whited calls typical, his associate would receive $3,000 plus $500, minus $350 in fees.

The listing fee is an important part of the mix, because it ensures associates get paid for filling out paperwork regardless of whether the deal closes. “I’ve earned $25,000 so far this year just in filling out paperwork for my own listings,” says Whited. By his count, Whited has listed 50 properties in 2003 through late July.

Whited and his associates tap contractors to manage administrative tasks. They pay a listing coordinator $200 per listing to input data and photos into the MLS and online listing sites; they pay a closing coordinator the greater of $250 or 10 percent of the commission to manage transactions.

Webmls.net is too new to have a track record, but Whited expects to grow his associate roster to 50 by the end of 2004. “Because I have no overhead, I can have an infinite number of associates,” he says.

Annuity brokerage

Profitability solution: Low overhead; high transaction volume, driven by strong recruitment incentive
Who’s doing it: Shaun Rawls, broker-owner, Keller Williams, Atlanta–Sandy Springs
Going for the golden years

Veteran sales associates have retirement on their minds. As independent contractors, they’re responsible for amassing their own nest egg, hence the attraction of a company such as Keller Williams that offers profit-sharing to its associates and carries that profit-sharing through retirement.

That financial lifeline is one of the incentives Shaun Rawls holds out to recruit associates to his office, which launched in 1999 and now has 150 salespeople.

But the benefit is a two-way street. Since the company needs to earn a profit before it can spread the wealth, associates are motivated to help keep costs down. “We keep our books open, so everyone can see where the money is being spent,” says Rawls. “This openness makes better businesspeople out of our associates. There’s not a lot of waste.”

Profit-sharing is based on recruitment: Associates recruit other associates and receive a cut of the profits their recruits generate.

The incentive is seven generations deep, so as one’s recruits in turn recruit other associates, the original recruiter continues to receive a portion of the wealth, although in diminishing percentage amounts.

“Some associates make $30 a month, some $100 a month, some several thousand dollars a month” in residual income, says Rawls. In the first six months of 2003, his office shared $211,000, he says.

Rawls builds economy into the administrative structure. The office maintains a closing department and administrative staff, but other services such as marketing and listing input are associates’ responsibilities. The company offers a comprehensive tech package, but associates cover the cost of options that go beyond the package.

Rawls caps at $18,000 the amount of annual commission each associate splits with the office. Once associates reach that cap, they keep 100 percent of their commission income, giving them flexibility to plow money into their retirement.

For high-producing associates, the split may be tens of thousands of dollars less than what they’d share with a traditional commission-split company. But it’s also largely guaranteed income for the company. Associates who choose a split higher than 70-30 guarantee they’ll meet the $18,000 cap.

Many associates reach the cap, Rawls says, because it’s set on the basis of market-specific factors, including the competitiveness of the market. It also factors in the cost of running the office to ensure Rawls’ expenses are covered.

Rawls believes the formula is working. In addition to his office, he has an ownership interest in two other Keller Williams offices and is set to open another office in Atlanta later this year.

Menu of services

Profitability solution: high volume; low overhead; fee income
Who’s doing it: Thomas Russell, broker-owner, Help-U-Save, Louisville, Ky.
For the do-it-yourselfer

When consumers call Thomas Russell for help in selling their house, they don’t want to see a fancy listing presentation. In many cases they expect to do much of the work themselves, so they like to cut to the chase.

Russell, who launched his company in the Louisville, Ky., area some 18 years ago as a self-described discount brokerage, knows how to oblige them.

He offers them a few options:

  • List the house in the local MLS. Cost: $495
  • Rent a lockbox. Cost: $100
  • Find the buyer yourself. He negotiates the purchase agreement, writes the contract, helps the buyer find a lender, and closes the deal. Cost: half a percent of the sale amount, plus a $250 transaction fee, plus 3 percent to any cooperating salesperson.

    Let Russell find the buyer and handle the transaction. Cost: 3.5 percent of the sales price plus $250 transaction fee.

    What Help-U-Save receives in exchange for parceling out services in this way is healthy traffic and a way to appeal to high-end sellers, says Russell.

    He and another associate, working with two assistants, generate half a dozen listings a week through most of the year. At an average of $300,000, the listings are twice the typical area price, Russell says. That’s because his model attracts move-up households who’ve bought and sold several times and are comfortable taking on a portion of the transaction.

    What’s more, a sizable portion of sellers opt for full service. In about a third of the listings, he or the other associate will handle the sale, generating the higher commission rate. And on a third of those listings Russell’s company helps sellers buy their replacement house, generating another commission. The brokerage claims a 50-50 split on the associate’s commission.

    Russell maintains an office in central Louisville and keeps the office outfitted with computers using proprietary software to qualify buyers, assesses home values, and estimate the seller’s net and buyer’s expenses. The brokerage also picks up the tab for marketing and signs, which Russell says is minimal.

    The model is built around relatively low margins, but with him and the other associate generating some 300 listings a year, the volume keeps income rolling in.

    Russell says he’ll affiliate a handful of new associates by late fall. “With just the two of us, we’re closing one house every 10 days and expect to move that up to one every seven days,” Russell says. Why? Because it’s a business model that’s resonating with customers, he says.

    Editor's Note: The fees and commissions cited and business models described in this article illustrate only those offered by the practitioners quoted and aren’t intended by REALTOR® Magazine or NAR as suggested or recommended business practices for other practitioners. Fees and commissions are established by each brokerage individually and negotiated freely with clients and customers, and each brokerage adopts and establishes its own business practices to best serve its goals and preferences.

Robert Freedman

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

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