Taking a New Approach

Switching models to find the right fit could mean a more profitable business.

August 1, 2008

When Jess McClellan launched HomeSense Real Estate in 2004, he took a fairly conventional approach. He opened an office in Tampa, Fla., brought on board a handful of associates, paid them a 60–40 split, and watched as they closed a handful of transactions a year. It wasn’t an auspicious beginning, but McClellan, who had owned his own mortgage company since 2001, was surviving.

Survival wasn’t his only goal, though; he was looking for a better way to grow his business.

He had been intrigued by the 100 percent commission model favored by big players like RE/MAX and Realty Executives, because sales associates like to control their commission income.

But in his mind, those mega companies were too heavily invested in bricks-and-mortar offices and had other high-overhead costs, forcing them to charge desk fees that in today’s slower market would provide a high hurdle to clear for strapped sales associates.

So in late 2006, McClellan tweaked the 100 percent model, switching to a model that was almost virtual.

Under his plan, his associates work from home and pay a fixed monthly fee of $95 plus $395 for each transaction they close. The brokerage covers their E&O insurance and MLS dues.

They also get temporary space in some of Tampa’s most high-end office towers where they can meet with clients.

Using a “scalable lease” arrangement he negotiated with the property managers of several Class A properties, his associates call ahead to get free access to office space, with a receptionist, in the buildings.

“A lightbulb had gone off in my head that there’s a niche here with office space,” he says.

His business model switch brought increased interest in his brokerage. By early this year, he was affiliating an average of 10 sales associates a month, up from about three a month prior to the change. Today, he has 80 and he’s expanded into Minnesota and Wisconsin, with seven more states in the pipeline.

McClellan isn’t the only broker who has switched gears in recent years to take a new approach to his real estate business.

The market slowdown of the last year and a half has been part of the driving force behind the change for these entrepreneurs. Different market conditions require new business approaches, they say. They’ve made the changes with an eye toward long-term success, whatever market conditions await them.

The Virtual Start-up

In late 2007, Jennifer Bunker, CRS®, GRI, was asking herself what she was getting for the commissions she was sharing with her broker. She very much liked her brokerage, a branch office of a large franchise brokerage in the Salt Lake City metro area, but in her mind her commission split was helping to pay for a building that neither she nor the other sales associates needed. “We did way too much chatting and not enough work there,” she says.

Nor did she think the resources the brokerage consumed — the paper, the electricity for the air conditioner, even the gas burned traveling back and forth to the office — were worth the cost to the environment. “Too big a footprint on the earth,” she says.

So in March, she launched a virtual company, Coldwater Creek Properties Realty in Ogden, Utah, and put her focus into leveraging the Internet to capture executives and military personnel relocating to her market area.

“This will be my best year,” says Bunker, who now has half a dozen sales associates affiliated with her. Most of them are closing transactions at a rate of almost two a month.

Her shift to relocation has resulted in a very different client profile. As a sales associate, she focused on listings. Today, two-thirds of her personal business is buyer brokerage. And within a year, virtually all of her personal business will consist of buyers, she expects. Her sales associates have become beneficiaries of online buyer leads as well.

“About half of our customers are from out of state,” she says. “They search online; we communicate mostly by e-mail and over the phone, then they come to buy and then they leave,” she says. “It’s much easier than going out to get listings.”

Bunker says her associates are each handling a smaller volume than they were when they were with their previous brokerages, but they’re working half the hours they used to, and they’re happy with that. Like them, she says, “I used to work 80 to 100 hours a week. Now I work 30 to 40 hours a week.”

The Real Estate Store

To Steve deGuzman, there’s still a place in real estate brokerage for a bricks-and-mortar office, and indeed, in his model the physical setting is key, although not for the traditional reasons.

When he opened the doors to his Rehava Real Estate Store earlier this year in Charleston, S.C., after a stint as a sales associate and tech guru at a large area independent brokerage called Sandlapper Real Estate Group, he pretty much eschewed the trappings of the typical office in favor of an Internet café-like setting in which consumers do their shopping much like they would if they were looking for an iPod in an Apple store.

In fact, some of his customers might even be shopping for an iPod, because deGuzman encourages customers to get comfortable at his computers, maybe with a cup of coffee from the Starbucks next door.

What he hopes to do with these consumers, whether they’re shopping in-store or house-hunting from their home, is “incubate” them until they’re ready to work with his brokerage.

At that point, one of his five salaried li­censees, called client advocates, steps in to guide them through the transaction. If he’s working with ­sellers, he charges a fixed $3,000 fee and the selling agent’s share of the commission.

If he’s working as the buyer’s rep, he rebates 50 percent of the selling commission to the buyers if the deal doesn’t take more than four hours of the client advocate’s time to complete. The four hours needn’t be continuous time but the total of the advocates’ time showing properties, preparing the contract, and completing other steps leading up to, but not including, the closing, which in South Carolina is conducted by an attorney.

If the clock exceeds four hours, buyers can still get the rebate, but it’s discounted by a $225 fee, which is his charge for restarting the clock for another four-hour block.

Two months after its launch, the company had 14 closings in its pipeline and deGuzman was looking to open a second location in downtown Charleston.

His goal is to bring on board one client advocate for every 85 transactions and to close 400 transactions, mainly on the selling side, in his first 18 months.

He doesn’t pretend his model is for every consumer. It’s mainly geared to buyers who’ve taken much of the initiative themselves — secured preapproval for a loan and narrowed down their choice of house on their own—and just need his brokerage’s help to take the last steps to closing.

“We’re not the ‘look at 30 houses’ real estate company,” he says. “Our clients know the clock’s running and they’re fine with that. They want a transparent process and the chance to save some money, and that’s what we offer.”

The Investors’ Bridge

In the Charlotte, N.C., market of Brett Furniss, ABR®, there’s no shortage of consumers who would like to buy. Because of bad credit or a life-shifting event like a divorce, however, they need time to get qualified for mortgage financing, particularly in today’s nervous lending environment.

For many home sellers, though, time isn’t what they have. They’re relocating or otherwise need to sell quickly. Or, if they’re overextended real estate investors, they need to trim their portfolio before the bank does it for them.

To bring together these two market segments — anxious sellers and buyers — Furniss in late 2007 shifted the approach of his company, BDF Realty Inc., which handles sales brokerage and property management, to offer what he calls “solution-based” sales.

His new approach aims to link hard-pressed sellers with investor-buyers by putting renters interested in becoming owners into the property before offering it for sale. His company then manages the property in a rent-to-buy arrangement until the renter obtains financing for the purchase.

Investors, he says, have taken to the arrangement because it makes it easy for them to take advantage of today’s lower-priced buying climate.

“We’re able to offer investors peace of mind on day one because there’s already a paying tenant on the property,” he says.

Tenants, meanwhile, are able to ease their way into eventual purchase from the investor by applying 10 percent to 20 percent of their rental payment each month toward the property.

Furniss says his com­pany is well positioned to offer this approach because it already uses the rent-to-own model in its property management operations.

What’s different is the company’s model for linking hard-pressed sellers with investors who want the security of having a rent-to-own tenant in the property.

“In 2007, a lot of our brokerage operations had dried up,” says Furniss. “We had been selling a lot with buyers who had originally contacted us about renting, not realizing they could buy in the easy mortgage market then,” he says. “But in July or August of 2007, that business just went away. Now, our volume has picked up again [with this new approach]. While other brokerages are down 50 percent, we’re up by a third.”

Waiting out a market that’s down is hardly an option for brokers today. Those who switch models do so for greatly different reasons. They might want to cut costs by reducing overhead or to increase their efficiency by targeting Internet buyer leads. Or they might want a new sales approach that reduces risk for today’s investor buyers. What model-switching brokers show, though, is today’s slower market can be the impetus for change that could mean more profitable business in the long run.

Robert Freedman

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

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