The #1 Thing Wrong With Real Estate Teams

Transcript:

I want to start with the first part of getting this thing right from a financial standpoint, and it comes down to when you make the decision to build leverage into your business through administrative people and outside sales agents and potentially inside sales agents, through marketing and technology, all those are leverage points in your business.

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When you make that decision you have to have some kind of model that you’re following. So the models around agent compensation, it is the the thing that I see wrong with all real estate teams. It’s the first decision you have to make in your real estate business - how you’re going to compensate agents on your team as you scale your business.

And the challenge is that when your production is lower, you don’t feel like you have much to give to someone, so you don’t fully understand how it’s possible to pay out such low splits, but you’ve got to get over that very quickly and you’ve got to find people that are willing to work within your value proposition. I debated going into what that looks like; that’s a whole separate topic. 

It’s more along the lines of recruiting, but you’ve got to understand that that first decision is going to dictate how much money you have left over to cover your expenses. So if you take the most dramatic example, a straight up brokerage like Re/MAX or Keller Williams. In that model, their margins, like their business model, 450 agents, a third cap - so if you know Keller Williams, capping is about $2.7 million in volume in a market, a third they hope will cap and a third will never cap.

That’s what real estate agents make, like most people aren’t going to sell $2.7 million worth of real estate in most markets. And $2.7 million, 3% of that is what, $70,000 or $80,000 before expenses? So at a Keller Williams office if you sell $3 million, you bring in $90,000 top line, you’re giving away $23,000 of it. And granted if you sell more it’s a lower percentage, but that’s the fundamental thing that’s wrong with the model, is that brokers don’t have very good profit margins. So switch it over to what our profit margins are, our target is really 70% and I’m pushing harder to get to that 70%, we’re at about 66%, 67% gross margin. 

So gross commission income, less agent compensation. And you’ve got to make a commitment to review your financials every month. Mine are ready by the 10th of the month prior and I set time aside where i review my financials. If there’s anything that looks a little weird, you know, anything that just doesn’t look right. And I want to let you guys know that what I have here, we have people in our group and in Boardroom that are even more aggressive with their splits. It’s all about value proposition right?

So whatever you think a buyer’s agent is worth is what you should design your compensation around. To me, it’s a $30 to $50 an hour position, and as along as you have enough opportunity and you provide the structure, the accountability and the framework for them to achieve that level, you’re going to be able to fill people in that position, because there aren’t many $60,000 to $100,000 positions in most markets. 

We can consistently and predictably get someone earning six figures. That’s not a normal thing in most markets, OK? You’ve got to track buyer and seller commissions separately along with buyer and listing agent splits, that goes back to the chart of accounts. Buyer business gross margin is in the 55% to 60%, that’s gross margin, how much you keep, so you want to pay our between 40% and 45%.

Right now I’m running at 45%. I want it to be less. I want to pay out less to my agents When people hear me say that they’re like “oh, you want to pay your agents less?” No. I just want to pay them a lower percentage, so my model tightens up more. My model is solid even though I’m on the upper end of these ranges, but for all of you I want you to know that what I do, I want to challenge you to do little bit better than what I do. 

Listing business gross margin 75% to 80% or 20% to 25% payout to listing agents, no salary there.