The real estate market is a cyclical business that historically rises and falls in a seven- to 10-year rhythm. The housing crash of 2008 started to turn upward in 2011-2012, which means we are seven to eight years into this positive market.
In our area, we saw weakening buyer traffic last summer, which continued through the end of the year. Increases in interest rates, a lack of inventory, stock market uncertainty and political volatility contribute to fears that we may swing to a housing downturn within the next year or two. While there are no calls for a full-blown crash, we are due for a correction.
Before that happens, take a look at your business operations and prepare for slower sales by following these five tips.
1. Diversify income streams and services
As in any business, depending on one stream of income (or a small number of large-volume clients) leads to greater risk when the market turns. Consider adding in-house mortgage, title or insurance lines of business to become less dependent on real estate sales.
Note that this may or may not be a good fit for every brokerage. I personally don’t have a “one-stop shop” because our office receives a strong referral business from lenders, attorneys and insurance agents. Bringing these services in-house risks that flow of business, but I do know other firms that make significant profit on these subsidiary businesses.
Similarly, look for niches and underserved markets in your area. During the last downturn, we expanded into rentals and property management services that provided a monthly flow of reliable income for the office. No other broker in our town serviced this group, so we quickly built up market share.
We also were able to pick up more investor clients as we then took care of their rental properties after the purchase and helped them buy and sell as necessary. Tenants dropping off rent built relationships with our staff and agents, which led to more purchases eventually.
2. Identify your best clients
No matter what part of the business cycle we are in, it’s smart to take time to identify your best clients. What clients do you work best with? If you’re a large brokerage, you hopefully have a diverse group of agents who can cover the needs of a wide variety of buyers and sellers — from young first-time homebuyers to downsizing seniors. In a smaller office you might realize that you just don’t have the capacity to handle commercial clients, for example.
Recognize your strengths and weaknesses, and don’t take on types of clients that don’t fit your model. Concentrate on serving the buyers and sellers you enjoy working with and can service at a high level, rather than spinning your wheels with those you cannot serve well. Partner with another broker who does work that market, and refer those out.
Besides identifying your best type of clients, identify your top repeat clients and referral makers. Work to deepen those relationships, never taking them for granted. I work closely with of our referral partners and set up quarterly lunches where we go over active files and also connect on a personal level. When I send his assistant anything in the mail, I include gift cards for coffee or lunch. Build personal connections now, sowing the seeds for the future.
3. Identify your lead sources
Brokerages of all sizes — from mom-and-pop shops to large regionals — should know the answers to the following questions:
- What are your top sources of leads? (Zillow, sign calls, repeat business, referrals, etc.)
- For all marketing dollars spent, what is your return on investment (ROI)?
- What is your conversion rate on each lead source?
When brokerage income drops, you might need to make hard decisions on how to allocate marketing dollars. Unless you know the answers to the questions above, you might make a wrong choice. You might be spending money in dribs and drabs on small marketing promotions that look cheap but bring little to no response. Conversely, a $1,500 per month pay-per-click campaign that has a 5x ROI looks expensive but more than pays for itself.
4. Cut expenses
Now that you’re probably knee-deep in tax stuff at the moment (I know I am), run prior year-over-year reports on your income and expenses. Analyze line by line to see if any costs were out of line in 2018. You should be doing this quarterly, if not monthly anyway, but tax time is the perfect excuse to do it.
Are there any places you can save money? Consider bidding out your insurance contracts as they tend to creep up year after year, and a new carrier might be less expensive. Look at recurring or automatic charges on your credit cards. Cancel anything you’re not really using or getting value from now. I did this and found a $500 annual charge for a software platform I haven’t used all year and a $59 a month charge for a copier program we don’t need.
Cutting expenses before you really need to is easier now than later.
5. Market smart
I know I just said to cut expenses, but be careful you not to cut marketing to the bone. Stay visible in the community. Keep a presence in the media that works for you, and on the platforms with a positive and proven ROI for you. Not every brokerage will have the same results, so this is why you have to track everything.
I know there’s a tendency to downplay print, but we actually get excellent results from a full page, full color back page ad in our weekly newspaper. That brings us high visibility in our market as we are the only brokerage who runs ads like this in this particular paper. Target your best customers, marketing to a well-defined market for the highest returns on your marketing dollars.
Take these five preliminary steps to streamlining your real estate business operations so that when a housing market downturn does occur — and it will — you’ll be ready.