In September, Inman digs deep on real estate teams — what it takes to join or build one, how to optimize a team and even when to consider leaving one. Adding nuance on top of Inman’s weekly Teams Beat email newsletter, this theme month will serve up top insights from the best team leaders across the country.
Newly licensed agents, eager to get their real estate careers launched, usually start shopping brokers to see who has the best offer. There is an inherent problem, however: Without a fundamental understanding of how a real estate practice actually works, they usually have no idea what they should be looking for.
While some love the idea of striking out as a solo agent, others — for a variety of reasons — should be looking at starting on a team. There is no question that there are tremendous benefits to joining a team at the beginning of a real estate career rather than trying to go solo, including:
- Visibility: Mega teams are much more visible than solo agents.
- Training: Most teams have significant training opportunities.
- Leads: Many teams have extensive lead generation levers.
- Camaraderie: For many, working in a group is preferable to being alone.
- Work-life balance: Teams remove the minutia so you can focus on your 20 percent and have more free time.
- Support: Teams typically have great internal support mechanisms.
- Systems: Effective teams can afford the requisite systems required for increased volume.
- Marketing: Teams can usually market much more effectively than solo agents.
- Knowledge: The knowledge base on teams can be huge and is typically very accessible.
- Accountability: Accountability is the breakfast of champions and teams usually have accountability structures built in.
Over the years, I’ve interviewed countless newbies. While enamored with the benefits offered by a team, they often stumble over one fundamental issue: team splits. Lured by brokers promising higher splits, many choose to strike out on their own instead of partnering with a team, thinking they are ending up with a better deal.
Why brokers won’t discuss profit with new agents
Brokers understand this reality. Given the need to hire as many agents as possible to stay ahead of the inevitable attrition, they brag about their higher splits, technology, training, potential leads and more. Because new agents typically do not understand how the business actually works, they buy into the dream and sign on. The one thing a broker will never discuss with a new agent is bottom-line profitability.
I think it’s safe to say that this is not just a newbie issue: A significant percentage of seasoned agents don’t understand basic business fundamentals.
When I ask agents what their profitability was last year, most look at me with blank eyes. Some say, “I ended the year with $______ in the bank.” Almost none point to a P&L (profits and losses) or balance sheet, and most have no idea how to read financial statements.
To be blunt, the majority of agents I talk to do not run their practice like a business and have absolutely no idea whether they are profitable or not. They figure if they manage to pay all their bills in any given year, they are good.
Those who truly succeed in any business long-term understand business financials. They know their gross revenue, cost of sales, percentages of their key expenses in relationship to their income and so on. They also know their net income and its percentage of the gross receipts. Ironically, some agents I have talked to in the past few months do not even know exactly how many units they sold last year.
At the end of the day, profitability in a real estate career is not about the split: It’s always the profit you manage to bring to the bottom line.
What’s your profit margin?
Steve Murray, senior advisor to RealTrends, states, “Well-run teams have profit margins between 18 percent to 30 percent of gross revenues …” The key here is “well-run.” In reality, especially in the current market, many teams are bringing far less to the bottom line.
For any agent looking to join a team, this is critical information, and it signifies the reality that most team splits give individual team members a higher percentage of their earnings than the team gets.
For example, if a team member’s split is 50 percent net of the gross commission (considered the norm for many teams) and the team is ending each month with approximately 25 percent profit, the team member is doing better than the team.
Given the fact that most teams cover the majority of expenses for their agents, it’s frankly hard to understand why any team member getting 50 percent would quibble about their split.
Unfortunately, agents continue to look at the split offered by their broker and, having no idea what their actual expenses are, assume they are making more than the 50 percent profit offered by the team. No one should ever run a business based on assumptions.
Although it’s true that agents who focus only on buyers have a higher profitability, there is also a ceiling to the number of clients they can serve before they need to add a showing agent and/or administrative help to back them up — at which point they become a team. Even though it’s a small one, it will still have a corresponding dip in profitability.
If they are paying large sums for lead generation, their bottom line can shrink even more dramatically. Additionally, it’s been proven that a practice focusing solely on buyers is a short-sighted strategy: Seasoned, productive agents usually have a ratio of listings that is slightly larger than buyers. For example, our team’s ratio fluctuates between 55 percent to 60 percent listings. The adage “list to last” is really true.
Keeping all of this in mind, agents who want to build a long-term profitable business and have a life will see their bottom line coming in at less than 50 percent. Although there are agents out there who are willing to work ridiculous hours in search of maximum profitability, most want to be able to take vacations, spend time with their family and have a modicum of work-life balance.
And for those agents who think they are getting a better deal by going solo with the office split, I’d recommend that instead of making choices based on conjecture, they sit down, learn some business fundamentals, and take a serious look at the math.