REAL Trends Newsletter

valuing a real estate firm

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What May Happen to Real Estate In The United Kingdom

by: Peter Gilmour

What May Happen to Real Estate In The United Kingdom

October 31 is the deadline for the U.K. to leave the European Union. What impact will it have on real estate in the area?
The next few months are going to be important for the real estate market in the U.K. as the discussion to leave the European Union (E.U.) moves quickly towards the October 31 deadline. Prime Minister Theresa May, who guided the first period of negotiation, resigned. It would appear that the ruling party is united in its decision to leave the E.U. on October 31, even without an agreement in place. According to the U.K. publication, The Week, wages in the U.K. are growing faster than the rate of home price inflation. The job market remains buoyant, offering hope to prospective home buyers. According to the latest Rightmove Property Index, U.K. wage growth currently stands at 3.4 percent compared with house price growth of nearly 2 percent. London is the largest market in Britain and has seen average house prices drop by almost 4 percent over the last 12 months, according to the Office of National Statistics. This is the biggest drop since the recession of 2009. Conversely, some areas in Northern England, Wales and Northern Ireland experienced year-over-year price increases of more than 5 percent. Since the announcement of Brexit some years ago, the housing market has been marked by volatility and supply constraints, which has sustained prices in many areas. The question everyone is asking now is, “What would the impact of a no-deal Brexit be on the real estate market?”

Worst Case Scenario?

A no-deal Brexit remains the default position if no agreement can be reached. The Bank of England predicted that, in the case of no-deal Brexit, the worst-case scenario could see average home prices drop by up to 30 percent, but there’s no way of telling yet. Surrenden Invest’s Jonathan Stephens said that the housing market would react slower than the stock exchange, and he expects a slowing in the market without a largescale fall in prices with low unemployment and stable mortgage rates sustaining housing demand. Banks may be less willing to lend in a no-deal scenario as the economic outlook would become riskier. It’s expected that in a no-deal situation, the pound may fall sharply in value, which may give investors some opportunity to make strategic purchases. A no-deal Brexit would leave the U.K. with no agreements on trade, customs, travel, or citizens’ rights. Plus, there would be no transition period to give U.K. businesses and organizations time to respond to changes. We will watch developments with interest.

» read full article


Regulatory Update on Marketing Services Agreement

by: Sue Johnson

Part Two: Marketing Services Agreement

Dramatic changes since Cordray’s tenure means more opportunities for marketing service agreements (MSAs). Find out what three attorneys have to say on the matter.
Just a few years ago, a cloud of regulatory uncertainty hovered over Marketing Services Agreements (MSAs) after Consumer Financial Protection Agency (CFPB) Director Richard Cordray expressed his opinion in a 2015 MSA Compliance Bulletin that any settlement service arrangement anticipating future referrals was suspect under the Real Estate Settlement and Procedures Act (RESPA). The guidance was vague and confusing, but one thing was clear, the CFPB believed that MSAs were inherently illegal, and you had to prove that yours was not. Since then, CFPB leadership has changed hands and the D.C. Circuit Court of Appeals, in CFPB v. PHH Corp., rejected Cordray’s view that payments made by one settlement service provider to another in a referral arrangement violate RESPA even if they are for the fair market value of the services provided. So, what does this mean for companies considering or reconsidering real estate MSAs? Here’s what three leading RESPA attorneys, Phil Schulman of Mayer Brown, Richard Andreano of Ballard Spahr, and Brian Levy of Katten & Temple had to say about today’s regulatory lay of the land.

A Dramatic Change, But RESPA Still There

“The change is really dramatic,” Levy said. “The PHH ruling was strong. When RESPA states that nothing in RESPA shall be construed as prohibiting market value payments for services, nothing means nothing. The PHH case effectively gutted the CFPB’s 2015 MSA Compliance Bulletin.” “You see folks reconsider MSAs,” Andreano noted. “You no longer have a CFPB director who is hostile to MSAs regardless of what the law says. But, all the PHH case said was that RESPA says what we thought it said. You still have to structure an MSA in a compliant way.”

The Compensation Must be Reasonable

The attorneys all emphasized that to be RESPA-compliant payments under an MSA must be reasonably related to the fair market value of the marketing services. It should not be based on the expected volume or quality of business, and any periodic adjustments should not be based on results.

The Marketing Services Must be “Actual, Necessary and Distinct”

Marketing services that are compensated should be actual, necessary, and distinct from the services that the real estate broker or agent typically performs in the course of their job. There should be no payments for nominal services or for services for which there has been a duplicative charge.

No Payments for Marketing to Individuals

The attorneys unanimously advised against payments for direct sales pitches by real estate brokers or agents to individual customers. HUD’s 2010 Interpretive Rule on home warranty company payments to real estate brokers and agents spells out why: RESPA prohibits payments for referrals, which are oral or written actions directed to a person which has the effect of “affirmatively influencing” their selection. Homebuyers and sellers are more likely to accept a real estate broker/agent’s recommendation of a provider, so the broker/agent is in a “unique position” to “affirmatively influence” their selection. Therefore, compensation to a real estate broker/agent to market to individual customers is an illegal payment for a referral. What does this mean for MSAs? “It’s OK to pay for marketing to the general public, but it’s not OK to pay for real estate agents’ email promotions,” Shulman said. “Real estate brokers shouldn’t encourage individual marketing by pressuring their agents to refer business to the MSA partner, or require people to get pre-qualified by a mortgage partner.” Andreano recommends focusing on more traditional forms of advertising, such as banner ads or signs. “The real estate agent shouldn’t be chatting [up] the [MSA partner’s] services,” he said.

Regular Monitoring is Essential

Both MSA partners also need to ensure that the services identified in the MSA are performed through data collection and regular reporting requirements. “MSA partners have to keep on top of the real estate broker and be ready to debit payments if five services are paid for, but only four are done,” Schulman said. “You also should do annual on-site reviews.”

The MSA Should be Disclosed

Levy advised that the MSA be disclosed to the consumer, even in the absence of a specific disclosure requirement in RESPA regulations. “If you’re hiding an illegal relationship, RESPA’s one-year statute of limitations could be equitably tolled to extend the liability for violations past one year,” he said. “With disclosure, any claim, regardless of merit, can be limited to the one-year RESPA time frame. There also could be a UDAP [Unfair and Deceptive Acts and Practices] issue under state or federal law that is generally minimized through disclosure.”

Consult with a RESPA Attorney

Finally, and most importantly, remember that RESPA is still being enforced by the CFPB, plaintiff’s bar, and state regulators. Legal analyses of MSAs can be fact-specific, so it’s essential to consult with an attorney with RESPA compliance experience when creating your agreements. Sue Johnson is the former executive director of RESPRO, the Real Estate Services Providers Council Inc. She retired in 2015 and is now a strategic alliance consultant.

» read full article


June's Northeast Region Buyer Traffic Shows Modest Improvement

by: REAL Trends

June's Northeast Region Buyer Traffic Shows Modest Improvement

Demand in Other Areas Remains Sluggish, Consistent with Seasonal Patterns
Key Points:
  • The Northeast Region reported a 0.9 percent year-over-year increase in showing traffic, the first time it has recorded two consecutive months of increases since March 2018 – April 2018
  • As a whole, June showing traffic across the U.S. was down 1.8 percent year-over-year, but it was the smallest decline since August 2018
  • Year-over-year showing activity declined in the West (5.8 percent), the smallest drop in the region since May 2018; in the South (1.5 percent), and in the Midwest (3.9 percent)
For the second consecutive month, the Northeast Region reported a more modest year-over-year increase in buyer traffic while the rest of the U.S. saw signs of showing activity stabilizing, according to the latest ShowingTime Showing Index® report. The 0.9 percent year-over-year increase in the Northeast is a positive sign for the region that had, until May, seen a full year of slower activity. Though the West, South and Midwest regions each saw drops in year-over-year activity, the declines were more modest compared to prior months. The West Region’s 5.8 percent decline is the smallest percentage decline in the region for more than a year, while the South’s 1.5 percent dip is the lowest since September 2018 – the last time the region saw a year-over-year increase in buyer activity.
“Year-over-year showing traffic continues to stabilize, as June’s overall activity was in line with June 2018 while the Northeast Region recorded a modest increase,” said ShowingTime Chief Analytics Officer Daniil Cherkasskiy. “Activity in the South and Midwest remains slightly slower than in 2018, though there is more buyer activity in the lower price quartiles of the market. Pricier homes continue to see less traffic compared to the same time last year.”
The ShowingTime Showing Index, the first of its kind in the residential real estate industry, is compiled using data from property showings scheduled across the country on listings using ShowingTime products and services, providing a benchmark to track buyer demand. ShowingTime facilitates more than four million showings each month. Released monthly, the Showing Index tracks the average number of appointments received on active listings during the month. Local MLS indices are also available for select markets and are distributed to MLS and association leadership. To view the full report, visit www.showingtime.com/index.
About ShowingTime
ShowingTime is the residential real estate industry’s leading showing management and market stats technology provider, with more than 1.2 million active listings subscribed to its services. Its showing products and services simplify the appointment scheduling process for real estate professionals, buyers and sellers, resulting in more showings, more feedback and more efficient sales. Its MarketStats division provides interactive tools and easy-to-read market reports for MLSs, associations, brokers and other real estate companies, as well as a recruiting tool for brokers. ShowingTime products are used in more than 250 MLSs representing nearly one million real estate professionals across the U.S. and Canada. For more information, contact us at [email protected]

» read full article


Housing Sales Slump Continues

by: Steve Murray

Housing Sales Slump Continues

What’s going on with housing sales?
May existing-home sales continued a 13-month slide in year-over-year results. This is despite a nearly 50-basis point decline in the benchmark 30-year mortgage rate to rates that are once again below 4 percent, a modest increase in inventory levels and moderation of rising prices for both new and existing homes. Lastly, this is in the face of the lowest unemployment rates of several generations among virtually every demographic group in the nation.

Tell Me Why?

So, what gives? For the past 40 years, when any of these factors pointed the same direction as they are now, housing sales would take off. Now, with every factor in favor of housing, we see month- over-month declines in existing home sales and flatness in the new home sales segment. Here are some thoughts.
  • New, single-family home construction has not recovered to anywhere near its record highs in the 2004-2005 period. They are barely above one-half of that level. They are at a lower level than almost any year in the past 30 years.
  • Boomers are at the stage where they desire to downsize, but there’s little inventory available to allow them to do so at an affordable price. So, many are sitting on their homes until opportunities come along.
  • Millennials and Gen Z want entry-level housing to begin their journey to a life of homeownership, but there’s little inventory available. Plus, this is also the market where investors and Boomers are looking for housing. This fierce competition is driving up the cost of homes in this segment well above the per-square-foot price of larger homes in many neighborhoods.
  • The mood of many communities, towns, counties, and even some states has turned bearish against home building and growth due to crowded streets, parks, and other amenities. Recently, a major suburb of Denver passed legislation limiting new home construction to no more than 1 percent of the existing stock of homes. A recent report in The Wall Street Journal pointed out that in many east and west coast cities, the level of new home construction is at record lows as well—just as employment and new household formation are reaching record levels in those same locations.

The Bottom Line

The bottom line is that unless (and until) government reduces the cost and complexity of new-home construction, which would ease the many bottlenecks blocking such construction, there’s little way the housing market will change from its current condition. That is unless you think a significant recession in the general economy will help.

» read full article


New Realtor Membership Leveling Off

by: Steve Murray

New Realtor Membership Leveling Off

Indications are that the growth in new Realtor® membership may be leveling off. 
Recent informal discussions with leaders of some of the larger state and local associations of Realtors® revealed that the rapid growth of membership might be leveling off in many markets. This is just as total membership has recovered from the recession low in the 950,000 level to nearly 1.4 million. One outcome of this could be intensified competition for those already in the business. With new, low-cost competition throughout the market, this can’t be good news for incumbent brokerage firms. It also reinforces the need for all brokerage firms to revisit their offerings so that they are more tailored to this new environment. According to our rankings, the highest producers in the industry appear to have captured nearly 25 percent of all housing sales volume in 2018. With the emergence of the iBuyer companies and other forms of low-cost brokerage firms, the total market share of both agents and transactions is shrinking from where it was three to five years ago. The ability to build a brokerage company in this environment remains bright, but it is not what it was in the past.

» read full article


Valuing a Selling Owner’s Real Estate Firm

by: Scott Wright

  The foundation of the sales process is the valuation. Much like selling a home, pricing a brokerage firm to market value is critical as we prepare a firm for sale. As trusted consultants in the residential real estate industry, we get the privilege of working with firms of all shapes and sizes. Whether branded by a major national franchise or independent, flat-fee or graduated commission plan, small or large, at REAL Trends we’re here to guide our clients through some of the most important and life-changing decisions they make as owners. When an owner decides it’s time to sell, it’s our job to prepare them for what’s usually an emotionally challenging journey.

A Tedious Process

Unlike pricing a home, valuing a brokerage firm is quite a tedious process. The financials are a crucial component that guides value, but numerous other factors must be considered. Some of these factors may manipulate the financials as we build our model for value. Expectation management is a huge part of this whole process. When the primary asset of firms in this industry are independent contractors who can leave whenever they want, it’s essential to understand the inner workings of an organization. With smaller-sized firms, we must take a close look at the concentration of sales, particularly the owners’ contribution to company dollar if they list and sell—which in most smaller firms is the case.

It’s About More Than The Multiple

Interestingly, most owners understand the basic principle of value as a multiple of profits. Unfortunately, some don’t understand the qualifiers that go into profits. I’ve had many preliminary conversations with owners who use the bottom line of their Profit & Loss Statement as the number for their internal calculation of value only to find out that the actual number they should be using is radically different. In the valuation world, we use what’s called Adjusted EBITDA (earnings before interest, tax, depreciation, and amortization.) The “Adjusted” part of the equation is often impactful for firms where the owners list and sell.

Owner’s Compensation

If owners draw their commissions like the rest of the agents, the impact may not be as significant. If they don’t, the bottom line of the Profit & Loss Statement can be quite distorted. For example, if an owner generates 0,000 in Gross Commission Income and, at that level, the standard company split is 85/15, then they should be drawing 5,000 off the top. This would result in Company Dollar of ,000. Many times, we see owners not taking a conventional split and merely letting their commissions flow through the company. When owners do this, they pay themselves on the back end via distributions after the company pays all its bills, they get what’s left. The problem is that when owners do this, their perception of company profits is misguided. I’ve had owners tell me that they have profits of 0,000. But, after analysis, we realize that this number is overstated because the owner ran their commissions through the company. Using the example above, if the owner drew their commission like any other agent, then the company profit would be 5,000 (0,000 in stated profits less 5,000 that is the owners’ commissions). Think of it this way; if this owner were to sell, then the owner isn’t going to give the new owner all his commissions; he is going to keep 85 percent. Ultimately, the income factor of a valuation is what a new owner can expect to make on a going-forward basis, all things being equal. If an owner is not drawing on the top end from their commissions earned, then an adjustment must be made to reflect a reasonable income factor accurately. This adjustment can be quite substantial. Again, using the example above, at a 3.0 multiple of adjusted profits, the value would be 5,000 (3 times 5,000), not ,250,000  (3 times 0,000).

Other Considerations

There are other things to consider when it comes to how selling owners are compensating themselves. Are they drawing a salary? Is that salary at a fair market rate for the operational duties they’re performing? Are the owners going to remain with the company after a sale? Are they going to continue to sell? Is the Company Dollar that the owners are generating on an adjusted basis a material portion of the overall Company Dollar? These factors and more should be considered as we build our valuation model. Owner activity is the first thing buyers look at when going through their due diligence. The bottom line: Expectation management is hyper-critical when preparing for a sale!

» read full article


Creating a Memorable Experience For Agents, Buyers, and Sellers

by: Steve Murray

Creating a Memorable Experience for Agents, Buyers, and Sellers

Many of the best performing brokerage firms had a particular “specialness” that played a role in their success.
Retailers of goods and services are told that they need to build a shopping experience to attract and retain customers. It’s not just about the products and services that one offers; it’s what the merchant does that makes the experience memorable that matters as much as the quality of the goods or services.

How Creating an Experience Relates to Brokerage

Thinking about this facet of modern-day residential brokerage caused us to think about great brokerage companies and national realty organizations. Which of them has achieved superior success over the past 30 years? Was there a part of that success that was due to specialness? Is there something to be learned from the past that points one way forward for brokerage firms or, for that matter, individual agents or teams? The answer is yes. Many of the best-performing brokerage firms and national realty firms had that certain distinctive quality that played a significant role in their growth and success. Here are some of the attributes that we think mattered:
  1. Leadership. There was a passionate, involved leader who communicated the purpose, mission, and values of the organization regularly and consistently.
  2. Marketing. There were specific attributes that the firm highlighted that made them different from their competitors. These may have been commission plans, but more frequently, they were business model differences, technology tools, marketing platforms, and educational offerings.
  3. Communication. The leadership also communicated not only how the above attributes benefited the participants in the organization but also how it made them different from others. That helped the participants feel they were part of a special organization.
  4. Relationships. The leadership at all levels worked diligently to build relationships among the participants and the leadership team.
  5. Storytelling. The leadership built stories about the people and achievements, and that reinforced a sense that the organization was exceptional in some way.
Organizations must have financial discipline and operational structure. The specialness won’t matter when a firm can’t manage its business well. But without a distinctive difference built on the characteristics listed above, an organization will be challenged to achieve above-average results—and average results in tough competitive markets won’t work well.

Bright Future

We believe that brokerage has a bright future, regardless of today’s challenges. There are new local, regional, and national realty firms being born every day. Some will achieve a level of success beyond what most might think probable or possible. We believe that building specialness is what will separate those that succeed and all the others.

» read full article


3 Record Stats From America's Best Ranking Report

by: Steve Murray

REAL Trends + Tom Ferry America's Best Real Estate Professionals Rankings

The results are in, and we calculated some statistics about this ranking.
  • The total number of individual agents and teams that met the qualifications in 2018 was just over 14,500 up from approximately 13,500 in 2017 or an increase of 7.4 percent.
  • The total closed sides done by all 14,500 was 1,088,000, and the total closed sales volume was 0.3 billion.
  • Approximately 1.5 percent of all the Realtors® in the country handled nearly 10 percent of all closed transactions and almost 24 percent of all the closed sales volume done in the country in 2018. Each of these numbers represents new record highs for Americas Best Real Estate Professionals.

To view both America’s Best and The Thousand agent rankings

» read full article


Realogy vs. Compass: Analysis and Possible Impact

by: Steve Murray

Realogy vs. Compass: Analysis and Possible Impact

On July 10, Realogy announced it had filed an action against Compass for “unfair business practices and illegal schemes to gain market share at all costs and to damage, or even eliminate competition. To reach its desired ends, Compass steals from, tortiously interferes with, and disparages its competition.” A few observations about our industry as it pertains to the claims by Realogy. First, predatory, borderline, and unethical activity in the recruiting of agents has occurred ever since the National Association of Realtors® (NAR) dropped its anti-solicitation clause from the NAR Code of Ethics 40 years ago. Most brokerage firms could cite various times when their agents were recruited through the spreading of disparaging, oftentimes untrue, statements about the target brokerage. Most leaders can recall incidents of what would be considered unethical conduct in terms of recruiting tactics.

Unethical Recruiting Tactics

How about a broker that showed up in the lobby of a hotel where a competitor was holding its Christmas party and attempted to recruit people on the way to the party? How about a brokerage that put fliers on the windshields of agent’s autos when they are at a company luncheon? What about recruiters who tell targeted agents that they know for a fact that the company is selling or is going out of business? Each one of these is a true story, and some of this conduct continues to this day.

Financial Incentives

As to the offering of financial incentives to lure agents to another firm, that too has been going on for 40 years. The 100 percent commission plan was just one example of offering financial inducements for agents to leave one firm and join another. There have been many others and more today than ever before.  Compass’s offering of money and stock options is just another example, except that they have tons of money to spread around.  It makes them a more deadly and threatening competitor than many from the past. We could go on about this but would be pounding the rubble on this topic.

Tortious Interference

As to tortious interference in contracts, this is another matter altogether. I have personally been involved in 11 or 12 cases of claims of tortious interference in franchise contracts in my career. In every case, the plaintiff won damages against brokerage firms that interfered in a franchise agreement. Thankfully, this was years ago, and most brokerage firms know not to tamper with franchise agreements. I have also been personally involved in two cases of interference and/or breach of employment agreements in the past. In both cases, the judges found the non-compete unenforceable but found that the non-solicitation agreement was enforceable. In both cases, the judges found for the plaintiffs who had been harmed by the breach of an employment agreement with non-solicitation agreements in them. In one case, a judge found that the defendant’s behavior was so egregious that the judge commanded that a special master henceforth would handle all communications between agents and employees for a set period of time.

Inducing Management-level Employees

Thus, a firm that may be trying to induce management-level employees—who have non-compete and non-solicitation agreements with their current employers—to depart that employer and breach their agreements may be adjudged to have committed both a tortious interference claim and a breach of contract issue.  Not being an attorney, I really couldn’t say which. We have for years, in all of our public statements and written articles, stated quite clearly that we believe in the sanctity of contracts whether franchise agreements or employment agreements. Where a firm is found to have caused someone to breach such an agreement, we think it’s actionable by the harmed party.

Out of Business

Lastly, as far as Realogy’s claim that Compass is trying to put competitors out of business, this would likely have thousands of co-sponsors join them in this part of their claim. While Compass may not have a stated aim to put Realogy, Berkshire Hathaway, Keller Williams, RE/MAX and thousands of other brokerage firms out of business, their business strategies are clearly having a negative impact on the economics of brokerage. We’ve seen more than enough financial statements of its competitors than to think otherwise. Again, it’s only its size and financial resources that make Compass any different than HomeSmart, Realty One Group, JP and Associates, eXp, and Fathom who have very low-cost options for agents and are also having an impact on incumbent brokerage operations. Compass is simply using their access to large amounts of capital to expedite the growth in their market share faster than more traditional recruiting tactics may take them.

Summary Thoughts

We are fond of saying to our brokerage clients that if it were always and only about the financial aspect of a relationship between and brokerage and an agent, then every incumbent in the country would be out of business. Clearly, this is not the case. Compass has not and will not likely achieve its goal of 20 percent market share in their 20 markets by 2020. We can look at our rankings of the 1,750+ top brokerage firms and 14,500 top-ranked agents and teams to see that they won’t likely get enough of them to get there in all these markets. It’s just a matter of who the incumbents are in each market and how well many of them have already adapted to Compass and other, low-cost competitors. I have no idea where this challenge from Realogy will end. Time will tell.      

» read full article


Ninja Selling: Real Estate Sales Meetings That Sizzle

by: Larry Kendall

Real Estate Sales Meetings That Sizzle Your 10-step plan for sales meetings that agents want to attend. Your sales meeting is the cultural point of your office or company. Have excellent sales meetings and attendance soars. Your tribe gets bigger, stronger, and more connected. Retention and recruiting improve. Momentum, rising market share, and profitability follow. How do you create great sales meetings? Here’s a simple 10-step template that helps you plan for a one-hour meeting that sizzles.
  1. Return on Investment (ROI). Make sure your people feel that they’re getting a return on their investment of time. Make the meeting memorable. When associates stay afterward and talk about what they learned or are repeating it the next day, you know you’ve made a difference for them.
  2. Goals. A great sales meeting accomplishes as many of the following goals as possible: Connection, Information, Education, Inspiration, Motivation, and Celebration. If you’re achieving these goals, your people will be drawn to your meetings to get their energy fix. They love the energy, learning, and being part of a tribe. Playing upbeat music before and after the meeting adds to the energy.
  3. Appeal to the four personality types.
  • Power People want takeaways (something they can use today in their business.)
  • Party People want to know that they’ll get to talk.
  • Peace People want reassurance that the company and the market are safe and OK.
  • Perfection People want to see some numbers, so make sure you provide market statistics. Also, have a printed agenda for your meetings.
  1. Start on time. (First 5 minutes) Start without really starting. Have you heard of “Realtor Time” (five minutes late)? So, start with a 5-minute inspirational video. The perfection people will appreciate starting on time. The party people will get there by the time the video is over and feel they made the meeting without being embarrassed for being late.
  1. Welcome and opening activity (5 minutes). Welcome everyone (including guests) and start with a group activity. “Turn to the person sitting next to you and share what you are grateful for,” is an example. Or, “Get into small groups of four or five and share the best deal you know about in the market.”  Party people (the largest group of associates) love this exercise because they get to talk.
  1. Celebration! (2 to 5 minutes). Find something to celebrate. Party people love this because it’s fun. Peace people love it because it means all is OK.
  1. Announcements, builders, property pitches. (20 minutes). This is the information stage of the meeting. Have market data for your perfection people. Format this section, so you have control of the time. Do not hand your meetings over to outsiders—lenders, title officers, or builders. If you have a new home neighborhood to announce, make sure the builder knows the time constraints.  Unfortunately, too many sales meetings stop right here and become only information meetings. When that happens, energy starts to leak out of the room, and people stop coming.
  1. Program. (20 to 25 minutes). This should be the main event. It’s the primary reason your people are showing up. The program needs to provide a takeaway. Something they can use TODAY! Your best programs often come from your people sharing how they do something.  The takeaway needs to be consistent with your culture and vision. If resources are required for your people to execute the takeaway, you need to have the resources teed up at the meeting. Avoid, “We’ll be getting you the __________ over the next few days or weeks.” They want it NOW!  They are motivated to act NOW!  Keep the momentum going.
  1. Finish with high positive energy. If you need to cover negative information, cover it earlier in the meeting. Always finish on a high positive. Hopefully, the program will end on a high positive note. If not, finish with an inspirational video.
  1. End on time. Meetings that run overtime are like a fish. They start to smell. People gradually drift away. Respect your people’s time. Control the agenda.  Follow these 10 points, and your meetings will sizzle and so will your company!
 

» read full article


What's Driving Brokerage Profitability?

by: REAL Trends

What's Driving Brokerage Profitability?

In this whitepaper, sponsored by Inside Real Estate, REAL Trends took an in-depth look at the top five drivers influencing brokerage profitability and identified critical elements necessary to execute on them effectively. Those drivers are:
  • Team Productivity
  • eLeads Programs
  • Coaching and Training Programs
  • Ancillary Services
  • Technology Platform
In our survey of brokerages large and small from around the country, the majority of brokerages recognize these drivers, yet some still struggle to use them effectively and to their fullest potential. This whitepaper seeks to identify how brokerages can leverage these profitability drivers.

Whats Driving Brokerage Profitability?

» read full article


When Will Big Data Make a Difference in Brokerage Strategy?

by: Steve Murray

We reviewed a new dashboard from one of the largest transaction management firms in North America a few weeks back. The current data on the performance of agents and the brokerage was incredible. Even more, it had a forecasting toolset that allowed brokerage firms to know its 30-, 60-, and 90-day likely results. It also compared and contrasted how the brokerage was performing against the market.

THE DATA IS THERE

Which brought to mind tools such as Broker Metrics, Real Data Strategies, and TrendGraphix, each of which reads MLS and sold data to do some of the same things. Then, there are the available data tools from companies like Adwerx, BoomTown, SmartZip, and others, that provide excellent information about consumer behavior for their brokerage and agent customers. REAL Trends provides a variety of such data, having access to 25 years of performance data on all forms of brokerage firms through our ranking reports and over 10 years of data on agent performance. Also, REAL Trends has 25 years of brokerage financial performance from which we derive metrics about brokerage firms’ financial performance.

ARE YOU USING IT?

Most brokerage firms do not use this information. Whether it’s their own firm’s financial performance, their performance against the market and competitors or the behavior of consumers, the majority of brokerage firms don’t make strategic or tactical use of this data to operate their companies. There is one case of a firm doing so. Keller Williams Realty International makes use of its global operating platform to track the performance of its market centers in every aspect of the business. Among other things, they can track recruiting results, agent performance, training, and educational involvement by their agents and teams, along with typical financial results. There is little argument that this has been a contributing factor in their growth over the past 15 to 20 years. Imagine knowing the correlation between agent performance and involvement in training programs and how that could be used to increase the credibility of a brokerage leader in the use of that training. Trainers like Brian Buffini, Tom Ferry and Larry Kendall each have systems for tracking the performance of agents and teams who have adopted their programs.

USE THE DATA

In short, it isn’t a lack of big data that holds brokerage firms back from using it to improve performance. In our view, it’s the leadership of the brokerage industry that needs to learn new ways of operating their businesses using this data. Much like the concept of Moneyball (the book and movie by Michael Lewis about the Oakland Athletics’ use of big data that changed how sports teams of all kinds are operated), the leadership and management teams of brokerage firms must not only look at the performance data of their firms and the market, but also must act on that information. It does little good to know you’re getting kicked around in the market if you don’t respond to change your performance. Billy Beane and Paul DePodesta of the Oakland A’s knew their team was underperforming and recognized the data that told them how to improve that performance. However, they had to take the next step and change how they used that data to produce a winning, profitable team.

SUCCESS STORY

One example from our consulting work was from an assessment we did with a reasonably successful brokerage firm that asked us to perform a valuation. The valuation includes a benchmark analysis of revenues and expenses against the firm’s peers. We were able to point out that the data showed that the firm was underperforming in gross margin, had higher-than-normal employment and higher occupancy costs on a per-dollar and per-agent basis. As a result, his EBITDA (Earnings Before Interest, Tax, Depreciation and Amortization) was lower both in total and in per-agent contribution. Armed with this knowledge, the principal focused on improvements in those areas. Now, the firm is much larger and leaner. It now leads its peers in EBITDA and most other vital measurements of performance. The firm is also more valuable than it was by a significant factor. The leader saw the data. He restructured his business to target the key areas the benchmark provided, changed the allocation of the firm’s leadership team in critical areas, and built a firm, as Good to Great author Jim Collins would say, “built to last.” We do believe that the national firms are all headed in this direction with big data and artificial intelligence. Indeed, it will give them a leg up in the environment of the future—although their affiliates must buy into the use of these tools and rearrange how they manage their business. As a result, nothing much will change. One might view, therefore, that nothing has changed. It’s still about the quality and intelligence and relationship skills of the brokerage leadership that will determine who wins.

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Do Lawsuits Against Our Industry Signal an End to Cooperation and Compensation Structure?

by: Steve Murray

Over the past few months, numerous lawsuits have been filed against the National Association of Realtors® (NAR) and some of the large national franchisers alleging that they are engaged in a massive conspiracy against housing consumers to maintain a certain commission level and sharing arrangement. Some commentators have said that they believe this is the beginning of the end of the cooperation and compensation structure of the North American brokerage market.

WE DON’T SEE IT THAT WAY

First, in our consumer studies with Harris Insights from 2001 forward, (and particularly our studies of 2004 and 2005) consumers were well aware that they had choices ranging from selling or buying a home themselves, or using a flat-fee firm, or a discount brokerage firm or a full-service firm. They knew to ask for discounts from the average brokerage commission. Second, consumers reported in these studies that not only were they aware of these options, but a significant share of them seriously considered using them.

MINIMUM SERVICE STANDARDS

Some years ago, REAL Trends was retained by the Canadian Competition Bureau (picture the U.S. Federal Trade Commission and the Department of Justice Anti-Trust Division combined) to study the effects of minimum service standards in various states in America on discount, flat fee, and limited service brokerage firms. We concluded, after interviewing more than 25 firms, that although these firms had to add somewhat to their service offerings, it did not affect their businesses. No consumer is forced to use an agent by law or regulation. If that were the case, then we could blame the regulators or politicians who put them in their jobs for forcing consumers to do so. Sellers who list their homes with an agent do so at arm’s length. First, they don’t have to list with an agent. If they do, they can negotiate the commission. When they do enter into a listing agreement, they know how much the commission is. There is no evidence that we are aware of that sellers adjust their market price net of commission. Most data we’ve seen indicates that the market price is, in fact, the market price. Whether a commission is 1 percent or 8 percent does not seem to have a direct impact on what the seller gets for their home. In REAL Trends consumer studies with Harris Insights & Analytics, the usage rate of agents has gone from approximately 81 percent in 2001-2002 to 90 percent in 2018. Even millennials are using agents more than predicted, at a 92 percent usage. In an age of more technology, limited inventory, and rising home prices, consumers think using an agent is more important and useful than ever before.

WHERE IS THE CONSPIRACY?

Where is the harm to consumers? What we suspect is that there are those who are hugely frustrated that the combination of tech and Wall Street hasn’t been able to blow up the residential brokerage industry as they have done to so many others. Numerous articles are calling for the demise of the agent, or the broker, or the MLS, and that something about it isn’t fair. They all say the same thing. Consumers now find their own homes online, do all the homework, etc., so why haven’t commissions come down? Two things—first, commissions have come down, and they are going to drift even lower in the years ahead. It’s incredible what competition (versus) litigation can accomplish. Second, the housing transaction is infrequent, complex, and consumers know at an instinctual level that if they were to make a mistake in buying or selling a home, it could hurt them badly. So, the usage rate of real estate agents goes up even as the commission rate comes down. Some research we’ve done suggests that the scarcity of inventory, together with increasing numbers of agents explains much of the decline in commission rates.

WHAT’S THE ALTERNATIVE?

Let’s break up cooperation and compensation. Sellers pay their agent; buyers pay their agent. Suddenly, first-time home buyers (34 to 36 percent of all buyers) have to negotiate to pay their agent and, then, pay their agent—on top of all their other closing costs. Anybody want to opine on the impact on first-time home buyers or the homeownership rate? Would this drive more double-sided deals as some buyers go directly to the selling agent to avoid paying any buyer’s agent? Would this cause the MLS to go away and tilt the playing field to firms like Zillow or Realtor.com? Or Upstream? Would a national MLS in the hands of two or three providers be a better situation for consumers than what is available today? Or, would change anticipated from the litigation drive the market to fragment the other way with more off-market or coming-soon listings than are available in the large public exchanges? Keep in mind that the claimants, in this case, are not non-profit public interest law firms. They are not in this to help improve the system, but to extract money from it.

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Northeast Reports First Year-Over-Year Increase in Buyer Traffic Since April 2018

by: Tracey Velt

The U.S. as a whole reports slightly lower buyer traffic, but more stable showing activity.

Key Points:
  • Showing traffic experienced a more stable 2.3 percent year-over-year decline throughout the U.S. in May, representing the smallest such decline since August 2018.
  • The Northeast Region reported a 1.5 percent year-over-year gain in showing traffic, the first increase in the region since April 2018. Real estate agents throughout the U.S. may have to brace for a more sluggish market than anticipated based on last month’s decline in home showing activity, the ninth consecutive month of a nationwide year-over-year decrease according to the ShowingTime Showing Index®.
  • Showing traffic was slower in the West (10.6 percent), the South (4.1 percent) and the Midwest (3.4 percent) compared with the same time last year.
Real estate agents throughout the U.S. may have to brace for a more sluggish market than anticipated based on last month’s decline in home showing activity, the ninth consecutive month of a nationwide year-over-year decrease according to the ShowingTime Showing Index®. Buyer traffic was down 6.5 percent across the U.S. compared to the same time last year. The diminished showing activity was felt in every region throughout the country, most notably in the West, where for the 13th consecutive month showings declined on a year over year basis. “Showing activity stabilized and is holding steady, but it is still slightly off from the higher levels registered in 2018,” said ShowingTime Chief Analytics Officer Daniil Cherkasskiy. “The slowdown in showing traffic continues to be concentrated in the upper price quartiles across the U.S., with less expensive homes registering the same or slightly higher levels of showing traffic than at the same time last year.” The ShowingTime Showing Index, the first of its kind in the residential real estate industry, is compiled using data from property showings scheduled across the country on listings using ShowingTime products and services, providing a benchmark to track buyer demand. ShowingTime facilitates more than four million showings each month. Released monthly, the Showing Index tracks the average number of appointments received on active listings during the month. Local MLS indices are also available for select markets and are distributed to MLS and association leadership. To view the full report, visit www.showingtime.com/index.

About ShowingTime

ShowingTime is the residential real estate industry’s leading showing management and market stats technology provider, with more than 1.2 million active listings subscribed to its services. Its showing products and services simplify the appointment scheduling process for real estate professionals, buyers and sellers, resulting in more showings, more feedback and more efficient sales. Its MarketStats division provides interactive tools and easy-to-read market reports for MLSs, associations, brokers and other real estate companies, as well as a recruiting tool for brokers. ShowingTime products are used in more than 250 MLSs representing nearly one million real estate professionals across the U.S. and Canada. For more information, contact us at [email protected].

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Trends in Valuations and Mergers & Acquisitions

by: Tracey Velt

Trends in Valuations and Mergers & Acquisitions

Experts Dispense Advice at REAL Trends’ DealMAKERS Conference.
The real estate market is softening, and home sellers who were accustomed to being in a strong negotiating position are seeing their advantage slip away. As go homes sales, so go brokerage sales, said Scott Wright, vice president of REAL Trends at the DealMAKERS conference, a precursor to the annual Gathering of Eagles meeting. In 2017, REAL Trends hosted the first DealMAKERS conference, which was designed to answer the most critical questions brokerage leaders have about how to value their companies and teams. That year, the seller's market was peaking. What a difference two years make, said Wright, adding that some brokerages that were once candidates to sell may now be deciding to buy instead. Since valuations have come down, they may look to merge with or acquire another firm rather than try to wait for another upturn to improve their acquisition deal. In a panel presentation called “Valuation and Deal Terms,” Wright was joined by Alicia Vivian, the chief financial officer of REAL Trends, who works with Wright to determine the valuation of brokerages as part of REAL Trends’ consulting work. The panel was rounded out with two executives from franchises that have been actively acquiring brokerages: Chrissy Oliver of Compass and Alex Seavall of HomeServices of America. The most significant change for brokerage acquisitions is that the transactions are commanding less up-front cash, much to the chagrin of sellers, noted Wright. "We see an environment with margin compression at the top," said Wright. "Valuations are determined by the last 12 months of activity, which hasn't been as strong." Brokerages, said Wright, do not get to cherry-pick their best year from several, "it's 'what have you done for me lately,'  "he quipped. The key to preparing for a potential transaction, said Vivian, is to ensure the proverbial house is in order with regards to financial statements, contracts, and agent productivity. “It makes the process much easier when you have clean and organized data available at your fingertips,” she said. “Someone in the organization who can speak to the financials should be prepared to do so.” Another factor in the M&A environment is that Realogy Holdings, which had been busily acquiring brokerages, announced in January 2019 that it was going to suspend acquisitions. That’s taken some pressure off buyers to act, the panelists agreed. It’s worth noting that HomeServices of America recently displaced Realogy’s NRT from the REAL Trends Five Hundred ranking of brokerages, although NRT still beats HomeServices when it comes to the total dollar volume.

Will this have any bearing on future acquisitions?

Seavall of HSA said “our formula has evolved,” adding that the organization looks for brokerages with strong leadership who are demonstrating growth despite the declining market. “We believe in the local ability of management to make the best decisions,” something they had “learned the hard way.” Acquisitions have helped Compass quickly grow from its launch in 2012, said Oliver, who oversees strategy and growth for the New York-based tech brokerage. Oliver noted that Compass is now focused on its 22 markets and gaining market share in those areas. She said that 2018 was an expansion year, in which the franchise opened in 11 new markets. In a session that followed, “Legal and Tax Issues,” attorneys Jim Thomas and Barbara Wells of Minor & Brown law firm discussed how the 2017 Federal Tax Act would impact the business. It's paramount to choose the most favorable corporate structure as you consider an M&A down the road, they noted, reviewing the differences between S Corporations, C Corporations, and partnerships. Acquiring stock to buy a brokerage is too risky, they said and does not confer tax advantages. It's risky because the buyer is "acquiring every skeleton in the closet," said Thomas.

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Relationships (Not Technology) Matter Most

by: Tracey Velt

Relationships (Not Technology) Matter Most

2019 REAL Trends Gathering of Eagles
Missed the event of the year? No worries, we’ve got the top takeaways from the conference ready for you. This year's Gathering of Eagles brought together leaders from all models of real estate brokerages to hear from industry icons, technology gurus, advertising experts and more. Missed the event? No worries, we cherry-picked the most pertinent tips and quotes from the event. The overarching theme: Technology only serves to help agents facilitate relationships. While the focus has been on technology, the truth is success in real estate has always been—and will always be—all about the relationships.
  1. Facebook has the power. Well, not really, but Ken Auletta, keynote speaker and author of the book, “Frenemies,” regaled GOE attendees with an insider view of the advertising world. Included in that analysis was the fact that social media is manipulating your decision to take action, buy something or sign up for a service. Of course, we all know that, but we’re still getting sucked in. Something to think about when you’re developing your next Facebook ad: no one likes being manipulated, so consider transparency and reaching out instead of gimmick ads.
  2. One-stop shops are the future. Robert Reffkin of Compass talked about making his company the “Amazon of real estate.” He thinks that along with the already-in-place Compass Concierge, which allows his agents to be full-service advisors, along with mortgage, title, and insurance components will offer the perfect way to fight the culture of the discounters. He also announced that listings agents always get the lead, even if they’re not with Compass. “On the Compass website, if you’re the listing agent, you get the lead, no matter what. It creates transparency, and creates the foundation for various ways to partner,” he says.
  3. If you can’t beat them; join them. The GOE iBuyer panel (by the way, they hate the term iBuyer), wants to make the transaction more straightforward for the home seller, so you have something in common with them. One tip: During your listing presentation, give prospective sellers all of their options, so you don't get left out of the transaction.
  4. Tech is great. but... Sure, Keller Williams is rebranding itself as a technology company, but their leaders are smart enough to know that technology is about making the transaction more efficient for the buyers and sellers. It won't take the place of great relationships. Coach Tom Ferry posed the thought that "Agents don't care about technology. They care about whether their kid is smoking pot, how they're going to lose weight, and when they'll get their next listings." In response, Keller Williams CEO Josh Team said, "I agree they don’t care about disruption on a macro level, but when it hits their bottom line, they care a whole lot. Agents do care about technology because to stay relevant, they need to compete with disruption." Ferry also mentioned that brokers should not give their managers an office. "Managers should be out on the floor getting to know the agents."
  5. Go back to basics. Ninja Selling's Founder Larry Kendall discussed the relationship-building basics that brokers and agents should get back to ASAP. “Focus on productive activities, and the sales will take care of themselves. We call these activities FLOW. Have your sales associates keep a weekly log of their flow activities (handwritten notes, live interviews, real estate reviews, mailings, etc.) If they are in a slump, your first question is, “Can I see your activity log?” Sure enough, you will notice a drop off in their activities about 45 to 90 days before their production slump. Activities predict production. Do a pattern interrupt! Get them back into the flow again and logging their activities.
  6. It’s time to tell your story. Author and Coach Mike Staver says to increase productivity, you have to reduce the noise (internal and external). To retain agents, he says you must be willing to tell your story. "Telling people why you’ll go to battle to get them over the hill will do more for you than promising them money. Most agents will tell you it's not about the money. The higher the percentage of people who leave you for the money; the more likely you will resign yourself that you can't compete against money," he says. So, get good at getting to know your agents and telling your story.
Telling people why you'll go to battle to get them over the hill will do more for you than promising them money. - Mike Staver

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Hotspots Around The World

by: Peter Gilmour

Hotspots Around the World

Transportation and new developments drive global hotspots.
Global residential hotspots continue to emerge, ranging from emerging technology centers to areas of significant new developments and those transformed by new faster transport links. We have seen many of these areas in North America. Delray Beach, Florida, situated close to two airports and recently serviced by the new billion Brightline train, is a good example. Detached family homes around 3,500 square feet with a pool start at around million with similar-sized townhouses starting at million. Boston's Seaport District, near the Financial District, is popular with young professionals and older residents alike. With over 11,000 residents, the area is well serviced by cinemas, restaurants, and bars, serving local fare. Two-bedroom apartments start at about ,800 per square foot with developments commanding the best views close around ,000 per square foot. Knight Frank, in their 2019 Wealth Report, has also identified several global hotspots—areas that are predicted to outperform the rest this year.

Lucca, Italy

Lucca, Italy is a scenic, walled city in Tuscany. The historic center comprised cobbled streets, shaded piazzas, art galleries, restaurants and many churches situated within the old city walls. Lucca offers a great lifestyle and sense of community close to the town of Pisa and the Mediterranean coast. It provides an alternative to the more tourist-filled, and a renovated three-bedroom apartment starts at 0,000 with larger apartments starting at .6 million.

Kowloon, Hong Kong

Kowloon in Hong Kong is in the Hung Hom area situated close to the exit of The Cross Harbour tunnel from Hong Kong Island. The city has traditionally been home to blue- and white-collared workers, but now has a large, new metro station to add to the road and ferry links to Hong Kong Island. The impact of the massive rail link is being felt in the nearby real estate with prices rising steadily. Two- and three-bedroom apartments are now priced between ,300 and ,500 per square foot. Hung Hom is also an area of delicious, authentic Chinese food.

Geneva, Switzerland

The third hotspot that Knight Frank lists in Geneva, Switzerland, a sophisticated lake city that I also visited recently. Steady development and price growth are happening in the Trois Chênes area, east of the city, which has been transformed into a new transport hub. A new rail link with the French Alps will provide fast connections to Evian and other cities in France as well to the Geneva Airport. Freehold two-bedroom apartments in Trois Chênes start at 0,000 while four-bedroom homes are selling for .6 million and upwards. Other hotspots in the Knight Frank report are the Wynyard Quarter, Auckland; Chelsea, London; St. Kilda Road Precinct, Melbourne; Applecross. Perth and the Pasadena area of Los Angeles, California, among others. These areas are all demonstrating strong price appreciation and are likely to attract savvy home buyers and investors in 2019.

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Humans Are The Value Wedge!

by: Larry Kendall

Humans Are The Value Wedge!

Your brokerage's unique personality and knowledge are what give you the edge.
Have you observed that money flows to value? Our value proposition typically answers three basic questions:
  1. How do I solve a client's problem? (pain)
  2. How do I make them feel good? (pleasure)
  3. How am I different from competitors? (value wedge)
The third question involves our value wedge, as shown in the diagram below.

value wedge

Value Parity is what nearly all sales associates and companies provide, including competitors.  Examples for a seller include a yard sign, multiple listing service (MLS), and home brochure.  Nearly everyone offers these services, so they are not differentiating. The seller wants to know what we do that is different and valuable. This is the Value Wedge. What is the most significant component of the value wedge? In my observation, it is the human factor–the unique personality, caring, knowledge, rapport, and skills of the person delivering the service. Take the human element out, and you come close to having a commodity. Commodities have a reduced value.

Are We Improving Service?

In our efforts to improve technology, are we enhancing our service or commoditizing it? Here's an example from the mortgage industry. After five days with 116 top-producing mortgage loan officers, they all agreed on one thing: Their companies’ efforts to improve technology had commoditized certain parts of their business, making it harder for them to build relationships, counsel borrowers, and create a value wedge. Buyers jump on the various prequalification apps to find the best rate. What buyers need is to find the best loan for their situation.  This comes with counseling. For example, if the buyers have limited cash, the best loan for them may be one that takes less cash but has a slightly higher rate.  The opportunity for the loan officer to counsel the borrower to find the best loan may never happen. In many cases, the value wedge and the human factor are being eliminated in the prequalification process. By the time the loan officer sees the computerized prequal and follows up on it, the buyers are confused. Has this process improved the borrower’s experience? According to the loan officers, it has increased confusion and lowered conversion rates from prequal to application. What about the real estate brokerage industry? Will the current tech race and infatuation with ibuyers commoditize the brokerage transaction? Is technology making it better consumers?  Is this effort consumer driven or industry driven? Where should you place your bets? Jeff Colvin, in his book, Humans Are Underrated, What High Achievers Know that Brilliant Machines Never Will, says the soft skills of Empathy, Creativity, Communication, Collaboration, and Relationship are the critical 21st Century Skills. He believes the human factor will be more critical than ever. Humans are the value wedge.

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Trends Come to Fruition

by: Steve Murray

Trends Come to Fruition

Future trends shared at the Gathering of Eagles over ten years ago are now business as usual.
Many years ago, we had the pleasure of having Rich Barton, then and now CEO of Zillow, and Channing Dawson, co-founder of HGTV, present to our guests at the Gathering of Eagles. We thought so much of what they shared, that we had them back two years later. Among the many insights, Barton shared was that “information wants to be free to all, accessible and available.” He said that those who attempt to stand in the way of this trend were fated to be left behind. He didn’t share this with arrogance but rather with a sense of inevitability. Dawson shared two key points that, on the one hand, left everyone scratching their heads and on the other, laughing about their own experiences. In the first instance, he said there was an entirely new world headed our way. He said that there would be a new universe where people lived, worked, shared, and commented—where people’s attention would be drawn beyond anything we had seen before. He shared that one such firm, Facebook, was one to watch but that it could be them or others—or multiple others. Dawson also shared that, while it was important that brokerage firms should have young marketing and technology talent around them to interpret these new trends, it was just as important that someone with gray hair also be the loop—to keep an eye on the youngsters. I also recall that at a dinner with Rich and Channing with five brokerage CEOs, it was clear that while Rich and Channing felt strongly about what was coming, those of us with longtime ties to brokerage didn’t fully understand its implications. We’re starting to now.

THE AGE OF THE INTELLIGENT BROKERAGE AND AGENT

We had the opportunity this spring to hear about the plans of each of the largest national real estate organizations as to their current and future technology and data investments and plans. In some cases, we reviewed the presentation of what was already built and what will be coming. We’ve also looked into non-brokerage firms, such as with Zillow and Realtor.com, Lone Wolf and CoreLogic and the direction of their technology and data developments both from public statements, deployed services and personal interviews.

IMAGINE ANY QUESTIONS

A brokerage or agent could ask, and we are entering a time where the convergence of data and AI can search and find answers. These systems tend to get better and smarter the more they are in use.

OUR VIEW

Call it the age of the intelligent brokerage and the knowledgeable agent. As with Moneyball, how big data and the application of intelligence arising from the data, changed sports at all levels forever. Systems will combine not only listing and sales data, but community data into one platform—one aggregated site. This includes all closing and tax data; social media interaction, whether through actual social sites or through other internet searches—and not just about housing; real estate education sources, demographic data about households, spending patterns, and habits and how those relate to other data, such as equity in a home; other societal and demographic data, such as age of children, vacation plans etc., and hundreds of other data points; and information collected and from such devices as Siri, Alexa and Google Home. Now, apply artificial intelligence (AI), or learning systems that access all of this data to discern patterns of consumer behavior as to housing, mortgage nance, investment decisions, etc. Imagine the questions one might ask such a system and the answers it could derive.
  • Who are my best candidates for purchase or sale in the next 3-6-12 months? (An easy one)
  • What are the pricing patterns expect- ed in the next 12-24-36 months in the neighborhoods where my clients live?
  • Which agents on my roster are most likely to increase their business over the next 12 months based on what their database looks like, how they’re connected to those clients and customers (based on the frequency of interactions), and what the potential turnover looks like in that database? What does this mean for potential income for the agent and the firm?
  • Who are the agents who might fit best with my brokerage? What is the profile of new people taking the real estate test and getting a real estate license, and how do I focus on those who t best with my firm?
  • Based on the database of clients and customers, and the retention of data from internet searches, what does the next year look like for our agents and our firm?
  • What are the most effective ways to add to our databases of clients and the best ways to reach and stay in touch with them?
  • What messaging is most useful to reach sellers? Or buyers?
Imagine any questions a brokerage or agent could ask, and we are entering a time where the convergence of data and AI can search and find answers. These systems tend to get better and smarter the more they are in use. Is it three years, five years or more before this all becomes a reality?

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What's Impacting the Value of Your Firm?

by: Steve Murray

What's Impacting the Value of Your Firm?

Key factors to consider when evaluating the value of your brokerages.
REAL Trends performed between 200 and 250 formal valuations in the past year—about equal to the year before that, and 50 percent more than in years before that. While some of these are for the sale or purchase of a brokerage firm, just as often they may be for the purchase or sale of interests in a brokerage, divorce within families, life insurance, estate gifting, and other general purposes. We hear from brokerage leaders often on this topic and read other sources from time to time as to what factors, other than the actual financial results, are examined when doing a valuation.  Here we review and few of the more critical factors that affect the ultimate value of a brokerage firm, regardless of the reason for the valuation assignment.

Location

The valuation of residential brokerage firms (and related entities such as mortgage, title insurance, escrow, and property management) is often affected by the size of the market where the client is located. Larger markets generally bring higher valuation results. This is because there are likely more purchasers or investors both inside and outside of the market that would have an interest and because the upside opportunity to grow an acquired business is higher in a larger market than one that is smaller. Many acquirers are seeking to build a scalable firm, and that is far easier in larger markets. There are, of course, exceptions. A large, market share­ leading brokerage, in a smaller market, may be valued as high as a sizeable non-market share leading firm in a larger market. Again, location comes into play as that large market share leading firm in a small market still needs to have some proximity to a larger market to attain an equivalent valuation.

Corporate Structure

The vast majority of brokerage firms (and related entities) are some form of a pass-through legal entity such as a partnership, an LLC, or an S corporation. A brokerage firm with this kind of structure generally will see no adjustments, positive or negative, in their valuation. For those few that are organized as C corporations, the situation is different, and most of the time, it harms valuation. Why? Most buyers (in fact virtually all) desire to purchase the assets of a brokerage firm, and not it's stock. This is for both liability and tax reasons, and it has been the case for the past 25 years at least. However, a seller of assets in a C corporation generally faces ruinous double taxation on the proceeds from the sale of assets out of a C corporation as they first have to pay capital gains taxes on the internal gain, then pay personal taxes to extract monies from the C corporation as salary, bonus or dividends. Thus, purchasers do not want to buy shares in a brokerage, and sellers do not want to sell assets from a C corporation. The standoff results typically in the purchaser agreeing to purchase the shares of the seller (rather than the assets) but at a discount which leaves the purchaser no worse off from an after-tax point of view.

Compatible Cultures and Commission Plans

There is a multitude of types of residential brokerage firms today with far more diversity in commission plans and service delivery than in years past. This is neither good nor bad for the industry, but it does affect valuation. In the past, the largest brokerage firms would be generally considered traditional, full-service with some form of graduated commission plans.  The Gross Margins (Company Revenue) of these incumbents were usually within a specific range of each other. Competition generally kept a lid on a brokerage firm having a significantly higher Gross Margin than their chief competitors. Today, many large firms have entirely different types of plans, many are lower cost, with less infrastructure, less managerial overhead, lower levels of office space, etc. The number and size of these kinds of firms have grown substantially over the years in many different markets. The challenge for them is that there aren’t many in each market and the larger national and regional firms that are the major investors in residential brokerage firms can’t mix the plans they have in that market with such a firm. Nor are there yet large national firms with war chests to acquire such firms (although there are at least three we are aware of raising funds to do just that). A firm with a flat monthly and transaction fee plan, with a Gross Margin of 11 percent is not going to be compatible with an acquirer with a Gross Margin of 20 percent. Our experience is that such an acquirer, although desirous of the market share that the lower Gross Margin firm may have, will look elsewhere for growth given the incompatibility between the firms. Further, given the lack of capital (thus far) among the brokerage firms with lower Gross Margins, there is lower liquidity (and hence lower valuations) for these kinds of firms. As we comment, we do believe this is changing as several firms of this kind are raising capital to expand. Likewise, a brokerage firm that has a measurably higher Gross Margin than the investors or purchasers in a particular market may have the same problem as the lower-cost brokerages.  Where most of the purchasers in a given market have average Gross Margins of 20 percent and a seller is at 28 percent for example, the purchaser will be leery of trying to both pay for the higher Gross Margin firm and then figure out to how to keep it there when their other local operations are at 20 percent. Of course, this is not as much of a factor when the purchaser has no local operations. However, even in this case, purchasers are now wondering not only how the higher Gross Margin brokerage accomplished it, but how much longer it can be maintained in the market of 2019-2020. In addition to compensation plan factors, other cultural factors that come into play. These include the level of support service differences between two firms, the history of support for core services, branding (national branding or local brand name), office structure, per person productivity and other such factors.

The Importance of Leaders

Among the most important cultural factors is that of the continuation of the leadership of a potential seller. Our experience has shown that this is the single most crucial factor.  Most leading brokerage firms, regardless of type, location, or compensation plan, has a leader or leaders who built the company. Future success is highly predicated on the retention of these leaders. We won't belabor this point here, but the ultimate value of a brokerage firm is highly affected by the continuation of the leadership in some form.

Franchise Affiliation

This is among the most misunderstood factors of all the non-financial factors affecting the valuation of residential brokerage firms. Most franchise agreements restrict the ability of an affiliated firm from selling shares or a controlling interest to other parties without the permission of the franchiser. The history of the actions of franchisers is that they do not approve of such transfers or sales unless the franchised brokerage remains in the current franchise. This history goes back 35 plus years. This limits the number of purchasers for such a firm. Logic instructs us on this point.  A firm with five potential suitors versus one potential suitor is generally going to have a higher valuation. It’s true that the franchise itself has contributed to the increase in the value of a brokerage firm.  We are not arguing that point. It’s more likely true than not, otherwise, why would intelligent brokerage leaders agree to the franchise in the first place, absent some value they believed they were getting in the exchange? Our experience indicates that regardless of a franchise brand, the value of a franchised brokerage does increase in most but not all cases as the franchise agreement near its end. That’s because that franchised brokerage is approaching the point where they may access a far broader market for their firm than that within its franchise brand. Note that we say in most but not all cases because then the valuation has to take into account all of the other non-financial factors we list here together with the financial considerations.

The Housing Sales Market

On top of all these factors, there is the market place itself. The current market for most brokerage firms is certainly more bearish than the market two years ago at this time. When housing markets are stable to increasing, then values typically move upwards. When housing markets are headed down, as they have been doing since the first quarter of 2018, then brokerage valuations are going to either be flat or in decline.

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