REAL Trending Episode 58: Business Fundamentals and Valuations

REAL Trending Episode 58

Business Fundamentals and Valuations

Find out the two key things brokers should be doing to stay profitable (and what not to do!). Plus, Steve Murray talks trends in brokerage firm valuations and some key things to note about the market.

Steve Murray

From REAL Trends, the trusted source for real estate industry news, this is REAL Trending episode 58. We’re breaking down the trends of the week and showing how they impact brokers and agents. I’m Steve Murray, President of REAL Trends. Today, we’re discussing ignoring the noise. Secondly, valuation trends, and third, sales up, pending down. So let’s jump right in.

All kinds of news rambling through the industry the last week or two about charges and counter charges between Compass and Realogy being played out in the press. We’ve been contacted a number of times for our comment, and frankly, first of all, we don’t know anything about it factually, nor do most of the readers out there. So why is it worth spending any time thinking about it?

Business Fundamentals

One of the big things that leaders, managers, top agents, and teams need to be focused on right now is their business and their business fundamentals. There’s all kinds of noise about stock prices, Realogy and RE/MAX down and the private valuation of Compass, and who’s doing what to whom and all kinds of noise.

My friends, the most important thing you can do right now is pay no attention to that kind of news. What are you doing to build your business? Lower your costs, stay focused for the fall fourth quarter of 2019. As we’re going to talk about in a moment, in July, existing home sales ticked up a little, two tenths of a point according to NAR, but the pending home sales index was off. We’ll get to that in a minute.

Here’s the thing. As we’re apt to say for brokerage companies recruiting and developing talent and spending less money than you have coming in are the primary functions of a brokerage. And to be successful, you must be focused on those. How much time are you getting dragged away, either reading about, talking about, or thinking about whether Realogy is suing Compass, Compass suing Realogy, or the stock price of RE/MAX is down, or the valuation of Compass is up?

It has no bearing on whether you’re going to be successful through the end of the year. Do you have a list of the three top priorities for your business, whether you’re a brokerage, an office manager, or you’re an agent, or you’re a team? Are you focused on those things they’re going to produce more business and more profit through the end of this year, and frankly, for all of next year and the years beyond that?

We’re in the trends business and the reporting business and the research business here at REAL Trends. But even we have grown weary of the nonstop constant drumbeat of information about all these things that have nothing to do with whether our clients and customers, our readers and the men and women we call friends and business associates in this industry are going to succeed through these very trying times.

Our recommendation is you make sure that when you’re out of bed in the morning, as our friend Gino Blefari has said so many times in the past, don’t get out of bed and first thing you do is read the news, it’ll just depress you. Well, some of the news in our industry is not depressing, it is distracting. Stay focused, ignore the noise.

Valuation Trends

Second, valuation trends. We are still doing 15 to 20 valuations a month and have been doing that or more every month for the last two and a half years here at REAL Trends, all kinds of brokers, all regions. We’re also representing a record number of clients for sale and have closed several this summer, including transactions recently in Virginia, Florida, and Texas with more on the way in the Midwest and the far West of all kinds, all brands, all models.

Here’s the key. The housing market is down, profit margins are down, Realogy is no longer buying brokerage companies, except for Rawlings, home services has reset what they’ll do when they’ll do it and how much they’ll pay, so has the Hanna family and other big purchasers. Sellers, you must reset your sites of what is doable and achievable. We are back to the days when most of the buyers are other brokerage companies, either in your market or in your region, and they are more nervous or let’s just say just as nervous as you are.

That is reflected in what we’re seeing in the valuations of brokerage companies. We’re looking at letters of intent several a week, where the buyers are expressing their reluctance to pay top prices and excellent terms like more cash down. Those deals are not where they were three years ago. Any more than home values in the upper end particularly are where they might have been three years ago, particularly before the 2017 Tax Act limited the deduction of mortgage interest, property taxes, etc.

Valuation trends, however, they’re not falling off a cliff, but they’re clearly off from the peak two and a half years ago. Everybody considering buying or selling needs to keep that in mind. If you need guidance on that, go to our website, look at our publications, and you’ll see a PDF free, Guide to Valuing Small to Medium-Sized Brokerage Companies. It will give you everything you need to know about what’s going on in the market and how to look at doing deals.

We don’t know when this trend will stop, when it will go down further, or when it might head back up, but certainly, it’s not going to change hugely in the next four to six months from all that we can tell. Lastly, is we mentioned a little bit ago, the National Association of REALTORS reported a few weeks back that existing home sales in July actually went up from the same month a year before two tenths of a point. That ended 16 consecutive months of year-over-year decline in existing home sales.

Now, these weren’t catastrophic drops. They were a point or two each month, and were down probably 3% to 4% from where we were a year ago in terms of existing home sales. Instead of 5.5 million existing home sales, likely were more like 5.3 million existing home sales. So it’s not catastrophic. But that together with competition for top producing agents is putting pressure on gross margins and net margins for brokerage companies.

We don’t know what’s going to happen next with existing home sales or new home sales. New home sales been stuck in a rut in the 600,000 plus new homes sales annually for a long period of time now. It may be trending up a little bit, but nothing dramatic. So focusing on creating inventory opportunities, focusing on, by the way, what we’re hearing from our clients, top teams and brokerage companies who are doing, for instance, their own iBuyer programs, or partnering with people like Knock, Opendoor, Offerpad to offer these services, or some brokers doing it themselves with their own credit facilities are really excellent ideas to attempt to create more inventory.

Because let’s face it, sales are derived from homes for sale. Inventory, one of the primary focuses in these kind of markets. Therefore, for any brokerage agent or team must be the focus on uncovering new inventory opportunities.

Learn more about industry trends, marketing and technology strategies, as well as listening to past REAL Trending episodes on our website, www.realtrends.com/blog/. This has been Steve Murray. Until next time.

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