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REAL Trending Episode 68: Gross Margins, Brokerage Performance and the Cost of Being Distracted

Feb 5, 2020 1:27:30 PM

Steve Murray: From REAL Trends, the trusted source for real estate industry trends and news, this is REAL Trending episode 68. We're analyzing the most important trends affecting brokerage companies, teams and agents. I'm Steve Murray, president of REAL Trends, and today we're discussing gross margins, brokerage performance and the cost of being distracted. What do these trends mean, and how can brokerage firms best deal with them?

Gross margins, the money that a brokerage company has left after outside referral sources, agents and co-brokes have been paid, declined to a seven year low as of calendar '19 year end results. REAL Trends develops this data from the 100 plus valuations we do a year, plus another 50 to 60 firms who submit financials to us for other reasons. So broad spectrum of different kinds of brokerage companies from flat fee to cap company dollar, to graduated commission plan and 100% commission plan brokerage companies.

Steve Murray: The gross margin for all firms in 2019 was down to 13.8% compared to 22% six years ago. So roughly a third decline in gross margin. Probably no surprise to anyone listening to this podcast, but there are a couple other pieces of information that are interesting to note about 2019. Number one, the transaction size per agent actually ticked up. Now this could have something to do with the sample size of the brokerages we covered, the 150 to 160 firms included.

But generally it's been 150 to 200 firms each year of our sample for the last six years. Interesting also to note that while the gross dollars per agent decline, that is the per agent contribution to gross margin declined a little bit. Profit margins across this sample actually ticked up a little bit in '19 over 2018 from 3.7% to 3.8%. lastly in our analysis, it was very interesting to note that the commission rate from our sample again, did not as it had in the prior six years.

Steve Murray: It held firm. Some of this is not good news for brokerages, but some is actually very good. Where do we see the good news in this? Brokers are adapting to this new highly competitive environment by reducing costs where they can. While they see reduced gross margins, they're managing to hold the line on profit margins. Keep in mind also this profit margin only includes brokerage and does not include revenues for mortgage, title, escrow or property management or insurance. So while it's not great news that gross margins are declining, it is positive news that brokers are adapting to this new environment and maintaining their profit margins.

Steve Murray: One tip for today for all broker owners, and this goes for teams and agents as well. Pull out that general ledger, that P&L, that QuickBooks report, that checking account statement for 2019, and go down line by line by line and find out where you spent your money. Where did you spend it? We had a conversation with a client recently, a fairly large firm, 30 million in gross revenues.

We located almost $400,000 of expenses that the owner was just not aware they were spending for things that were not producing new agents or improved productivity or more sales. In fact, they weren't even related to these things. So the tip for today. Yes, gross margins are down, profit margins are holding, productivity is even up a little bit. Go examine those costs. That's our tip for today.

Steve Murray: Secondly, brokerage performance. At the Gathering of Eagles, April 29th to May 1st here in Denver, we're going to reveal information on the performance of the brokerage industry for the last five, 10 and 20 year period of time. The results are going to surprise everyone. Further, they will point to where brokers should be focusing as opposed to perhaps where they have been focusing. Here's a tip ahead of time.

Almost all the improvement in brokerage operations for almost every model and every brand and independents included over the last 10 and 20 years has been driven mainly by the increased sales price of the homes we're selling, and not in total transactions, not in agent productivity, not in any of those areas. Mainly the information is going to show that far too many brokerage companies of all types in all regions are relying solely on the increase in the prices of the homes we're selling to boost their financial results.

Steve Murray: Now, I clearly understand that commission revenues are driven by the sales price and not transaction sides. What is interesting is that if we look at a shorter term look, five and 10 year periods of time, there are hundreds of brokerage companies who have increased their transaction sides far faster than the market as a whole. So when we get to the Gathering of Eagles, we're going to be talking about what are those people doing that enable them to grow faster than the market and most of their competitors.

In fact, we're going to have a special panel for CEOs who are the fastest growing in four different brands of brokers, and four different models who are either number one or number two in growth in transaction sides organically. How did they do that? It is doable. There just aren't enough brokers focused on it. One more item on brokerage performance over the long term.

Steve Murray: There clearly are some questions surrounding the benefits of doing large acquisitions, either in market or outside the market over the long term. We'll reveal this detail and more at the Gathering of Eagles, April 29th to May 1st. It's worth coming to hear the detail and the solutions that are there. Lastly, the cost of being distracted. There are numerous recognition and awards, publications and events in our industry.

Most powerful, most influential, best known, all kinds are out there. It's interesting to note when I look at the brokerage performance, the top performing brokers of the last five years, and I just look at the top 50. The 50 best performing brokerage companies over the last five years, not one of them was mentioned as the most influential, the best known, the most powerful, the this, the that, not one of them. Also, the individual running the fastest growing training organization in the country was not mentioned in any of these reports. Fascinating, isn't it? We refer to this as the cost of being distracted.

Steve Murray: This business, as we have said and you have heard on these podcasts in the past, the business of brokerage and agency, if you will, for agents and teams is the attraction or recruitment of customers if you're an agent or a team, and if you're a brokerage, the attraction of talent. Secondly, how do you develop that talent, or how do you develop your database to capture and retain more clients and customers over a longer period of time? And lastly, as we talk, how do you manage your money, your finances, or as we've simply said, you have to spend less money than you have coming in.

Steve Murray: We've gotten lots of notifications congratulating various friends of ours for their notifications and recognitions. And we're pleased for all of them, because we think they're all superb people in this great industry. But it is very important today, particularly if you're running a brokerage, a team, or you have your own practice.

If you want to succeed and prosper in the future, being distracted by any and all of these is not going to be of any assistance to your future success and profitability. Learn more about industry trends and success tactics for brokerage firms, agents and teams, as well as listen to past REAL Trending on Apple podcast, Spotify, Google Play, and others. Visit www.realtrends.com/channels/. This has been Steve Murray. Until next time

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