How does your firm compare to your competitor’s firms?
Our highly sought-after REAL Trends Brokerage Benchmark report is an incredibly useful tool for our valuation clients. It not only gives them insight into how their firm compares to regional peers using various performance metrics (retained company dollar, return on revenue, etc.) and agent productivity benchmarks, but it also offers a snapshot of how they scrub up with several key expense ratios.
Brokerage financial performance can be broken out into two areas of focus, above-the-line and below-the-line. Above-the-line focuses on Gross Margin, or Retained Company Dollar. Simply put, Retained Company Dollar is what’s left after brokers pay their agents. It’s the portion of every dollar of commission they keep as well as any transaction fees that may be charged. Below-the-line is operating expenses, what brokers spend to keep the doors open, the lights on, the staff paid and forgetting their name out there.
Areas of Pain
Of course, brokers have some control over above-the-line performance, but as they will all tell you, this is an area of pain that they’ve been losing their grip on over the years. Many broker/owners remember the days when 30 percent+ retained company dollar was the norm, a stark contrast from a national average that is now well under 20 percent. In today’s hyper-competitive environment brokers only have so much control above the line, so below-the-line management of operating expenses is key to driving profits.
As part of our Benchmark, we look at three crucial areas of spend: Salaries & Payroll, Occupancy and Advertising & Marketing. To quantify comparably, we look at these expenses as a percentage of Gross Margin, and as you can see in the chart, the three combine for over half of all operating expenses.
Salaries & Payroll
Salaries and payroll-related costs are by far the largest expense for real estate brokerage companies. In fact, the three-year average shows brokers spending nearly one-third of Gross Margin on the management and support of their companies’ operations. Executives, office managers and support staff like admins and transaction coordinators play an integral role in the success of a broker’s primary asset, the agent.
Though this expense bucket is a big one, it’s been trending down over the years. 2012 was the first year we started compiling this benchmark data, which interestingly was also the first year average U.S. home prices rose coming out of the Great Recession. Since then, spend for Salaries & Payroll has declined by 20 percent on average. There are many reasons for this decline, but the biggest is the response to decreasing retained company dollar. As mentioned, brokers need to work below the line to manage their profits, and naturally, this large expense is a prime target for reduction.
Occupancy-related expenses, of which the lion’s share is rent, comprises about one-fifth of a broker’s operating expenses. With this age of technology making it easier to telecommute, you’d think this would be an expense that brokers would aggressively target for reduction. Interestingly though, occupancy expenses have only decreased by about 11 percent since 2012.
Many brokers are trying to reduce this expense, but what this slower-than-expected decline shows is that brick and mortar is still important to most agents. Even the telecommuters like to have a place to drop by whether it be for making photocopies or using a conference room.
Advertising & Marketing
As you can see, Advertising & Marketing expenses aren’t that large relative to the other two categories. Though on average, this spend is just under 5 percent of Gross Margin, it’s an important one that brokers carefully monitor. Like the other two, this bucket has also seen a decline since 2012, but this decline has been much larger, to the tune of nearly 50 percent.
This decline is a head-scratcher to many brokers. How do you get away with only spending 5 percent of Gross Margin in this important area? It makes more sense when you take into consideration the effects of Keller Williams and RE/MAX. Brokerages running under these brand names spend practically nothing on advertising and marketing given the name recognition and a little bit of advertising at the national level.
Keller Williams has seen so much growth over the last five years that it alone has skewed the data. Interestingly, if we remove Keller from the Benchmark, the national average for advertising & marketing spend is just over 8 percent and the five-year decline is not nearly as severe.
The bottom line is that, given the tightening margins above the line, brokers must focus below the line in their efforts to maximize profitability. With expenses on the salaries & payroll, occupancy and advertising & marketing fronts declining, according to our latest Benchmark update, brokers are successfully adapting.