Trends from the REAL Trends Brokerage Benchmark report
Operating a profitable real estate brokerage business is simple—spend less than what you’re bringing in! Of course, it’s the bringing in part that is the ultimate challenge. It’s a constant battle to recruit and retain talent.
As the nation’s leader in valuations, mergers and acquisitions and consulting in the residential real estate industry, REAL Trends gets to see the inner workings of hundreds of brokerage companies each year. From small one-office firms to regional power players to firms struggling to stay afloat and those swimming in money—we see it all.
The brokers who are profitable go about it many ways, but they all adhere to the principle of spending less than they’re bringing in. This practice is easier said than done, especially in an environment where retained company dollar continues to trend from the northwest to the southeast.
Managing below-the-line operating expenses, or spend, is a challenge in every business. With less control above-the-line, controlling below-the-line spend is especially important for real estate brokerage firms. Brokers’ largest expenses are on salaries, payroll and occupancy, which for most is at least half the budget. Next up is usually monies spent on advertising and marketing, and this is an area where we see wild variations.
As a percentage of gross margin, we see brokers spend between 0 and 20 percent on advertising and marketing. On the low side are firms affiliated with Keller Williams and RE/MAX, with Keller brokers spending practically nothing in this department.
According to our Benchmark Report, the national average for advertising and marketing spend is less than 5 percent of gross margin, but this is skewed to the downside by the aforementioned franchises. If we remove Keller Williams and RE/MAX, we see the national average just above 8 percent. As implied by the rule of averages, there are outliers well above and below par.
Brokerage Model Drives Marketing Spend
In our observation, it’s the brokerage model that drives where they fall within the advertising and marketing spend spectrum. On the lower end are the 100 percent, flat-fee and low-cap models. Agents working for firms that operate these models typically keep a bigger piece of the pie. As a trade-off, their brokers tend not to spend as much on advertising and marketing. With tighter margins, the broker can’t afford to spend a lot in this area if they hope to turn a profit.
On the flip side are more traditional brokerage models running fixed splits or graduated commission plans. Some firms employing these models pour a ton of money into advertising and marketing on print ads, television, radio and mass mailings. Some also invest heavily in online marketing and lead generation. Agents who work for firms like these greatly benefit from this spend and rely on it to support their businesses. As a trade-off, these agents accept lower splits. Lower splits lead to higher retained company dollar for the broker, which ultimately allows them to spend more on advertising and marketing.
We see brokers turn spectacular profits using variations of any of these models. Brokers must be careful as there’s an art to making sure advertising and marketing spend falls in line with the operating model. When we run our valuation clients through the benchmark, this can be an area where they may either lead or lag their peers, and this variance can be the differentiating factor in whether they achieve profitability or affect return on revenue.
The bottom line is that advertising and marketing are major parts of brokerage’s overall spend. A wise man once told me, if your outflow exceeds your inflow, then your upkeep will be your downfall. Spending less than you’re bringing
in is no easy feat, but those disciplined in doing so will live to see another day.