FOR MANAGERS
Best Practices
More bucks, same business
Brokers finding innovative ways to bost the bottom line
BY ROBERT FREEDMAN
In the face of escalating operating costs, brokers are learning that getting bigger isn’t the only way to a better bottom line.
Some brokers are finding innovative ways to mine more profit from existing operations. And they’re doing it in ways that don’t put a squeeze on their key assets--their sales associates.
“The issue confronting any broker in this maturing real estate industry, as office costs grow and technology commands a bigger share of your bottom line, is how to grow your profitability,” says Ron Peltier, president and CEO of Edina Realty, Edina, Minn.
“And how to do it in a way that doesn’t impact the way you compensate your sales associates,” Peltier says.
Although you may have relied on bigger being better, growing your transaction volume through office acquisitions, it’s a strategy requiring resources that few small and midsize companies can muster. You can also find gold in the treasure you already have by
Diversified services: making it convenient
Edina Realty Inc., Edina, Minn.
Don’t talk to Ron Peltier about ancillary services. The president and CEO of this large, independent company operating throughout Minnesota and Wisconsin prefers to think of his company’s mortgage, title, and insurance operations as core businesses.
Edina Realty launched a handful of diversified operations in the mid-1980s to stem eroding revenue at a time when its sales associates were jumping on the bandwagon for higher commission splits.
And it plans to rely on diversified services going forward as homebuyers and homesellers increasingly look for the convenience of one-stop shopping.
“Like other companies in the mid-1980s, rather than taking a bigger share of the commission to increase revenue, we were looking elsewhere, and the most logical place for us to look was complementary services,” says Peltier.
Mortgage originations now add $500 million to Edina’s bottom line, but success was by no means certain when it launched the program in 1983. “Customers expect to have the best rate available anywhere, but we can’t always offer them that,” says Peltier. “The trade-off is convenience, simplicity, and good service. Everyone in our company is working in concert.”
The company works hard to market its mortgage services to customers, but it also works hard to market the services to its own associates. If its associates don’t feel the in-house products are best for their clients, they’ll take their mortgage business elsewhere.
“If a customer wants the lowest-priced mortgage, the associate has a responsibility to back that,” says Peltier. “Our approach is to give customers the facts. We try to communicate that discounted prices are not always what they seem. On the other hand, we provide competitive pricing, plus we’re service oriented.”
Between 25 percent and 40 percent of Edina’s clients use the in-house mortgage services annually, a “capture rate” that’s expected to grow to 50 percent in the next year or two as customers get more comfortable with one-stop shopping, he says.
Title services are less risky to add because few homebuyers feel they have the background to discriminate between competing services, so they’re more inclined to use in-house services. “It’s really a matter of just providing the service,” Peltier says.
In 1985 Edina launched its title service operations, which now process about 60 percent of the company’s transactions annually.
The relative ease of marketing title services doesn’t mean you should run out tomorrow to launch a title affiliate, Peltier says. It requires a fairly large volume of business to make it cost-effective.
“If you don’t have critical mass, it doesn’t work,” he says. “You need a few thousand transactions a year to be well positioned. If you have only a few hundred transactions a year, it would be difficult to run a profitable title operation. The economies of scale just aren’t there.”
Economies of scale are also key to providing homeowners insurance, but for the insurance provider, not the real estate company. “To get providers interested in working with you, you need a certain volume; otherwise, it wouldn’t be worth their time,” he says. “You don’t need to be as big as we are"--Edina reported 35,000 transaction sides and $5.7 billion in volume last year--"but if you reach a certain critical mass, you have the best opportunity to create the revenue stream that’s needed.” Edina offers insurance in affiliation with PLI Brokerage, a nationwide provider.
Now the company’s set to diversify even more. It plans to roll out a concierge program this year that will bring in additional fee income for referring new homeowners to postclosing home services providers such as plumbing contractors.
Unbundled fees: making it cheap
Shield Realty, Alexandria, Va.
In this hot Northern Virginia market, sellers think they can attract buyers simply by placing a For Sale sign in their yard. But they soon find that getting the buyers’ attention is not enough and that they need help on key parts of their transactions, says Linda Haese, broker of a small office in this historic city near Washington, D.C.
Since she moved to a fee-for-service operation 11 years ago, building her transaction volume hasn’t been a problem. She could easily list a house a day, because so many sellers in the area are looking to cut sales costs, she says.
“You just get a lot more business operating on a fee basis,” she says. “People want to do everything for themselves now, search for places on their own on the Internet, and so on. They’re happy to save money.”
The issue for brokers who unbundle their services is to make sure the income from unbundled services exceeds the income they made from their previous sales volume.
Haese divides up transactions into discrete blocks and charges a fee commensurate with the amount of work she does. “I generally charge flat fees to list a property in the MLS, run comparables, and provide a lockbox,” she says. “I may charge an hourly rate to help them with a contract. People have paid me to hold an open house, but I don’t do that very much, because it’s time-consuming.”
She typically rebates part of her commission split to her clients when she’s working as a buyer’s rep, depending on how involved her role is. “I do that if they do a lot of the work themselves,” she says.
Going this route makes sense if you prefer to exchange lower per transaction income for higher client volume. “It’s a lot more pleasant for me,” she says. “I work with a lot more people than I did when I worked in a conventional office, and that’s what I prefer.”
It can also be a big cost saver. “A lot more of your business is through referrals,” she says. “I rarely advertise, and there’s no need for a fancy office. I meet my clients at their house, and that’s it. If you need office space, you can always sublease with someone. It’s very cheap to start up.”
Virtualized operations: making it digital
Concept 2000 Realty Inc., Raleigh, N.C.
It made perfect sense to launch a virtual real estate operation in the heart of the Research Triangle area. So many people are already tech oriented, says Sheri Moritz, broker-owner of a three-year-old company that’s distinguished for what it doesn’t have: square footage.
The company operates two offices, but they’re so small it’s probably a good thing her 12 associates have little need to go to them. All her associates work out of home offices and use the company offices for little more than a drop-off point for earnest money deposits and the occasional client meeting.
“None of the associates really need to come in,” says Moritz. “They have mailboxes here, plus I have training if their volume gets too low. Sometimes we use it to socialize, but they rarely meet with clients here. Most meetings are at customers’ houses.”
By structuring her company around a team of home-based sales associates, Moritz keeps overhead costs to a minimum. She pays only $750 a month for her main office in the heart of Raleigh and pays only a single full-time administrator to run it.
But the benefits go beyond that to transaction efficiency. Associates use their home computers for everything, from filling out paperwork to communicating with clients and colleagues to creating marketing material. More important, they can structure their day in a way that makes sense for them, even if it means doing most of their work at 11 p.m.
The result has been a quick jump out of the starting gate. Since Moritz brought her first associate aboard last year, the company has posted $30 million in transaction volume. “This kind of operation attracts more independent-minded associates,” she says. “You have to know what kind of person can work from home. You can’t have a person who’s going to sit on the couch all day.”
Moritz makes attendance at training sessions mandatory for associates whose volume drops, generally to below two transactions a month. “If they’re doing more than $500,000 a month, I’m not bothering them,” she says. “That seems like a lot, but the average price here is $200,000.”
At a minimum, associates need a computer with fax, printer, scanner, MLS and Internet access, and appropriate software to fill out contracts and track transactions. Finding associates with fully equipped home offices hasn’t been a problem given the tech orientation of the area--and that’s not to say all her associates are twentysomething cyber geeks, either. Their ages range across the board, from 21 to the mid-60s.
With its costs at a minimum, the company is able to underprice its competition, Moritz believes.
“Real estate is changing a lot,” she says. “There’s no reason for people to come into an office. Even when people call into our office, the call gets sent directly to the associate’s home or cell phone or pager. People have no way of knowing there are no real offices here.”