Broker/owners have been on quite a ride over the last few years.
With the residential real estate pendulum swinging from blissful exuberance in the second half of 2020 to extreme consternation for many today, brokers have had to pivot like never before.
The ongoing housing market decline, which saw existing-home sales fall 36% in 2022 alone (on a seasonally adjusted annual basis) and 41% overall to September’s low, is the sharpest (though not the deepest) in the history of this industry. As such, it certainly feels like that pendulum is a labrys slicing through our brokerage firms.
While there’s been a modest offset due to rising home prices in most markets over the last two years, if your firm is tracking the market, you’ve seen revenues slashed by a third in short order.
For even the most astute operators, it’s been nearly impossible to get out ahead of a decline this sharp, resulting in brokerage profitability taking a huge hit.
As we’ve long preached at RTC, the three pillars to running a successful brokerage firm are:
- Retain and develop.
- Spend less money than you make.
Given the state of the market, the third pillar has been a major focus for not only our clients but for all brokers who want to successfully weather this storm.
When revenues and thus company dollars rapidly decline, it’s important to right-size the way your company spends money in order to protect the bottom line. Reducing operating expenses (OPEX) commands serious attention, and there are certain areas of spending that can yield a relatively immediate impact.
In our recently updated brokerage benchmark, we see that the average firm spends right at one-third of their company dollar (gross margin) on personnel expenses. As difficult as it is interpersonally to initiate change in this area, personnel reductions can make an immediate material impact.
If you’re spending more than 33% of company dollar on personnel, which you likely are given the sharp decline in company dollar for most firms, then you ought to take action.
The next-largest expense is occupancy, with the national average at 19% of company dollar. It obviously takes time to unwind lease obligations, but it’s prudent to at least examine your footprint to see where you may feasibly reduce expenses.
Once you get through the big two OPEX categories, you then drill down into your general ledger to find out where else you may be able to reduce/cut spending.
The next level of OPEX to attack is marketing/advertising, technology, professional services, meetings/events, meals/entertainment, etc.
Obviously, you’ll want to target areas which have the least impact to agents, but in times like these there needs to be some shared sacrifice. Really go through that GL with a fine-tooth comb. There’s no expense too small. Look at office supplies, water/coffee, telephone, gifts, etc.
The bottom line is many broker/owners have been through downturns before, and understand that market undulations come with the territory. They know there’s always light at the end of the tunnel, and that if they’re smart, they’ll be well-positioned to thrive when the housing market recovers.
The good brokers also aren’t Pollyannas. They realize when action needs to be taken, like aggressively attacking OPEX, in order to be in that position down the road.
Scott Wright is a partner with RTC Consulting, a firm that specializes in real estate brokerage consulting, valuation and mergers and acquisitions.