This article is designed to give you some understanding and information required to open a real estate agency. We delve into the pros and cons, showing you what’s needed to open your real estate business.
HOW TO OPEN A REAL ESTATE AGENCY
This structure has been around for generations, long before social media, CRM’s, data providers, mobile applications, in fact well before the internet.
Pre-internet it was hard to access training, data, systems, procedures, compliance etc. Now thanks to technology and competitive industries, all of these options are more affordable and sometimes free to access.
Most Directors have joined a franchise system from 50 years ago that is no longer relevant. Many Directors still open using a franchise model because that’s how it’s always been done. Everyone did, it’s cultural and generational thinking passed down.
This analogy of the ‘chicken in the oven’ helps depict this reoccurrence, the story goes; I tasted some chicken and it was delicious! I gave the chef my feedback and asked “but why do they cut so much of the chicken’s rump off?” Their response: “that’s how I was taught by my mother”. The chef asks their mother “why do you cut so much off the chicken?” Her response was: “That’s how my mother taught me”. If we could go back and ask her mother the same question, her response: “Oh, that’s what we had to do it because the ovens were smaller”.
The real estate landscape has changed dramatically and its evident that the ‘ovens are now bigger’. Directors have access to great tools and systems from competitive software companies meaning it’s affordable to continuously improve. Costs of running a real estate business rise, additionally sales agents are demanding higher commission splits, so Directors can no longer afford to run a traditional business model that pays a franchisor 7-10% of its revenue. They can no longer afford to and they no longer need to.
Times have changed and prospective vendors now list based on skills and relationships; they don’t prioritise which brand someone works for as they are listing with a person, not a logo. When you speak to a Franchisor, they will entice you with examples of turnover, the power of the brand, the business systems etc. but never the profits of their franchisees.
If you join a franchise, you are leasing a name that you don’t own and can’t control. Many franchisors charge fees on top of the sales revenue, this could include rental revenue and marketing levies. They may also have rights to the premises, database and telephone number. Leasing a franchised name can become very expensive, and unlike a mortgage that will eventually be paid out, this expense is ongoing.
For example, if you have 4 salespeople who each produce $300,000 in gross fees per annum – that’s $1.2 million in fee production. Add your earnings, another $300,000, and your agency’s fee production, then we hit $1.5 million. If you pay a franchise 8% of your gross turnover in sales income, you pay $120,000 in franchise fees per year. You might think that $120,000 is not a large expense when your TURNOVER is $1.5 million, but always remember that TURNOVER IS NOT PROFIT. You have expenses to pay. Typical real estate agencies, using standard industry reward systems for employees, struggle to achieve 10% gross profit on sales income. A turnover of $1,500,000 with a 10% profit leaves $150,000 for the owner, while the franchisor takes $120,000 for doing none of the work and without taking on risk.
It’s not easy to make your own independent brand. It’s very risky, costly and time consuming.
The time you spend continuously innovating prevents you from listing and selling more property, basically the money you save in not paying franchise fees can easily be lost in productivity.
A brand not only has to appeal to the general market but it also has to appeal to potential recruits, a hard balance to find.
Build your business using the Area Specialist service, see us as your virtual assistant, delegate the non-dollar productive activities and take advantage of the below:
- Continuous innovation
- Time leverage
- Lead generation
- All admin and trust accounting taken care of
- Up-to-date compliance
- We have all the systems and procedures for you to plug into (documents, agreements, policies, user manuals etc…)
- Supplier buying power
- Subscriptions to RP data, REA, Domain and Zenu CRM
- Your business, run it the way that you want
- Keep your creative freedom
- Make your name prominent
- Tap into our team size, website, SEO, IP, group knowledge, events and weekly training
- Social media application and templates making it easy to design professional posts
- Vendor finance for Vendor Paid Advertising
- You can recruit employees to work for you PLUS other Mobile Agents within Areas Specialist allowing you to earn 25%-50% of whatever Licence Fee they pay without any risk from your side
Rather than reinventing the wheel, focus on growing your business and making more profit.
In Australia to run your own real estate agency you need someone to be a Licenced Estate Agent, this person will be the Officer In Effective Control (O.I.E.C) and will hold all legal responsibilities.
When fitting out an office you may require a DA from your local council. You should also check with the council over its sign policies.
Your business name should be registered with Australian Securities and Investments Commission (ASIC) an independent Australian government body that acts as Australia’s corporate regulator. ASIC’s role is to enforce and regulate company and financial services laws to protect Australian consumers, investors and creditors. Registering with ASIC will protect your ownership of the name and ensure nobody else is already using it.
In Australia, you must have an Australian Business Number (ABN) which you can obtain online.
The several insurances to take out include Professional Indemnity Insurance (PI), Public Liability and contents.
The financial legal obligations of a business are GST, PAYG withholding tax and superannuation. It is advised to set this aside in a separate bank account. You may also need to pay award rate, car and phone allowances to your employees.
Arrange Workers’ Compensation Insurance before you employ anyone, register with the tax office as an employer, which can be done when you get your ABN. You will be required to deduct tax from your employees’ wages (your accounting software will do this for you) and remit it to the tax office, usually quarterly. Employee superannuation must be paid every quarter to a super fund of the employee’s choice.
There is a massive difference between income and profit. Some of the largest income producing agencies are some of the lowest profit agencies. The real estate industry is more obsessed with turnover over than profit due to its visual competitive culture.
Income, minus expense does not equal profit as many real estate businesses that run this way don’t make any profit as they are continuously spending (they call it investing) and there is no profit left over. An improved way to look at it is Sales Revenue – Profit = Expense, this way your work out your realistic monthly revenue, minus your targeted profit and the leftover is what your allowed to spend per month. A great profit margin that is still realistically achievable is 30%.
Preparing a cash flow statement and revenue projections show you what you need to start and grow your business. Forecasting your costs, income and profit also allows you to see when new team members and resources will be needed. This knowledge helps you make informed decisions about the sustainable growth of your business.
1) A business partnership with someone based purely on money.
Yes an initial cash boost will help get things up and running – hello cashflow! However you’re soon left with a silent partner who is benefiting from profits without contributing to the workload. Your future self is left with the prospect of buying them out, often at above market rates.Instead, work on your business plan and wait until you have the funds to start out on your own, or take out a loan knowing once it is paid off the business is all yours.
2) Decisions made based on ego instead of profit.
Live within your means, making decisions to create a false sense of reality to impress your competition, loved ones or friends are destined for disaster. The saying goes; ‘size is vanity, profit is sanity’.
3) Not paying yourself the correct salary.
Figuring out pay for yourself and partners can be tricky, too much or too little is detrimental. Make time for this conversation, ensuring a healthy foundation and helping to set future expectations. It’s a delicate balancing act, you need to give yourself a wage to ensure you can maintain a lifestyle and prove serviceability to obtain personal finance while also leaving enough cashflow to run your business.
4) Covering vendor advertising.
As it can be some time from listing and settling the same property, the advertising expense of your listings can cause a massive burden, this is why it’s important to have systems to get VPA upfront or at least payment plans. Ensure your authority includes scope to lodge a caveat on the vendors property should they not sell and the vendor decides not to pay your advertising invoice.
5) Not employing experts to help you.
Being great sales people, many top performers open a business without the necessary day to day, admin, accounting or marketing knowledge and experience. They are soon spread too thin trying to cover all aspects and roles within the business, while their yearly GCI drops along with market share. In many cases the best thing for a top performing agent to do is what they do best – list and sell real estate. By paying someone to manage the rest they could have a really successful business.
6) Entering business partnerships without a unit holders agreement.
A unitholders agreement can be used for parties involved in a business venture to document matters that may not be covered in the trust’s deed. This is a contract between the unitholders of a unit trust containing agreed terms as to how the trust is to be managed. For example, it could cover, but is not limited to, the following:
- Composition of the trustee company’s board of directors (and how to appoint them)
- Types of decisions requiring majority (50%), special (75%), unanimous (100%) or other approval
- Who can be a unitholder
- The meetings of the unitholders
- Voting rights of unitholders
- Minority unitholder protection
- Special rules for the issue, transfer or disposal of units, or rights or options in relation to units
- Unitholder exit strategies
- The consequences of a unitholder defaulting, and ‘bad leaver’ arrangements; and/or
- The management, structure and business plan of the trust
There’s still 10 more mistakes to avoid. For a copy of our “16 MOST COSTLY MISTAKES TO AVOID WHEN OPENING A REAL ESTATE AGENCY pdf” please enter your email address below.
Does an agent need their office? Consider this the perpetual Private Sale vs Auction debate; it has people split, because there is no one right answer.
There’re many factors to take into consideration, so let’s explore them here.
Firstly, let’s look at what many offices provide their agents:
- Physical building/place of work
- Electricity, water, gas and internet
- Retainer, car allowance and phone allowance
- Team size and strength
- A sense of community
- Admin/Account persons
- Subscriptions to technology
- Market share
- Training and coaching
- Financial contribution towards a P.A.
- Financial contribution towards marketing
- Ongoing listing leads
- Local sponsorships
- Christmas Party, Goal Setting Days and social outings
- Director to help you list properties at no charge
- Client gifts
- Sliding scale commission splits based on performance, this may include bonuses
- Multiple lead source marketing
An agents commission split with their office funds many things that help each individual run their business within a business.
Given the above, why is there a growing trend of agents starting their own business or moving to Mobile Agent models like Area Specialist? Many top performers feel that starting their agency is the next logical step of progression in their career. There’s usually a multitude of reasons why salespeople want to start their own business.
- Earn all of your commission
- Grow your own rent-roll
- Ability to be more innovative
- Work when and how you want
- Grow a team to create time leverage
- Personal satisfaction
- Ability to earn more income
- Time, energy and resource investment
- Costly if it doesn’t succeed
- Managing employees can be frustrating, timely and expensive
Some insights into why a salesperson may start to think about leaving their current office for another or to open their own real estate business. It’s important to be aware of these so you can avoid and remove the likelihood from your future business.
- Sales Meetings including irrelevant topics or an ‘old school’ manager who likes the sound of their own voice
- Being required to work from the office, so the boss ‘sees’ that you’re working
- Caravan, wasting time looking at houses you have no interest in selling
- Stock meetings, time consuming if talking about properties unrelated to you
- Compulsory and repetitive training from someone who isn’t a top performer
- Working long hours to earn a commission when after GST, franchise fees, company split, personal tax and superannuation are taken out, there’s not much left
- Competing against Director(s)/Partner(s)
- Politics with colleagues
- Lack of personal branding and creative freedom
- No listing leads generated from office for agents
- Paying 100% for personal marketing to generate a listing, you then have to share 50% of your commission with the office (that didn’t invest in the marketing to win the listing)
- Not being allowed to list properties in other office territories
The Area Specialist model is a solution that removes the above 12 frustrations while you run your own business either as a Mobile Agent or as a Team/Office.
It’s important to understand these points, empowering you to choose a model and structure that will avoid or minimise these issues in your future business.
- Cost of rent
- Cost of portal fees
- Vendors not paying advertising upfront, effecting cashflow
- Agents asking for higher splits when the office is only just making enough money to survive
- Cost of government taxes
- Turnover of property management staff
- Mistakes from employees that lack care factor
- Recruiting passionate hard-working individuals
- Retaining passionate hard-working individuals
- Selfish and/or immature behaviour between salespeople
- Having all of the risk and responsibility while the franchisor makes more profit out of the business than Directors do
- Forced to use out of date clunky Franchisor systems
- Dated branding
- No listing leads generated from Franchisor
- Franchisor restrictions and rules
The Area Specialist model is a solution to help remove these frustrations while you run your own business either as a Mobile Agent or as a Team/Office.
We call this “The Golden Handcuff Cycle”.
Imagine this scenario, you’re a top-performing salesperson, and decide to approach your Director with the desire to buy into the company. Initially the director prefers that you don’t as they are keeping 100% of the profit, however they also acknowledge if they lose you, they will make less money. A ‘buy-in’ is negotiated, this way you feel career progression and they get to ‘lock you in’. Once you are a director the restriction of trade clause is enforceable, hence “The Golden Handcuff”.
Bear in mind when you buy into an established real estate business you’re mainly buying into a rent-roll, typically at a multiple of 2.5-3 times its yearly revenue. You are also purchasing goodwill, the database and forecasted revenue the sales team produces.
Let’s say you buy in at 20% with the promise to be able to increase your share in the future. Your aim is to own 100% while the current Director’s goal is to dilute their interest over a 10-year exit strategy, for example. In this situation you start to feel torn – do you help grow the rent-roll knowing that you are increasing the value of your 20% share but also making it more expensive in the next round of buy out? Remember, whilst you’re a minority shareholder you don’t have decision-making power – is that made okay because your business card now says ‘Director’?
Once the exiting Director waters down their share to 50% or less, you notice a change in their care factor and work ethic. You are now carrying a majority of the work load and creating long term strategies for growth, while they are focused on other plans and still taking half of the benefits. This is frustrating, encouraging you to push and buy in more and more. As you are the one asking and pushing to buy, the price that you pay increases, reflecting your motivation. Fast forward ten years down the track and you have paid a fortune to own 100% of a business that you were already the main driver for.
Meanwhile, you have a large loan to payout based predominantly on the value of the property management side of the business. Over this time, there have and will be advances in technology, allowing property managers to oversee more properties meaning the business makes more profit. It’s now this profit you’re competing against other local agencies for as they have the same technology. Everyone begins dropping fees as the profit margin allows them to, it becomes a race to the bottom, and the rent-roll income is now decreased, yet you still have unpaid loans for its purchase which was based on the revenue the property management department previously produced. You’re in a predicament and feel like your life’s work is devalued. It’s similar to buying a taxi licence back in the day, which due to limited supply were a growing asset with many selling for over $500,000 however, deregulation and competition from share ride apps and services dropped their value to near nothing.
In parallel, perhaps over the last five years, you’ve been mentoring two sales agents who are now top performers. Next thing you know they want to buy into the business, you’re hesitant as it took 10 years to finally own 100% and you worked hard to achieve this. Yet you need these agents. Concerned you will lose them to mobile agent models where they can earn 100% commission, you do a deal and sell them each 20%. You’re now diluted to 60%, with two partners taking up 40% and “The Golden Handcuff Cycle” begins for them.
Purchasing a minority share without intent to procure further usually happens when a top performing agent works for a Director who has no intention to exit the business in the near future.
This relationship works when the agent buying-in has no interest in running the business, they just want to make money selling property and receive yearly profit distribution via director dividends, while growing an asset through the rent-roll.
- Personal satisfaction through career progression
- Rent-roll growth
- Profit share
- Everyone’s work in the office benefits you
- “Golden Handcuff” you are now locked in by your “restriction of trade clause”, limiting your ability to sell real estate locally should you wish to leave the business
- Additional income depends on profit to be distributed and these margins are dropping year on year
- You are only growing your asset via the percentage you own. If it’s 10% and your office net rent-roll growth is 50 properties every year, then your net asset growth is 5 properties a year which is worth approximately $15,000-$20,000 depending on your market. If you had your own business you would arguably grow your own rent-roll more than 5 properties per year
- As commission structures increase nationally you won’t be able to increase personal commission splits as the office needs this income to run the business
- Frustrations in not being able to change/improve business systems and decision making processes as you have minority voting rights
Many salespeople start their own business as they are exhausted from feeling they do all the work, then having to split their commission with the office. They envisage starting their own business will keep them 100%, life would be great!
To grow the business you recruit salespeople, to ensure as much cash-flow and profit for the business as possible, they are put on a similar pay structure as you were in your previous office. Becoming a part of the broken system, hypocritically structuring a business in a way that made you venture out in the first place. The irony…
If you leave an office what makes you think agents won’t leave your office? It’s a matter of time, so make sure you provide value, have key points of difference to retain your team – they are your most important clients.
At Area Specialist we have created 52 Points of Value to ensure recruitment and retention of great sales people.
Opening a real estate business is only for the committed and is highly suggested for sales people that are already top performing agents. Done correctly its very rewarding, fun and is the only way to create true income while you’re not physically working. It’s the logical progression for those with strong local reputation and steady flow of pipeline sellers.
The Area Specialist model is a platform that transforms agents into businesses by providing all the systems, tools and technology you need to create, grow and power your own businesses, without the cost, time, or risk of doing it yourself.
We have structures for individual mobile agents and teams/offices.