7 Common Pitfalls Of An Unprofitable Real Estate Sales Business.

(Originally posted on JonBrooksGroup.com on 1/18/2020)

5 MINUTE READ – Hang with me!

As our team has evolved over the years, and we've pivoted from left to right, up and down, and side-to-side, we've still maintained our focus on three key aspects of our real estate business in order to keep moving forward:

1) Customer Service
2) Results for Buyers and Sellers
3) Well-Functioning Team

First, what does service have to do with real estate profits?

Let me explain:

The key, in our mind, to service in real estate sales is three fold:

1) Responsiveness
2) Convenience and
3) Skill

Responsiveness is getting back to clients quickly. For our team (based on the expectations set with clients), that's 5-10 minutes during business hours. After hours is mostly text and email. A call if absolutely necessary.

Convenience is the availability to do showings at the drop of a hat (or call), which in most cases requires a full team if you want to have any semblance of a personal life as a salesperson.

Skill is the ability to negotiate the contract and manage the many issues that arise from appraisals to repairs to negotiating the price from the start. Check out the Certified Negotiation Expert (CNE) designation. It's wonderful and eye opening. One good goal for skill, for example, is to perform better than the Board in terms of days on market and list-to-sales price ratio. Keep track of your numbers!

When you execute these three pillars to service and combine them with a strong ask for referrals, your business will grow. Referrals are the holy grail of real estate leads because they're easier to convert and do not cost money. Trust, which can take time to build, is usually already built into the inherent nature of the referral.

If you're not building your business through referrals by asking for them, the other options to generate leads are to pay for marketing or to solicit cold leads such as FSBO (for sale by owner) or expired listings. Marketing costs money and soliciting takes time, both of which will eat up your ability over time to make a profit.

Thus, the primary goal of a real estate business is to build a loyal following of raving fans who will consistently send you referrals directly, and whom you then take excellent care of. The momentum of referrals will eventually snowball year after year and your business will generate profit.

To our surprise, as my wife and I have traveled the country and met with other Mega Agents who do a lot of sales, not many of them created significant profits. When asking the right questions, here's what we've identified as the top 7 reasons why real estate agents and teams are not profitable or just barely so:

#1. They do NOT have a service-based company (as described above). They have a transaction business. They do not have strong relationships, and thus do not ask for additional referrals at any point throughout the transaction or after closing. They do not have any sort of system to follow up with their past clients to provide them with additional value throughout the year. Because of this, they're running on a treadmill that's exhausting, always looking for the next client, and never profiting from warm relationships.

#2. Too much staff for the sales volume. This is most commonly because they have poor systems or models in place, and may not slow down to build them or learn how to build them - Or, they may have hired someone who doesn't know how to build them. From our calculations, with the right model, the right person can likely take a staff pool down from 5 to 1. We notice agent team leaders retain team members because of the emotional strain it takes to confront someone to let someone know they're not performing to the business demands. Instead, they go hire another person to take over that task that's not being done well, and thus overpay employees that are not adding value. In most cases, the standard for what success looks like in the staff role was never communicated by leadership.

#3. Providing too generous of splits with team members. We see this with agents who are afraid they're not providing enough value to their agents through training, coaching, systems and tools. The team owner also may be inclined to purchase leads for their agents rather than training their agents to do the hard work to create business for themselves. Buying leads is a Band-Aid for lack of value. Though, leads can jumpstart a business and be fairly profitable if very carefully managed and with the right kind of person working them. It takes a specific personality type and a specific phase of life for someone to be successful in buying and capturing leads. You can buy a fish every day or you can teach someone to fish for themselves.

#4. Not following the 4/1 rule. Each $1 dollar spent should generate $4 back in revenue. On a monthly basis, financials should be reviewed and the question should be asked - is this cost giving me a return on my money? If so, what is the multiple? Many are now saying that real estate sales are saturated, so the new standard for a multiple return on money spent is 3/1 instead of 4/1. Though, at the end of the day it's your business, and you can decide for yourself.

#5. Not reviewing weekly, monthly, and annually where their time is spent, and how that time translates into revenue generation, and the profitability of that specific activity. For example, is the time spent buying leads, calling them 8-12 times, going on appointments, showing houses, etc. more profitable than calling FSBOs/Expireds, going on appointments, listing the house, etc? Find the most profitable activity for the time invested and focus there, then go down the list. Make sure the activity aligns with your natural abilities!

#6. They invest 100% of their revenue BACK into the business. I definitely love growth and can respect the dedication, though there is a healthy balance of how much capital your business needs. I hear many agents say they put EVERYTHING back into their business for it to grow. Is that really wise? Maybe. Though in most cases I think that businesses don't need more money invested; what they need first is to optimize their team's skills and systems to the highest extent possible. Only then, should they invest profits back in to expand the business. As they say, anyone can throw money at buying leads and staff - and build a big business -- though making that business profitable is a totally different beast. Essentially, do you want to buy your way to growth or do you want your service and systems to grow your business organically for you? Would Warren Buffett invest in your company if you showed him your profit and loss statement for your business?

#7. They don't create the right business structure for tax purposes or don't take advantage of tax strategies. The business structure was a big learning moment for my wife and I. By not having the most efficient structure, we paid the government roughly $40,000 more than necessary. Hindsight is 20/20, so please don't make the same mistake! Get with an accountant early and begin reading books on tax strategies.

If you are looking for real estate business knowledge, we'd love to help. We love business conversations about real estate. Call or text me at 904-570-1216 or email me at momentumagents@gmail.com.

• Jon Brooks