The Good, Bad & Ugly: Begin with the End in Mind

What's up there everyone? Another edition of the Good Bad Ugly of building a real estate team. This is Lars Heddenborg, founder of Real Estate B School. And I am super stoked, just about as excited as a guy like me can, can be. Today I want to chat about, you know, it's a topic that is rarely shared in our industry and it's the transparency around, you know, what we truly have in terms of the results of our business. And I'm talking the financial results of our business, among many other things. The purpose of owning a business is to make a massive profit. And there are seasons and there are reasons why you would run your business at a smaller profit to maybe build out a strategic capability or add a new person that will have a long term impact in the business. And for the most part the reason why as an industry, the real estate industry, these top teams really, there isn't transparency into their numbers because they built it on a completely shaky, at best, you know, at worst, completely. I'm trying to think of the building analogy for a shaky foundation or a failed foundation. And I want to talk about beginning with the end in mind and talk about like, what is your economic model? What does it even mean to have an economic model? And so basically an economic model of a business is the target for what you're building. So if you're, let's say you're half a million of GCI now and let's say that in your market there's a 10,000 average commission check and you're doing 50 transactions, you've got the admin hired, you've got kids and a wife that you're trying to keep happy, you're hiring that first buyer agent. And when I talk economic model, you need to look out from 500,000 GCI to 5 million GCI, what's the thing going to look like when I hit 5 million GCI? Maybe you hit it, maybe you don't. Maybe you stop at two and a half because that's a good sort of business that's manageable and you can make it super profitable. When I talk economic model, I'm talking about four numbers basically. And at 500,000 GCI you're the only one in production. At 5 million GCI, I know top teams where the guy that's the team leader has to stay in production to make money. Can you imagine running a business where you have $5 million top line and you're only making money because you're selling, you know, let's call it 10 to 15% of that 5 million, not a business I ever want to get close to owning. And maybe that's just me and I've got a small mind. I want to build a business that is the best in the world, providing buyer and seller services and serving my team members and not a loose collection of agents that I'm taking on all the burden of the overhead and lead generation and the physical space and the phone systems and, you know, all of that and making a marginal profit. I want to build a business where I know the model that I'm following and if I miss it by a few points, you know, so be it. At least I go into the year with a very distinct idea of how the year is going to end up. And I feel like a lot of these real estate teams that are scaling and posting big numbers, they're big top line numbers and they're spending 20, 30, $40,000 a month on Zillow. And these paid lead sources that I've watched them go up three, four times. And I know people that are losing money on every closing with Zillow and they continue to spend the money because they don't know how to generate buyer and seller business without the crack cocaine addiction that has become Zillow. In some of these real estate teams, I've talked to brokers that spend this guy was spelling a million dollars a year on Zillow and every transaction he was losing money and he made a little bit of money on mortgages, a little bit of money on title and overall he made a decent living. And in his core real estate business he was losing lots of money because he didn't have the accountability, didn't have the structure, didn't have the lead management protocol to be able to optimize those different lead sources. This is definitely going to sound a little preachy because this is the one thing that I'm most passionate about. It's the complete bullshit that is thrown around in our industry and guys that are teaching others to do the thing that they're doing, even though it's built on a flawed model and it just drives me nuts and maybe there's some sort of learning for me in there that I need to be more open minded to different types of business models. But making a marginal profit. When you look at, on the one end of the spectrum there's the traditional broker model where the broker there's not a whole lot of money in that business. And if you had brokers that shared their P and L statements, you would consistently see that there's not a lot of money in that they're making money on some, you know, advertising agreements they're making. Usually they're in the lending business or they take title or transaction fee from all their closings that on the one side all the way to the point where the business that I really do feel strongly about that I'm building, it's the Ritz Carlton of real estate. So providing buyer and seller services is the most important thing that we do. Serving our agents and our team members to be able to do that, empower them to do that where they can get paid really well doing it. And there's still a really good profit left over for the owners of the business. And so let's get back to the economic model and beginning with the end of mind. And if you already have a real estate team, it's going to be helpful to look at your numbers from last year to see how you stack up in this economic model. The first thing in the economic model is to look at. Let me see how I want to do this. It's your gross margin and we call it real revenue. It's the amount of money you have left over after you pay your agents and you pay your broker and you have to consider your own production. So I almost, I take the team leaders production out of it. I just want to see how much gross margin they're making on their team. And if that amount of gross margin is enough to cover all of their overhead and to have a reasonable profit. And if you want to do production and you're in love with production, that's great. But it has to be additional profit on top of the core business, if that makes sense. So if you're out of production, let's just say you're out of production. Let's use that model. If you run a team and you're out of production, the goal is to be as close to 70% gross margin as possible. So if you run a 50, 50 listings buyers business, the goal is to pay out about 20% of the listings and about 40% on buyers. And that'll blend out at a 30% payout, which is a 70% gross margin. You know, if you're at 60% and you're out of production, that is doable. That's in the ballpark. You know, we say 65% is kind of that target. Our real estate team runs at. We run with our lead agents and our Keller Williams. We ran at about 78, 79, I think even a little bit higher than that last year. And then we have showing agents Inside sales, some lead agent bonuses, and we had a paid training program for new agents on our team. We take those categories because they're in payroll, those categories and you put up in cost of sales. We run at about 70% gross margin. And that's the target. That's our model. That's how we do it. And we have to be able to do it that way because our focus is on serving buyers and sellers. And if we don't have the margin necessary to do that, we're not going to be able to fulfill the mission of helping buyers and sellers at the highest level in a very specific way where a specialist is tending to the thing that they do. We've got three in our marketing department, we've got two runners, we've got four in our operations staff. We've got everyone playing a different position. We have showing agents, buyer's agents, listing agents, inside sales inbound versus outbound. So it's a highly specialized model. It's definitely not for everybody. And it's not the only model that we teach in real estate B school. I'll say that you just need to know is what you're building on a model that's sustainable. Once you build it, you don't want to end up with 3,4 million dollars of GCI and make marginal profit. We took on a new client in real estate B school, 3 million GCI with $220,000 of profit. They had not heard of the economic model before we chatted with them. And now we're in the process sort of recalibrating, taking the bits of the business, extracting the team, bringing down expenses. On the broker side, he runs a brokerage and runs a team and overall did 3 million. But a million was from the team. A million dollar team. We can run that at about 4 or $500,000 profit with the owner doing just a little bit of production and so just kind of dissecting all of it. That's the number one, number one thing we have to track is gross margin. It's real revenue. It's what you're actually taking home. One more example, the one of the top teams in ReMax was a guy in Minnesota, I think. And it, I mean it was like the numbers were off the charts. And he called himself a team, but his gross margin wasn't a million bucks. So in the REMAX vernacular, he didn't qualify for like that platinum club or whatever. And because the numbers are, you know, as a team leader in the REMAX structure, you, you get to report what you Take from your agents and his production, plus his agents didn't equal a million. And he was like the top team in ReMax. That is not an economic model that I want because he's just running a loose collection of agents. It's a brokerage within a brokerage. The reason I'm so passionate that that's not the right model because that is not going to be able to serve buyers and sellers at the highest level, because every agent on that team is doing business differently. There's not a consistent level of service. Right. Ritz Carlton. Everybody knows their place, everybody knows what they do, how it fits in, why it's so important. When you go to a Disney park versus a local amusement park, it's a different experience. Everyone knows why they're there and what the goal of their job is to sort of imprint, impart this experience onto someone who's coming to the park. All right, so now we've got gross margin. Hopefully it's as close to 70% as possible. If you're in production, it could be more than that. Problem is, some of these teams, they'll do a million and a half of GCI. The team leader will do, you know, 600,000. Let's do a million. So a million of GCI, the team leader would do 500,000. And they'll pay out way too much on the remaining. And when they go to get out of production, they. They may have like 60% gross margin, but they have a chunk of production. So that number 70% is with you out of production. So outside of that number, there's only three more numbers. So let's say you have 70% coming out of, you know, a million GCI. You pay out 300,000 to your agents to do that million and your broker included in there. And then you've got 700,000 to spend. 10% goes to staff. So 10% to staff, 10% to marketing and advertising, and 10% to overhead. And that is a rough rule of thumb. There are seasons and reasons, like I said, that you spend more, but for the most part, you want to stay as close to 10%. I say 10 to 12%. But there are teams that we coach that, you know, they'll run their overhead at 7% and their marketing at 8%. I know a guy who runs his marketing, you know, over 100 million of gross commission income at 2%. So you know, this, this paying to grow your business, it only works if you have a back end that keeps them coming back in your referral business. And you do such a Great job. That the long tail of that spend a lifetime value, that customer sort of plays out. So that's the whole model. You got 70%, less 10% for people, less, less 10% for marketing, less 10% for overhead, leaves you 40% profit. If you're running at 60%, 60% gross margin or real revenue and you're running let's say 12, 12 and 12, 12% people, 12% marketing, 12% overhead, it's 60 minus 36 or 24%. That's a pretty common thing that I see is a low 20s, a well run team in the low 20s of profitability, you're giving up about 10, 12% because it's not really run the right way or the team leader thinks that they don't provide enough value and the real value is in the splits that they give their agents versus the accountability in the structure. With accountability and structure, you drive your returns on lead sources through the roof. So hopefully that's helpful. You know, anywhere from 25 to 40% on a million dollar business with the team leader out of production is where you could be, you know, and if you're running these crazy splits and you're offering a value proposition to agents, that's you know, just a financial motivator versus like hey, we've got the backstage to be able to provide, you know, a service to your buyer and seller clients to help you get out there and sell more homes. You gotta know what you're building and so do you know what you're building? Are you thinking about your economic model? Are you beginning with the end in mind? So a little bit of a rant in here and it's one of the things I'm most passionate about is that our industry's jacked up, people are not telling the truth. We are given access to different sort of platforms and stages and you know, we're not telling the truth as an industry. And I feel like the more we could do that and the more we can be honest about what our, the financial side of things looks like and you know, our system for, you know, increasing our net worth and empowering our team members and how that all works together. And on our team it is 100% transparent. We share our financials with every team member, a team member that's been on our team for one month and team members that have been around for six years. So it is just pure transparency. So, you know, a lot of people in our industry aren't transparent because the freaking profits aren't there. And it's time we just speak truth as an industry. So, as always, much love and respect. If you're challenging your business and you want to take it to the next level, or if this struck a chord with you and you got pissed off, you know, because your financials aren't where they need to be, or you're forced into production because you set the thing up the wrong way. We have taken dozens and dozens for the last six years. We've taken teams through this transition process of getting this financial foundation straight so you can build something worth owning. If that's you, just go to realestatebschool.com, request a strategy session, and we will just hop on the phone, look at where you're at today, where you want to be in three years, and we'll bridge the gap with you. So we'll talk to you later. Bye.