Making the transition from being an agent to being an Owner/Broker and having your own office is much more difficult than most individuals realize. It is not really about selling houses any longer as that is now the role of your agents. Your role is now about running a profitable office and recruiting real estate agents.
If you are reading this, then you are most likely already a successful real estate agent. You probably know everything you need to know about listing and selling houses, as well as how to get a deal closed. However, as a broker/owner you are no longer in the business of listing and selling houses. You are now in the business of recruiting and managing agents who list and sell houses.
Your office is worth as much as your agent count. Sometimes this will be part of the selling price of your firm – so much per agent, per deal if they stay.
It is a simple enough premise – the dollars to a real estate brokerage come from transactions and transactions come from agents. Therefore if you want more transactions (dollars) you have to have more agents.
But how many agents do you really need to be profitable and how do you calculate their worth to you?
This is one of the basic fundamentals of real estate office management.
A top producing agent understands they must prospect for listings and by that same reasoning a profitable broker must prospect (recruit) agents to be successful in their business.
The analogy that we like to use is that an agent recruiting appointment should be treated as importantly as a million dollar listing appointment – for the simple reason that they are worth about the same amount of income to you. (And you should be just as enthusiastic and excited about it!)
We actually go into greater detail in our on-line video lessons, but for now, here is some simple math to help you calculate the value of an agent to your firm. Once you have this you can also start to calculate your breakeven points and how many agents you require to be profitable.
We start with the average agent production which is typically about 6 transactions per year a/k/a PPA
“Properties per Agent” = 6
Next we determine the average company revenue per transaction: a/k/a CCI “Company Commission Income”
CCI can in the form of a split – such as an 80/20 (80% agent – 20% company) in which case the CCI portion would be 20%. More commonly now the CCI takes the form of a flat per transaction fee. We will use the flat fee for our math purposes but if you are running a split shop you can easily calculate your own CCI per transaction Most offices also charge some sort of monthly fee – whether they are charging the agents by split or by transaction and this should be included here.
The last item that should be included is Lead Generation /referral fees – which are by far your largest revenue stream as a broker and the one that you should always be most focused on. There is more detail on this in the video version of this lesson as constraints do not permit us to delve into it here, but suffice to say that if you as a broker/owner are not using “Lead Gen” as a profit center – you are missing out on the easiest and most profitable area of your business. (This area is so important that we actually have several video lessons just on this subject alone)
We now have everything we need to calculate the average annual revenue for an agent in your firm, which is the main component of agent value.
We will keep the assumptions both conservative and simple for our purpose here today:
- 6 transactions per year per agent
- Average sales price of $150k
- $100 monthly fee
- $295 Transaction fee
- 30% referral fee from our company lead gen. with 1/3 of transactions from company leads (typically higher)
The math now looks like this:
Average Annual revenue per agent:
- Monthly Fees: 1200
- Transaction Fees: 1770
- Referral (lead) Fees: $2700
- Revenue per agent: $5670
We now have the first part completed to determine the value of an agent as we now know that our average annual revenue per agent is: $5670
The final part in determining the value of an agent, is understanding that each agent has a lifecycle with your firm. Agent lifecycle is simply how long the average agent stays with your company. This varies greatly as some agents don’t last long and others may be with you for life… but will typically this will average out to about 4 years across your entire agent population.
We now have what we need to understand the value of an agent to our company.
Annual Revenue per Agent X Lifecycle of Agent = Value of Agent
In this example that would be: $5670 x 4 = $22,680
You really need to think of each agent that you recruit (hire) as an annuity that will pay you $22,680 over the next four years. That is their real value to you.
You should now also be seeing why an agent interview is to be treated as if it were a Million Dollar Listing
Appointment! The dollars that you will make from each are very similar.
We go into a great deal more detail in the video version of this lesson, including how to use this information to calculate your break even and profit points.
One final note and probably the most exciting one! – Agents are annuities!
When you learn how to recruit real estate agents and set up a decent recruiting program you will find that your average cost to recruit an Agent is about $1000 per producing agent. (Yes – there is a Broker School video lesson about this as well)
So the question becomes:
Would you invest $1000 to get $22,680 back over 4 years?
Congratulations! – You now understand how a real estate brokerage really makes money!
Let’s Talk
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FreeBrokerSchool.com is a resource to give brokers the advantage in running their offices. Hey – they know how to sell properties well, but they don’t always know all of the ins and outs of running a successful real estate brokerage. These videos are designed to give you the inside scoop from industry leader and success tornado, Mike Krein. You can’t take notes fast enough when he starts giving tips. These videos allow you to watch one nugget topic at a time, digest it and implement it to add to your success.
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