The Two Drivers of Profit in a Real Estate Team

By Andy Mulholland

He has a background in leading a top real estate team for over a decade and an understanding of the critical role of clear financials, Andy, along with his wife Ellyn, a seasoned real estate CFO, co-founded Simple-Numbers.

When we ask team leaders what they think the answer is to becoming more profitable, most of them say the same thing: sell more homes. It sounds logical, but it’s almost never the real answer. The answer is hiding in one of two places every single time, and once you understand that, the path to profitability gets a lot simpler.

Two main drivers of profit: Cost of sale and operating expenses. Those are the two things that drive profit in a real estate team. We like to compare it to physical fitness. If you want to get physically fit, there are two things that matter: diet and exercise. If you want to get financially fit as a team, the two things that matter are your cost of sale and your operating expenses. When profit isn’t where it should be, it’s one of those two, or it’s both. And when the books are set up correctly, it becomes really clear which one it is.

Cost of sale is where most teams go wrong. Operating expenses are the easier fix because you can make decisions and cut things. Cost of sale is different because if you get it wrong from the beginning, you’re in a tough spot. You almost have to blow everything up and start over, and that’s not a place anyone wants to be.

When we dig into cost of sale, there are three things we look at every time:

• How much are you paying your broker?
• How are your splits structured with your agents?
• How reliant is your business on third-party referrals?

It’s one of those three. And the most common problem we see is the splits.

The listing side should be your profit center. Here’s the pattern we see over and over again. Teams set the same split on the listing side as they do on the buy side, but on the listing side, the team is paying for everything. Admin support, listing coordinators, staging, photos, videos, and maybe even an ISA to set the appointment. All of that cost sits on the listing side, and it sucks the profit right out of that part of the business.

• The listing side should actually be where your profit lives, because that’s where you can leverage your agents the most with systems and people, which is what increases profitability.
• The buy side is harder to leverage because buyers just take more time. Agents still have to show homes, drive around town, and do all the work. You might add a showing assistant to help, but the real opportunity to generate profit is on the listing side.

If your splits are the same on both sides, that opportunity disappears.

The worst model we see is one that can’t scale. The hardest situation to scale is a team that does mostly buyer deals where most of those buyers come from the agent’s own sphere of influence, and the team is paying out 70% to 80% on those deals. There’s just not enough left. You’re losing money in that scenario, and it’s not a model that can grow. The same is true for teams that rely heavily on third-party referral fees. There’s just not enough margin left on the bone to build a sustainable business.

The pattern is almost always the same. When profit isn’t where it should be, we follow the decision tree down from cost of sales and operating expenses, branching out from there until we find the specific issue. If your books are set up correctly, the answer is usually staring you in the face. If you want help figuring out where your profit is going and what to do about it, reach out to us at andy@simple-numbers.com or visit simple-numbers.com. We’d love to help you see your numbers clearly.