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Internal Disrupters Bound to Implode

November 10th, 2017 by Geoff Baldwin

While external disrupters demanding ludicrous lead referral fees from desperate agents are a huge threat to our industry it is the internal disrupters offering unsustainable packages to salespeople that are currently causing as much or more havoc in Australian real estate industry.

Entities offering packages of 90% and more of the commission plus everything but the proverbial “steak knives” have and continue to lure unsuspecting salespeople into their web. The problem is the model is financially unsustainable when used for all reps in a business.

The 90% plus model can work for salespeople who are in the top echelon who write big numbers and who are able to work on their own. In fact our own brand RE/MAX introduced a 90% package into the Australian market 20 years ago. It is however an extremely sophisticated arrangement that cannot work for the majority of average salespeople and it certainly cannot be sustained by a company when they are paying it to all of their people. Kindergarten maths says that a company cannot survive on retaining only 6% of commission income even if they are employing 100 reps.

In recent times we have seen the emergence of companies that use the model to attract agents, many of whom are writing less than impressive figures but who think the answer to their poor performance is a larger slice of the pie. Even the big writers, most of whom leave offices where they are already on 60% or 70% are joining these entities in the belief that they will earn more, only to find that there are a myriad of hidden costs including per deal admin charges, listing process charges, marketing charges, etc, etc which when added to the fact that they are miles from any support base results in them being worse off.

A study of these high commission entities shows that, if the top 5% of their salespeople are removed from the equation, the average listing holdings of the remainder is around 3 listings per rep and the average sales per year is around 6 to 7 deals. A rep writing those sorts of figures should be questioning whether they are cut out for real estate at all let alone thinking they will survive in a work alone environment.

A Tale of The Real Estate Industry: If It Sounds Too Good To Be True, It Probably Is

In the early years of my career, a career that has seen me personally write over 3,000 sales and manage other salespeople to write hundreds of thousands more, I was given two pieces of advice that resonated with me and held me in good stead. The first one was “You can’t get rich working for a poor boss” and the second was “If you want to earn more don’t ask for more of your bosses pay, just list more and make more sales”. Despite many, many offers of higher commissions I never worked for more than 50% because I studied and understood the finances involved and had too much respect for my employers and their reasonable expectation to be fairly rewarded for their own efforts, their investment and the business risks they were taking.

The brutal truth though is that “average” Australian agency is retaining around 6% to 7% of their commission turnover to profit with the better agencies achieving no higher than 20%. The maths are simple, even at the higher margin if the reps commission increases by 10% but the agency’s retained income from that rep is slashed by 50%. it’s frightening that many principals themselves don’t understand this simple equation.

The problem in our industry today is that in many offices the tail is wagging the dog and the end result can only be that the agencies that let this happen or that actually believe they can sustain a business where they are paying 90% plus of the commission are doomed no matter how skinny they think they can operate. The shame is that all of the salespeople they have lured into their web will be put back into a position of having to again, reset and restart their careers not to mention the cost in lost self esteem and reputation.

I can certainly understand why big writers may be attracted to these sugar coated offerings but underneath all that sugar can often be a big belly ache that causes pain for a long period after the initial sweetness.

When you see the share prices of these entities dropping by up to 70% and the records showing them losing many millions of dollars, having to sell rent roll assets, and having to answer to disgruntled shareholders it is not a bold prediction to say that their days are numbered. In fact, I for one confidently predict that we will see some of these brands change their models drastically or otherwise fold, merge or be taken out and that this will happen sooner rather than later.

My strong advice to salespeople who may be attracted by the mega high commission bait is to think twice, do you own numbers, google the entity and study their financial position, check the history of their share price, talk to salespeople who have joined and left those entities (there are plenty of them some of whom have taken court action for alleged breaches of contract, etc). Do your homework before you jump because if it looks too good to be true, it almost certainly is.