How much are you mak­ing?

As ev­ery real es­tate busi­ness is dif­fer­ent, it can be dif­fi­cult to bench­mark your per­for­mance against oth­ers. Busi­ness ex­pert John Knight comes up with an an­swer to the reg­u­larly asked ques­tion, ‘How much should my busi­ness be mak­ing?’

Elite Agent - - BUSINESS DEPOT - John Knight

When I am pre­sent­ing at in­dus­try con­fer­ences or host­ing prin­ci­pal work­shops, there is al­ways one ques­tion I am asked: ‘How much should my busi­ness make?’

Usu­ally when peo­ple ask this ques­tion they are re­ally fish­ing for a bench­mark profit per­cent­age.

It is a ques­tion that is hard to an­swer; hard, be­cause ev­ery real es­tate busi­ness is dif­fer­ent. It is near im­pos­si­ble to com­pare a sales-only busi­ness with a prop­erty man­age­ment-only busi­ness, or a sell­ing prin­ci­pal busi­ness with a non-sell­ing prin­ci­pal busi­ness. There are al­ways dif­fer­ent com­po­nents of the busi­ness that can be bench­marked, but it is vi­tal to first un­der­stand the dif­fer­ences be­tween busi­ness mod­els.

In­stead, I like to turn the ques­tion around and share the char­ac­ter­is­tics of the busi­nesses that I see achieve above-av­er­age re­sults. In my ex­pe­ri­ence, I see above-av­er­age re­sults com­ing from busi­nesses that tend to have the fol­low­ing.

1 LARGE RENT ROLL COM­PARED TO COSTS

The im­por­tant thing here is the rel­a­tiv­ity be­tween the fixed in­come you gen­er­ate from the busi­ness (usu­ally prop­erty man­age­ment) and the fixed costs you in­cur ir­re­spec­tive of per­for­mance. The greater the pro­por­tion of your fixed costs cov­ered by your fixed in­come the bet­ter. This re­duces the risk within your busi­ness and, be­cause your profit breakeven is lower, you don’t have to sell as many prop­er­ties be­fore you start to make a profit.

In an ideal world, your rent roll is big enough to gen­er­ate in­come ev­ery month equal to the fixed costs of the busi­ness. Al­though this is rare, it does hap­pen, and when it hap­pens it is a nice place to be.

2 MUL­TI­PLE PRIN­CI­PALS

The key with mul­ti­pleprin­ci­pal busi­nesses is that you have more than one per­son with a vested in­ter­est in the suc­cess of the busi­ness. This could be a hus­band and wife team or un­re­lated par­ties in busi­ness to­gether. Not all prin­ci­pals need to be equal own­ers for this to be the case, and in re­cent times it has be­come more and more com­mon for older prin­ci­pals to be sup­ported by oth­ers with a mi­nor­ity own­er­ship in­ter­est.

Given the many hats a prin­ci­pal needs to wear in busi­ness, this works be­cause it en­ables you to share the hats around. You may have one prin­ci­pal re­spon­si­ble for PM and one for sales, or one has the job of sell­ing while the other looks af­ter the back of­fice.

3 AT LEAST ONE SELL­ING PRIN­CI­PAL

Ir­re­spec­tive of whether a sell­ing prin­ci­pal takes a com­mis­sion on their sales, having one sell­ing prin­ci­pal re­duces the re­liance you have on your sales team and cre­ates an op­por­tu­nity for some higher profit mar­gin sales.

Also, don’t dis­count the value a busi­ness en­joys by lean­ing on the pro­file and ac­tiv­ity of a strong sell­ing prin­ci­pal – some­one who is not go­ing to just up and leave when they ne­go­ti­ate a few ex­tra com­mis­sion per­cent­ages with an agency down the road.

4 CON­SIS­TENTLY PER­FORM­ING SALES TEAM

The more con­sis­tently your sales team per­forms, the bet­ter the prof­its. Having no bag­gage in the team and ev­ery­one con­tribut­ing to the profit ev­ery month makes a mas­sive dif­fer­ence to the re­sults. For ex­am­ple, if you have one per­son on a re­tainer and not mak­ing sales, you need one other per­son to make a sale per month just to pay for the re­tainer agent.

One way I like to fo­cus on per­for­mance is by track­ing the av­er­age num­ber of sales per sales­per­son per month. If any­one is not mak­ing a sale each month they are not con­tribut­ing to profit. Get­ting ev­ery­one to con­sis­tently meet base­line per­for­mance ex­pec­ta­tions flows straight through to the bot­tom line.

I see net profit per­cent­ages of real es­tate busi­nesses range from 0 per cent (or neg­a­tive) to around 40 per cent.

To my mind, 40 per cent is only achieved when the busi­ness is re­liant on a sell­ing prin­ci­pal who does not take a com­mis­sion from the busi­ness for the sale. If you are a sales-only busi­ness achiev­ing 20 per cent net profit per­cent­age you are do­ing well. I think the in­dus­try bench­mark here is closer to 18 per cent.

One of the best profit per­cent­age busi­nesses I work with achieves around 27 per cent net profit per­cent­age, but one of the best dol­lar profit busi­nesses only achieves 16 per cent net profit per­cent­age and it has about 10 per cent of its to­tal in­come com­ing from prop­erty man­age­ment.

There is no one-size-fits-all. If you are go­ing to com­pare your­self to oth­ers, make sure you are com­par­ing ap­ples with ap­ples.

Foot­note: To en­sure you are com­par­ing ap­ples with ap­ples, when I men­tion net profit per­cent­age I am talk­ing about profit be­fore owner’s draw­ings (but af­ter a com­mis­sion on prin­ci­pal sales) and be­fore tax, ex­pressed as a per­cent­age of to­tal in­come.

Newspapers in English

Newspapers from Australia

© PressReader. All rights reserved.