Regardless of if times are good or bad, you should always pay attention to your bottom line. But when things are like they are right now, it’s even more critical. The one area you have the greatest control over is your expenses yet many business owners seem to put expenses on auto-pilot. With brokerage net margins hovering around the 2-3% mark, very few can afford to treat expenses as if they’re all fixed. According to a recent analysis of 100 real estate brokerage clients by accounting software firm AccountTECH, half of those brokerages had a net margin of between -3% and +3%. With such a razor thin line, the slightest changes can have a material impact.
Very frequently we see expenses go unchecked and it can be small things like the phone bill to massive outlays like an office lease. Of course, some agreements are long-term and require some significant work to negotiate, but those are very typically the one that will provide the greatest relief. Here are a few recommendations on where you should focus some attention:
Office and equipment leases: Go through your agreements to determine your anniversary dates, your cancellation terms and your penalties. A lot of owners feel like they “need” the office or agents will leave. They need the printer, a special coffee machine with monthly service, water service, etc. If it’s the difference between profit and loss, you need to seriously evaluate whether it’s truly a need. Are agents there because the office is there or because they need it? Between the office, the equipment, cleaning service, fresh flowers, a receptionist, added insurance costs and other expenses you may find that you’re sitting on $100k+ in annual cost of a few hundred thousand in potential bottom line added to the business valuation.
Review Contracts: Carefully examine your lease agreements to identify anniversary dates, cancellation terms, and penalties.
Evaluate Necessity: Determine if your current office space and equipment are truly essential. Consider the potential impact on agent retention and productivity if you downsize.
Negotiate Terms: If possible, renegotiate your lease terms for more favorable conditions.
Marketing expenses: While I wouldn’t recommend cutting the things that drive revenue, you will probably find that certain marketing expenses don’t have a clear ROI. Are you spending on billboards, print ads, direct mail, sponsorships and other hard-to-track marketing methods? Do you know how many closed deals came from your paid search, PPC and social marketing? Are you paying for leads from various sources that have not converted or have very low conversions? You have to look at conversions to make sure your spend is actually worth it and look at ditching the things with no or little return. Even if you don’t completely cut the expense, recalibrating the spend toward higher-performing options will have a payback.
Track ROI: Measure the return on investment (ROI) of your marketing activities to identify ineffective channels.
Optimize Spend: Allocate resources to high-performing marketing channels and reduce spending on those with low returns.
Explore Alternatives: Consider less expensive or more effective marketing strategies to achieve your goals.
Technology: It’s not uncommon for a brokerage to license five to ten different technology products. Website, CRM, transaction management, marketing automation, marketing design, accounting, email, collaboration, online meetings, and many others. What’s actually being used? Are there any duplications of services? Are there optional packages you’re paying for but don’t need? Are you paying for licenses for people that are no longer with you? Are you actually getting value out of the products you’re paying for? Are there less expensive alternatives? It’s easy for these expenses to get away from you to the tune of thousands of unaccounted for dollars a month.
Audit Usage: Evaluate the utilization of your technology products to identify redundant or underutilized tools.
Eliminate Unnecessary Features: Cancel optional packages or features that are not essential to your operations.
Explore Alternatives: Research more affordable or feature-rich technology solutions.
Personal and discretionary: While I’ve seen some whoppers in some brokerage’s P&L statements, the items that tend to stand out are travel, entertainment and auto expenses. These may not be significant on a monthly basis but some random expenses can add up into the tens of thousands annually, especially if you’re leasing a luxury SUV at $1500 a month or more. It’s worth reviewing the expenses that you have significant discretion over since they may be the easiest to curtail even if they don’t mean the difference between profit and loss.
Review Spending Habits: Analyze your personal and discretionary expenses to identify areas where you can cut back.
Prioritize Needs: Focus on essential expenses and limit non-essential spending.
Consider Alternatives: Explore more cost-effective options for personal and discretionary items.
It’s good practice to keep an eye on your expenses no matter what the business climate is. With the headwinds we’re seeing in real estate, it’s not just good practice, it’s imperative. But beyond the day-to-day piece of mind, if you’re thinking of exiting the business and getting the most potential out of your asset, you have to find every way to deliver bottom line results. Remember, even small reductions can have a big impact on your bottom line. Earnings drive valuation, it’s that simple.
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