Often, the questions I am asked when presenting at conferences or hosting workshops in the real estate industry come back to 3 common debates – I call them the great rivalries of real estate. These rivalries go to the heart of the business model and therefore, ultimately affect how you make money, how much money you make and how you go about growing your business.
In my mind, the great rivalries of real estate are:
- Selling versus non-selling principals
- Organic versus acquisition growth
- Big versus boutique [which some people associate with independent v franchise]
clarity of vision
I have seen businesses achieve great things irrespective of which way they decide to focus but one thing is common with all of the businesses that achieve great results – they know who they are!
Businesses that are trying to be something they are not do not succeed. They may survive but with confusion around who they are and who they are wanting to be, their resources are not used efficiently and their energy is wasted.
Anyone who knows me knows I hate ‘waste’. Not waste of the rubbish kind but wasted time. There are many examples of waste in real estate businesses [ see my blog 7 Deadly Wastes In A Real Estate Business] but one of the biggest causes of waste is having an unclear vision and lack of clarity on how they are going to make their ideas a reality.
Appreciating whether you are a selling or non-selling principal, for example, enables you to customize your strategy to suit your business model. Don’t waste your time putting in place initiatives that suit a non-selling principal business model if that is not what you are striving for.
how much profit should my business make?
I am always asked, ‘how much profit should my business make?’ My answer is, of course, non-committal until I know more about the business.
The people asking this question are not expecting a $ figure but a % – the benchmark profit as a % of income [number crunchers call this % your profit margin].
I have seen very profitable real estate businesses of all shapes and sizes – both selling and non-selling principals can make good money but their profit margin is very different.
Every year we analyse the financial results of our ‘benchmark’ clients and compare their profit margins behind closed doors to help us identify the opportunities for improvement buried in their data. This data shows profit margins ranging from 10% to 40% but the benchmark you should be working towards is different depending on your business model.
For example, I think a PM-only business that achieves a 35% profit margin is doing well but probably does not have much of a focus on organic growth. Likewise, a sales-only business with at least one selling principals can achieve profits as high as 40% because they typically do not take a commission on their sales [something we often advocate for tax purposes]. A sale-only business with no selling principals may struggle to get to a 15% profit margin.
above average results
After analyzing the data available to us, I see the above average results in real estate businesses come from those that have:
- A large rent roll [large relative to their fixed cost to reduce risk and their breakeven point]
- Multiple Principals [reducing the reliance on one individual and having more people with a vested interest in performance]
- At least one selling principal [making a huge contribution to profit margin] and/or
- A consistently performing sales team [no non-performing baggage to hold back profitability]
which business model is right for you?
Often your business model changes over time. Many businesses start with a selling principal and eventually change to a non-selling principal business. Usually, the timing of this is more specific to the individual principal than the business itself but even the right time to be focusing on organic growth or by acquisition changes due to more macroeconomic conditions.
Not sure what profit you should be focusing on for your business? Give us a call [07 3193 3000] or shoot me an email [firstname.lastname@example.org] and I would be more than happy to give you some guidance.