How to Add $100,000+ or more in value in a residential real estate brokerage

by | Aug 11, 2023 | Uncategorized

You might get a kick out of this.

But what do you think adds more value to a brokerage? Cutting $3,000 in monthly expenses or recruiting 32 new agents?

Spoiler alert: They’re the same.

Here’s how it works.

The Foundation

NOTE: Any examples or mathematical calculations presented are based on national averages and hypothetical scenarios. The information provided is for general informational and educational purposes only and is not a substitute for professional advice.

Allow me to introduce you to ABC Realty.

ABC Realty is a hypothetical brokerage we’re using as we walk through the calculations and explanations.

The owner of ABC Realty wants to increase the value of their brokerage. The question is: how?

Below are the variables we used for ABC Realty’s calculations.

Variables

  • Avg. Home Price = $400,000
  • Commission = 2.5%
  • Avg. Agent Split = 80/20
  • Profit Margin = 15%
  • Valuation Multiple = 3.5
  • Avg. Agent Transactions: 3.8 (per NAR)
  • No. of Offices: 1

Step 1: The Transaction Value Add

To start, let’s first understand how much value a single additional transaction brings to ABC Realty.

This allows ABC Realty to compare the cost of any business decision to the number of additional transactions in an apples-to-apples scenario.

Makes sense? Let’s dive in.

Formulas

  1. (Avg. Home Price) x (Commission) = $ in Gross Commission Income (GCI)
  2. (GCI) x (Agent Split) = $ in Brokerage Gross Margin (Revenue)
  3. (Brokerage Gross Margin) x (Profit Margin) = $ added to EBITDA (Cash Flow)
  4. ($ added to EBITDA) x (Valuation Multiple) = (Added Value)

Calculations

  1. ($400,000) x (2.5%) = +$10,000 (GCI)
  2. ($10,000) x (20%) = +$2,000 (Revenue)
  3. ($2,000) x (15%) = +$300 (Cash Flow)
  4. ($300) x (3.5) = +$1,050 (Added Value)

To summarize, after paying the agent and paying the costs of doing business, one transaction adds $300 to the brokerage’s checking account. In other words, +$300 added to EBITDA.

But that’s not all.

That same $300 (times the valuation multiple) makes ABC Realty $1,050 more valuable as a brokerage.

Step 2: The $3,000 monthly expense cut

Okay, ABC Realty just cut $3,000 in monthly expenses.

How much added value does that bring to the brokerage?

Formulas

  1. ($ cut in expenses) x (# of months in a year) = $ added to EBITDA (Cash Flow)
  2. ($ added to EBITDA) x (Valuation Multiple) = $ in added value!

Calculations

  1. ($3,000) x (12) = +$36,000 (Cash Flow)
  2. ($36,000) x (3.5) = +$126,000 in added value!

It adds $126,000 in value!

And that’s only with one office!

What if you had multiple offices that cut $3,000 in expenses? How much value would that add to your brokerage?

Little cuts in expenses = BIG returns in brokerage value.

Step 3: The 32 Agents

Now for the fun part.

So far, up to this point, we’ve calculated how much value a single additional transaction and cutting expenses adds in value to ABC Realty.

But here’s the big question: How many agents do you need to recruit to equal the $3,000 cut in monthly expenses? (This is a great way to think about any brokerage decision).

Formulas

  1. ($ cut in expenses) x (# of months in a year) = $ in added EBITDA (Cash Flow)
  2. ($ in added EBITDA) / ($ of how much one additional transaction adds in EBITDA) = # of additional transactions
  3. (Additional Transactions) / (Average # of Transactions per Agent) = # of new agents

Calculations

  1. ($3,000) x (12) = +$36,000 (Cash Flow)
  2. ($36,000) / ($300) = 120 additional transactions
  3. (120) / (3.8) = 32 new agents

But here’s the catch.

Those 32 new agents can’t cost a penny to recruit, and ABC Realty has to hire all of them on January 1st.

If they do that, then recruiting 32 new agents is the equivalent to cutting $3,000 in monthly expenses.

The Summary

To be clear, are we saying recruiting is bad or that you should stop? No!

You should be recruiting AND managing your expenses!

Try to look at every decision in your business and ask, How many additional houses do I need to sell to equal this decision?

Now it’s your turn.

Plug in your own numbers to our example calculations and see what you get!

The answer may surprise you.

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