Steve Murray: The Ultimate Guide To Valuating Your Real Estate Business

Guests: Steve Murray, Daniel Ramsey
Recorded: March 8th, 2019

Excerpt

Steve is the President and Owner of REALTrends and earned his credibility by having been in the residential real estate field since 1977. He has co-authored four books on the valuation of residential real estate brokerage firms; co-authored the 2011 book “Game Plan,” about the past and future of residential brokerage; and co-authored the 2014 book, “Game Changers: The Unfounded Fears and Future Prosperity of the Residential Real Estate Business.”

Steve has also served dozens of state and local Realtor® associations and MLS organizations in a consulting capacity and has consulted with several large technology firms over the years.

This in-depth and highly informative conversation with Steve is something you do not want to miss — from knowing what the value of your Real Estate Business is, how to go about getting that information, working and keeping your brokerage alive during market shifts, business & team operations, and hiring talent to maximize the leverage to grow and scale your business.

Transcript

[00:04 (Daniel) Hey, everyone. Daniel Ramsey here with MyOutDesk. I’m really excited. Today’s going to be a kind of we’ve got somebody who’s a big deal, Steve Murray from Real Trends. So I’m excited for that. Before we get going, if you’re here live, just go ahead and type in where you’re from and what it feels like outside. What’s your temperature?

Freezing. Cold, hot. Just. Just let us know. Say hello. We are also Steve is going to take a lot of questions at the end of this. So if you’re live here with us today, we’ve got the brain and this guy is going to just kind of share everything he knows. If you’re here with us, it’s likely that you’re in my out as client.

And what we do is we help companies, real estate companies instantly scale with high-class, high-quality talent. That’s how we help people. So we’re getting some we got Sandy from Manhattan. It is freezing. Michael, New York. We got a lot of New York people. Milwaukee, there we go. Those guys are good. Steve, hey, thanks for joining us today.

[01:04 (Steve) Yes, thanks for having me on.

[01:06] (Daniel) So we’re going to talk about a lot of cool things, guys, if you’re here, we’re going to talk about market. We’re going to talk about different real estate models. And really, we’re just going to really dove into valuations. And there’s there’s there’s just nobody that knows how to value a real estate practice like Steve does. And so, you know, thanks for joining us today, man.

Let’s get started. I mean, everybody wants to know what does Steve think about the market? Where where are we right now if we’re a real estate practitioners?

[01:37] (Steve) Housing market declined last year. Nine of the 12 months housing sales were down the same month from the year before. January was down again from last January. Yeah, I did notice that the pending index is up or reported, so maybe the spring will come back. Mortgage rates have backed off lack of demand for money yet, so we expect this year.

The surprise would be if the surprise would be if we actually have an increase in housing sales this year. Yeah, most people think at best will be flat this year with last year.

[02:17] (Daniel)
For our audience, we were talking about this. You started your career 42 years ago, right? A But like, what’s the beginning story of Steve Martin?

[02:31] (Steve) Well, I, I moved to Atlanta after college. I was with ADP and Proctor and Gamble and a friend from where I grew up, moved to Atlanta and hired me into the relocation management business. There you go. 42 years ago, I was a property manager out of Atlanta, Georgia, handling corporate homes in, I think, eight southeastern states and so I did that for a little over a year and was originally a franchise salesman for the original Better Homes and Gardens.

And from there, I got hired to run a referral network and started real trends in 1986.

[03:10] (Daniel) Okay. So tell us about real trends. Like what do you guys do? Who do you serve? And you’re kind of the authority in kind of valuing real estate practices. Everybody hires you to do that. But talk a little bit about real trends. How do you guys serve the real estate community right now?

[03:26] (Steve) Well, real trends we have we do research and publications. We rank the top brokerage companies in the country. We are the official ranking company for agents and teams. At least we’re the only ones that actually have to. You have to verify the information and you have to do certain minimum levels. It’s not just, Oh, you’re a top five agent.

We don’t do that stuff. You can’t pay. You can’t pay to get ranked got and we rank eight. We do we have 54,000 various readers of our publications. Daily, weekly, monthly.

White Paper’s research on the brokerage industry. We have conferences for the owners and operators of brokerage companies.

And then we do consulting. And a lot of the consulting is targeted at residential brokerage companies primarily. Yeah, almost all of it. And we do merger acquisition valuation and general strategic planning and business planning for companies.

[04:29] (Daniel) Now you go, well, what’s, what’s cool is we were talking earlier and you said that every real estate company should focus on three things. So I and it’s cool because we’ve got kind of a softening market and I’m like and I ask the question like, how do I make more money? Or What do I do in a shifting market?

And you’re like, None of that matters. And then you drop some knowledge like, So what are the things that as a real estate person, I should be focusing on?

[04:56] (Steve) Well, if you’re a brokerage company, you’re not going to be in business much longer if you don’t recruit talent and then develop that talent, increase productivity and spend less money than you have coming in. If you’re trying to operate a team. Yeah, not your priority should be my database and building my leads. System number two is to make sure I got the right people, the systems to convert those leads and again, try to spend less money than you have coming in.

And if because in this kind of a flat market or a declining market, if all you’re doing is treading water, you’re losing ground.

[05:35] (Daniel) Right?

[05:36] (Steve) Right. This is a time when generally the best operators take market share because they don’t want to have a shrinking business, which right now in this market, if you’re if you want to grow, then that means you’re taking share. But you’re not going to have that happen unless you’re focused on the basics. And if you get distracted by, you know, all the conferences and all the yak yak about tech and all the yak yak about what Zillow’s doing, and you worry yourself to death and get distracted, you’re going to lose ground.

[06:08] (Daniel) Right. So talk to me. You know, it’s kind of curious. I want to dove deep. I get recruiting agents. Yup. Tell us, like, the best systems you’ve seen because one thing that you that’s unique about you is that you get a look inside of every brokerage that you do these consulting things. And so you’ve seen the right way to recruit the right way to develop talk talk to us about like what systems have to be in place on the recruitment side.

[06:36] (Steve) You know, first you have to know who you are as a company. What what’s our culture? What do we stand for? What’s our mission plan? What’s our model? Are we a luxury brokerage or are we not? And you have to you have to really define that. And then you have to use available data through your MLS system or broker metrics or trend graphics or real data or somebody you you try to identify those kind of agents that are with other companies that look like you or that your agents have told you, Hey, Bob’s a great agent.

I think you fit well here. Yeah, all those resources. And then you focus intently on your database. If you own a brokerage or you manage an office, you focus on that’s your database. Got it. You should be reaching out to those people and saying, and it won’t work if you don’t see them in person. Direct mail and email and text recruiting does not work.

[07:32] (Daniel) No.

[07:33] (Steve) You have to do it in person. And and again, with the team, it’s the same kind of functions. How are you going to stay in touch with those potential clients of customers? What message are you going to use? How frequently are you going to do it? What’s your messaging? You know, how are you going to get in front of people?

[07:51] (Daniel) What about the develop? You said develop develop talent. Yeah, talk to me. I mean, I don’t work.

[07:58] (Steve) For a brokerage. Everybody a lot of people knows how to recruit and recruit people. And what do you do once you get them? Do you help them develop their skills?

No. As Ninja Larry Kanter would say, are you do you have a plan for developing their mindset and their skill set? Do you give them a path and then hold them accountable or guide them into the steps so they can be successful? Are you investing any time in that? Yeah, because if you’re not, who are you kidding?

You’re just putting bodies in the seats.

[08:36] (Daniel) Yeah, I love it.

[08:37] (Steve) And you that’s developing, by the way, that may mean to development is you need to have a transaction management system or it may be you have a great website and maybe you have a mobile app. You have tools that help them become productive.

[08:54] (Daniel) Yeah, a lot of brokers are now and this is just for everybody listening. A lot of brokers are actually hiring our people to give them to their agents as a retention development tool because as salespeople, we only you and I only want to talk. I don’t want to do paperwork and I don’t want to, you know, do anything but do a face to face like this.

And so brokerages are now coming around to they have to actually serve their agent population. And yep, we’re an easy button for that. We’ve got a question, Bruce, my man. Okay, so here’s here’s an interesting question for you. How to value a business and sell in what form? So per month, so much upfront percentage of commission over the years by the way.

My. GROSS okay.

[09:40] (Steve) So I think I think they want to get to valuation, though.

[09:43] (Daniel) I do. There’s a couple I mean, I love that. So let’s talk I mean, how do you value and everybody who’s listening if you if you register we’ve got a landing page, we’re going to drop it right here. Steve has given he’s given us years of data on what your net profit should look like, cost of goods, gross margins, like what company dollar should be.

And so he’s given us a ton of data and it’s just a free gift. And thanks, Steve, for doing that. So if you register, you’ll get that and you can kind of look at yours compared to everyone else’s. But let’s talk about valuation. How do you value a real estate practice.

[10:23] (Steve) The value of a real estate brokerage business or a team practice is based on how much profit it produces.

And a story.

People say, good. I have a great brand name, ladies and gentlemen. We’ve sold 760 brokerage companies in 32 years. 98% of we change the name. Okay, well, we acquired it. So what was the value of the seller’s name when every buyer changes the name?

And we don’t lose business because we change the name. No, we don’t. So it’s it’s it’s net income or profit. We use the term e ba da EBITDA earnings before interest taxes, depreciation and amortization. Now I don’t want to get technical with let’s not waste time it’s how much cash did your business produce? And then we look at a multiple.

[11:24] (Daniel) Wait, wait, wait, Steve, I pay myself a $300,000 salary and I have my car and my R for my house, so I might go on trips and write it off. What do you think? I mean, how does.

[11:38] (Steve) That which I do again, I don’t want to get we don’t have 3 hours, so I’m not going to get real technical. But you would add personal expenses or stuff paid to the owner. You add that to border.

But then you deduct the cost of what it would cost to replace you as the owner-manager, the services you provide. Did your company add back what you paid yourself? Cars, autos, everything. But then you have to deduct. Okay, if I got to hire someone to do what I did, how much does that cost?

And we get to this what we call adjusted EBITDA. You have those kind of adjust. We also adjust for non-recurring expenses, but we won’t go into all that right now. You look at that EBIDTA and you put a multiple on it and this is where everybody gets well. What’s the multiple? Everybody wants to know the multiple. Yeah, multiple for brokerage companies.

And brokerage companies can range today from two to about five and a half.

Okay. And well, jeez, that’s a big range. And it is two would be, for instance, small brokerage, small metropolitan area.

[12:59] (Daniel) No growth. Right.

[13:02] (Steve) Just just there.

Five and a half would be large brokerage, probably independent brokerage in a large metro. And that that kind of gives you the two stakes.

[13:20] (Daniel) And I’m guessing that.

[13:22] (Steve) That happens here. There are very few, five and a half, very, very few. The the sweet spot right now is between three and four.

[13:31] (Daniel) Okay. And we talked a little bit about the market shifting because of what’s happening. And so talk about that a little bit about selling. Like what what are the things that are happening right now?

[13:44] (Steve) And for 20 years leading up to a year ago, yeah, we had two big companies buying brokerage companies as fast as they could buy Realogy and Berkshire Hathaway.

Now there were some other regional companies buying, but those two guys drove the market.

They paid the highest prices and the best terms. So Realogy dropped out a year ago January. They’re not buying brokerages anymore.

That that gave homes Berkshire Hathaway the right to. Well, I don’t have that kind of competition. So they backed up a little bit.

They lowered a little bit. Then you had housing sales start to go down.

So then Berkshire Hathaway said, well, we’re not going to keep paying high prices in a down market.

And everybody has followed that down.

All the buyers out there generally are well below 20 or 30% below what they would have paid 18 months ago. They’re off 20 to 30% today.

[14:50] (Daniel) That’s that’s crazy. We’ve got a question. It’s one of my favorite questions. Ryan Solberg asked, How can I hire an assistant to grow my business? Steve, I’m going to actually ask you to talk about that and then I’ll I’ll follow up how we help people.

[15:10] (Steve) Well, I’m in my you know, my best to answer that is pretty simple. And I think you’ve said it, Daniel, and I think every expert who knows really knows what they’re talking about has said and I practiced it here. I finally had to give up doing $20 an hour work because I’m $1,000 an hour guy.

And and so in a week, when we did the first time I hired a non-revenue producing person in our company was about five years ago. They’d go five years ago. And within three years of doing that, we doubled the size of our company because I wasn’t doing $20 an hour stuff anymore.

And it’s the simplest thing I can tell people, not to mention pardon me, not to mention you, you then as a leader, owner of your practice, your business and this same true for broker owner.

Look at what you’re doing. And you say, well, I don’t want to add overhead. How much of your time really look at your time are you spending in in those priorities that that grow your business, recruit agents or develop agents or focus of your team, lead gen, building your database. When are you going to realize that your where is your time best fit and can I get somebody to do the other stuff.

[16:38] (Daniel) Well, you know, okay so I love we do this thing it’s called the sticky challenge. So if you’re listening right now you need to go to my our guest dot com record slash real trends and download Steve’s multi-year kind of report because it’s a big deal but Steve you’ll like this because anybody can do it. We call it the sticky challenge and you just follow yourself around all day and then you write down, Did I talk to a client or did I talk to a potential agent that I’m recruiting?

Yep, I did one hour and that’s productive and that’s the most important stuff. And write about the three priorities. Like if you just follow yourself around and you find out how much of your day is spent on doing admin tasks or surfing Facebook or I mean, it’s insane. I mean, most people, when they come through and do a consultation with us, we find that they’re spending 70% of their day on stuff that just doesn’t matter.

Yeah. And then their business valuation is going down, right? And so we just help people focus on their priority leverage, what isn’t in your unique skill set and then and then your business just froze. I mean, that I mean, we call it we call it a double my business strategy call. So your wall is exactly.

[17:56] (Steve) That same thing for a guy running a consulting publishing company. You have to you have to keep three priorities. If you have more than three priorities, you have no priorities at all.

[18:07] (Daniel) I love that you…

[18:08] (Steve) Say, what am I going to focus on today? And, you know, 80% of my world is client work.

This is pretty much client work. Maybe it’s 70 and another 15% is researching, reading and writing because I do a lot of writing and podcasting for our company. The other 15% is working with our team of 1212 people here at Real Trends, making sure we’re all staying on task, that we’re on our calendars, that we’re accountable. We have leadership meetings once a month to review the month.

How did we do? We have impromptu meetings. We have a lot of meetings that there’s no chairs allowed. We don’t sit down. It’s a quick we’re standing. We need to resolve an issue. Let’s stand. Let’s not take a lot of time. Let’s decision, get everybody on board and get it done and move on.

And we assign somebody to say email everyone confirm what we just agreed to. Let’s get let’s move beyond this.

Anyway, so back to valuation. So I talked about how you value a company and one part of it is the price which I just talked about. Yeah, there’s we could do, do an hour on the things that might affect it, but that’s generally what I told everybody. That’s true. Then there’s the terms.

How is the price paid?

There’s no such thing as all cash at fair market value in our industry. It does not happen or it happens so infrequently that I can say it doesn’t happen. And whether it’s a team or a brokerage these days, generally, let’s say cash down is 25, 20 or 25% to 40 to 50%.

And the rest will be based on the future three years performance of the team or the brokerage.

And if that team or brokerage replicates, it’s perhaps past 12 months performance for the next three years, the seller will get all their money.

It’s that simple. I So if you’re thinking about selling a practice, whether it’s a team or a brokerage, don’t call me a month before you want to retire. You got you have to plan at least a year and sometimes a little bit longer to be around. Maybe not full time active, but be around.

For at least a year, if not a little bit longer. If you want to maximize your price.

[20:52] (Daniel) Yeah. Okay. So we’re going to start taking questions. We with a little bit more time with Jeff. I want to respect his time to be worth $1,000 an hour. So this guy is brilliant and bright. So let’s talk a little bit about model because I think it’s interesting what’s happening and you’re in the middle of it. We’ve got the flat free fee discount brokers, we’ve got the online models, we have an emerging tech models where there’s no office.

And so there’s all these models out there, right? Talk like help people understand as a brokerage, as an agent, what should they be moving towards if they’re growing their own practice?

[21:35] (Steve) We have we we have said this before, but we’re we’re evolving into what we’ll call a bipolar industry. You’re going to have on one hand, you’re going to have WalMarts.

Let’s call them EXP.

Or Realty one group or HomeSmart or benchmark or signature. I could go on and on.

Now, $300 a transaction, $100 a month, very low cost to agents, not a ton of support, large offices if many offices, the XP 16,000 or cap office where you want not a lot of infrastructure in terms of personnel to support your practice right your team you got to kind of yeah they have online webinar they have stuff but nobody to kind of network with in an office.

No, none of that. So you got you got the WalMarts and the WalMart Target over here and then over here, you’re going to end up with a few Tiffany Nordstrom’s type companies.

That are that are I Sothebys. There’s a number of great Sotheby’s companies that’s a great brand. It’s a great brand. Yeah. They tend to be a little bit more premium price in favor of the broker because that’s a great luxury brand. It’s a really good angle. Volkers is trying to establish that that type of brand. You have niche companies that are special specialist in luxury homes or in new homes or in REOs.

I met with a RE/MAX company at our for last week. They’re doing a ton of I didn’t realize we’re still a whole lot of Oreos out there, but they are they have a broad swath of territory in New England where they’re the Fannie and Freddie-approved guys and they do such a good job, they keep getting more business, they’re doing hundreds of deals a year and they’re great at Oreo business.

Right. And so they’ll be they’re not just all high priced, but they’re specialty specialty in between. No fun.

[23:51 (Daniel) Get out.

[23:52] (Steve) No fun. You either go this way or you go that way.

And what we tell people is, how’s how’s being in the middle working out for Sears and J.C. Penney’s and Kohl’s and Borders and Toys R US. And they got caught in the middle.

And they couldn’t compete on that with low costs of Amazon and Walmart. Those guys. Yep. And they’re not really specialty because you could find all the Toys ‘R Us toys in WalMart and Sam’s Club and Costco and and other places.

Amazon, just go online and order them.

You don’t have to worry about whether they’re in stock or not or go to Target for right. So they got caught. They got caught in the middle. Don’t get caught in the middle. We have told brokerage companies who are kind of that middle area, if you intend to compete and be healthy 3 to 5 years from now, you need to plan on a gross margin.

The company dollar or percent of about 12%.

I don’t care where you are now. You need to write a business plan for how you’re going to compete there or you’re going to shrink your footprint and you’re going to become a specialty company.

Like another great specialty company. Right now. There’s two that come to mind. One national is couples.

They are typically buying all the top producing high-end agents. They’re creating a specialty company, not perfectly, but that’s what they’re that’s what they’re aiming to do. And they’re only going to be in 20 major metros. Right. With a few add-ons like aspirin, you know, markets like that. But then you’ve got a company in Fort Collins, Colorado, called the Group Inc and the Group INC.

They only mostly only hire brand new people because they have a system, a real system for taking a brand new person, which they select carefully, and they put them through three, six, nine, 12 months. And they know if they do the work and they’re held accountable and their coach properly, they’ll be doing a six figure gross income in 12 months.

Right. And they go people. How do they know that? We’ve been doing it for 40 years.

We know what works.

[26:17] (Daniel) I love it. We’ve got a couple comments here. We’ve got Gloria says great stuff and she says, Thank you, Steve.

[26:24] (Steve) You’re welcome.

[26:24] (Daniel) Gloria Yeah. And then Stuart from Happy Grasshopper is here. So what’s up, dude? We have a question. Mike DeRosa, I know this guy he asked, you know, EXP is operating at a loss with 17,000 agents and and they’re basically removing the responsibility from the brokers, which is why brokers are moving over there. How does that impact the sale of brokerages?

[26:52] (Daniel) And compared to previous methods like, well…

[26:56] (Steve) You know, you and I chatted before it live the the valuation of brokerage companies. As I said earlier, is declined.

And we have fewer buyers, fewer large buyers that are willing to buy into a housing market that’s kind of soft.

And also buy in to a brokerage market where the gross margin and profit margins are under pressure.

There’s a little hesitancy to go in and buy a brokerage that’s at an 80% gross margin when all around that company, everybody else is 12.

So is EXP and Compass and Smart Realty one group effecting valuations? Absolutely. They are.

Absolutely. They’re there and they’re affecting the economics of their competitors.

So, you know, the key is but you know, so but it’s like HomeSmart, you know, they’re big player down there, get larger. They came up to Denver a few years ago and they paid a very handsome price for the largest HomeSmart like company in Denver.

Now. And I like. I like the gentleman. Is that Mike DeRosa?

[28:13] (Daniel) Yeah.

[28:13] (Steve) Yeah, EXP is losing money. The bigger they get so far, the more money they’re losing. Right. They can get away with that for a while. Same thing with Compass, same thing with Zillow for a while. Wall Street will let you get away with that. But sooner or later, you’ve got to prove you’ve got a plan to get to profitability and that that your model will increase its profitability.

The more scale you get right. The jury’s out. Clearly, the jury has got to be out right now on he XRP and Compass. It might be out on Redfin, but my personal view is they have a substantial business process, a substantial online process and pretty good metrics of what it costs for them to get a close customer.

And I think they will figure out in the not too distant future how they get to profitability and then really how to push that profitability up. I think I know how they know how they get there and I think I see how they’re going to get there. I don’t know how I expect going to get there yet and I don’t know I don’t know enough about Compass’, internal financials, although I could model them.

I could model them. I don’t know for sure how they get there. We’re at a time where Wall Street and Silicon Valley still have this absolute like brain cloud going on, that they’re going to be able to disrupt the relationship between agents and consumers. Right. Even though our own every four years we hire one of the world’s best research firms, Harrison Sites do a consumer study, recent buyers and sellers.

The percentage of buyers and sellers that use an agent last summer was the highest it’s been since we started doing this 17 years ago.

So all this tech isn’t causing buyers and sellers to not use agents. But we already know that, right? You also know that how they find an agent still roughly two thirds as well. I know one or somebody referred me.

Hasn’t changed in 35 years.

[30:28] (Daniel) Why? Why hasn’t that changed? I’m just kind of curious because a lot of people think that there’s a major shift or disruption happening in the real estate world.

[30:37] (Steve) Well, I mean, yeah. I mean, here it is. Buying or selling a home first is infrequent. This isn’t buying a bottle of wine or booking a hotel or using Uber. Yeah, this is like every six, eight, nine, ten years for most people. Number two, it’s highly complex and getting worse yet. And lastly, the interesting thing about Americans collectively, Americans are pretty smart shoppers, not individually.

We all get stupid down there, but.

[31:13] (Daniel) But what?

[31:13] (Steve) We know as human beings we will do anything to avoid pain. Sure, it’s the number one motivating thing. Emotion for people is avoidance of pain, right? Americans understand since it’s infrequent and highly complex. If I screw up the purchase or sale of a home, it could wreck me for a long time.

This is not a bad bottle of wine or a bad Airbnb experience. I’ll survive that. Mm. You may. You may financially get crippled. You may end up in the wrong neighborhood for your wife and kids.

Or your husband or your partner. And it can be bloody awful. And there you are. Sure you are. So that’s that’s why they still rely on agents. And most Americans want to deal with somebody they know right?

[32:10] (Daniel) I love it. All right. We’re about to wrap up. We’re going to be done in just a minute. We talk model, we talk valuation, we talk market. Who’s buying, who’s not, what? What’s your advice for like folks who are considering building a business the other day? So I’m talking to a broker and he’s got a large I’m like with a B kind of broker and he wants to sell and he’s like, Look, they’re offering me three x my net profit.

And if I just hold on to it for the next three years, I’m going to get that back. So it’s like, why would I sell? And like, so what’s your advice for somebody in that space that is considering selling? What should they do and what are the considerations?

[32:52] (Steve) Well, first first you need to ask yourself question, why are you thinking about selling? Are you tired of the responsibility of running the company? Are you tired of having the liabilities? Have your name on leases, contracts all over the place?

If you are, then just say, well, I just keep this for another three years. I get the same money. Well, that’s true. But you know, by the way, you have the liabilities of the business won’t do as well in the next three years, right? It might get better. It might get worse. You got risk. Your name is still going to be on everything.

You’re still going to have 3000 agents bugging you about something. You’re going to have lawsuits.

If you sell a business, generally the capital gains tax on the sale. Proceeds from a company are less than personal income tax rates.

So there’s a number of reasons. But the first thing you have to ask, why are you interested in selling? I mean, that’s a true statement. Well, I’m Steve three times my EBIDTA. I could make that if I keep for three years. Yeah, well, then don’t sell it. All right? You got all the rest of the business, all the liability of the business.

Ask yourself why. Why do you want to sell right.

[34:07] (Daniel) And then?

[34:08] (Steve) And then you can call us. I’ll help you do it. There’s. There’s. We have four full-time people in our company. This is mostly all we do.

And we know what that market is. There’s one or two other people we can recommend that really know what they’re doing. Brokerage companies or teams. Yeah, but you should. You should get your records and books in order. Okay. You should get a report from your accountant. Right, and review all your expenses and get rid of anything that really doesn’t pertain to the growth of your company, all that slop that we all have, because every dollar of slop is $3 of value or $4 short.

So get your books, records, organize all your contracts, all your independent control, everything.

[34:58] (Daniel) You have to do to?

[34:59] (Steve) Organize your leases, your everything, and then gear and then go through that general ledger and get rid of all that stuff. That really doesn’t help you do business.

[35:09] (Daniel) We just had a webinar with an author of a book called Profits First, and if you’re listening to this, I only there’s only two business books for real estate people. One is with profits first. And he says, take your profits first from the business and then make the business run on the operating expense. Yeah. And then he has like a chart and I love that.

And what he said and this goes to your point, he said “cut the fat but not the muscle”.

[35:40] (Steve) Never.

[35:41] (Daniel) Never take out the muscle from a crowd. You but always the fat.

[35:46] (Steve) My favorite story of a large broker in the middle of just going into that last downturn back in ’08 big firms 120 million in revenue.

We were helping him go through the GL the general ledger we found buried in there like $100,000 a year for a guy to go around all 50 offices and make sure all the light bulbs were working.

He had a stroke.

[36:22] (Daniel) Yeah.

[36:22] (Steve) But when you’re 120 million revenues making $8 million a year, you’re not looking at the little stuff when we get that downturn. And I’ve told clients that you ought to look as if if you had to cut 10% a year off your costs. We did this just a year ago at Real Trends. I told my CFO, go find 10% of our operating overhead that we’re wasting.

An order of priority.

We found it.

Unfortunately, most of it was mine.

[36:57] (Daniel) Well, hey, Heidi, I…

[37:00] (Steve) Done, I got one more question.

[37:02] (Daniel) Yeah, well, we’ve got a KW model. Is it stuck in the middle?

[37:09] (Steve) No, because I think what we’re going to see happen now, KW is a very efficient model. I mean, whether they’re caps or wherever you are, you’re 15 to 30 cap depends on where you are. But I know a lot of my clients operating partners are working now to lower their caps.

They’re not going to sit here and just let ESPN and these other guys just pick them apart. They’re they’re going to competitively respond.

And and Keller Williams is going to allow that.

[37:42] (Daniel) They have to.

[37:43] (Steve) Yeah, they’re going to this. You know, Gary says, look, if I’m not going to let them cannibalize me, I’ll we’ll do it to ourselves first. And that means that means Keller Guy Keller operators may have to shrink their space, their footprint. You got to look at that operating overhead where they don’t spend a lot. They’re really efficient generally.

They really are pretty efficient, but they’re going to have to look at it again.

[38:09] (Daniel) I love it. Yeah, this has been amazing. Anybody got more information? Just jump on MyOutDesk forward slash real trends and you’ll get his report again. This has been fun and I appreciate you for doing this. You guys need help with leverage. Check us out. Thanks a lot. Okay.

[38:27] (Steve) Daniel. Thank you, everybody. Take care, Daniel, all right.

[38:30] (Daniel) Bye bye. Bye.

Key Takeaways

Keeping your brokerage alive in the shifting market:
Steve says that you won’t be in business much longer if you don’t recruit talent, develop that talent to increase productivity, and spend less money than what you have coming in.

If you are operating a team, your priorities should be:

1. 1. Expanding your database and building a leads system should.
   2. Have the right people and systems to convert those leads.
   3. Spend Less Money than what you have coming in. If all you’re doing is treading water in this declining or flat market, then you are losing ground. The best operators take market share to avoid shrinking business, but it’s never going to happen unless you focus on the basics. Do not get distracted by what’s going on around you and focus on your business. What systems should you have in place for successful recruitment:
      • Know who you are as a company.
      • Truly define who you are. What is your culture, what do you stand for, what is your commission plan, and what is your model?
      • Use available data from your MLS or other sources to find people who would fit into that definition.
      • Focus intently on your database.
      • Do it in person.

Develop Talent for your brokerage: Developing the talent, you recruit is a commitment to taking each of your team members’ strengths and allowing them to evolve those strengths for success. This also means having the right systems, tools, and support to give your team the best avenues possible to be productive within your business.
On Valuating your brokerage:
The bottom line is that the value of a brokerage business is how much profit it produces. Your “business name” means nothing. Its name does not value business but on net profits or EBITDA – Earnings Before Interest Taxes Depreciation and Amortization. Basically, it’s how much cash your business produces.

On Hiring an assistant:
Several years ago, Steve hired a non-revenue producing person (Assistant) in his company for the first time.

Within 3 years of hiring his assistant, Steve doubled his company’s size because he wasn’t doing $20 stuff anymore. Do not focus on the fact that you are increasing overhead expenses. Rather, focus on the time you will be getting back to focus on revenue-producing activities within your company. Keep 3 priorities for your business. If you have more than 3, then you have no priorities at all. It would help if you focused on what is important to growing your business and leave the rest to other people.