The real estate industry has staged a degree of a recovery during 2009 – ending the calendar year transacting just on $29 billion worth of sales from 69,629 property sales. This was up 25% in value from the 2008, but is still down 23% from the 2007 year when 92,101 properties were sold with a total transaction value of $37.87 billion.
The chart below ably demonstrates the rise and fall of transaction values over the past two decades with the red line representing the 12 month moving average volume of sales and the blue line indicating the total value of those transactions.
From this market perspective it is interesting to look into the structure of typical real estate offices within the industry. I am grateful to the Real Estate Institute (REINZ) and the Australian real estate training and business support company Best Practice for an insight into a typical real estate office’s business structure, which I am sure will prove insightful for anyone looking to build a future in this industry. Best Practice undertook a survey of NZ real estate offices in June and July 2009 seeking to understand the make up of the business – level of income, expenses, personnel and profit performance. This data was published in the REINZ monthly magazine in December.
The survey reviewed the performance of real estate companies across three tiers – those companies with sales of less than $2m per annum; between $2m and $3m and those with sales over $3m. From their analysis each of these segments represented a third of all offices that completed the survey. To the Best Practice data I have added some data drawn from the database of real estate office held by Realestate.co.nz. The detail of the sample size of the survey was not published in the magazine so there is no way to validate the numbers as a representative samples of offices of a similar size.
Small offices
According to the survey the bottom third of all NZ real estate offices as measured in terms if sales value had sales of less than $2m. These offices averaged 8.6 sales people and had 1.5 principles. By contrast the database of Realestate.co.nz shows the bottom third of all offices (by number of salespeople) have less than 4 sales people.
From the survey the average total revenue of such an office is $1,083k per annum. This business generates an operating surplus of $207.6k, which is effectively the return to the principle (owner / branch manager) of the office after all expenses have been covered.
The pie chart below shows the representation of the total revenue made up of all expenses and the operating surplus.
The largest cost is the sales commissions and employee salaries which make up half of the revenue generated by the office, marketing accounts for 15% and includes both marketing of the office as well as the expenditure on behalf of clients, some of which is recharged. Group fees refer to franchise fees and marketing group fees.
Medium Offices
According to the survey the middle third of all NZ real estate offices as measured in terms if sales value had sales of between $2m and $3m per annum. These offices averaged 17.2 sales people and had 1.8 principles. By contrast the database of Realestate.co.nz shows the middle third of all offices (by number of salespeople) have between 4 and 8 salespeople.
From the survey the average total revenue of such an office is $2,271k per annum. This business generates an operating surplus of $558.9k, which is effectively the return to the principles (owner / branch manager) of the office after all expenses have been covered.
The pie chart below shows the representation of the total revenue made up of all expenses and the operating surplus.
As compared to the small offices, these medium sized offices have the same primary costs of staff, but do deliver a better profit for the owners at 25%, the marketing expenditure is less with better amortization of overheads of General & Admin (G&A). Interestingly this survey group identified the lowest cost of referral / conjoint fees – that is fees paid to other real estate offices when those offices sell listings of this company – the level was just 0.1% or $3,045 per annum.
Large offices
According to the survey the top third of all NZ real estate offices as measured in terms if sales value had sales of more than $3m. These offices averaged 29.4 sales people and 2.75 principles. By contrast the database of Realestate.co.nz shows the top third of all offices (by number of salespeople) had more than 9 sales people. Interestingly there are only 12 offices in NZ with more than 29 salespeople.
From the survey the average total revenue of such an office is $5,178k per annum. This business generates an operating surplus of $1,114.8k, which is effectively the return to the principles (owner / branch manager) of the office after all expenses have been covered.
The pie chart below shows the representation of the total revenue made up of all expenses and the operating surplus.
As compared to the other two thirds of real estate offices these large offices pay out the lowest percentage of staff costs – 42% compared to 50%. They deliver a healthy 225 operating profit to be shared by the owners. The cost of premises is slightly higher than the other groups whilst G&A is average. What is considerably different is the share of referral income and conjoint which at 7% is far higher than the other groups. Could this indicate a more co-operative style of business assisting the success of these businesses perhaps?
The last part of the analysis is comparing the revenue generate per salesperson. Based on the salesperson numbers in the survey the largest offices have the most effective sales people generating $176,324 per sales person. The medium office generated $132,089, whilst the smaller offices generated $126,273.
Fascinating stuff Alistair.
Big offices mean big profits for owners.
It could be one reason why agencies can be relatively undiscriminating when hiring new salespeople. There is definitely a more bums on seats philosophy in many of the offices I have contact with. It costs owners very little if the salesperson doesn’t earn (overheads like office space, phone lines, admin staff for the office are being paid anyway so you may as well have people sitting in the office even if they aren’t earning much) and there is always the chance that any particular person may beat the massive odds and intense competition to become a star performer.
There is a perception that selling real estate is easy and that sales people earn huge wads of cash for doing relatively little and so there is always a steady stream of new entrants with eyes as big as dollar coins wanting to try their hand. Anyone who has become a real estate salesperson will tell you how hard it is to earn a decent living selling houses if you aren’t prepared to give up your evenings, weekends, privacy and do the hard grind that all salespeople know they should be doing but only a few actually do.
This bums on seats philosophy doesn’t help the main earners in any office as the new people tend to feed off these salespeople. This results in a bit of a hen pecking order in larger offices especially. New people tend to be left to their own devices more often than not unless the principal is active at the coalface to guide and nurture them. Very few experienced and successful salespeople have the time and motivation to help newbies. And why would you want to help someone who may end up competing directly with you for business? Is it any wonder that there is such a turnover of staff in the real estate industry?
David
Many thanks – some great insight to add to the numbers.
Alistair. No Salespeople NO MONEY at all How do you reckon that commission is a cost?
Bob
I take your point – however the survey was clearly designed to identify the net contribution from a real estate business and as such the “cost of sale” component which is commissions paid and staff costs need to be identified and apportioned.
Alistair this article prompted Bernard Hickey on his blog to pronounce that NZ real estate commissions should be lowered to match those in Australia. I’ve sold two properties in Australia over the last 5 years. One with The Professionals and one with Ray White and I didn’t notice any difference in the commission charged there.
I wonder what Bernard is on about, spreading the word that we in NZ charge more than our mates in Australia?
Actually on $500,000 a QLD fee can be a max of approx 2.8% and in NZ around 3.5%. In NZ we need to provide a level of service, professionalism and results to justify our fee. I stand corrected on my prior comment, my QLD fees paid were a tad cheaper.
It would be good to see an analysis of offices for sole traders and those that have only 1 or 2 staff, as I believe that this could well be an emerging trend over the next couple of years with the changing in legislation within New Zealand.
For me being a “sole trader” of sorts, means we give a very personalised service, where the majority of our business comes from relationships with clients, referral work and repeat business.
I know that my overheads are low and my nett profit is high, and I am at a level of work activity that is very, very rewarding, even on my low fees of 1% +
Brad
Appreciate your thoughts. The survey was focused on these 3 groups and as such no further details are available.
It is clear that the changes to the legislation has the potential to create change in the industry, although I would have thought (from a personal perspective) that the attributes you exemplify would be necessities of any professional and successful real estate company – at least I would hope so.
Real estate is a relationship business. There has to be high levels of trust and personal service and this is what ensures repeat business and referrals – exactly as you state.