Home Brokers & Agents Brokerage Models: A Mathematical Analysis, Part 3

Brokerage Models: A Mathematical Analysis, Part 3

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Thinking about the dawn of a new day
Thinking about the dawn of a new day

I had promised in Part 2 of this series that I would tackle the so-called “K-Dub” model in this part.  Well, I’ve decided against it.  Looking at the numbers, it seems to me that from a model perspective, there’s nothing particularly novel about the K-Dub (based on Keller Williams) model.  Its appeal and power lie elsewhere — power of recruiting, passive income streams, etc. — but on paper, K-Dub is clearly inferior to an optimized Traditional model and to the employee-based TerraFirma model.  In the real world, of course, Keller Williams is the fastest growing real estate company in America for a reason.

Instead, I think it might be time to get into a meatier, opinion-based discussion about what the future might look like, based on the models thus far.  So first, for those of you inclined to mess around with spreadsheets and such, I’m attaching the actual Excel spreadsheet I’ve been using for my analysis: Brokerage Models 2.0 (.xlsx workbook file).

Also, before we dive in, please take a moment to go read this post by Nicolai Kolding, the guy who sort of started this all with his prescient post on the status quo.  Some of the comments to that post are just excellent, and this post of mine can be thought of as an extended comment to his post.

TerraFirma, Simulacra, K-Dub: What’s the Future?

On paper, it looks as if all three models are viable at least once some of the performance-enhancing measures such as cutting costs, increasing agent productivity, and increasing broker lead generation (which leads to higher % retained) are successfully put into place.

Progress! The Future!
Progress! The Future!

But on these numbers, it seems to me that TerraFirma is the clear winner on all counts: higher profits, higher profit margins, and greater financial rewards for the Customer Relationship Owners (“CRO” hereafter).  Averaging 25% profit margins (again, on these hypothetical numbers), the partnership + associates model of TerraFirma actually could out-invest any of the other models by significant margins if the owners (partners) chose to reinvest in the business as opposed to taking the profits home.

The K-Dub model, based on Keller Williams which is the fastest growing real estate company in America in the real world, is interesting in that I couldn’t figure out a way to incorporate KW’s seven levels of profit-sharing that results in passive income for agents who are strong recruiters.  But from the brokerage owner’s perspective, it seems to me that the K-Dub model is the least attractive on paper: even with all of the Optimization measures, the K-Dub owner never breaks 4.3% of gross GCI as profit margin.  With such thin margins, it isn’t at all clear to me that the K-Dub owner has much room for capital investment, for reserve funds, or anything of the sort.

On the flipside, of course, the K-Dub model really lends itself to incredibly strong recruitment; so my assumptions about distribution of agents between Tier 1 and Tier 4 may be completely off when it comes to a recruitment-heavy model like K-Dub.  And that may lead to far higher margins and profits for the K-Dub owner; I’d need to see some actual numbers to determine if the distribution of agents within a K-Dub model is significantly different than in traditional brokerage.

Traditional brokerage — what we all know of as “real estate brokerage” — is something of an odd beast to me.  On the one hand, if all of the Optimization measures can be implemented successfully, it can be a viable model generating about 13% margins on gross GCI.  In theory, and on paper, this is the most lucrative model since those profits are not shared with a bunch of partners as in the TerraFirma model.  The Broker/Owner would walk away with that entire amount if he so chose.

That’s the story the numbers tell.  Now, let’s go behind the numbers a little bit.

Behind the Numbers: Significant Issues

Each model has significant issues behind the numbers.

TerraFirma

Issues and Challenges
Issues and Challenges

TerraFirma has two major issues behind those numbers.  First, as with a law firm, there are serious issues of governance and compensation between the partners.  In a traditional brokerage, the Broker/Owner pretty much rules; it’s his company, so he can do what he wants.  With a bunch of partners, ensuring effective governance becomes a major challenge.  Compensation amongst and between the partners is usually a major issue with a model like this as well — not each partner is going to bring in exactly 60 transactions of equal size as on paper.  In the real world, you may have partners who are bigtime rainmakers, and others who have hit a rough patch.  How do you divvy up the firm profits equitably, and with an eye on aligning the interests of each partner with that of the firm as a whole?

The best thing that can be said about these issues, of course, is that they’re nothing new; professional services firms have been dealing with these issues for decades, and there are best practices to minimize conflict and to setup governance.

The second issue is perhaps far more challenging for real estate: cashflow management.  Because the expenses are more or less fixed — salary, overhead, etc. — TerraFirma needs a far stronger hand when it comes to cashflow management.  With long deal cycles, and the culture of real estate in the United States being one of payment at completion, the TerraFirma brokerage is looking at having to pay out expenses in advance of revenues.  At least with law firms, the firm can charge a retainer fee in advance of starting work — and use that to invest in what it needs to.  With real estate, the firm has to wait to get paid at the closing, but do a ton of work in advance of the closing.

Additionally, it means that TerraFirma requires startup capital unlike the other models.  Hiring staff, setting up systems, setting up CRM, etc. are all costs in advance of revenue.  In this sense, TerraFirma behaves more like traditional companies in other industries and less like a real estate brokerage.

Simulacra (the “Traditional”)

Simulacra’s major issues remain the key question of recruiting and retaining top performers.  On paper, the Optimization techniques lead to healthy margins, substantial profits, and so on.  It doesn’t take enormous funds to start a traditional brokerage; nor is there a pressing governance issue.  But behind the numbers, there’s a very serious problem indeed.  Look at the sources of revenues:

  • Company Dollar is simply taking a piece of each and every deal an agent brings in, even if sourced by the agent.
  • Transaction and Per Head fees are more or less arbitrary fees levied on the agent for the privilege of generating revenues for the brokerage; it isn’t at all clear to me what the value proposition is here for the productive agent.  Many traditional brokerages do not charge these fees and instead take it out of their share of the net GCI, but then you have to reduce the model accordingly –> which means lower revenues and lower profits.
  • Broker Leads are valuable, and can be justified easily, but what the model leaves out is the cost of generating those Broker Leads.

Of the three revenue streams, only the Broker Leads revenue stream strikes me as being even remotely acceptable psychologically.  The other two are essentially, “If I make money, then you lose money” propositions that makes alignment of incentives more or less impossible in real estate.  The incentive on the part of the agent, then, is to minimize the amount she’s paying out to the broker pretty much at all costs.

He dont like paying taxes either...
He don't like paying taxes either...

A truly top producing agent might then demand very high splits (95% splits) or elimination of fees (“You pay the transaction fee, okay?”) or some combination of goodies so that she can extract the most value from her own revenues.  This is no different than tax minimization strategies that all Americans follow.  Government can tell us that we get tremendous value for these taxes we pay, and some of us may be fine paying taxes, but I don’t know a single person who doesn’t claim deductions they could otherwise, tries to minimize the tax he has to pay, or overpays taxes on purpose.

And as long as that adversarial relationship exists between broker profitability and agent pay, I believe that all traditional models have to contend with the Lowest Bidder: someone else will come along and offer more goodies to their top agents.  The success of Keller Williams, which attempts to eliminate this tension, is suggestive.  And there are models coming up that contemplate 100% splits with minimal services making tiny margins on the transaction fees.

The answer then has to be Broker Leads.  The question here is… how do you generate such broker leads while cutting costs?  These broker-generated leads (let’s say they’re all from the brokerage’s IDX website for simplicity’s sake) aren’t exactly free manna from the heavens.  The broker would have to do things to generate traffic, to generate leads, then to distribute the leads, manage the leads, and so on through to closing.

Perhaps the answer is that the Simulacra owner can reallocate expenses from one place (like Occupancy) to another (like Marketing).  This is, to say the least, highly theoretical, especially if the Simulacra owner is losing money while trying to do this.

Furthermore, it is not at all clear to me that cost-cutting measures have zero impact on productivity.  Are agents who work virtually really as productive as agents who sit together in an office?  Are agents really able to keep up the same level of production if the support staff has been slashed by 25%, resulting in them having to do more transactions, more paperwork, more whatever?  And is it reasonable to think that amidst major cost cutting, amidst reduction in staff, that the agents can be pushed to higher productivity?  These are, to be fair, all questions of fact; real world data might show that yes, indeed, all of these things are possible.

Maybe.  But until I see real world data, I see serious issues with getting from the broken, going-bankrupt Simulacra model to the healthy, making-money Simulacra with Optimization.

K-Dub

It’s difficult to opine about this model, largely because I couldn’t model the key to its success: residual-based recruitment and retention.  K-Dub works because it overcomes the key question of recruiting and retention, and much of that is based on the tiered profit sharing mechanism.  From a financial standpoint, you can model out what the cost of such profit sharing is to the brokerage, and I have done that.  But it’s impossible to see what the impact on agent earnings is because you have to make too many assumptions about how effective each agent has been on recruiting.  Furthermore, it isn’t clear that the more productive agents are necessarily the top recruiters, which means that a Tier 3 agent could in theory have tons of residual income from simply going out and recruiting a ton of people.

But on the numbers themselves, what’s remarkable is how similar K-Dub is to Simulacra in terms of key revenue drivers.  It remains a model where brokers and agents split the commission pie; the cap on broker splits (which I’ve put at $22K as per a Keller Williams recruiting document, attached at the end of this post) appears to mitigate the conflict, and the profit-sharing certainly does, but neither of those things hides the fact that the broker still takes a piece of the agent’s business.  And until the cap is reached, the splits are fairly aggressive in favor of the broker: 70/30 split is what I saw in the Keller Williams document.

Without optimization and enhancement — cost-cutting, etc. — the K-Dub model also loses money.  So the same questions arise here as do with Simulacra: How does one raise productivity while cutting costs?  The answer from a K-Dub perspective likely is something about “culture” — recruiting only the most highly motivated agents who want to cap out and make 100% of the commissions — and something to do with profit sharing.  Perhaps; but as I’ve pointed out, neither of those can be adequately modeled.

Aligning Incentives: Why TerraFirma Should Win Out

Those are the issues and potential weaknesses of each model.  Each has its strengths as well.

In the final analysis, however, I do believe that TerraFirma should win out because of its key strength: aligning the interests of all of its people.

Unlike other models where essentially the broker and the agent fight over shares of the same pie, assuming that partnership issues are worked out, TerraFirma is the only model where partners, associates, and staff interests are in alignment.  Partners have an incentive to focus on bringing in business, and to share profits with other rainmakers: shared resources maximize profitability.  Although the model scales staff and marketing expenses along with GCI revenues, in practice, TerraFirma will reach a point where one can add incremental revenue and partners without increasing staff or marketing spend significantly.

Aligning incentives = Win!
Aligning incentives = Win!

For example, take the 187 person version (the Large) with 95 staffers and 72 associates working under 20 rainmaker partners.  Let’s say that the 95 staff number includes a marketing team of 15 and an IT staff of 5: a serious headcount that likely could support a far larger organization.  That firm can easily add 5 more partners and 300 more deals without needing to add more to either marketing or IT.  Going from a 3.6 to 1 ratio of associates to partners to a 2.88 to 1 ratio does not strike me as ridiculous.

So even if a partner feels that he might be able to make more money on his own, he’d have to consider the costs of replicating all of the support and infrastructure of TerraFirma — a costly and time-consuming effort.  There are some strong incentives to stay and share the business with others.  The model clearly suggests that a partner at TerraFirma makes more money than top tier agents in other models.

The associates and staff interests are to ensure that the firm is profitable so that they continue to have a job.  Furthermore, the associates are not required to bring in business but merely to execute the business in support of the partnership.  If they don’t perform, if they violate brand standards, ethical standards, or professionalism standards of the firm, they will be fired and someone else brought in to replace them.  Of course, what makes this probable is the salary.  TerraFirma pays its associates; they are a fixed expense.  Therefore, the interests of the firm are to maximize the value from its associates — quite unlike the traditional or K-Dub models where agents are a variable expense and are a source of fee revenues even if unproductive or unprofessional.  This means training associates, making sure they have all of the tools, ensuring that they remain knowledgeable about the market, the rules and regulations, best practices for transactions and customer service, etc. are all very much in the firm’s interest.

There are no questions of value propositions; TerraFirma agents don’t ask, “Well, why do I need a brokerage anyhow?” because they’re getting paid a salary, getting benefits, a 401(k), like any other corporate employee.  They can always want more money, ask for a raise, or a bigger office, and so on, but that’s standard HR management.  Do a great job, have a great year, and there are raises, bonuses, and the like; screw up, have a crappy year, and there will be firings and layoffs.

Ambitious associates who want to build their own business can do so; become a big enough rainmaker, and the firm would have to consider making you a partner or losing you to a competitor.

TerraFirma can actually make and enforce brand promises because its people are salaried employees.  If an agent doesn’t answer emails, you don’t think about how much revenue walks out the door with her; you just replace her with someone who is up to your standards.  You can actually hold your people to far higher standards of customer service and make them accountable in ways that the other models find very difficult.

And finally, TerraFirma has a built-in exit strategy for each and every partner beyond the sale of the whole business to a competitor.  When one partner decides to hang up her spurs, the other partners can essentially buy out her partnership interests.  In the alternative, she’ll keep earning a share of the firm’s profits (likely reduced upon retirement) as an equity owner of the firm.

Game Changer

Lastly, but not least, TerraFirma is a game changer in a way the other models cannot be because of its profit margin.

At least on paper, the TerraFirma model nearly doubles the profit margins of the traditional brokerage and nearly sextuples the margins at K-Dub.  Most of those profits go towards paying the partners.

However, it has the flexibility to reinvest those profits back into the business.  K-Dub with its 3-4% margins doesn’t have the cashflow to plow back into the business, and Simulacra’s high margins need to be questioned as above.

If a novel technology comes along, or there is a disruption in the market, he who has the war chest starts with a big advantage.  High margins can and should lead to larger war chests, larger cap-ex budgets, and the ability to out-market any non-TerraFirma competitor.  Simply by agreeing to take less profits, and paying themselves on par with Tier 1 Agents at Simulacra, the partners of Terra Firma (Large) can plow back in nearly $2M into investments that will continue to widen the competitive advantage.

This is a game changer in real estate.  To believe otherwise requires a real leap of skepticism.  It requires believing that a company which invests 5% of its revenues into R&D won’t have or develop a sustainable competitive advantage over a company that has no money to do R&D at all.

Even I am not that skeptical.

-rsh

References/Resources:

– Keller Williams Profit Sharing White Paper (PDF): MA_ProfitShareWhitePaper

– Keller Williams Recruiting Document (DOC): Keller_Williams_Info

43 COMMENTS

  1. Rob,

    I think TerraFirma has a real chance at making a game change in the real estate industry. I think the K-Dub model will run out of steam once those participants realize there is no profit payday or some substantial lawsuits leave them bankrupt, and I really think the Refin rebate model will flourish in some fashion.

    You are leaving out one very successful brokerage model which will become even more successful in the coming years due to changing technology and client expectations. We are seeing it now as more and more successful agents & brokers are leaving the big brokerages to strike out on their own.

    Closely held small companies headed up by a principle broker. These are successful Brokers from traditional companies tired of the old ways of doing business and the and sharing 10 to 25% of GCI with little to show for it. I don’t have the market software I used to have, but I am guessing in my local San Diego market that may be like 30 to 40% of the transactions.

    Expenses can be kept low, adjustments can be made quickly to market changes, technologies can be embraced at the speed of light, and profits can be substantial. Take a very successful agent making $300,000+ a year in the traditional model – by leaving they get a 10-25% increase in GCI.

    Small teams of agents can be added, mentored, and grown into full blown productive/effective/ethical agents. The company culture & branding can be tightly controlled.

    Rob, look at Jay Thompson @phxrealestateguy, Ines Hegedus-Garcia @ines, or Kris Berg @krisberg for examples of what I mean. While small as brokerages, collectively we are a big force for change in our industry desperate for such.

  2. Rob,

    I think TerraFirma has a real chance at making a game change in the real estate industry. I think the K-Dub model will run out of steam once those participants realize there is no profit payday or some substantial lawsuits leave them bankrupt, and I really think the Refin rebate model will flourish in some fashion.

    You are leaving out one very successful brokerage model which will become even more successful in the coming years due to changing technology and client expectations. We are seeing it now as more and more successful agents & brokers are leaving the big brokerages to strike out on their own.

    Closely held small companies headed up by a principle broker. These are successful Brokers from traditional companies tired of the old ways of doing business and the and sharing 10 to 25% of GCI with little to show for it. I don’t have the market software I used to have, but I am guessing in my local San Diego market that may be like 30 to 40% of the transactions.

    Expenses can be kept low, adjustments can be made quickly to market changes, technologies can be embraced at the speed of light, and profits can be substantial. Take a very successful agent making $300,000+ a year in the traditional model – by leaving they get a 10-25% increase in GCI.

    Small teams of agents can be added, mentored, and grown into full blown productive/effective/ethical agents. The company culture & branding can be tightly controlled.

    Rob, look at Jay Thompson @phxrealestateguy, Ines Hegedus-Garcia @ines, or Kris Berg @krisberg for examples of what I mean. While small as brokerages, collectively we are a big force for change in our industry desperate for such.

  3. “And there are models coming up that contemplate 100% splits with minimal services making tiny margins on the transaction fees.”

    The 100% model is the trend I see continuing (I’m in the process of creating such a brokerage–but unlike the others. Stay tuned.)The problem with the model is the tiny margins, which require creative supplementation (working on that too).

    Don’t see the R-fin rebate model working if commission rates continue to trend lower — less to rebate, less to put in your pocket. And a rebate model is buyer biased— where is the seller side USP? You’re leaving half the pie on the table.

    • Hey Joe 🙂 Thanks for the input.

      One thing I do want to point out is that TerraFirma is NOT a rebate-model biased towards buyers, but rather a wholly different animal biased towards listings and agents who can bring in tons of listings.

      And as I’ve said, the 100% models are coming; I think they’ll flare up for a bit, then die away as the tiny margins leave no room for error, for litigation, for changes to the market, etc. And those are entirely dependent on outsiders for technological innovation because they can’t afford to invest in much of anything with those types of margins. So going against models that are boasting 25% profit margins — able to compete at a lower price point if need be and still make 10-15% margins fairly easily — I just don’t see that as a fair fight, do you?

      -rsh

    • Joe, can’t wait to hear your thoughts on this new 100% brokerage. When will we know more?

      There are lots of way to be creative in the supplementation of your profit margins, but they are rarely in the best interest of Clients. IE: Property ID kickback to brokers or insisting agent use “in house” services.

      Is your model different?

  4. “And there are models coming up that contemplate 100% splits with minimal services making tiny margins on the transaction fees.”

    The 100% model is the trend I see continuing (I’m in the process of creating such a brokerage–but unlike the others. Stay tuned.)The problem with the model is the tiny margins, which require creative supplementation (working on that too).

    Don’t see the R-fin rebate model working if commission rates continue to trend lower — less to rebate, less to put in your pocket. And a rebate model is buyer biased— where is the seller side USP? You’re leaving half the pie on the table.

    • Hey Joe 🙂 Thanks for the input.

      One thing I do want to point out is that TerraFirma is NOT a rebate-model biased towards buyers, but rather a wholly different animal biased towards listings and agents who can bring in tons of listings.

      And as I’ve said, the 100% models are coming; I think they’ll flare up for a bit, then die away as the tiny margins leave no room for error, for litigation, for changes to the market, etc. And those are entirely dependent on outsiders for technological innovation because they can’t afford to invest in much of anything with those types of margins. So going against models that are boasting 25% profit margins — able to compete at a lower price point if need be and still make 10-15% margins fairly easily — I just don’t see that as a fair fight, do you?

      -rsh

    • Joe, can’t wait to hear your thoughts on this new 100% brokerage. When will we know more?

      There are lots of way to be creative in the supplementation of your profit margins, but they are rarely in the best interest of Clients. IE: Property ID kickback to brokers or insisting agent use “in house” services.

      Is your model different?

  5. Thanks for your comments, Jeff — I think you’re one of the most perceptive people on this topic.

    However, I do want to encourage you to keep looking at that Small Independent model a bit more closely. How do you grow? How do you scale? What’s the limit to growth?

    Sure, a top rainmaker can make more simply by going off on her own — but now she’s doing lead gen, doing fulfillment, doing customer service, doing marketing, washing bottles, cleaning the streets, doing accounting, and technology work. All of it.

    The minute she starts to hire people to take care of those tasks, she’s taking on fixed costs for staff and overhead. And what about leadgen vs. fulfillment? If she brings on buyer agents underneath her, how does she align their incentives with her own? Wouldn’t she put them on some aggressive splits since she’s the one bringing in all the business? Of course she would.

    The key question of incentive alignment is unanswered with those Small Independents. Why would an agent go work underneath such a Principal Broker, and at what kind of splits? if that agent starts to build his own book of business, why would she continue to tolerate high splits with the Principal Broker agents?

    In other words, as long as the operation remains small, a one-man shop with some staff (effectively an Agent Team), then yes, it can work as you describe. Those simply can’t scale, however, without turning into either a TerraFirma model with strong support, paid associates, and rainmaker partners, or into a Simulacra/K-Dub model with all of its attendant issues.

    Furthermore, in such an Independent shop, what is the endgame? What’s the exit strategy for the Principal Broker? Say she decides to retire after 25 years in the business. What does she do with her little Brokerage?

    Not sure I see the fundamental differences.

    -rsh

    • Hi Rob,

      Thanks for your kind works, I appreciate a good thinking debate, and your certainly on the cutting edge of the “big picture” future brokerage question. Good food for thought – and always fun to play “what if?”

      Not all brokerages have to be built to scale – not everything has to be BIG. Some things are better small and efficient.

      As you have stated once you add a certain amount of agents/employees/staff you pick up all the same problems that the traditional model has, you become more of a manager of people and transactions, and less about selling real estate. I think my point is the small agency is a serious contender in what will define the future of brokerages. There are 1000’s of them across the County and the numbers are growing.

      Bigger is not always better. As Joe says we are a group of independent thinking people and the times have changed to allow more mobile or virtual business vs. the old brick and mortar way of olden days.

      Rob, I noticed you used “she” all through your comments regarding “top producer”. There are both male and female that play this roll so lets be fare to include us males in your discussion.

      Not all small brokerages have to be filled with “top producers”. There are many of us that feel the business should be approached not from a volume level, but by quality and care perspective. A team and staff producing $750,000 in GCI can many times collectively make less than an individual agent making $300,000. If it really a matter of how efficient the model is – if you spend less you make more.

      Anyway, just wanted to give a shout out to all of us little guys out there that collectively make a big difference and we will be a part of the future brokerage community.

      BTW: Anyone that builds a most excellent small boutique style brokerage will most likely have the option to be bought up by one of the big boys looking to bump market share – if indeed you want the end game. Another option or course is to mentor and grow your existing agents and have them take over the business as skill sets and experience grows.

      1st is the sad route which usually destroys the Company within a few years, the second would take someone committed to building something beyond themselves.

      Thanks Rob –

  6. Thanks for your comments, Jeff — I think you’re one of the most perceptive people on this topic.

    However, I do want to encourage you to keep looking at that Small Independent model a bit more closely. How do you grow? How do you scale? What’s the limit to growth?

    Sure, a top rainmaker can make more simply by going off on her own — but now she’s doing lead gen, doing fulfillment, doing customer service, doing marketing, washing bottles, cleaning the streets, doing accounting, and technology work. All of it.

    The minute she starts to hire people to take care of those tasks, she’s taking on fixed costs for staff and overhead. And what about leadgen vs. fulfillment? If she brings on buyer agents underneath her, how does she align their incentives with her own? Wouldn’t she put them on some aggressive splits since she’s the one bringing in all the business? Of course she would.

    The key question of incentive alignment is unanswered with those Small Independents. Why would an agent go work underneath such a Principal Broker, and at what kind of splits? if that agent starts to build his own book of business, why would she continue to tolerate high splits with the Principal Broker agents?

    In other words, as long as the operation remains small, a one-man shop with some staff (effectively an Agent Team), then yes, it can work as you describe. Those simply can’t scale, however, without turning into either a TerraFirma model with strong support, paid associates, and rainmaker partners, or into a Simulacra/K-Dub model with all of its attendant issues.

    Furthermore, in such an Independent shop, what is the endgame? What’s the exit strategy for the Principal Broker? Say she decides to retire after 25 years in the business. What does she do with her little Brokerage?

    Not sure I see the fundamental differences.

    -rsh

    • Hi Rob,

      Thanks for your kind works, I appreciate a good thinking debate, and your certainly on the cutting edge of the “big picture” future brokerage question. Good food for thought – and always fun to play “what if?”

      Not all brokerages have to be built to scale – not everything has to be BIG. Some things are better small and efficient.

      As you have stated once you add a certain amount of agents/employees/staff you pick up all the same problems that the traditional model has, you become more of a manager of people and transactions, and less about selling real estate. I think my point is the small agency is a serious contender in what will define the future of brokerages. There are 1000’s of them across the County and the numbers are growing.

      Bigger is not always better. As Joe says we are a group of independent thinking people and the times have changed to allow more mobile or virtual business vs. the old brick and mortar way of olden days.

      Rob, I noticed you used “she” all through your comments regarding “top producer”. There are both male and female that play this roll so lets be fare to include us males in your discussion.

      Not all small brokerages have to be filled with “top producers”. There are many of us that feel the business should be approached not from a volume level, but by quality and care perspective. A team and staff producing $750,000 in GCI can many times collectively make less than an individual agent making $300,000. If it really a matter of how efficient the model is – if you spend less you make more.

      Anyway, just wanted to give a shout out to all of us little guys out there that collectively make a big difference and we will be a part of the future brokerage community.

      BTW: Anyone that builds a most excellent small boutique style brokerage will most likely have the option to be bought up by one of the big boys looking to bump market share – if indeed you want the end game. Another option or course is to mentor and grow your existing agents and have them take over the business as skill sets and experience grows.

      1st is the sad route which usually destroys the Company within a few years, the second would take someone committed to building something beyond themselves.

      Thanks Rob –

  7. @rob

    I do not know enough about TerraFirma’s model, their bottom line profitability or the salary scale. As a pragmatist, I am willing to see the results of the model before judging it. But, IMO, salaried employee-agent models may not be the best suited for the real estate industry– I believe they attract the newbies (who bring higher liability risk & cost) and lower producers.(I have no proof other than limited observation). An experienced top producer who can get 95-100% (and residuals) will not take a salary and watch the partners grow fat on their hard work. There is also the issue of the employee yolk and perception/reality of subservience. I’ve worked in law firms and have never met an associate that aspired to remain one. Thus, there will remain pressures to retain the best workers by paying them more (cutting into profit margins) or making them partners to avoid losing them to the competition (as you note). There is also the huge legal burden associated with having employees– in the US, the cost of labor is high, in dollars and legal liability. Ask any labor lawyer. Fat cats and worker bees is not my idea of long lasting bliss. (At some point the cats get stung.)

    “So going against models that are boasting 25% profit margins — able to compete at a lower price point if need be and still make 10-15% margins fairly easily — I just don’t see that as a fair fight, do you?”

    Perhaps not, but victory does not always go to the strong or the heavy favorite (citing the 1969 NY Jets and the 1776 American colonists). But to your point…

    Higher profit margins do not “automatically” equal higher profits. It’s “statistical sleight of hand”. For example, if you sell 100 pens, which cost $1 apiece, for $2 each, you can boast a profit margin of 100% and a $100 profit. If I sell 50 pens, which cost me $10 each, for $15, my profit margin is only 50% (half of yours) but my profit is $250 (more than double your profit). I’d happily trade lower profit margins for higher profits. For me, the issue is not profit margins, it’s bottom line profit. If TerraFirma or R-fin or any other model has it, I celebrate that, more than their profit margin.

    BTW, my comment was addressed to traditional brick and mortar laden brokerages which give 50/50 splits to most agents and 95-100% splits to top producers (usually after hitting a quota) vs. the 100% virtual model.

    The (low cost)virtual and mobile web will allow nimble & creative 100% models to compete with the traditional brokerage models, whose splits do not favor most agents. Top producers will always gravitate to the 100% model and the broker with top producers will be in a better position to craft bottom line success. Profit margins do not equal success. Creativity and talent do. (I now know the gift I’m going to give you– Chris Anderson’s “Free”.)

  8. @rob

    I do not know enough about TerraFirma’s model, their bottom line profitability or the salary scale. As a pragmatist, I am willing to see the results of the model before judging it. But, IMO, salaried employee-agent models may not be the best suited for the real estate industry– I believe they attract the newbies (who bring higher liability risk & cost) and lower producers.(I have no proof other than limited observation). An experienced top producer who can get 95-100% (and residuals) will not take a salary and watch the partners grow fat on their hard work. There is also the issue of the employee yolk and perception/reality of subservience. I’ve worked in law firms and have never met an associate that aspired to remain one. Thus, there will remain pressures to retain the best workers by paying them more (cutting into profit margins) or making them partners to avoid losing them to the competition (as you note). There is also the huge legal burden associated with having employees– in the US, the cost of labor is high, in dollars and legal liability. Ask any labor lawyer. Fat cats and worker bees is not my idea of long lasting bliss. (At some point the cats get stung.)

    “So going against models that are boasting 25% profit margins — able to compete at a lower price point if need be and still make 10-15% margins fairly easily — I just don’t see that as a fair fight, do you?”

    Perhaps not, but victory does not always go to the strong or the heavy favorite (citing the 1969 NY Jets and the 1776 American colonists). But to your point…

    Higher profit margins do not “automatically” equal higher profits. It’s “statistical sleight of hand”. For example, if you sell 100 pens, which cost $1 apiece, for $2 each, you can boast a profit margin of 100% and a $100 profit. If I sell 50 pens, which cost me $10 each, for $15, my profit margin is only 50% (half of yours) but my profit is $250 (more than double your profit). I’d happily trade lower profit margins for higher profits. For me, the issue is not profit margins, it’s bottom line profit. If TerraFirma or R-fin or any other model has it, I celebrate that, more than their profit margin.

    BTW, my comment was addressed to traditional brick and mortar laden brokerages which give 50/50 splits to most agents and 95-100% splits to top producers (usually after hitting a quota) vs. the 100% virtual model.

    The (low cost)virtual and mobile web will allow nimble & creative 100% models to compete with the traditional brokerage models, whose splits do not favor most agents. Top producers will always gravitate to the 100% model and the broker with top producers will be in a better position to craft bottom line success. Profit margins do not equal success. Creativity and talent do. (I now know the gift I’m going to give you– Chris Anderson’s “Free”.)

  9. […] Brokerage Models: A Mathematical Analysis, Part 3 | Notorious R.O.B. – Conversations on Marketing, http://www.notorious-rob.com/2009/08/28/brokerage-models-a-mathematical-analysis-part-3 – view page – cached I had promised in Part 2 of this series that I would tackle the so-called K-Dub model in this part.  Well, I've decided against it.  Looking at the — From the page […]

  10. Rob – I’m fascinated by this series, as I’m in the middle of running my own start-up hybrid brokerage that’s almost a year old. I think the concept for TerraFirma is interesting, and the numbers look great, but there’s one major hurdle that I think will keep it from happening. I don’t think you could ever get a group of mega-performing agents to come together and throw aside their personal brand and not have their own name on the sign out front. Ego is a big problem in real estate, and I can’t see top-producers ever agreeing to merge with other top producers to split their commissions in this type of setup.

    When agent’s reach that type of production, they pretty much feel like they know it all and don’t need anyone else to tell them what to do. I see it every day, and I can’t believe they would ever form this type of partnership. Seems like it would have happened already if it was viable. Yes, it’s viable on paper, and from a numbers prospective, but psychologically I can’t see it ever happening.

  11. Rob – I’m fascinated by this series, as I’m in the middle of running my own start-up hybrid brokerage that’s almost a year old. I think the concept for TerraFirma is interesting, and the numbers look great, but there’s one major hurdle that I think will keep it from happening. I don’t think you could ever get a group of mega-performing agents to come together and throw aside their personal brand and not have their own name on the sign out front. Ego is a big problem in real estate, and I can’t see top-producers ever agreeing to merge with other top producers to split their commissions in this type of setup.

    When agent’s reach that type of production, they pretty much feel like they know it all and don’t need anyone else to tell them what to do. I see it every day, and I can’t believe they would ever form this type of partnership. Seems like it would have happened already if it was viable. Yes, it’s viable on paper, and from a numbers prospective, but psychologically I can’t see it ever happening.

  12. @Jeffrey –

    It’s hardly fair to use the ’69 Jets in support of your argument to a Jets fan now is it? 🙂 How am I supposed to disagree with that? Hehe, great great points, Jeff.

    And fact is, I largely agree with you. There definitely is room for independents and small operations — there has always been. Just because big law firms exist doesn’t mean that great 2-3 lawyer boutique shops can’t exist. And yes, bigger is not always better.

    However, the critical number in my mind is the profit margin. And this addresses Joe’s point as well… while profit margin and profit dollars are two different things (see, e.g., Exxon-Mobil), and a company can “make it up in volume”, the reason why I focus on profit margin in my analysis so much is that margin advantage is competitive advantage.

    Take Joe’s example of 100 units at $2 at 100% margins vs. 50 units at $15 at 50% margins. If my operations are structured where I can maintain 100% margins, then that $15 pen costs me $7.50 to produce while it costs Joe $10 to produce the same thing. So I can sell my pens at $12.50 and capture the same $5 profit that Joe can: selling the same product for less is a huge competitive advantage.

    In the alternative, I can just sell my pens at $15 like Joe, but keep an extra $2.50 per sale to reinvest into R&D; to come up with a “Pen 2.0” product.

    Now, Joe’s example is inapt in one respect: with pens, you can have the cheapie-market (the $2 pen) and the high-end fountain pen market (the $15 pen). With brokerage services, I’m not sure that there is much differentiation: it isn’t as if “luxury brokers” offer some service that the “low income brokers” simply can’t. Listing, marketing, showing homes, doing analysis, etc. are all pretty much the same whatever your market. The differences appear fairly minute to me, and brokerage services are more or less commoditized.

    In a commodity services situation, the absolute key is either (a) differentiation, or (b) price competition. Everyone focuses on differentiation, but based on things like personality, “relationship building”, and the like. I say, there’s differentiation based on actual services, and those services cost money, and therefore, margin advantage ==> service differentiation.

    One more thing: the endgame for a small boutique is, as you point out, either (1) sell to Big Brokerage, or (2) groom a successor. #1 makes little sense if it comes to a solo shop since the key asset (the rainmaker) is looking to get out. #2 basically amounts to going from a one-man shop to a two-man partnership (just, over time) with relationships being transferred from the Lead Agent/Owner to the new guy taking over. TerraFirma’s advantage is that this “relationship transfer” is unnecessary, as it’s always been at the Firm level.

    Finally, @John makes a wonderful point about ego. Yes, ego is a part of business; we’d be fools not to take the human element into account. Even law firms and big major investment banks fall prey to egos gone wild. I think, however, that’s a matter of competing sins: Vanity vs. Greed. 🙂 And in today’s environment, Fear is on the side of Greed, heh.

    -rsh

  13. @Jeffrey –

    It’s hardly fair to use the ’69 Jets in support of your argument to a Jets fan now is it? 🙂 How am I supposed to disagree with that? Hehe, great great points, Jeff.

    And fact is, I largely agree with you. There definitely is room for independents and small operations — there has always been. Just because big law firms exist doesn’t mean that great 2-3 lawyer boutique shops can’t exist. And yes, bigger is not always better.

    However, the critical number in my mind is the profit margin. And this addresses Joe’s point as well… while profit margin and profit dollars are two different things (see, e.g., Exxon-Mobil), and a company can “make it up in volume”, the reason why I focus on profit margin in my analysis so much is that margin advantage is competitive advantage.

    Take Joe’s example of 100 units at $2 at 100% margins vs. 50 units at $15 at 50% margins. If my operations are structured where I can maintain 100% margins, then that $15 pen costs me $7.50 to produce while it costs Joe $10 to produce the same thing. So I can sell my pens at $12.50 and capture the same $5 profit that Joe can: selling the same product for less is a huge competitive advantage.

    In the alternative, I can just sell my pens at $15 like Joe, but keep an extra $2.50 per sale to reinvest into R&D to come up with a “Pen 2.0” product.

    Now, Joe’s example is inapt in one respect: with pens, you can have the cheapie-market (the $2 pen) and the high-end fountain pen market (the $15 pen). With brokerage services, I’m not sure that there is much differentiation: it isn’t as if “luxury brokers” offer some service that the “low income brokers” simply can’t. Listing, marketing, showing homes, doing analysis, etc. are all pretty much the same whatever your market. The differences appear fairly minute to me, and brokerage services are more or less commoditized.

    In a commodity services situation, the absolute key is either (a) differentiation, or (b) price competition. Everyone focuses on differentiation, but based on things like personality, “relationship building”, and the like. I say, there’s differentiation based on actual services, and those services cost money, and therefore, margin advantage ==> service differentiation.

    One more thing: the endgame for a small boutique is, as you point out, either (1) sell to Big Brokerage, or (2) groom a successor. #1 makes little sense if it comes to a solo shop since the key asset (the rainmaker) is looking to get out. #2 basically amounts to going from a one-man shop to a two-man partnership (just, over time) with relationships being transferred from the Lead Agent/Owner to the new guy taking over. TerraFirma’s advantage is that this “relationship transfer” is unnecessary, as it’s always been at the Firm level.

    Finally, @John makes a wonderful point about ego. Yes, ego is a part of business; we’d be fools not to take the human element into account. Even law firms and big major investment banks fall prey to egos gone wild. I think, however, that’s a matter of competing sins: Vanity vs. Greed. 🙂 And in today’s environment, Fear is on the side of Greed, heh.

    -rsh

  14. Regardless of the profit margin, you still have to sell the pens. A profit margin is only “potential” profit.

    The future, IMO, is a lower profit margin model built on volume. That’s why we’re going with a 100% agent commission model. We also have some Andersonian surprises. Rather than a deadly sin, we’re marketing on love 🙂

  15. Regardless of the profit margin, you still have to sell the pens. A profit margin is only “potential” profit.

    The future, IMO, is a lower profit margin model built on volume. That’s why we’re going with a 100% agent commission model. We also have some Andersonian surprises. Rather than a deadly sin, we’re marketing on love 🙂

  16. Quick points:
    1. The “small boutique” shops are all going out of business in my market (400,000-500,000 population). I know because I used to own one and the firm I merged with has taken over others as well. They simply don’t have the scale to compete in this type of market. Even well established names have gone down in flames.
    2. Regarding the ego issue: I don’t think that would be a problem because if I understand Rob correctly even at TerraFirma the listing agent’s name would go on the sign/marketing similar to a team format. Only the brand (brokerage) name on the sign would change. Otherwise, the brand that is the name of the rainmaker would diminish over time making them less and less of a force to bring in business.
    3. Working for a lower split agency I can tell you that we do have competitive advantages over the largest firms in town because of our lower cost of commissions and because our agents don’t do anything except take listings and help buyers. They do no clerical/data input work at all except writing the initial listing contract. We are 5th in volume yet have only 20 agents. Our next closest competitor above us does similar to slightly higher volume with more like 100 agents and doesn’t (can’t?) do anything like what we do for marketing. Only their biggest “rainmakers” do any kind of real marketing and only for themselves and their listings, not the firm.

    I think you are onto a great idea here, Rob.

  17. Quick points:
    1. The “small boutique” shops are all going out of business in my market (400,000-500,000 population). I know because I used to own one and the firm I merged with has taken over others as well. They simply don’t have the scale to compete in this type of market. Even well established names have gone down in flames.
    2. Regarding the ego issue: I don’t think that would be a problem because if I understand Rob correctly even at TerraFirma the listing agent’s name would go on the sign/marketing similar to a team format. Only the brand (brokerage) name on the sign would change. Otherwise, the brand that is the name of the rainmaker would diminish over time making them less and less of a force to bring in business.
    3. Working for a lower split agency I can tell you that we do have competitive advantages over the largest firms in town because of our lower cost of commissions and because our agents don’t do anything except take listings and help buyers. They do no clerical/data input work at all except writing the initial listing contract. We are 5th in volume yet have only 20 agents. Our next closest competitor above us does similar to slightly higher volume with more like 100 agents and doesn’t (can’t?) do anything like what we do for marketing. Only their biggest “rainmakers” do any kind of real marketing and only for themselves and their listings, not the firm.

    I think you are onto a great idea here, Rob.

  18. Rob,

    Most agents in k-dub are not their for the profit sharing, the profit sharing is icing on the cake.

    K-dub doesn’t use every little nuance as a profit center where they nickel and dime you. Everyone is on the same cap and everything else is a pass through, which allows you to control your expenses yourself. There is a lot of buying power that comes along with that.

    The expenses are monitored by the ALC (see below) and there are policies in place to protect the profit sharing in the franchise agreement.

    Another is the education.

    I think one of the elements that is missed in the success of the K-dub model is the ALC (Associate Leadership Council) The ALC serves as the board of directors, to qualify to be on the ALC you must be in the top 20% of production. It has two really good facets to it, one who knows the “local” market better than the top 20%, two agents usually lack business and leadership training. When agents serve on the ALC they have the opportunity to learn how to manage a business at a higher level. Based on the 80/20 rule again, 20% of the ALC members will grow their business significantly. That is good business and leadership training.

    There is so much high level training. I don’t know of any other brand that offers the amount of training that K-dub offers period. On the local levels it is beginner and middle based. However k-dub-U has some serious training, I mean serious.

    Last but not least is the culture model. This one baffles the Yale and Stanford students as they study the models as part of their MBA program.

    The idea of paying it forward is contrary to the math taught in school.

    We are an open book and open door. Any and all k-dub agents have the right to examine the books. The open door policy, if you decide k-dub is not a match, you can take your listings.

    PS My office is debt free, has cash reserves and we have turned a profit every month except one in 6 years. We close our books every month, only new offices can carry their loses forward.

    In a nutshell k-dub has figured out that the company works for the agent.

  19. Rob,

    Most agents in k-dub are not their for the profit sharing, the profit sharing is icing on the cake.

    K-dub doesn’t use every little nuance as a profit center where they nickel and dime you. Everyone is on the same cap and everything else is a pass through, which allows you to control your expenses yourself. There is a lot of buying power that comes along with that.

    The expenses are monitored by the ALC (see below) and there are policies in place to protect the profit sharing in the franchise agreement.

    Another is the education.

    I think one of the elements that is missed in the success of the K-dub model is the ALC (Associate Leadership Council) The ALC serves as the board of directors, to qualify to be on the ALC you must be in the top 20% of production. It has two really good facets to it, one who knows the “local” market better than the top 20%, two agents usually lack business and leadership training. When agents serve on the ALC they have the opportunity to learn how to manage a business at a higher level. Based on the 80/20 rule again, 20% of the ALC members will grow their business significantly. That is good business and leadership training.

    There is so much high level training. I don’t know of any other brand that offers the amount of training that K-dub offers period. On the local levels it is beginner and middle based. However k-dub-U has some serious training, I mean serious.

    Last but not least is the culture model. This one baffles the Yale and Stanford students as they study the models as part of their MBA program.

    The idea of paying it forward is contrary to the math taught in school.

    We are an open book and open door. Any and all k-dub agents have the right to examine the books. The open door policy, if you decide k-dub is not a match, you can take your listings.

    PS My office is debt free, has cash reserves and we have turned a profit every month except one in 6 years. We close our books every month, only new offices can carry their loses forward.

    In a nutshell k-dub has figured out that the company works for the agent.

  20. Rob – This is an absolutely fascinating study of a subject I have given, and will continue to give a lot of thought to. I have been affiliated with 3 different broker models myself including a small boutique shop and a k-dub before making the decision to go out on my own. I thought the k-dub model was going to do if for me and in the beginning it seemed like a dream. There is no question in my mind that Gary Keller is brilliant and reading his books opened my eyes up to the importance of lead generation, staying on task, treating your business like a business, and education, amongst many other things. Unfortunately, in practice I have found my particular experience with the k-dub model to be a horrible disappointment. I was “sold” on the training, the technology, the office staff, the profit share, etc. In reality, during the year I have been with my office the admin was let go, the tech person left, the team leader left, and the office is still digging out of their debt. I am set to go out on my own next month and will take many of the principles I learned from the model and from this post with me! Thanks again for incredibly thoughtful and informative stuff, as always.

  21. Rob – This is an absolutely fascinating study of a subject I have given, and will continue to give a lot of thought to. I have been affiliated with 3 different broker models myself including a small boutique shop and a k-dub before making the decision to go out on my own. I thought the k-dub model was going to do if for me and in the beginning it seemed like a dream. There is no question in my mind that Gary Keller is brilliant and reading his books opened my eyes up to the importance of lead generation, staying on task, treating your business like a business, and education, amongst many other things. Unfortunately, in practice I have found my particular experience with the k-dub model to be a horrible disappointment. I was “sold” on the training, the technology, the office staff, the profit share, etc. In reality, during the year I have been with my office the admin was let go, the tech person left, the team leader left, and the office is still digging out of their debt. I am set to go out on my own next month and will take many of the principles I learned from the model and from this post with me! Thanks again for incredibly thoughtful and informative stuff, as always.

  22. Jacob that is a shame about your office, I am with a text book office and since we hit maturity about 5 years ago, we have been profitable every month except one, that was while the market was imploding and offices all around us were closing and the month following the lowest # of units closed since our MLS went online in 1995. We have had the same team leader and principal broker since launch, been through a few MCA’s.

    It is all about hiring the right people for the job. the k-dub model is not a magic pill, it is a model that is a win-win (owners-agents) when executed properly.

  23. Jacob that is a shame about your office, I am with a text book office and since we hit maturity about 5 years ago, we have been profitable every month except one, that was while the market was imploding and offices all around us were closing and the month following the lowest # of units closed since our MLS went online in 1995. We have had the same team leader and principal broker since launch, been through a few MCA’s.

    It is all about hiring the right people for the job. the k-dub model is not a magic pill, it is a model that is a win-win (owners-agents) when executed properly.

  24. @Rob Aubrey – I agree Rob, it is a shame and has been an incredible disappointment for me. When I read your previous post I was filled with envy and had always hoped my experience would be similar to yours. But again, I agree with you 100%, the model is only as good as those who execute it and unfortunately it doesn’t work at all without the pieces and people coming together properly.

  25. @Rob Aubrey – I agree Rob, it is a shame and has been an incredible disappointment for me. When I read your previous post I was filled with envy and had always hoped my experience would be similar to yours. But again, I agree with you 100%, the model is only as good as those who execute it and unfortunately it doesn’t work at all without the pieces and people coming together properly.

  26. Should have responded sooner, but my schedule is something fun these days.

    A question I have, Rob, is that as I’ve said in the past, the K-Dub model seems like a no-brainer for the agent. What about for the broker/owner? Do you have any stats on what the profit margin is for the typical K-Dub broker, or are you willing to share your numbers?

    It may be that I’m really missing something, but it doesn’t look to me that the K-Dub broker (not the agent, or the ALC, or whatever, but the broker/owner) is making all that much money, nor does it appear as if the brokerage has the margins to be competitive in the long run. (This assumes competent management across all the models, of course, as opposed to a smart operator in a K-Dub competing with a moron at some other model. 🙂 )

    -rsh

  27. Should have responded sooner, but my schedule is something fun these days.

    A question I have, Rob, is that as I’ve said in the past, the K-Dub model seems like a no-brainer for the agent. What about for the broker/owner? Do you have any stats on what the profit margin is for the typical K-Dub broker, or are you willing to share your numbers?

    It may be that I’m really missing something, but it doesn’t look to me that the K-Dub broker (not the agent, or the ALC, or whatever, but the broker/owner) is making all that much money, nor does it appear as if the brokerage has the margins to be competitive in the long run. (This assumes competent management across all the models, of course, as opposed to a smart operator in a K-Dub competing with a moron at some other model. 🙂 )

    -rsh

  28. Hi Rob H,
    I do not have other’s numbers. It is definitely a low margin high volume.

    I will dig in for you.

    One of the things is not to saturate the region to where the owners are not profitable.

    It is your agent count and mix. First take your annual expenses and divide it by your cap. Then you know how many capping agents you need and the rest are profit.

    That is the basic model, now some expenses can be geographical i.e. rent. For example if the your annual expenses are $1,000,000 and your cap is $20,000, you would have to have 50 capping agents then ideally you would have 50 half cappers and 50 1/4 cappers that would give the owner(s) a $750,000 profit.

    Also one of the things that most people miss with k-dub is the owners are usually not that active in the shop. My owner lives in AZ and I am in UT. My team leader runs the show and our principal broker is a staff member.

    So if an owner invest a few hundred k and gets a $300-500,000 or more return a year not a bad investment.

    With that kind of passive income an owner can venture out into other revenue streams…

    Then there is the $3,000 royalty and I believe the owners might get a piece of that I am not sure.

    That is the concept behind profit share, share a piece of the owners profit for bringing talent and agents will keep brining talent. The cool part a capper at $20,000 and the commission of r discussion is 3% is only a $2.2 million in volume, so capping agents are not that hard to recruit in fact they are easier then a mega agent. Somebody with 25 listings and 6-8 pending, that is a logistical nightmare.

    I hope that helps

  29. Hi Rob H,
    I do not have other’s numbers. It is definitely a low margin high volume.

    I will dig in for you.

    One of the things is not to saturate the region to where the owners are not profitable.

    It is your agent count and mix. First take your annual expenses and divide it by your cap. Then you know how many capping agents you need and the rest are profit.

    That is the basic model, now some expenses can be geographical i.e. rent. For example if the your annual expenses are $1,000,000 and your cap is $20,000, you would have to have 50 capping agents then ideally you would have 50 half cappers and 50 1/4 cappers that would give the owner(s) a $750,000 profit.

    Also one of the things that most people miss with k-dub is the owners are usually not that active in the shop. My owner lives in AZ and I am in UT. My team leader runs the show and our principal broker is a staff member.

    So if an owner invest a few hundred k and gets a $300-500,000 or more return a year not a bad investment.

    With that kind of passive income an owner can venture out into other revenue streams…

    Then there is the $3,000 royalty and I believe the owners might get a piece of that I am not sure.

    That is the concept behind profit share, share a piece of the owners profit for bringing talent and agents will keep brining talent. The cool part a capper at $20,000 and the commission of r discussion is 3% is only a $2.2 million in volume, so capping agents are not that hard to recruit in fact they are easier then a mega agent. Somebody with 25 listings and 6-8 pending, that is a logistical nightmare.

    I hope that helps

  30. @Rob & Rob – In our area, the K-Dub thing is hard to figure out. Our average commission is more like 2.5% and our average sale price about $150k-$170, so it’s much harder to get “capping” agents. In the last year, most agents I look up have only sold 1-5 homes. At our average numbers, they could make more at McD’s, so I can’t see how the brokers with high overhead are making any sort of profit. They all maintain semi-expensive office spaces and licensed staff people, so I just don’t get it.

    I know that some of the owners are at the top point of the pyramid for their profit-sharing system, so they are making a chunk of money through that route, but it still doesn’t seem to make sense. They are definitely growing fast in our area, as RE/MAX continues to shrink, but I can’t figure where it’s all heading if their agents aren’t really doing much business.

  31. @Rob & Rob – In our area, the K-Dub thing is hard to figure out. Our average commission is more like 2.5% and our average sale price about $150k-$170, so it’s much harder to get “capping” agents. In the last year, most agents I look up have only sold 1-5 homes. At our average numbers, they could make more at McD’s, so I can’t see how the brokers with high overhead are making any sort of profit. They all maintain semi-expensive office spaces and licensed staff people, so I just don’t get it.

    I know that some of the owners are at the top point of the pyramid for their profit-sharing system, so they are making a chunk of money through that route, but it still doesn’t seem to make sense. They are definitely growing fast in our area, as RE/MAX continues to shrink, but I can’t figure where it’s all heading if their agents aren’t really doing much business.

  32. Hi John,
    I used the 3% as a simple math tool, I know for a fact that our average is not that, maybe not as low as yours.

    My average price is $225k and I don’t seem to have any problem capping. I realize there are a lot of part time people, they are the half and quarter cappers.

    One of the keys that k-dub has is the ability to have a team. We have a fee structure that can work for a rain maker as well as the co-agent.

    As for pyramid, it is profit sharing. The owner of my office does not have many agents in my market in his front line. Yes it is multi-level, but again based on profit. Also the books are closed monthly.

    We have 250 agents and we are growing to 350 at my office, there are two other market centers in my county of 1.2 million people, about 40% under the age of 18. So it can be done, you have to have a model that the agents want and offer it at a reasonable price.

  33. Hi John,
    I used the 3% as a simple math tool, I know for a fact that our average is not that, maybe not as low as yours.

    My average price is $225k and I don’t seem to have any problem capping. I realize there are a lot of part time people, they are the half and quarter cappers.

    One of the keys that k-dub has is the ability to have a team. We have a fee structure that can work for a rain maker as well as the co-agent.

    As for pyramid, it is profit sharing. The owner of my office does not have many agents in my market in his front line. Yes it is multi-level, but again based on profit. Also the books are closed monthly.

    We have 250 agents and we are growing to 350 at my office, there are two other market centers in my county of 1.2 million people, about 40% under the age of 18. So it can be done, you have to have a model that the agents want and offer it at a reasonable price.

  34. This may be oversimplifying, but each brokerage model has the capacity to succeed. Some thrive in certain markets and flail in others. Agents flock to low-fee brokerages during the good times, then run to more financially sound models in tough markets.

    Some models focus on hiring only experienced, producing agents. Of course, those are the hardest agents to get…and sometimes the most difficult to manage. Other offices fire off buckshot and eat what they kill, meaning they’ll hire anyone that contribute in some way to the bottom line. I have to agree with Rob, capping agents are not hard to recruit and can be some great additions to an office.

    My model is completely different. I don’t hire any agents, and I farm out the leads I can’t handle. The math just got easier. The math is also impossible for competing companies to measure since the information just isn’t trackable since the sales are not attributed to my office on the MLS.

    We’re in the people business. Any model will work if we love our peeps!

    Oh, and sorry about the no gravitar thing. I have several to fit my multiple personalities, so I just couldn’t settle on one. 😉

  35. This may be oversimplifying, but each brokerage model has the capacity to succeed. Some thrive in certain markets and flail in others. Agents flock to low-fee brokerages during the good times, then run to more financially sound models in tough markets.

    Some models focus on hiring only experienced, producing agents. Of course, those are the hardest agents to get…and sometimes the most difficult to manage. Other offices fire off buckshot and eat what they kill, meaning they’ll hire anyone that contribute in some way to the bottom line. I have to agree with Rob, capping agents are not hard to recruit and can be some great additions to an office.

    My model is completely different. I don’t hire any agents, and I farm out the leads I can’t handle. The math just got easier. The math is also impossible for competing companies to measure since the information just isn’t trackable since the sales are not attributed to my office on the MLS.

    We’re in the people business. Any model will work if we love our peeps!

    Oh, and sorry about the no gravitar thing. I have several to fit my multiple personalities, so I just couldn’t settle on one. 😉

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