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There’s one question I have been asked hundreds of times over the years by real estate business owners and aspiring sales agents looking to become entrepreneurs.
That is: ‘What’s the perfect business model?’ The reality is that there is no perfect model in real estate. The right business structure depends on many factors.
Many new business owners start up with the simple model of a principal plus three or four sales agents to get the ball rolling. Of course, property management will follow down the track, but the priority is getting runs on the board and building up from there.
In the ensuing months, there is a typical pattern comprising:
- Sales agents coming and going – some doing well, some not so well
- Lumpy sales patterns by everyone, including the principal, who is doing far worse now than when he was employed
- The principal experiencing heightened stress levels having to juggle between sales, recruiting, office matters and finances
- Months of financial surplus and losses and no real certainty for the business
This is hardly a well-designed business, and quite often this new venture is left to the mercy of external events that can become largely uncontrollable.
Firstly, it is important to be clear how deep your pockets truly are when you start – that is, what financial reserves you can dip into without feeling too much stress.
It is senseless to have big, ego-filled growth visions when you do not have enough capital to achieve or manage growth. Your financial reserves will dictate a lot for you, so you need to carefully think through what this business will really need to look like. That includes:
- Brand – whether to go franchise or independent
- Level of ambition – how ambitious you truly are; and, if you’re part of a franchise, how you will cope with strict revenue targets
- Premises size – starting small and scaling up sounds easy, but leases last from four to six years, and you need to weigh up your risk appetite in being able to put up with empty desks for months until agents find the confidence to join you
- Premises fit-outs – top sales agents whom you want to recruit will not work out of a cramped, budget office environment
- Growth capacity – whether you have the money to absorb more capacity or open additional satellite offices
Key factors that need to be considered should include your savings, debt levels, personal survival costs for your family, business overheads (including allowances for sales agent retainers), and marketing budgets to allow your business to make its presence known.
Your model also has to be consistent with who you are as a person. Are you a high-performing sales agent who will always remain a top sales agent? If that is the case, don’t have the expectation to build a big sales team because nobody likes a principal who always wins their own awards! In this case, your model could gravitate to hiring sales associates to work with you in half a dozen suburbs to push your profile surgically into every home.
If you want to build a big team, you will need to create space for people to grow, which means stepping aside and hiring a sales manager. Investments will be needed in training systems, database management and administration staff. Your accounting system has to operate at a peak level to cope with listings, bills, trust receipting, wages, commissions, deductions, tax compliance, cash flow management – all to make sure you do not financially implode.
Think about property management in your business model. Real estate sales will no doubt provide the cash flow, but we all know the rent roll represents your ultimate retirement. As the business owner, you must think about what you want to get out of the business in the short, medium and longer terms. Growing organically versus through acquisition should always be an issue on the table for you to consider.
Think about your model in the context of whether a partnership might be the right way to go. Will you be better off with a property management director as a fellow partner; or will you only go solo or jointly with your life partner?
Whatever your visions, you have to reach beyond salesperson thinking and garner better business skills so that you can work through the multitude of options.
The more important thing is to have a strong and workable business strategy that matches your financial capacity and leadership style. Once you know this, it becomes far easier to determine what model to apply and when to time your growth initiatives.
After all, you are setting up the business to make a living and hopefully provide for retirement. To do this, you must have a realistic, achievable business and financial plan to work with your ideal model.
ABOUT THE AUTHOR
Sanjiv Pabari
Sanjiv Pabari is the founder and director of Financial Controllers Real Estate, which specialises in real estate agency accounting, tax and performance maximisation. Sanjiv is considered one of the most commercially focused real estate financial experts in the industry with a professional background emanating from KPMG, Ernst & Young and Ray White before he established Financial Controllers Real Estate to work with various real estate franchise groups.
His business currently provides specialised daily accounting, payroll, taxation and business advisory services to a number of award-winning franchised brands and independent agencies. Sanjiv has personally consulted and worked with over 100 business leaders on business formation, stabilisation, profit and growth and is retained by a large number of agency principals as their ongoing business advisor. For more information, email
