This article first appeared in Elite Agent Magazine October/November issue 2015.

What should real estate businesses do today to make themselves sustainable for the future? Paul Davies gives his opinion.

The market has been very strong in most major centres across the country, and as ever with an extended robust period, there will come a time where the market slows down. There is a real possibility ahead for reduced activity, reduced prices and perhaps also pressure on fees, or in the worst possible scenario, pressure on all three. 

There’s a tremendous unpredictability with business and business owners need to be prepared for that unpredictability. A sustainable business to me is one that has a healthy profit margin so that it can weather variations in income.

Some agencies have gotten into bad habits during the boom years by paying attention to the wrong part of the balance sheet.

When things are going great and the market is at its peak, it’s easy to get over excited by strong sales figures and then lose sight of the simple fact that, business success is measured by profits and not revenues.

“My advice to business owners today is don’t rest on your laurels, thinking that business will always be this way. You need to stay one step ahead of the market.”

Paul Davies
Founder & CEO One Agency

You need to plan ahead to remain sustainable throughout the tougher years, whether it’s a global upset or a market turn-around, we know that the market will change.

Agencies need to put their operating costs under a microscope, because for the bulk of agencies across Australia, their businesses aren’t set up to be run economically. They’re set up to maximise income – of course, that’s relevant and very important, but what’s actually left after you’ve paid your operating costs is the only measure of success.

I think that one reason this problem occurs, is that many people who become principals are well versed in listing and selling but lack business management experience. The lesson for principals is to do more than just focus on where the next deal is coming from – you also need to calculate what it costs to create those deals.

If you discover that your margins are too small, you should consider cutting costs. That could include reducing your staffing levels, sub-leasing part of your premises or even doing away with your expensive shop-front.

Did you know that an average shop-front business across Australia retains between 15 - 19c in the dollar after all expenses are paid?

Did you also know that this is considered within our industry as normal, however, I think it’s abnormal and outrageous to spend between 81 - 85c to keep only 15 - 19c in every dollar. This is also a very risky business! If you were to have either a drop in income, or an increase in costs, or both, the 15 - 19c profit margin very quickly disappears and that’s why you see so many businesses close down.

My mission is to create businesses that have the opposite position – that is 15 - 19c in the dollar to cover the entire business operating costs, and leaving you with 81 - 85c in the dollar clear profit. I’m not making this up! It’s completely true. I actually have many members at One Agency that do just that.

Business can be conducted so much more economically than it used to. The need for a huge office is not required any more. Lets not forget that the real estate agency business is a fabulous business. Our shelves are stocked with millions of dollars of stock that other people own. Then you can have those people that own the stock, the vendors, pay you to promote their property so you can earn a fee.

But there’s more. You can actually do it without an office, from the comfort of your home, anywhere, a shop-front isn’t essential any more. So you can run a very efficient and effective real estate business without all the substantial overheads that we’ve been brought up to think that we need.

My advice to business owners today is; don’t rest on your laurels thinking that business will always be this way, you need to stay one step ahead of the market.

For any person that is a business owner that’s come into the business during a boom market, when they’re only really concerned with revenue, and when they start to run out of money they just look at creating more revenue – those sorts of businesses need to review their attitudes quickly, otherwise they will go under.

I urge all those who own real estate businesses to watch their operating costs very closely, as this will help to weather any drop in revenues and bolster the survivability of each of you. At the end of the day, the businesses with the biggest reliable profit margin, will be best positioned for the future. So prepare yourselves well and expect the best, but prepare for the worst.

Planning ahead: revenue vs. profit


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