What some brokers did to weather the downtorn.

By Roger Cruzen

It’s Lesson No. 1 for most successful real estate agents turned brokerage owner or manager: Your job no longer is to sell real estate—it’s to operate a profitable business.

That’s difficult enough to do when the market is healthy, let alone when you’re facing the prospect of another difficult year. So how are California brokerage owners and operators keeping their heads above water?

California Real Estate turned to three seasoned broker/owners to share what they’ve done to weather the current recession.

Dennis Badagliacco | CCIM, CRB
*Altera Real Estate, Silicon Valley
Three offices, 130 agents

“Looking back, 2005 was a banner year. Our average sales price was around $780,000, and a lot of agents were able to make a living doing only two or three deals a year. Then we got to September ’07 and the bottom fell out. There was no transition–it was just going down, down, down.

“Eventually, it hit us that this was not going to go away and that we needed to cut our expenses. We considered everything: leases, staffing … everything. At one office we were spending $3,000 a month with PG&E, so we looked at how we could reduce that cost. We cut salaries and staff so dramatically that if we cut any further, we’ll have to split a front-desk person with two offices. We outsourced our concierge services and closed our loan company, which had been a profit center. I could see us bringing back some of those services, but I don’t think the loan company will come back. There’s too much risk.

“Eventually, the foreclosures began to hit. Our price is down from $780,000 to $500,000, which means you need three times the sales. We had agents who hadn’t done a deal in 12 months, and I just couldn’t afford them, because it costs between $15,000 and $25,000 to carry an agent. We’re down now to about 85 agents in our largest office.

“Today, we want agents with a minimum of two to four transactions, but prefer someone with six to eight who will be able to get to eight to 10 with our system. And we’ve instituted coaching sessions with all our agents.”

*The Altera brand was co-founded by Dennis and Colleen (C.A.R. Past President) Badagliacco and Gary Thomas (C.A.R. Past President).

Karl Bundesen | GRI, CRS, CRB, e-Pro
Broker/Owner, CENTURY 21®-Bundesen, Petaluma
Single office, 33 agents

“My father was one of the first CENTURY 21 franchisees north of the Golden Gate. I got my license in 1984, and he brought me on as a partner in 1988. I learned the hard way back in the early ’90s about money management and have had a conservative approach to running a real estate business from that point. [Sacramento REALTOR®] Mike Lyon once told me, ‘Pay for everything with cash.’ That made a lot of sense. 

“2005 was like picking up money off the ground, which was not a great training ground for when things changed. But I never anticipated it [the downturn] would be as bad as it is. I thought maybe we’d see a 15 to 20 percent correction.

“What got some in trouble—and I saw the same thing with agents that I saw with brokers—was that they didn’t plan for a downturn of this magnitude. Some were living hand-to-mouth even when the market was good.

“There came a point when I said to some of my people who weren’t producing, ‘I owe it to the people who are producing and who are struggling to feed their families to not have people who are just sticking their toe in the water all the time.’ Four or five [agents] got out entirely, and a couple went to other offices. I felt like it was my job to help them make a decision. That was helpful maybe in that some of them decided to ‘get in.’ That’s what I encouraged them to do: Go one way or the other. Don’t just sit on the sidelines and watch.

“What have I learned? To have people who handle a diversity of properties. We have people who do mobile homes, commercial, ranches, the upper end. We handle probates and trusts, which continue regardless of the market. We handle fewer REOs as a company than most. A lot of agents were reluctant to get into short sales and REOs, but a lot of the younger agents, who were more flexible, did. And we have a good-sized property management company.

“How do I judge success? It’s really pretty darn easy. You should be meeting all your obligations and still be able to put away some money for retirement.”

Todd Olson
RE/MAX Olson & Associates, Northridge
Five offices, 228 agents

“I started as a salesperson in 1977. My father was one of the owners of a large independent, Forest E. Olson Co., which was sold to Coldwell Banker. I opened my own firm in 1987 as a small boutique and in 1999 signed on with RE/MAX. Since 2005, we’ve gone from 10 offices to five and 370 agents to 228. The biggest hit we’ve taken is in actual sales volume and the income we earned from that volume. In 2005, we did $1.3 billion in sales. That’s down to about $776 million for 2008. However, our transactions per agent have actually gone up to seven from five in 2005 …and [agent annual income] has dropped to $30,000 to $40,000. RE/MAX charges agents a monthly fee, which is appealing to highly productive agents because it limits their cost and they know what they have to pay every month. But a lot [of agents] couldn’t pay the monthly fee, even if it cost them more [somewhere else] at the end of the year in terms of percentage of commission. My guess is that 60 percent [of agents who left his firm] got out of the business entirely and 40 percent went to other companies.

“We saw the change coming in the fourth quarter of 2005 and sat down and talked about what to do. … We went after our landlords, renegotiating leases or terminating or consolidating leases. We initiated a no-hire policy and a salary freeze and eliminated people who couldn’t pay [their monthly] fees. That was tough for a family-run company. Overall, I’d say we cut our expenses by about 40 percent.

“During this time, we were very hands-on with staff. We held meetings with each office and told them what direction we needed to take the company in order to survive. I think they appreciated that honesty.

“Sixty to 70 percent of our market is REOs, so we became very proactive about REOs … they’re what kept us afloat. We had some people with longstanding relationships with Fannie [Mae] and Freddie [Mac] and with asset managers. We dusted off our old training materials on short sales and how to sell REOs and work with lenders and started training agents. We also did some motivational training to keep people optimistic.

“In Q4 ’08, we had our highest volume in three years, so we are really encouraged because that’s typically a slow time. 2009 is showing good signs of recovery, but we don’t see an end to this anytime soon.”

Where to Cut

When it comes to cost-cutting, occupancy and general and administrative costs can have the greatest impact on brokerage profitability, according to a recently published analysis conducted by REAL Trends . The study, which examined two categories of income and five categories of expenses, concluded that the most profitable brokerage models were those that limited occupancy expenses to less than 3 percent of gross commission income (the high was 9 percent) and held general and administrative expenses to as low as 1.8 percent (the high was 7.9 percent). There was less benefit from cutting advertising/marketing or employment costs.

Roger Cruzen is a freelance writer.